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A Project Report
On WORKING CAPITAL ANALYSIS IN HINDUSTAN
ZINC LIMITED, UDAIPUR (RAJ.)
SUBMITTED FOR
Partial fulfillment of the requirement of two year full time course in Master of Business Administration (MBA)
SUBMITTED BY
DIMPLE MARDIA
(2006-07)
INSTITUTE OF MANAGEMENT STUDIES, AISHWARYA INSTITUTE OF
MANAGEMENT (OUR AIM…. ) ADARSH NAGAR UDAIPUR (RAJ.) 313001
ACKNOWLEDGEMENT
“FOR ANY SUCCESSFUL WORKS, IT OWNS THANKS TO MANY.”
Every nature individual in professional life is keenly aware of his/her sense of indebtedness to many people who have stimulated & influenced his/her intellectual development ordinarily. This feeling is formally expressed in customary gesture of acknowledgement. Therefore it seems right to acknowledge my gratitude with sense of veneration to almighty god for the blessings showered on me and varies people who helped me during the course of my investigation.
Prima facie I express my profound gratitude & indebtedness to my research supervisor Mr. Hemendra Sharma (Associate General Manager- finance) for his worthy, scholarly & unimpeachable efforts, inspiring supervision & invaluable guidance which helped me to complete my dissertation.
I olso owe my sincere gratitude to the director, Aishwarya collage of management Mr. N.K. Dashora for providing me this opportunity.
I acknowledge my gratitude with sense of reverence to the management of HZL who provide me opportunity to undergo research in there esteemed organization. I owe my sincere thanks to Mr. Naresh Agarwal (Manager CSA), Mr. K.S.Sardaliya (Material dep’t.), and Mr. S.K.Dahire (Production dep’t.) for their providing necessary facilities, data, facts & information from time to time.
Finally I wish to express warm gratitude to my family, it is entirely due to their blessing & constant encouragement that I have been able to complete credibly my dissertation.
DATE:- PLACE: - UDAIPUR
(DIMPLE MARDIA)
Preface
The importance of working Capital in a company that arise in attempt to manage the current assets, the current liabilities and the interrelation ship that exists between them.
Many changes occur in the company’s when “Disinvestment” takes places. Especially in the Finance and HR departments. As far as the changes in Finance dep’t. are concerned, new policies are being implemented for the coming year which effects directly or indirectly the working capital of the company.
So the purpose of the research is to analyze- “Working Capital Management of the Hindustan Zinc Limited”.
The focus of the study is on Pre and Post-Disinvestment changes that might have happened in HZL and its effects on the financial performance of the company. The study has tried to cover all the aspect determining the financial performance of the company in term of working capital management.
Finally, all research is cumulative. I have, as a researcher, needed to cull out priorities, interpret and finally put down my analysis.
CONTENTS
Research methodology Company profile Introduction Mgt.Structure of HZL Need of working capital Determination of working capital Source of working capital Ratio analysis Conclusion of the study Limitation of the study Balance sheet, P&L A/C for five year working capital for five year Bibliography
Research Methodology
This chapter furnished the methodological details of present
investigation. Procedural specification and through observation of
study and design which are indispensable feature for any research
work.
OBJECTIVES:
To study the meaning, concept & importance of working
capital.
To study the concept of collections & payment of debtors,
creditor & bills.
To study the meaning of Working Capital and describing its
various procedures.
To study various techniques of working capital used in HZL.
To study the management of working capital. How to use its
working cash.
To study its current assets and liabilities.
TECHNIQUES USED:
Collections, payment, classification, completion, tabulation,
analysis & interpretation of information, facts and figures
relevant to the company.
Consultation and personal observation.
Discussion with officers and employee of the company.
Drawing conclusions through applications of various statistical
& financial tools and technique.
Graphical and diagrammatical presentation of data.
SOURCE OF INFORMATION:
PRIMARY SOURCE .
Information schedule prepared for collection primary data relevant to the
working capital management of the company.
Personal observation & interviews with officers.
With the help of my supervisor and company’s employees.
SECONDARY SOURCE.
Annual financial statement of the concerns i.e. Balance Sheet, Profit &
loss account related to the period.
Annual reports tread Journal, magazines & periodical of the company.
References book, journals, statistical bulletins & newspaper.
CHAPTER # 1
Introduction Of
HINDUSTAN
ZINC
LIMITED
INTRODUCTION
India is a country of large dimension. It spreads over a geographical area of 3.29 million Square Kilometers, which is about 2.5% of the globe and makes the country the seventh largest in the world. India is Asia’s third and worlds eleventh largest economy.
India produces as many as 84 minerals compromising 4 fuels, 11 metallic, 49 non-metallic industrial and 20 miner minerals. Their aggregate production in 2004-2005 as about 600 million tones, contribution by over 3,100 mines (reporting mines) producing coal, lignite, limestone, iron ore, bauxite, cooper lead, zinc etc. the aggregate value of mineral production in 2004-2005 was more than Rs. 450 billion ( appx. $10 billion ).
