financial analysis- final new-1

________________________________________A Study of Financial Performance___

Chapter 1

Research Design

1.1 Introduction, Importance and Significance

Finance is needed to perform a firm’s production, marketing and other functions.

The actions of managers have financial consequences for the firm. It is, therefore

imperative that they know the importance of finance functions and there with their own

activities.

Finance involves the management of firm’s financial resources. A firm carries out

production and marketing activities to make profits and to generate wealth for further

growth. All business operations involves, use of financial resources e.g. acquiring new

equipment or replacing the old one in order to interpret financial reports prepared by the

finance department and should be able to ask finance related questions.

“Financial analysis means evaluation of past performance, present financial

position, liquidity situation, and enquires into profitability of the industry”

Our study is based on the financial analysis. By analyzing financial statement we

see the financial position of company. Financial ratios are used for financial analysis. We

should know the solvency and liquidity position of company so far controlling the

production cost researcher try to study financial analysis.

1.2 Rationale of the study

In India, the sugar industry is the second largest agro base industry next to cotton

textile. It provide direct employment to well over 4 lacks of people and livelihood to

_______YCMOU______MBA Programme___________________________________1


another one million of agriculturist and persons engaged in transportation and harvesting

sugarcane.

The government encouraged primary cooperative societies, banks, irrigation

schemes, and agro industrial processing organization so also spinning mills and sugar

factories. These cooperatives have about outstanding progress in the course of time.

Jawaharlal Nehru was so much impressed by the contribution of cooperative movement

and its basic principle that he wanted this movement to spread up not only in industrial

sectors but also become a part of our every day life.

In 1991, Jawahar Shetkari Sahakari Sakhar Karkhana is established.

Last two-three years there is disease on sugar-cane named Lokary mava, so

farmers have got very less crop of cane. Also some times more percentage of crop is

destroyed due to flood etc.

So we want to study the financial position of Jawahar. For reducing production

cost of sugar, to over come financial losses, researcher studied the financial analysis of

Jawahar sugar factory.

1.3 Objectives of the study

The main objective of the study of financial analysis is to control the cost of

production and also we can analyze and reduce the production cost. For controlling

financial soundness this study is also very much helpful.

To analyses and to evaluate the cost management in company is also one of the

objective. Following are the other objective of the study:

1. To study the financial analysis.



2. To assess the problem of process costing.

3. To study cost control methods.

1.4 Hypothesis of the study

1. Financial position of factory can be understood by analyzing financial

statements.

2. Solvency and liquidity position of company so far controlling the production

cost help to study financial analysis

1.5 Research methodology

Both primary & secondary data will be collected from different sources to

evaluate the objective of the study.

Primary Data:

To collect primary data on the financial analysis of the “Jawahar Shetkari

Sahakari Sakhar Karkhana Ltd., Hupari, Dist. Kolhapur.” researcher has taken interview

schedule. Care will be taken to include most of the variables, which will relevant for the

study. The data will be collected through personal interviews by the researchers on

working performance for the years 2003-04 to 2007-08.

Secondary Data:

The secondary data on the physical & financial performance indicators of the

organization will be collected from the annual reports, audit reports & other official

records of the study unit for a period of five years i.e. 2003, 2004, 2005,2006,2007,2008.



1.6 Expected Contribution of the study

In this project report the emphasis was given on the working capital of the “Jawahar

Shetkari Sahakari Sakhar Karkhana Ltd., Hupari, Dist. Kolhapur.”. The study was

focused mainly on the various factors of financial analysis. The study is important as it

gives the various financial positions of the business. After the data collection, the

presentation, analysis & interpretation was done with the help of tables & graphs. And

finally, the findings & suggestions if any were given for further improvement.

1.7 Limitations of the study

Limitations for the study are as follows,

As the certain documents and data are confidential, it was not possible to collect

all the information necessary for the deep study.

As the study is on the implementation stage so there is non-availability of any past

record.



Chapter 2

Organizational profile

2.1 Overview of the organisation:

Name of the organization: Jawahar Shetkari Sahakari Sakhar Karkhana Ltd., Hupari,

Dist. Kolhapur.

Location of the unit: 100 hector of land at Hupari-Yalgud formally known as “

Shreemati Indumati Rani Sarkar Park.”

Establishment: 28th September 1990.

Annual turnover: 14005.45 Lac

2.2 History:

Sugar industry is a backbone of Indian economy. Western Maharashtra has

always remained on the fore front of co-operative movements. To make an integrated

development of Maharashtra state the first sugar factory on co-operative basis was

established in Maharashtra at ‘Loni’ in Shrirampur, Tehsil of Ahmednagar district under

the leadership of Padmashri Vitthalrao Vikhe-Patil and guidance of Lt. Dr D.R. Gadgil.

Prior to this, efforts were taken to form sugar factory on co-operative basis in 1918 and

Baramati in Pune district named ‘Neera vally co-operative sugar factory’ under the

guidance of Mr. Lallubhai Samaldas. As a result of successful endeavor of Padmashri

Vitthalrao Vikhe-Patil’s ‘Pravara co-operative sugar factory’ at Loni.

The co-operative sugar factories are conducting various schemes such as cane

development programs, roads, repairing, construction of bridges, provide drinking water

to people, educational & medical facilities, biogas plants, etc.



Preamble:

Kolhapur district has made speediest progress towards abundant production of

sugarcane on account of fertile soil, favorable climate, hardworking farmers & growing

irrigation facilities. In turn it gave impetus to co-operative sugar industry. In the

beginning of 80es Kolhapur District witness such a bumper crop of sugar cane that even

after meeting the requirement of the existing factories a large quantity of sugar cane

remained surplus. Rather an additional land was come under irrigation due to new

irrigation projects such as Chandoli and Kalammawadi. Moreover it has been observed

that other food crops can not take root when sugarcane mushrooms the surrounding areas.

It being a cash crop, farmers also incline towards the cultivation of sugar cane.

This has resulted in soaring the sugar cane production. Even then existing sugar factories

and some of them implementing their expansion program could not have crushed the

voluminous production of sugar cane.

This abstain a large number of non member came cultivator from crushing their

sugar cane in time and there interest was at stake. These circumstances necessitated the

acute need of one more sugar factory in co-operative sphere. Hence a meeting of cane

cultivators was called in the year 1981 and it was decided to establish “Jawahar Shetkari

Sahakari Sakhar Karkhana” under the leadership of honorable Shri. Kallappanna Awade,

Ex. M.P. However in spite of persistent follow-up the licensing was dragged for about

decades due to restrictions in the licensing policies of union government.



Multi state status:

The factory is situated on the southern border of Maharashtra adjoining the state

of Karnataka. A number of farmers from Karnataka have been supplying sugarcane to

Jawahar factory. Hence in the year 1994, the status of Jawahar was converted into multi-

state co-operative society by incorporating 182 villages in the area of operation of which

62 belong to Karnataka & rest 120 are from Maharashtra.

Location:

100 hector of land at Hupari-Yalgud, formally known as ‘Shreemati Indumati

Rani Sarkar Park’ was purchased for the project as approved by the site selection

committee appointed by Govt. of Maharashtra. A district water supply scheme from

Dudh Ganga River, about 6 KM away from the site was completed to cater the

requirement of industrial as well as drinking water. This place is near the silver city

Hupari which is connected by road transport cane from cultivated land to factory.

Vision:

To be an ideal sugar industry in the co-operative sector in the term of providing

better price and benefit s to the agriculturists who supply cane and provision of

employment to the people residing around the industry.



Mission:

To promote the interest of all members to attain their social and economic

betterment through self-help and mutual aid.

To inspired for promoting self-confidence thrift and co-operation amongst the

members to give encouragement.

Objective of Industry:

The principle objective of the industry will be to promote the interest of all its

members to attain their social and economic betterment through self-help and mutual aid

in accordance with the co-operative principles.

Past five years cane crushing bagging or Production of sugar:

Year Cane crushing(M.T.) Production of sugar

(Lacs Bags)

2003-04 6.58 8.31

2004-05 9.13 10.98

2005-06 10.6 12.76

2006-07 9.54 11.6

2007-08 6.99 8.1



Awards:

Season Name of the Institution Particular of the Prize

1994-

95

National federation of co-op Sugar

factories Ltd., New Delhi

1st prize for excellent technical

performance

1994-

95

National federation of co-op Sugar

factories Ltd., New Delhi

1st prize for best implementation of

various cane development schemes

1994-

95

Vasant Dada sugar institute Pune 1st prize for highest reduced overall

recovery

1996-

97

Vasant Dada sugar institute Pune 3rd prize for excellent technical

performance

1996-

97

Maharashtra Rajya Sahakari Sakhar

Karkhana Sangh Ltd., Mumbai.

3rd prize for excellent technical

performance

1997-

98

Vasant Dada sugar institute Pune 2nd prize for highest reduced overall

recovery

2000-

01

Maharashtra chamber of Commerce

industries and Agriculture, pune.

Dr. R.J. Rathi award for environment

pollution control



Conceptual background

3.1 Introduction

Finance is needed to perform a firm’s production, marketing and other functions.

The actions of managers have financial consequences for the firm. It is, therefore

imperative that they know the importance of finance functions and there with their own

activities.

Finance involves the management of firm’s financial resources. A firm carries out

production and marketing activities to make profits and to generate wealth for further

growth. All business operations involves, use of financial resources e.g. acquiring new

equipment or replacing the old one in order to interpret financial reports prepared by the

finance department and should be able to ask finance related questions.

What should manager know about finance?

Finance functions may require special skills. Managers should understand and

able to interpret financial statements, namely the balance sheet and the profit and loss

statement. They should also know how costs are estimated and allocated, how they help

in decision making and how they are related to profit. Managers must be familiar with the

following in finance to better equip them to function effectively and efficiently.

Understanding financial statements:

What are financial statements? Why and how are they prepared? The overall

financial consequences of a firm’s activities during a given period of time are

summarized in the financial statements balance sheet and profit and loss statements.

These statements may also prepare for divisions. They contain information on the firm’s



revenues, expenses, profit and loss, sources and uses of funds. Managers must know the

basic principles of preparing these statements.

Financial statement analysis:

What does financial statement imply? How can information given in financial

statements be interpreted? If financial statements contain information about the financial

consequences and sources and uses of financial resources, one should be able to say what

the financial conditions of a firm is good or bad, whether it is improving or deteriorating.

One can relate the financial variables given in financial statements in a meaningful way

which will suggest the action which one may have to initiate to improve the firm’s

financial condition.

Meaning:

“Financial analysis means evaluation of past performance, present financial

position, liquidity situation, and enquires into profitability of the industry”

The analysis of financial statement is an attempt determines the significance and

meaning of the financial statement data. The analysis of financial statements and is an

important accounting activity.

Types of financial analysis

Ratio analysis:

According to J Batty, “Accounting ratio is used to describe significant

relationship between figures shown in balance sheet, in a profit and loss account, in a

budgetary control system or in any part of the accounting organization.”

Ratio analysis is useful to shareholders, creditors, and executives of the company.



Framework for ratio analysis:

It is possible to calculate a large number of ratios, because a ratio as just as

arithmetic relationship between two figures. But too many ratios only tend to confuse the

analyst. Therefore, it is desirable to first establish the broad parameters of financial

analysis, so that certain ratios may be calculated to fit into that basic framework.

There are 6 important areas, which should be studied.

1. Stability ratio

2. Liquidity ratio

3. Solvency ratio

4. Turnover ratio

5. Profitability ratio

6. Coverage ratio

Stability ratio:

By studying these ratio we should understand strong and stable is the company

and also know to what extent it can absorb. Future stocks which may be caused by

business cycles, risks and uncertainties. Study the relative stake of the stake holder in the

success of company, compared to that of the outsiders, who extend loans to the company.

There are two stability ratios:

Fixed assets to net worth:

Fixed assets as cost less depreciationFixed assets to net worth = ------------------------------------------------------------------

Equity shares preference shares + reserve & surplus



It shows whether fixed assets are entirely financial by the shareholders fund or

whether outside participation is also there in financing the fixed assets.