The minerals policy opened the gates of Indian minerals industry to domestics and foreign investment, much of which was earlier reserved for the public sector. It ails to boost the country’s exploration and mining efforts and render the mineral industry more competitive.
There are following player’s deals in mineral and mining sector-
HINDUSTAN ZINC LIMITED (HZL)
HINDUSTAN COPPER LIMITED (HCL)
INDIAN ALUMINUM COMPANY (INDAL)
STERLITE INDUSTRIES LIMITED (SIL)
HINDUSTAN ALUMINUM COMPANY (HINDALCO)
MANAGEMENT STRUCTURE OF HZL
BOD
Mr. Agnivesh Agarwal : Chairman
Mr. Ajita Bajpai Pande : Director
Mr. Sujit Gulati : Director
Mr. A.C. Wadhawan : Director
Mr. N.K. Shukla : Director
Mr. Anil Agarwal : Director
Mr. Navin Agarwal : Director
Mr. K.K Kaura : Director
Mr. Tarun Jain : Director
Mr. M.S. Mehta : CEO & Whole time Director
Mr. S.L. Bajaj : Chief Financial Officer
Mr. Rajendra Pandwal : Company Secretary
Registered Office
Yashad Bhawan Udaipur (Raj.)313001
VEDANTA
VEDANTA RESOURCES(Yashad Bhawan, Udaipur)
Vedanta is a US $2.2 billion London listed, diversified metals and mining Group
Vedanta has copper, aluminum and zinc operations are India. Two copper mines in Australia and copper mines in Zambia.
Vedanta also has interests in gold (AGRC) and optical fiber (SOTL) Through the Sterlite Group.
FY 2005 group turnover : US $1884.2 million FY 2005 group EBITDA: US $455 million.
In India, Vedanta Resources has interests in HZL (through sterile), BALCO and MALCO.
Indian Market Shares :-
Zinc – Vedanta (HZL) 75% Only Integrated Zinc producer
Copper – Vedanta (Sterlite) 42% One of two leading copper producers
Aluminum – Vedanta (BALCO and MALCO) 21% One of three aluminum producers
Corporate Objectives Harnessing natural resources in harmony with natural to enhance
economy well – being and quality of life. To put India on the world metals and mining map by becoming a fortune
500 company. To be in the top decide in term of cost of production by 2007 across all
businesses. To double per capita consumption of copper, aluminum and zinc through
application development and marketing efforts by 2009. To explore and develop mineral reserves by 2010, for the subsequent
15 years in copper, aluminum and zinc. To have relentless focus on execution using best in class processes. To build an organization having world class capabilities and high
performance culture by attracting, developing and retaining talented people.
To set up CPP’S / captive sources for entire power requirement. To explore and develop additional mining resources. To build world class capabilities and high performance culture. To develop value added products such as CGG alloys, zinc sheets etc.
Corporate environmental policy
Use appropriate environmentally sound technologies in all over operations wherever feasible.
Conserve key inputs resources like water, energy and chemical particularly the hazardous ones.
Institutionalize the sense of environmental care among all the members of HZL family.
Effect continuous improvements in hose areas that is environmentally significant.
Not only comply with the applicable environmental lows, but go beyond wherever possible.
HZL Milestones at a Glance
Rampura Agucha Mine
Commissioned 1991Location 225 km north of Udaipur, Rajasthan, India.Capacity 3.7 mtpa oreDetails An open cast mine with low strip ratio 5:1 and
good mineralogy leading to higher recovery and overall low cost of production. Onsite concentrator to produce zinc concentrate.
Concentrate Zinc 54-54.5%, lead 63.7-67%Certification ISO 9001:2000, ISO 14001:1996, OHSAS
18001:1996
Rajpura Dariba Mine
Commissioned 1983Location 75 km north-east of Udaipur, Rajasthan, India.Capacity 1.3 mtpa oreDetails An underground mine with on site concentrator
and two vertical access shafts. Mining is done through vertical crater retreat and blast hole stopping. Ore is crushed before hoisting and stockpiling for secondary and tertiary crushing.
Concentrate Zinc 51.5%, lead 51.2-52.9%Certification ISO 9001:2000, ISO 14001:1996, OHSAS
18001:1999
Zawar Mine
Commissioned 1942
Location 40 km East of Udaipur, Rajasthan, India.Capacity 1.2 mtpa oreDetails An underground mining complex consisting of
four underground mines and one concentrator for all mines. Mining is done with sublevel stopping with matching infrastructure. The complex is equipped with 6 MW of captive power generation capacity.
Concentrate Zinc 54.3-55.2%, lead 64.7-64.8%Certification ISO 9001:2000, ISO 14001:1996, OHSAS
18001:1999.
HZL operates smelters based on Pyro-metallurgical (Chanderiya Lead Zinc Smelter) and Hydro-metallurgical (Debari and Vizag Zinc Smelter) process routes. The Chanderiya Lead Zinc Smelter is one of the most cost-effective Pyro metallurgical Zinc Smelter in the world.
Chanderiya Lead Zinc Smelter :- Commissioned 1991Location 120 km east of Udaipur, Rajasthan, India.Capacity 1, 05,000 TPA of refined zinc, 35,000 TPA of refined
lead Details A Pyro-metallurgical smelter using ISP Technology.
Main by products is Sulphuric Acid and Silver and one of the by product is cadmium.
Capacity power coal based 155 MVV captive power plants commissioned in 2005.
Generation Certification ISO 9001:2000, ISO 14001:1996, OHSAS 18001:1999
Debari Zinc Smelter :-
Commissioned 1968Location 12 km east of Udaipur, Rajasthan, India.Capacity 80,000 TPA of refined zinc.Details A Hydro-metallurgical smelter using RLE Technology.
Main by products is Sulphuric Acid and Cadmium. The plant is equipped with 29 MW of captive power generation capacity.
Certification ISO 9001:2000, ISO 14001:1996, OHSAS 18001:1999
Vizag Zinc Smelter:-
Commissioned 1977Location 17 km from Vishakhapatnam, Andhra Pradesh, India.Capacity 56,000 TPA of refined zinc.Details A Hydro-metallurgical smelter using RME Technology.
Main by products is Sulphuric Acid and Cadmium. The plant obtains part of its power requirement al low cost due to Share holding in a gas utility company in Andhra Pradesh.
Certification ISO 9001:2000, ISO 14001:1996, OHSAS 18001:1999
HZL has an on going expansion project in these mining as well as
smelting, to raise its capacity of refined zinc to 4, 00,000 TPA.
Leading foreign venders like Lurgi, Outokumpu, ABB, Alstom and BHEL
are associated with these projects. The total capital investment by HZL on
these projects is Rs. 16,475 million.
PROJECT
HZL has undertaken expansion project (phase II) in mining as well as smelting
which has raised the capacity of refined zinc to 4,11,000 tons per annum. The
main expansion projects are:-
Chanderiya zinc smelter expansion: - The new 1,70,000 TPA Hydro-
metallurgical zinc smelter at chanderiya and associated 154 mvv power
plant were commissioned in may 2005. This was built at a total cost of
$335 million. A second 1,70,000 TPA Hydro-metallurgical smelter will be
built at chanderiya along with a 77 mvv captive power plant. The second
smelter and the accompanying captive power plant are expected to be
commissioned by 2008. This is being built at a cost of $300 million.
Rampura Agucha mines: - The Rampura Agucha mine expansion was
also completed in may 2005. The mine is now operating its full capacity is
3.75 mtpa.
Chanderiya Lead smelter: - The new 50,000 TPA AusmeltTM lead smelter
was commissioned in Feb. 2006.
Corporate Social Responsibility
HZL has donated Rs. 11 million towards the mid day meal scheme of govt. of Rajasthan for constructions of kitchens at Chittorgarh, Bhilwara, and Udaipur district for catering to about 100000 rural school children.
Reducing sulpher dioxide (SO2) emission by ½ by 2006 and achieving Zero waste water discharge through 100% recycling.
HZL has prepared action plans and has planned investment of Rs. 380 million over the next 2-3 year.
HZL is implementing a meaning full need based sustainable development initiative in a no. of operational village at its six difference location. Through its CSR initiatives HZL is impacting the lives of more than 1, 05,000 rural masses belonging to over 22,000 families.
Supporting education with contributions over Rs.21 million through the running and equipping of schools for children of employees and other local children. HZL also offered scholarship of Rs.2.4 million for children from the words from which the employee are drown.
Provision of 30% of the fund of around Rs.180 million and supervision of the construction of a dam, which is supply water from the region the Mansi Wakal project to be completed.
Contribution Rs. 63 million for the construction of the Hindustan Zinc cardiology center in Udaipur inaugurated in April 2003, now operated by the Government of Rajasthan. Medical aid is also being offered to local people through the dispensaries and medical facilities located at the HZL sites and through health initiatives.
Contribution of Rs. 2 million in support of programmers to strengthen local self-government in the villages of southern Rajasthan, for example supporting the empowerment of women.
Human Resource Development
The main strength of any organization is its employees. The management of HR in HZL is a continuous process to ensure the development of employee’s confidence, dynamism, effectiveness, motivation and morale in a system at way, which helps to achieve higher productivity in terms of physical and financial outputs. The management of HR is always aimed at, to develop and nurture a culture change in the organization.The focus is on positive attitude, openness, trust and achieving, excellence in all spheres of activities.
Social Responsibilities
The concern of man kind at HZL is not limited to its boundaries, but spills over whole country, providing the backward and tribal populance in and around its unit in Orissa, Andhra Pradesh, Bihar and Rajasthan. The concern manifests itself in form on numerous rural health campaigns, family welfare activities, adult education programmes, water supply, construction of roads in rural areas; cattle fodder camps, cyclone relief measures in Orissa and Andhra Pradesh, earth quake relief measures in Bhuj etc.
Disinvestment
For the competitive success in the fast changing global market, strategic partnership alliance is inevitable. The focus shall be on the value creation within alliance. The capacity of both partners to dynamically and creatively maneuver the alliance through a thicket of uncertainties, changing priorities, organization fractions and competitive surprise is of vital importance. In this background, the Govt. of India has identified a strategic Group and divested its majority stake.