Debt / equity ratio:

Short term lib + long term lib (including debentures)Debt / equity ratio = ---------------------------------------------------------------------

Equity shares + preference shares + reserves & surplus

Liquidity ratio:

Liquidity ratio measures the relationship between current assets and current

liabilities, and indicate the firm’s ability to honor its current obligations. Two common

liquidity ratios are:

Current ratio:

When we divided current assets by current liabilities you obtain the current ratio.

That is:

Current assets Current ratio = ---------------------------

Current liabilitiesLenders generally consider 2:1 to be a desirable current ratio. By this norm, even

if half of the current assets are realized in cash, current obligations will be fully met. This

provides a 100% safety margin. The logic is based on the principle of conservatism. It

assumes that all current obligations have to be met immediately. Some lenders shw even

greater caution. The argue that out of current assets, inventories take longer to be

converted into cash. You have to first convert raw material into finished goods, sell it and

then realize cash from customers. They therefore, like to judge the firm’s liquidity after

deducting the inventories from current assets.

Quick ratio:

When we divided current assets excluding inventories ( called quick assets) by

current liabilities, we obtain the quick ratio.



Current assets - InventoriesQuick Ratio = --------------------------------

Current liabilities

It is also called ‘acid test ratio’ or simply liquidity ratio. Lenders would be

satisfied if a firm has a quick ratio of 1:1

Current ratio and quick ratio are a ready means of assessing a firm’s liquidity.

They are mostly used by creditors and lenders to ascertain the margin of safety. A firm’s

liquidity is in fact determined by the matching of cash flows – in & out. It may be having

difficulties with customers who do not pay or it may be stuck with slow moving

inventories. Another firm may be holding a smaller inventory but converting it into cash

faster. It may have customers who pay in time the firms point of view, it is much better to

have fast moving current assets and hold as few current assets as possible without

sacrificing production & sales.

Solvency Ratios:

When a company borrows money, it creates a legal obligation to pay interest

regularly and repay the principle at maturity. On the other hand, payment of dividend to

shareholders is discretionary and share capital is not returnable. An owner thus assumes

the risk of business. A high amount of debt can, therefore, threaten the solvency of a firm.

We can relate shareholders funds and loan funds to assess the company’s dependence on

to the people money. The mix of share holders funds and loan funds represents the

company’s structure and therefore, solvency ratios are also called capital structure ratios.

Some peoples also use the term leverage ratios.

We can calculate the following ratios to determine a firm’s solvency:



Debt – Equity Ratio:

This is most commonly used solvency ratio and is obtained by dividing borrowing

by net worth. That is:

Borrowings Debt – Equity Ratio = ------------------------------------------------

Net worth

In this ratio, debt means total loan funds and equity means net worth (share

capital + reserves, which are shareholder funds. Again lenders follow a norm of a debt

equity ratio 2:1; which means you can have borrowing twice the equity. A company will

be considered, risky fit exceeds this norm. Should you borrow accounts twice, your

firm’s equity funds, if some one is prepared to lend them to you? Obviously if it cannot

put borrowed funds to profitable use, you should not borrow. The debt equity ratio

provides a broad guideline for this. A cash flow analysis is needed to determine whether a

company can service debt.

Debt to – capital employed ratio:

Debt ratio can be expressed differently. We can take the total of debt and equity

i.e. capital employed, in the denominator of the ratio.

Borrowing Debt to – capital employed ratio = ------------------------------------

Capital employed

Borrowing Debt to – capital employed ratio = ------------------------------------

Borrowing + net worth

Debt to – capital employed ratio will range between 0 & 1 because part of capital

is divided by whole (i.e. debt and equity).



Interest coverage:

We have indicated that more than its debt ratio, it is the firm’s ability to pay interest

regularly which determines its solvency. Therefore, we can examine how many times a

firm’s earning cover its interest. We may require earnings to be at least twice the amount

of interest. This is because interest has to be paid in cash while earning may take time to

appear as cash.

Profit before interest and taxInterest coverage = -------------------------------------------------------------

Interest

Turnover ratios:

Shareholders funds and loan funds are invested in assets so that revenue could be

generated. A firm should, therefore, utilized its assets efficiently so that it can generate

maximum revenue. Turnover ratios are used to indicate the firm’s efficiency in managing

assets for generating revenue current assets are covered into sales and ultimately into

cash within a short period of time. The higher the speed with which these assets are

turned over into sales and cash, the better the performance of the company. Turnover

ratio, thus relate sales or revenue to various assets. They are also called activity ratios.

Commonly used turnover ratios are,

Net assets turnover:

When we divide sales by net assets we obtain net assets turnover since net assets

equal the employed, we can also call this ratio the capital employed turnover. Thus net

assets turnover ratio is

SalesNet assets turnover = --------------------

Net assets



Net assets turnover indicates revenue generated for each rupee of net assets

investment. If assets are unutilized or underutilized, the firm will generate less revenue.

This will prove to be expensive.

Inventory turnover:

Inventory is an important item of current assets. We will generate more sales if

inventory is turned over faster. Inventory turnover can be calculated by dividing sales by

inventory. That is

SalesInventory turnover = ------------------------------

Inventory

Debtors turnover:

Like inventory debtors should also be turned over faster. We can obtain debtors

turnover by dividing sales by debtors. That is

SalesDebtors turnover = ------------------

DebtorsDebtors arise when a company sells or credit. A higher debtors turnover implies

that the company is realizing its sales faster. We should also calculate the collection

period as

360 daysCollection period = --------------------------------

Debtor’s turnover

Debtors= ------------------------- x 360 days

Sales

Creditors turnover ratio:

Creditors x 365 Creditors turnover ratio = ------------------------------------

Annual credit purchases



It indicates the extent to which credit facilities are being enjoyed by the company

from its supplies. It is also expressed in number of days. A comparison between debtors’

turnover ratio and creditors turnover ratio indicates how efficiently more credit is

extended than received.

Profitability ratio:

Profits are necessary for a company’s growth and for satisfying investors with

reasonable returns. A firm’s profitability can be determined by relating profits to sales

and investments. The most important profitability ratios are as follows.