CHAPTER # 2
What makes HZL suitable company for the study?
HZL is the major producer of zinc/lead with the vertical integration in other non-ferrous metal. It has been one of the mini-Navaratna PSU of government of India.
Following the policy of disinvestment of the government of India, the company has undergone into disinvestment on 11 April 2002. Since then the new management has introduces significant policy changes in various function and taken number of steps to control cost and improve the performance of the company.In view of the above, HZL is considered a suitable company for the financial analysis.
Scope of the study
Objective of the study:- Judgment of the overall performance of the company by analysis of financial statements.
Span of the study:- Analysis of financial statement for the period of 6 year i.e. from 2001 to 2006.
The study included the following.
1. Study of the financial statements through ratio analysis.2. Analysis of the possible reason for the change in the
performance of the company.3. Study of the role of uncontrolled factors like LME prices,
taxation policy etc on the profit.4. Study of the expansion plans of the company.
DESIGN OF STUDY:
The study comprises of seven chapters in all. The first and second chapter throws ample light on the growth and development of industry selected. The third chapter discusses the research methodology used for study. The fourth chapter deals in detail with theoretical concept of the working capital management. In fifth chapter the Ratio Analysis of HZL & sixth chapter is the Limitation of the Company. and finally main conclusions have been drawn & suggestion given in the last chapter, the seventh. To facilitate an easy understanding of the chapter, the timely helps of diagrams & charts has been taken.
Objective of the studyThe analysis of financial statements is very important in the modern business. The financial analysis is very useful for management as well as for other interested parties to know the performance of company. The management can take corrective action on adverse or undesirable aspect.
The following are the main objective of our study.
1. To access the overall performance, liquidity position, solvency position, profitability of the company through Ratio Analysis.
2. To make item wise analysis of the financial statements to identify items responsible for changes in the liquidity, solvency, profitability and overall performance.
3. To identify the various factors affecting profit and steps taken by new management for improving performance and their effect on the company.
4. To know the effect of uncontrolled factors on the profits.5. To know the effect of changes in the accounting policy.6. To make overall judgment of the company.
CHAPTER # 3
Working
Capital
Management
CONCEPTS & DEFINITION OF WORKING CAPITAL
A manufacturing concern needs finance not only for acquisition of fixed assets but also for its day-to-day operations. It has to obtain RM for processing, pay wages, Bills and other manufacturing expenses. A non manufacturing trading concern may not be require funds for purchase of RM and their processing but it also needs finance for storing goods and providing credit to customers similarly, a concern engaged in providing service may not have to keep inventories, but it may have to provide credit facilities to its customers. Thus, all enterprises engaged in manufacturing and trading or providing services require finance for their day to day operations. The amount required to finance day to day operation is called Working Capital.
It is that capital which makes the company work. Fixed assets from the skeleton while WC is the Flash and blood. WC is also known by other terms. Viz. circulating capital, fluctuating capital, revolving capital etc. The peculiarity of WC is that keeps on changing continuously in course of business operations. The assets and liabilities created during the operating cycle are called current assets and current liabilities.
The term WC can be looked at in two ways.
1) Gross Working Capital (GWC): it refers to the total of all current assets of the company.
2) Net Working Capital (NWC): It refers to the difference between CA & CL.
The goal of Working capital management is to manage the CA and CL in such a way that an acceptable level of net working capital is maintained.
While the study of GWC indicate the nature and extant of working capital requirements, the analysis of NWC indicates the liquidity positions of an enterprise.
NEED FOR WORKING CAPITAL
The objective of financial decision making is to maximize the Shareholders wealth. To achieve this, it is necessary to generate sufficient profit, which will depends upon the magnitude of the sales, among other things. However, sales do not convert into cash instantly; there is invariably a time lag between the sales of goods and the receipt of cash. There is therefore, a need of working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically, this is referred as the operating or cash cycle. The operating cycle can be said to be at the heart of the need of working capital.
The term operating refers to the length of time necessary to complete the following cycle of event.
1. Conversion of cash into inventory2. Conversion of cash into receivable 3. Conversion of receivable into cash.
The operating cycle, which is a continuous process, is as shown in figure 1
Phase 3
Phase 2
Phase 1
RECEIVABLE
INVENTORY
CASH
OPERATING CYCLEFig.1-- If it were possible to complete the sequences instantaneously, there would be no need for current assets (working capital).Since cash inflows and cash outflows do not match, firm have to necessarily keep cash or invest in short term liquid securities.So that will be in a position to meet obligations when they become due similarly, firm must have adequate inventory to guard against the possibility of not being able to meet a demand for their products. Adequate inventory, therefore, provides a cushion against being out of stock. If firm have to be competitive they must sell goods to their customers on credit which necessities the holding of account receivable.
The concept of operating cycle is a cycle is a more precise tool for financial management to precisely measure the WC requirements, to trance its change and to determine the optimum level of WC requirement. It is emphasized that the various component of the operating cycle have to be continuously moving and changing from one status to another.
The following situation prevalent in a business is assessed in an operating cycle approach to WC management.
Nature of WC changes with the passage of time & also with day-to-day business transactions.
There are businesses which are seasonal in nature of buying of row materials. A company manufacturing and selling seasonal items like packed tea, has to buy the raw materials during the seasonal which means more money is required during that period.
What is “current” (either assets or liabilities) for a particular period for particular industries depends on technologies and business characteristics peculiar to each nature of business.
Maintaining of two small WC may yield higher return of capital employed temporarily but in the succeeding periods and also in the long run the profitability and yield on capital employed may reduce.
The levels of WC to be maintained as a direct bearing on the profitability of the business beside the question of maintain liquidity.
Production cycle consist of the following in respect of a manufacturing concern.
I. Buying of row materials.II. Storage of row materials.III. Input of row materials to the productions process.IV. Output as finish goods.V. Selling of goods.VI. Collection of money from credit customers.
The sum total of days starting with the input of raw materials and the selling of finish goods and the collection against sales involved in each segment will be the “Gross Operating Cycle Period.” When the average payment of the company to the suppliers is deducted from the gross operating cycle period it is called the “Net Operating Cycle Period” or simply cycle period. The shorter the duration of operating cycle period, the faster will be the transformation of current assets into cash; as a consequence the lesser will be the necessity of WC fund.The average inventory of row material and store consumption cost of production, cost of sales and the purchases are derived by dividing the respective year-end figures by 365 days.The total number of days against each formula is found out for (a) to (d) which is the gross operating cycle and the total number of days against (e) is deducted to arrive at the net operating cycle.
CURRENT ASSETS AND LIABILITIES
CURRENT ASSETS:-
The term ‘current assets’ includes assets which are acquired with the intention of converting them into cash during the normal business of the company.
The board categories of CA, therefore, are –
1. Cash including fixed deposits with bank
2. Accounts receivable, i.e., trade debtors and all bills receivables.
3. Inventories, i.e., stock of row materials, work in progress, finish goods, Store and spare parts.
4. Advances recoverable, i.e., the advances given to suppliers of goods and services or deposits with government and public authorities, e.g.- customs, port-authorities, advance income tax.
5. Prepaid expenses, i.e., cost of unexpired services, e.g., prepaid advances, etc.
CURRENT LIABILITIES:-
The liabilities payable within a year and out of current assets. The value of these liabilities generally changes within one year. Long term liabilities if matured and are to be paid in the current period and out of CA, will become CL.
Long term categories of current liability are:-
Accounts payable, e.g. Bills payable and Trade Creditors.
Out standing Expenses – Expenses for which service have been
received by the business but from which payment have not been
made.
Bank Overdraft
Short term loan i.e. loan from bank etc. which are payable within one
year from the date of Balance Sheet.
Advance payment received by the business for the services to be
rendered or goods to be supplied in future.
Current maturities of Long Term Loans.
There is another way of looking at the WC on the basis of time
element; the WC can be classified into two categories.
1. Fixed or Permanent or Hard-core WC – It represents the minimum
amount to ensure effective utilization of FA and supports the normal
operations. It is permanently invested and can be realized only when
the business operations are closed down. Every business has to
maintain a minimum stock of RM, WIP (work in progress), FG
(finished goods), Tools, and Spares etc. Similarly it required certain
amount for disbursement of wages, salaries and other expenses
regularly. In Characteristics it is very similar to fixed assets, since it is
employed almost permanently and it cannot be retrieved at a short
notice.
2. Variable or Temporary or Fluctuating WC – It fluctuated with the
activity level in the firm. Such as fluctuation are subject to season’s
variation or cyclical changes. The temporary EC could be funded by
short term sources of finance.
CHAPTER # 4
RATIO
ANALYSIS
INTRODUCTION
Ratio analysis is a widely used tool or finance analysis. The term ratio in it refers to the relationship expressed in mathematical term between two individual figures and group of figures connected which each other in some logical manner and are selected from financial statement of the concern. The ratio analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when expressed as a relative to some other figure, it may definitely provide some significant information. The relationship between two or more accounting figures/ groups is called a financial ratio. A financial ratio helps to express the relationship between two accounting figures in such a way that users can draw conclusions about the performance, strength and weakness of a firm.
The operations and financial position of a firm can be described by studying its short terms and long terms liquidity position, profitability and its operational activities. Therefore, ratios can be classified into following four board categories.
1- Liquidity Ratio
2- Capital Structure/ Leverage Ratios
3- Activity Ratios
4- Profitability Ratios
** Liquidity Ratios:-
The terms ‘Liquidity’ and ‘Short term solvency’ are used synonymously. Liquidity and short term solvency means ability of the business to pay its short term liabilities. Inability to pay off short term liabilities affects its credibility as well as its credit rating. Continuously default on a part of the business leads to commercial bankruptcy. Eventually such commercial bankruptcy may lead to its sickness and dissolution. Short term lenders and creditors of the business are very much interested to know its state of liquidity because of their financial stake. Traditionally, two ratios are used to highlight the business ‘Liquidity’. These are Current Ratio and Quick Ratio.