Gross margin (Gross profit ratio):

Gross profitGross margin = ----------------------------

Sales

Gross profitGross profit ratio = ----------------------- x 100

Sales

It indicates the gross margin obtained on all goods sold. It demonstrates the

manufacturing efficiency of a company.

Gross profit = Sales - Cost of goods sold

If selling price does not change significantly, the firm’s gross profit can increase

only if it can control its materials and other manufacturing costs.

Net margin ( Net profit ratio):

Profit after taxNet margin = -------------------------------

SalesNet profit

Net profit ratio = ----------------------- x100Sales



It indicates the overall profitability, after taking into account all expenses and

income net margin indicates the overall cost effectiveness of the firm. If company is able

to control its non manufacturing costs, other things remaining the same its net margin

will increase.

Return on investment (ROI):

Investments refer to the funds invested by shareholders and lenders, or the capital

employed. The profit figure to be used for calculating return on investment, therefore,

should reflect incomes of both shareholders and lenders. Profit before interest and tax

(PBIT) is the most appropriate figure for this purpose. Thus ROI can be calculated as

PBITReturn on investment = -----------------------------

Capital employed

Since capital employed is equal to net assets, ROI or return on net assets can also

be found by dividing profit before interest and tax by net assets.

PBITReturn on net assets = ----------------------------

Net assets

Return on equity (ROE):

Ultimately the firm has to earn reasonable income for its owners shareholders in

the case of a company. It is thus imperative to calculate return on equity to ascertain

whether shareholder’s expectations are being met. ROE can be calculated by dividing

profit after tax (PAT) by shareholder’s funds (i.e. net worth). Thus

PATReturn on equity = --------------------

Net worth



Coverage ratio:

Interest cover:

Profit before interest and income taxInterest cover = ------------------------------------------------------------

Interest charges

It shows the extent to which interest on debentures, bank overdrafts, etc are

covered by net profit.

Equity dividend cover:

Profit after tax and preference dividendEquity dividend cover = -----------------------------------------------------------

Dividend on equity shares

It indicates the extent to which equity dividend is covered.

Uses of financial ratios:

Financial ratios are helpful in different ways as follows,

They helps to the management for taking decisions like forecasting, planning ,

budgeting etc.

They help to inter firm comparison.

They help to state government to ensure that its industrial policy can be suitable to

the national planning strategies.

They help to shareholders and investors.



Chapter 4

Data presentation, analysis and interpretation

The present study is related to the financial analysis of Jawahar sugar mill. The

researcher has studied last five years data from 1999-2004.

Financial position:

The current assets, current liabilities etc. are considered for analysis. The base

year figure is taken as 100 and then figures of the subsequent years are shown in term of

percentage.



4.1Current assets over the period:

Current assets include cash and other assets which can be easily converted into the cash

within a short period of time generally one year such as bills receivables sundry debtors’

inventories etc.

Table no – 1 current assets

(Rs. in Lacs)

Year Yearly current assets Trend ratio

2003-04 12268.03 100%

2004-05 18030.15 147%

2005-06 24510.27 200%

2006-07 19266.27 157%

2007-08 20351.77 166%

Table no 1 is

related to the industry’s current assets are continuously and slightly increasing per year.

In the year 2003-04 it is Rs. 12268.03 but last year in 2007-08 current assets has

increased i.e. Rs. 20351.77. This is possible sue to stock of sugar and cash and bank

balance along with sundry debtors also increasing.



4.2 Current liabilities over the period:

Current liabilities are those obligations which are payable within a short period of

time generally one year and include out standing expenses bills payable, sundry creditors,

working capital loans etc.

Table no – 2 current liabilities :

(Rs. in Lacs )

Year Yearly Current Liabilities Trend Ratio

2003-04 8747.38 100%

2004-05 15788.9 180%

2005-06 20318.09 232%

2006-07 17998.89 206%

2007-08 18838.49 215%

The above table and graph shows that industry’s current liabilities are Rs 8447.38

in the year 2002-03 which is continuously increasing and it become Rs 18838.49 in year

2006-07. The increase in current liabilities is required high amount of working capital.



4.3 Working capital over the period:

Working capital is the difference between current assets and current liabilities.

Working capital = Current Assets – Current Liabilities.

Table no – 3 Working Capital

( Rs in Lakhs )

Year Yearly working capital Trend Ratio

2003-04 3520.65 100%

2004-05 2241.25 64%

2005-06 4192.18 119%

2006-07 1267.38 35%

2007-08 1513.28 43%

We can understand from above table and graph that the working capital position

of the industry is fluctuating since last five years due to stock of sugar is increasing

because industry has to sale the sugar as per release order. So keeping the stock of sugar

in warehousing industry requires additional working capital. In the year 2007-08 working

capital is decreasing as compare to 2003-04. It was Rs 3520.65 to Rs 1513.28.



4.4 Fixed assets over the period:

Fixed assets are those assets which exclude current assets and include plant and

machinery, land and building etc.

Table no – 4 fixed assets

( Rs in Lakhs )

Year Yearly fixed assets Trend Ratio

2003-04 7149.94 100%

2004-05 14363.61 201%

2005-06 15380.58 215%

2006-07 16438.40 230%

2007-08 17482.06 244%

We can interpret from the above table and graph that the industry fixed assets are

increasing per year. This is possible as the industry has extended its daily cane crushing

capacity from 2500 TCD to 5000 TCD.



4.5 Analysis of short term liquidity:

To analysis short term liquidity position of the industry, the liquidity ratio can be

calculated from the liquidity ratios. We can understand whether industry is able to meet

its current obligations within the stipulated time or not and from the efficiency ratio we

can understand whether industry has utilized its funds very efficiently in the various

assets or not here the base tear figure is taken as 100 and then figures of the subsequent

years are shown the term percentage.



a) Liquidity ratios:

Current ratio

The current ratio is the ratio of total current assets divided by total current

liabilities. The current assets include current cash and bank balance sugar stock, sundry

debtors, bills receivables etc. and the current liabilities including working capital

calculated by using following formula.