Significance of the Current and Quick Ratio:-
Current Ratio in a business concern indicates the availability of current assets to meet its current liabilities. Higher the ratio better is the coverage. Traditionally, it is also called 2:1 ratio, i.e. 2 is the standard for current assets for each unit of current liabilities.
Quick asset consists of only cash near cash assets. Inventories are deducted from current assets on the belief that these are not ‘near cash assets’.
** Capital Structure/ leverage Ratio.The Capital Structure/ Leverage Ratios may be defined as those
financial ratios which measure the long term stability and structure of the firm. These ratios indicate the mix of funds provided by owners and lenders and assure the lenders of the long term funds with regard to:-
1- Periodic payment of interests during the period of the loan and 2- Repayment of principal amount of maturity.
Therefore leverage ratios are two types:-
1- Capital structure Ratio and2- Coverage ratio
** Activity Ratio:-
The activity ratios are also called the Turnover ratios or Performance ratio. These Ratios are employed to evaluate the efficiency with which the firm manages and utilized its assets. These ratios usually indicate the frequency of sales w.r.t. its assets. These assets may be capital assets or WC or average inventory. These ratios usually calculated with reference to sales/ costs of goods sold and are expressed in term of rate or times. Several activity ratios are follows:-
1- Capital Turnover Ratio
2- Fixed Assets Turnover Ratio
3- Working capital Turnover ratio
4- Inventory turnover Ratio
** Profitability Ratios
The Profitability ratios measure the profitability or the operational efficiency of the firm. These ratios reflect the final result of business operations. The result of firm can be evaluated in term of its earning with reference to a given level of assets or sales or owners interests etc. Therefore, the profitability ratios are broadly classified in three categories:-
1. Profitability ratio required for analysis from owners point of view.
2. Profitability ratio based on assets / investments.
3. Profitability ratio based on sales of firm.
Application of ratio for evaluating financial performance
A popular technique of analyzing the performance of a business concern is that of financial ratio analysis. As a tool of financial management, they are of crucial significance. The importance of ratio analysis lies in the fact that is presents fact on a comparative basis and enables drawing of inference regarding the performance of firm. Ratio analysis is relevant in assessing the performance of a firm in respect of following aspects:-
** Liquidity position –
With the help of ratio analysis one can draw conclusions regarding liquid position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have ability to meet its short term liabilities if it has sufficient liquid funds to pay the interest on its short maturity debt usually within a year as well the principal. This ability is reflected in the liquidity ratio of the firm. The liquidity ratios are particularly useful in credit analysis by bank and other supplier of short term loans.
** Long term solvency –
Ratio analysis is equally useful for assessing the long term financial viability of a firm. The aspect of the financial position of a borrower is of concern to the long term creditors, securities analyst and the presents and potential owner the business. The long term solvency is measured by the leverage/ capital structure and profitability ratios which focus on earning power and operating efficiency. Ratio analysis reveals the strength and weakness of the firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or weather heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly, the various profitability ratios would reveal weather or not the firm is able to offer adequate return to its owners consistent with risk involved.
** Operating efficiency –
Ratio analysis through light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, department upon the sales revenues generated by the use of its assets total as well as its component.
** Overall Profitability –
Unlike the out side parties which are interested in one aspects of the financial position of the firm, the management is constantly concern about the overall profitability of the enterprises. That is, they are concerned about the ability of the firm to meet its short term as well as long term obligation to its creditors, to ensure a reasonable return to its owner and secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.
** Inter firm comparison –
Ratio analysis not only throws light on the financial position of a firm but also serves as a stepping stone to remedial measures. This is made possible due to inter firm comparison. A single figure of particular ratio is meaningless unless it is related to some standard or norm.
OBJECTIVE
To do comparative study of financial position of pre and post disinvestment period.
SAMPLE
TYPE OF DATA : SECONDARY DATA
SOURCE OF DATA : ANNUAL REPORT
PERIOD OF DATA TO BE ANALYSE : 2002 -- 2006
AnalysisDebt Equity Ratio
Debt equity ratio used to measure long term financial solvency of a
firm. It can be calculated by the following formula:-
Total Debt Debt Equity Ratio =
Share’s holder’s equity
Table: 1 (Rs. In million)
YEAR TOTAL DEBT SHAREHOLDER’SEQUITY
DEBT EQUITY RATIO
2002 37.63 10710.38 .0035
2003 6.78 11704.15 .00058
2004 6077.96 21146.7 .29
2005 5713.24 26246.18 .22
2006 5580.2 39878 .14
GRAPH: 1
DEBT EQUITY RATIO
YEAR
Interpretation:-
As shown in data table and graph, after disinvestment debt
equity ratio has increased with rate as compared to before disinvestment. In
2006 the ratio is 0.14; it means higher rate proportion of owner’s fund which
indicates lower degree of risk. The capital structures of the company only
consist of equity share capital. It shows smaller calm of creditors and less
interest burden.