Current assets Current ratio = ---------------------- Current liabilities

Table no 5 current ratio:

(Rs in Lacs)

Year Yearly Current

Assets

Yearly Current

Liabilities

Ratio

2003-04 12268.03 8747.38 1.4

2004-05 18030.15 15788.9 1.14

2005-06 24510.27 20318.09 1.21

2006-07 19266.26 17998.89 1.07

2007-08 20351.77 18838.49 1.08

The above table and graph shows that current ratio of industry at all the year is

below the standard norm 2:1 but the satisfactory position in the year 2007-08 as

compared to other years. It indicates that there has been deterioration in the liquidity



position of the industry to achieve the standard norm either industry should have to

increase the current assets or reduce the current liabilities.

Quick ratio:

The quick ratio is the ratio between quick assets and current liabilities. The term

quick assets refer to those assets which can be converted into cash immediately. It

includes cash and bank balances sundry debtors bills receivables etc. it is calculated by

using the following formulae:

Quick assets = current assets – prepaid expenses stock

Quick assetsQuick liquid ratio = --------------------- Current liabilitiesTable no – 6 Quick Liquid Ratio

( Rs in Lakhs )

Year Quick Assets Current Liabilities Ratio

2003-04 2518.2 8747.38 0.29

2004-05 2562.9 15788.9 0.16

2005-06 3654.64 20318.09 0.18

2006-07 3410.39 17998.89 0.19

2007-08 2717.78 18838.49 0.14

The above table and graph shows that quick ratio of the industry is 0.14 in the

year 2007-08 which is less as compared to standard norm 1:1 but better position in the

year 2003-04 i.e. 0.29 times. This has been possible due to industry have very low



amount cash in hand. To improve this ratio either industry should have to increase quick

assets or reduce the current liabilities.

b) Efficiency ratio:

Inventory turnover ratio:

The inventory turnover is the ratio between cost of good sold and average

inventory.

Cost of good sold = (sales – gross profit)

The average inventory refers to simple average of the opening and closing

inventory. It is calculated by using the following formula.

Cost of the goods soldInventory turnover ratio=------------------------------- Average inventory

Table no 7 . inventory turnover ratio

(Rs in Lacs)

Year Cost of the goods sold average inventory Ratio

2003-04 9424.48 9273.13 1.02 Times

2004-05 13050.79 14809.9 0.88 Times

2005-06 14316.83 20633.85 0.69 Times

2006-07 10868.08 15094.75 0.72 Times

2007-08 11216.21 12751.78 0.88 Times



Debtors turnover ratio

It is the ratio between net amount sales and average debtors are the simple

average of debtors at the beginning and at the end of the year. It is calculated by using the

fallowing formula.

Net annual salesDebtors turnover ratio = ----------------------- Average debtorsTable no 8. debtors turnover ratio

(Rs in Lacs)

Year Net sales average inventory Ratio

2003-04 10834.41 839.51 13 Times

2004-05 15116.95 1826.59 8.27 Times

2005-06 18973.33 2330.35 8.14 Times

2006-07 12899.01 2051.45 6.29 Times

2007-08 13016.87 1264.8 10.29 Times



The Above graph shows that industry’s debtors turnover ratio is 10.29 times in the year

2007-08 as compare to the year 2003-04 it is decreased by 2.71 times. It shows that

shorter time lags between net sales and cash collection. At all year debtors’ turnover ratio

is low so inefficient management of debtors but in 2003-04. It is higher i.e. 13 times. It

shows efficient management of debtors.

Creditor turnover ratio

It indicates to what extent trade creditors are willing to wait for payment can be

approximated by the creditor’s turnover ratio. It is a ratio between purchase and average

amount of creditors outstanding during the year. It is calculated as follows.

Net amount purchaseCreditor turnover ratio = -------------------------------------

Average creditors

Table no 9. Creditor turnover ratio

(Rs in Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Purchases 6334.88 8659.57 9354.11 7185.49 6974.18

Creditors 2805.11 5600.16 2166.11 5158.35 2236.03

Ratio 2.26 times 1.54 times 4.32 times 1.39 times 3.12 times



We can understand that industry creditor’s turnover ratio is 3.12 times in the

2007-08 which is less than the 4.32 times in the year 2005-06 and somewhat increased

then the 1.39 from the year 2006-07. It shows that the industry is not able to settle its

creditors rapidly. It is possible due to industry is not getting good rates for sugar in the

national as well as international market.

Working capital turnover ratio

Cost of goods soldWorking capital turnover ratio = -------------------------------------

Net working capital

(Net working capital = Current assets – Current liabilities)

Table no. 10 Working capital turnover ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Cost of goods sold 9424.48 13050.79 14316.83 10868.08 11216.21

Net working capital 3520.65 2241.25 4192.18 1267.38 1513.28




We can understand from above graph the marketing capital turnover ratio of the

industry is 7.41 in the year 2007-08 which greater than the year 2003-04 but slightly

decreasing as compared to 8.58 in the year 2006-07. it means up to 2006-07 industry has

utilized its working capital satisfactory but in 2007-08 it has facing problem of getting

working capital, so it has affects in ratio which is reduced 1.83. Therefore factory has

improved its working capital investment.

Analysis of long term solvency

To analyzing long term solvency position of the industry equity ratio can be

calculated from these ratios we can understand whether industry is in position to meet its

long term debts along with interest within the time or not. Here the base year figure is

taken as 100 and then figures of the subsequent years are shown in terms of percentage.

Equity ratio

The ratio of proprietor’s funds to total assets is an important ratio for determining long

term solvency of the industry. The components of this ratio are not worth.

Net worth = (Equity share capital + Undistributed profit + reserve and

surplus) – Accumulated losses



Total assets denoted the total resources of the concern. It can be calculated by the

following manner.

Net worthEquity ratio = ---------------------- x 100

Total assets

Table no 11. Equity ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Net worth 5132.56 5313.65 6989.47 5737.41 5446.8

Total assets 19417.97 32393.76 39890.85 35704.67 37833.83

Ratio 26% 16% 18% 16% 14%

We can understand from above table and graph , in the year 2007-08, share

holders funds are less than the outsiders fund. It means long term solvency position of the

industry is not satisfactory. Better position in the year 2003-04 i.e. 26%, industry should

maintain this.

Solvency ratio

It indicates that relationship between the total liabilities and total assets. The total

liabilities include current liabilities and long term liabilities. It can be calculated as

follows.



Total liabilitiesSolvency ratio = -------------------------------- x 100

Total assets

Table no. 12 Solvency ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Total liabilities 14349.97 27175.58 33243.9 30309.63 32448.44

Total assets 19417.97 32393.76 39890.85 35704.67 37833.83

Ratio 74% 84% 83% 85% 86%

The above table and graph show that the solvency ratio of the industry is lower in

the year 2003-04 which is satisfactory or stable long term solvency position. But this

ratios is increasing per year, in 2007-08 it is 86% which shows that long term solvency of

the industry is unsatisfactory.

Analysis of profitability

To analyze the profitability, following ratios are to be calculated. It consists of gross

profit ratio, operating profit ratio, net profit ratio. Return on capital employed. From these



we can understand that earning capacity of the industry base year figure taken as 100 and

then figures of subsequent years are shown in terms of percentage.

Gross profit ratio

Gross profit measures the relationship of gross profit and net sales. The gross

profit is simply the excess of net sales over cost of goods sold. Net sales can be found by

deducing sales returns or return in words. It can be calculated as follows,

Gross profitGross profit ratio = ----------------------------- x 100

Net sales

Table no 13. Gross profit ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Gross profit 1409.93 2066.16 4656.5 2030.93 1800.66

Net sales 10834.41 15116.95 18973.33 12899.01 13016.87

Ratio 13% 14% 25% 16% 14%

The above table and graph shows that industry’s gross profit ratio is 14% in the

year 2007-08 which is decreased as compared to last year overall it shows that from last



five years industries gross profit is fluctuating. It means company’s profitably position is

not highly satisfactory. It is better in the year 2005-06 which show 25% means cost of

goods sold is lesser amount.

Operating profit ratio

Operating profit ratio shows the relationship between operating profit and net

sales.

Operating profit = Net sales – (Cost of goods sold + Administrative & office

expenses + Selling & distribution expenses)

This relationship can be calculated as

Operating profitOperating profit ratio = --------------------------- x 100

Net sales

Table no. 14 Operating profit ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Operating profit 1179.15 1759.49 4224.06 1733.5 2214.04

Net sales 10834.41 15116.95 18973.33 12899.01 13016.87

Ratio 11% 12% 22% 13% 17%



From above graph we can understand industry’s operating profit ratio is 17% in

the year 2007-08 which is not up to mark. It means operational efficiency of the industry

is unsatisfactory. Satisfactory position in the year 2005-06 i.e. 22%.

Net profit /loss ratio

It establishes the relationship between net profit or loss and net sales. The net

profits are obtained after deducting income tax and generally non operating incomes and

expenses are excluded from the net profit. This ratio measures the overall profitability of

the industry. It can be calculated as follows.

Net profitNet profit ratio =------------------ x 100

Net sales

Table no 15 Net profit ratios

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Net profit / loss 31.07 -938.89 183.44 161.49 -176.51

Net sales 10834.41 15116.95 18973.33 12899.01 13016.87

Ratio 0.29% -6.21% 0.96% 1.25% -1.36%



Industry has suffered from huge loss in the year 2004-05 i.e. -6.21% as well as in

the year 2007-08 i.e. -1.36%. Even though the industry has suffered from loss, it has to

pay compulsory statutory minimum price (S.M.P.) to the producer of sugarcane farmer.

Financial expenses ratio

Expenses ratio indicates the relationship of various expenses to the net sales. Here a

financial expense means interest is taken. Hence the ratio can be calculated from the

following manner.

Financial expensesFinancial expenses ratio = ------------------------------------ x100

Net sales

Table no 16 financial expenses ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Financial expenses 908.63 1842.57 3279.38 3539.03 3202.61

Net sales 10834.41 15116.95 18973.33 12899.01 13016.87

Ratio 8% 12% 17% 27% 25%



Financial expenses ratio has been continuously increasing from the last four years

but last year 2007-08 it is decreased by 2% as compared to year 2006-07. in the year

2007-08 the ratio is 27% and in the year 2007-08 it become 25%. It indicates that

industry has try to control on payment of interest on the borrowed funds because it

influence on the profitability of the industry.

Return on the assets

Net profitReturn on the assets = -------------------- x 100

Total assets

Table no 17 Return on the assets

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Net profit 31.07 -938.89 183.44 161.49 -176.51

Total assets * 100 19417.97 32393.76 39890.85 35704.67 37833.83

Ratio 0.16% -2.90% 0.46% 0.45% -0.47%

From above table and graph we can understand that industry’s return assets ratio

is -0.47% in the year 2007-08 which reflect that industry get to earn less amount of



returns. It means industry has not utilized its amount satisfactory, because it gives very

much problems in earning.

Return on capital employed

This ratio establishes the relationship between net profit and capital employed.

Net capital employed = (Net fixed assets + Net current assets + Investments)

- All current liabilities

It is calculated as follows.

Net profitReturn on capital employed = --------------------------- x 100

Net capital employed

Table no 18. Return on capital employed

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Net profit /loss 31.07 -938.89 183.44 161.49 -176.51

Net capital

employed

8127.28 13029.41 15216.52 14863.64 16157.58

Ratio 0.38% -7.21% 1.21% 1.09% -1.09%

We can say that from the above table and graph net capital employed ratio of the industry

has shown some improvement since last 2 years i.e. 1.21 % and 1.09% resp. but it is not

continuous because last year 2007-08 company face -1.09% loss and also industry has not



overcome from -1.21% which is accord in the year 2004-05. it means industry is not

utilized its funds satisfactory.

Analysis of capital structure and net worth

To analyze capital structure & net worth debt equity ratio , net worth & reserved

to equity ratio etc. are calculated. From these ratios we can understand industries ability

to raise in the funds.