Return on Total Assets:-
Return on total assets is measured in terms of the relationship
between Net Profit and Assets. Formula to calculate it is:-
Net Profit
Return on Total Assets =Total Assets
Table: 2 (Rs.
In million)
YEAR NET PROFIT TOTAL ASSETS
ROTA
2002 790.76 13850.91 .60
2003 1421.52 12973.51 .112004 4045.88 19040.56 .21
2005 6553.30 24616.80 .272006 14724.80 30652.50 .48
GRAPH: 2
RETURN ON TOTAL ASSETS
YEAR
Interpretation:-
In graph it is that the overall return on total assets is increasing
but the highest increase in year 2002 at the time of investment. Post
disinvestment trend of return on total assets is higher than pre disinvestment
trend. This is due to efficient utilization of assets in generation revenue.
Return on Fixed Assets:-
Return on fixed assets is measured in term of the relationship between Net Profit and Assets. Formula is given as:-
Net Profit Return on total assets =
Fixed Assets
Table: 3 (Rs.
In million)
YEAR NET PROFIT FIXED ASSETS
RETURN ON FIXED ASSETS
2002 790.76 6922.11 .11
2003 1421.52 6601.19 .30
2004 4045.88 8918.70 .52
2005 6553.30 18441.41 .41
2006 14724.80 19181 .83
GRAPH: 3
RETURN ON FIXED ASSETS
YEAR
Interpretation:-
Return on fixed assets is highest in 2006. In 2005 it was low due to high
proportion of fixed assets. In 2006 net profit has increased so return on fixed
assets has also increased.
Return on Investment: -
The profitability ratio can also be relating the profits of a firm to its total
capital employed. Return on investment can be calculated by the following
formula:-
Net Profit Return on investment =
Capital Employed
Table: 4 (Rs.
In million)
YEAR NET PROFIT CAPITAL EMPLOYED
ROI
2002 790.76 10710.38 0.07
2003 1421.52 11704.15 0.17
2004 4045.88 21146.7 0.23
2005 6553.30 26246.18 0.29
2006 14724.80 39878 0.40
GRAPH: 4
RETURN ON INVESTMENT
YEAR
Interpretation:-
After disinvestment return on investment has increased. In 2006 it is
0.40 which is highest. It is due to optimum utilization of the assets of the
company. The company has obtained assets that are providing a satisfactory
return on investment and has disposed of assets that are not providing return.
Current ratio
This ratio measures the solvency of the company in the short term. This
can be calculated by using the following formula:-
Current assets, Loans & advances
Current Ratio =
Current liabilities & Provisions
Table: 5 (Rs.
In million)
YEAR CURRENT ASSETS
CURRENT LIABILITIES
CURRENT RATIO
2002 6928.8 2945.44 2.35
2003 7365.74 2994.32 2.46
2004 10949.67 4258.54 2.57
2005 7368.88 5117.28 1.44
2006 13093.8 4158.1 2.17
GRAPH: 5
CURRENT RATIO
YEAR
Interpretation
There are not many changes in CR but as compared to 2005 CR has
increased with higher rate in 2006. It is due to increase in sundry debtors. The
company’s CR in 2006 is 2.17 which are higher than ideal (2:1) due to pilling
up of inventory.
Liquid Ratio
Liquid ratio (quick ratio) is used as a measure of the company’s ability to meet its current obligations. The formula to calculate it is as follows:-
Liquid assets Liquid Ratio =
Current liabilities
Table: 6 (Rs.
In million)
YEAR LIQUID ASSETS
CURRENT LIABILITIES
LIQUID RATIO
2002 6276.29 2945.44 2.13
2003 4303.97 2994.32 1.44
2004 7723.85 4258.54 1.81
2005 4025.82 5117.28 0.78
2006 9262.8 4158.1 0.22
GRAPH: 6
LIQUID RATIO
YEAR
Interpretation:-
In 2002 it was high that was 2.13. It was due to increase in sundry
debtors and bank balance in short deposits. At the same time current liabilities
also reduced in the form of tax provision.
Again in 2003 at the time disinvestment liquid ratio had to 1.44 due to
increase in current liabilities mainly in provision for dividend.
Working capital turnover ratio:-
This ratio indicates the extent of working capital turnover in achieving
sales of the firm. The ratio can be calculated by the following formula:-
Sales Working capital turnover ratio=
Net working capital
Table: 7 (Rs.
In million)
YEAR SALES NET WORKING CAPITAL
W.C.TURNOVER RATIO
2002 12344.89 3983.36 3.10
2003 14112.63 4371.42 3.232004 18414.94 6691.13 2.75
2005 21868.01 2251.60 9.712006 38769.70 7062 5.49
GRAPH: 7
WORKING CAPITAL TURNOVER RATIO
YEAR
Interpretation:-
There is a significance changes in 2005 as working capital turnover ratio
is highest. In 2006 it is due to increase in sundry a debtor which contributes in
increased working capital.
Net Profit Ratio
Net profit ratio reflects net profit margin on the total sales after deducting
all expenses but before deducting interest and taxation. This ratio measured
the efficiency of operational of the company. This can be calculated by the
following formula:-
Net Profit Net profit ratio = x 100
Sales
Table: 8 (Rs.