Debt equity ratio

It establishes the relation between outsider’s funds & shareholders fund that is

equity capital performance, share capital, reserved & surplus and outsider’s funds include

all liabilities or debt. It is calculated as follows

Total long term debtDebt – equity ratio = ------------------------------------

Equity share capital

Table no 19 : Debt Equity Ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Debt 5602.58 11386.68 12925.79 12310.74 13609.95

Equity 5196.23 6286.09 7778.46 6364.91 5756.96




We can interpret from the above table & graph that the industries debt equity ratio

is 1.03 times in the year 2006-07 which is less than the standard norms 2:1 which is

accepted by financial institutions. It means debt is greater than equity. But last year 2007-

08 industry has try to improve debt equity ratio up to standard norms not more than 2

times therefore industry must try to maintain proper mix of capital means either increase

the equity or decrease the debt.

Debt to net worth ratio

This ratio establishes the relationship between long term debt & net worth long

term debts. It is calculated as follows

Total long term debtDebt – net worth ratio = ------------------------------------

Net worth

Table no 20: Debt – net worth ratio

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Debt 5602.58 11386.68 12925.79 12310.74 13609.95

Net worth 1720.74 5313.65 6989.47 5737.41 5446.8




Above table says that industry’s net worth is 2.50 in the year 2007-08 which

indicates that industry having less amount of net worth to meet the long term debt.

Industry must try to reduce long tern debt and improve debt net worth ratio.

Ratio of reserve to equity capital

This ratio establishes the relationship between reserve & equity share capital. It

shows that how much amount is kept by the industry from the profit for the future

growth. It is calculated as follows

ReservesRatio of reserve to equity capital = ---------------------------

Equity capital

Table no 21. Ratio of reserve to equity capital

(Rs. In Lacs)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Reserve 3411.62 4475.92 5504.59 3991.19 3209.33

Equity capital 1784.61 1810.17 2273.87 2373.72 2547.62


We can understand the above table & graph that the industry’s reserve to equity

capital ratio is 1.26 in the year 2007-08 which shows that industry has retained the

sufficient amount in the term of reserve for future growth.



Chapter 5

Findings & Suggestions

The present study will be observed that with tighter control over its expenses the

organization will be able to improve its performance in future. The efficient running of

any firm successful handling the cash flow and control the production cost is must.

I] Findings

A) Analysis of financial statement:

Current assets & current liabilities of factory have been higher in the year 2005-

06 as compare to the other years.

Working capital of industry shows a fluctuation position since last five year.

Fixed assets of industry is increased per year because of increased its cane

crushing capacity from 2500 TCD to 5000 TCD.

B) Analysis of short term liquidity:

Current ratio of the industry is less than the standard norms mean liquidity

position of a factory is not sound.

Inventory turnover ratio has fallen from the year 2003 to 2008.

Creditor turnover ratio is increased as compare to year 2003-04 to 2007-08, which

shows that increased in purchases & decreased in creditor’s outsider’s credit.

C) Analysis of long term solvency position:

Industry’s long term solvency position is unsatisfactory and industry is depending

upon outsiders fund for financing its affaires.

Proprietary to equity ratio is fallen from 26 % in the year 2003-05 to 14 % in the

year 2007-08.



Solvency ratio of the industry has grown up from 74% in the year 2003-04 to 86%

in the year 2007-08.

D) Analysis of profitability:

Gross profit ratio has improved in year 2005-06 as compare to 2003-04 because

industry has been reduced cost of sales.

Operational expenses are reduced. Operating profit increases from 11% to 17%.

Profitability of the industry has been slightly decreased in year 2007-08. To

improve the profitability industry should reduce cost of sales.

E) Analysis of capital structure:

Industry having less amount of net worth to meet its long term liabilities.

Debt to equity ratio is below standard norms.

Reserve to equity capital ratio shows that industry having sufficient amount of

reserve for future growth

Capital structure position is not sound because industry having more amount of

capital from outsiders.

II] Suggestions

After analyzing the case study of the organization some suggestions can be given

for the further improvement of the organization.

Management of the industry should take measures to improve the operational

efficiency to reduce the cost and increase the turnover.

The researchers think that with tighter control over its expenses the organization

will be able to improve its performance in future.



Industry should avoid diversion of funds also borrow low cost of loans must

reduce interest burden.

By improving industry’s operating efficiency avoid accumulated losses.

Take cure control of factory’s cost of goods selling, administration as well as

general expenses.

The organization should prepare monthly cash sheet and production data for

proper control over its costs and improvements in its working whenever the

monthly figure shows deterioration. The management must take immigrate steps

so that there is improvement in its working.

In order to attain control over materials the factory should introduce the perpetual

inventory system. It will help maintaining up to date records and continuous stock

taking.

As the wholes production and the duration of crushing seasons depends upon the

availability of sugarcane and in order to encourage the cultivators to grow better

quality of sugarcane. The organization should be tried to control various cost

centers other than the cane price which constitutes the major part of the total cost

of production.

Most important aspect of costing control is cost control and cost reduction

organization should be decided standards for production as well as cost and

compare the actual with these standards and take proper action whenever

variations are observed.



APPENDIX – 1

“COMPARATIVE STATEMENT OF BALANCE SHEET” (Rs. in Lacs)