In million)
YEAR NET PROFIT SALES NET PROFIT RATIO (%)
2002 790.76 12344.89 6.40
2003 1421.52 14112.63 14.18
2004 4045.88 18414.94 25.33
2005 6553.30 21868.01 34.53
2006 14724.80 38769.70 41.09
GRAPH: 8
NET PROFIT RATIO
YEAR
Interpretation:-
The net profit has increase with higher rate after disinvestment as
compared to before it. The net profit ratio was 6.40% which was lowest but in
2006 it is 41% which is highest.
Earning per Share:-
The earning per share is one of the important measure economic
performance of a corporate entity. It can be calculated by the following
formula:-
Net profit available for Equity Share holder Earning per share =
Number of equity Share
Table: 9
YEAR EARNING PER SHARE
2002 1.61
2003 3.36
2004 9.58
2005 15.51
2006 34.85
GRAPH: 9
EARNING PER SHARE
YEAR
Interpretation:-
Earning per share is increasing with high rate. After disinvestment
steady growing in EPS year after year indicates a good track of profitability. In
2006 EPS is 34.85 which are highest.
CHAPTER # 5
Conclusion of the study
The following are the main conclusion of the study.
The current ratio maintains at a level of 2.17 times and the acid test ratio
has fallen to 0.22 times in 2006, which is less then the normal level.
The cash and the bank balance have reduced tremendously and the
creditors have increased. At the same time the sundry debtors have also
decrease.
There has been a tremendous increase in the profitability of the company.
The net profits in 2006 have shown a good increase.
Sales have increased by 214% in 2006 as compared to 2002 i.e. after
disinvestment.
PAT available for appropriation has increased to roaring and tremendous
height in 2006 i.e. 1915% as compared to 2002
Return on capital employed and return on share holder equity has shown
continuous improvement as compared to the previous year. The EPS was
1.61 in 2002 which has increased to 34.85 in 2006.
After disinvestment co. has paid off most of its loan.
Thus the overall position and the performance of the company are very
good. From shareholder point of view, their investments are quit safe and they
are likely to get more and more benefits in the future. The short terms as well
as the long term lenders of loan funds are also very safe. The company’s
future is very bright.
CHAPTER # 6
Limitations of the study
Every project work has its limitations further, a work in social sciences
and commerce can not be like that of any natural science where results are
universally true.
In the absence of universally accepted norms, interpretations of results
often become a matter of judgment uniformity and the present study is not an
exception to do it. Despite my best endeavor to maintain uniformity and
maximum converge.
Each ratio is indicative of certain aspects of the organization, e.g. CR is
with respects of CA & CL only and as such totally is not possible to be
drowned.
Ratios have overbearing reflection of post position.
The study is limited to only five years (1998-2006) performance of the
company.
The data used in this study have been taken from published annual report
only. As per the requirement and the necessity some data are grouped and
sub grouped. Therefore the data is not comparable over the year.
CHAPTER # 7
WORKING CAPITAL AS AT THE END OF FINANCIAL YEAR
(Rs. In million)
BIBLIOGRAPHY
READINGS:-
1. S.N Maheshawari: Cost & Management Accounting: Sultan
Chand & Sons, New Delhi2. M.Y.Khan & P.K.Jain: Management Accounting; Tata McGraw
Hill Publishing Co. Ltd., New Delhi.3. I.M.Pandey: Management Accounting Vikas Publishing (P)
LTD., New Delhi.
PARTICULAR
A- CURRENT ASSETS
Inventories Sundry Debtors Cash & Bank balanceOther Current Assets
TOTAL(A)
B- CURRENT LIABILITIES & PROVISION
Sundry Creditors Provisions-DividendCorporate Dividend taxProvision towardsContingencies
TOTAL(B)
C- WORKING CAPITAL(A-B)
D-INCREASE / DECREASE IN WC
2002-03 2003-04 2004-05 2005-06
3061.77622.692569.10118.76
3225.822727.304046.13121.18
3343.082608.49221.072.70
3831.006898.50740.3001.70
6372.32 10120.43 6175.34 11471.5
2450.69338.0343.31161.49
3254.411004.13--------
4274.15843.13--------
4158.101873.70--------
2993.52 4258.54 5117.28 6031.80
3378.80
-------
5861.89
2483.09
1058.06
- 4803.83
5439.70
4381.64
4. N.K. Agarwal: Cost Accounting; Shuchita Prakashan (p) Ltd. Allah bad.
REFERENCES:-
5. N.K. Prasad: Principals and Practices of Cost Accounting: Book Syndicate (P) Ltd., Calcutta.
Published Accounts, Reports & Statistical Bulletins & Periodicals:
6. Annual Reports of HZL. From 2002 to 2006.7. Company’s annual data & Financial Statements.8. Finance & Commerce.9. Records, Journals & Magazines of HZL.
NEWSPAPERS:
10. The Economic Times.11. The Financial Express.12. The Times of India.13. The Industrial Times.