Particulars 2005-06 2006-07 Increase in

amount

Increase in

%

1. Share Holder’s Funds

a. paid up capital

b. reserve & surplus

2. Loans fund

c. secured loans

d. unsecured loans

e. deposit

2273.87

5504.59

5631.17

958.70

6335.91

2373.72

3919.19

5090.25

896.19

6324.30

99.85

-1513.04

-540.92

-62.51

-11.61

4.39

-27.00

-10.00

-7.00

-0.18

Total 20704.24 18675.65 -2028.59 -10.00

Fixed assets

Investments

1. Current assets

a. stock of sugar

b. spares & stores

c. cash & bank balance

d. sundry debtors

e. loans & advances

15380.58

342.50

20033.85

821.78

1261.95

2330.35

62.33

16438.40

342.37

15094.75

761.13

1311.67

2051.45

47.26

1057.82

-0.13

-4939.10

-60.65

49.73

-279.20

-15.07

7.00

-0.04

-25.00

-7.00

4.00

-12.00

-24.00

Total current assets 24510.27 19266.27 -5244.00 -21.39

Less : current liabilities &

provision

Working capital loans

Sundry creditors

Bills payable

Provision

16753.22

362.48

1803.63

1398.76

11541.38

890.67

4267.68

1299.16

-5211.84

528.19

2464.05

-99.60

-31.00

146.00

137.00

-7.00

Total current liabilities 20318.09 17998.89 -2319.20 -11.00

Current assets 4192.18 1267.38 -2924.79 -70.00

Profit & loss account 788.99 627.50 -161.49 -20.00

Total 20704.24 18675.65 -2028.59 10.00



APPENDIX – 2

“COMPARATIVE STATEMENT OF BALANCE SHEET” (Rs. in Lacs)


amount

Increase in

%

1. Share Holder’s Funds

a. paid up capital

b. reserve & surplus

2. Loans fund

c. secured loans

d. unsecured loans

e. deposit

2373.72

3919.19

5090.25

896.19

6324.30

2547.63

3209.33

7520.22

828.92

5260.81

173.91

-781.86

2429.97

-67.27

-1063.49

-7.33

-19.59

-47.74

-7.51

-16.81

Total 18675.65 19366.91 691.49 3.70

Fixed assets

Investments

1. Current assets

a. stock of sugar

b. spares & stores


d. sundry debtors

e. loans & advances

16438.40

342.37

15094.75

761.13

1311.67

2051.45

47.26

17482.06

340.87

16930.96

703.01

1235.77

1264.80

217.21

1043.66

-2.00

-1836.23

-59.12

75.12

-786.65

169.95

6.35

-0.58

12.61

-7.64

-5.79

-38.35

359.60

Total current assets 19266.27 20351.77 1085.50 5.63

Less : current liabilities &

provision

Working capital loans

Sundry creditors

Bills payable

Provision

11541.38

890.67

4267.68

1299.16

15241.36

300.08

1935.94

1361.11

3699.98

-590.59

-2331.74

61.95

32.06

-66.31

-54.64

4.77

Total current liabilities 17998.89 18838.49 839.60 4.66

Current assets 1267.38 1513.28 245.90 19.40

Profit & loss account 627.50 310.16 -596.90 -95.03

Total 18675.65 19366.91 691.26 3.70



APPENDIX – 3

“COMPARATIVE STATEMENT OF PROFIT & LOSS ACCOUNT”


amount

Increase in

%

Net sales

Less cost of goods sold

18973.33

14316.83

12899.01

10868.08

-6074.32

-3448.75

-32.00

-24.00

Gross profit 4656.50 2030.93 -2625.57 -56.00

Less operating expenses

Selling & distribution

Administrative expenses

152.03

280.41

109.89

187.54

-42.14

-92.87

-28.00

-33.00

Total operating expenses 432.44 297.43 -135.01 -31.00

Operating profit 4224.06 1733.50 -2490.56 -59.00

Other income 283.14 2591.25 2308.11 815.00

A. Total income 4507.09 4324.75 -182.44 -4.00

Less non operating expenses

Interest paid

Depreciation

Accumulated losses

3279.38

1044.36

0.00

3539.03

624.22

0.00

259.65

-420.14

0.00

8.00

-40.00

0.00

Total non operating

expenses

4323.74 4163.25 -160.49 -4.00

Net profit / loss account 183.45 161.50 -21.95 -12.00

Total expenses 4507.19 4324.75 -182.44 -4.00



APPENDIX – 4

“COMPARATIVE STATEMENT OF PROFIT & LOSS ACCOUNT”


amount

Increase in

%

Net sales

Less cost of goods sold

12899.01

10868.08

13016.87

11216.21

117.86

348.13

0.91

3.20

Gross profit 2030.93 1800.66 -230.27 -11.34

Less operating expenses

Selling & distribution

Administrative expenses

109.89

187.54

159.12

254.26

49.23

66.72

44.79

35.57

Total operating expenses 297.43 412.38 115.95 0.38

Operating profit 1733.50 2214.04 480.54 27.72

Other income 2591.25 812.06 -1779.19 -68.66

A. Total income 4324.75 3026.10 -1298.65 -30.03

Less non operating expenses

Interest paid

Depreciation

Accumulated losses

3539.03

624.22

0.00

3202.61

0.00

0.00

-336.42

-624.22

0.00

-9.50

-100.00

0.00

Total non operating

expenses

4163.25 3202.61 -960.64 -0.23

Net profit / loss account 161.50 -176.51 -328.01 -209.29

Total expenses 4324.75 3026.10 -1298.65 -30.03



APPENDIX – 5

“STATEMENT OF NET WORKING CAPITAL”

(Rs. in Lacs)

Particulars 2003-04 2004-05 2005-06 2006-07 2007-08

1. Current assets

a. stock of sugar

b. spares & stores


d. sundry debtors

e. bills receivable

9273.13

476.69

607.76

1472.94

437.51

14809.90

657.36

432.03

1318.98

811.88

20033.85

821.79

1261.96

1878.88

513.79

15094.75

761.13

1311.68

1326.43

772.27

16930.98

703.01

1235.77

1064.73

417.28

Total 12268.03 18030.15 24510.27 19266.27 20351.77

2. current liabilities

a. Working capital loans

b. Sundry creditors

c. Bills payable

d. Provision

5556.01

1977.17

827.26

386.26

9551.74

3642.37

1975.79

6370.00

16753.22

362.48

1803.63

1398.76

11541.38

890.67

4267.68

1299.16

15241.36

300.08

1935.94

1361.11

3520.65 2241.25 4192.18 1267.38 1513.28



Bibliography

1. Finance – A Management Guide for Managing Company Funds & Profit

–by I.M. Pandey

2. Finance for Non Financial Executives ---- by N.J. Yasaswy

3. Cost Accounting & Financial Management --- by M.E.Tukaramrao

4. Annual Reports ---- Jawahar Shetkari Sahakari Sakhar Karkhana Ltd.


Documents

financial analysis- final new-1