Finance Management 12

FINANCE MANAGEMENT Introduction Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial recourses. As a separate activity or discipline, it is of recent origin. The subject of financial management is of immense interest to both academicians and practicing managers. Finance management means in simple word getting the finance mean first planning of finance then find recourses of finance then utilization of the same fund. In every business activity finance is required continuously. For each and every activity of the firm finance is required. For starting business, for running it, for its development, modernization and diversification, for many other propose. Hence finance is rightly termed as the ‘Life Line Of Business” & “Lubricant of business”. According to Prof. S.C. Kutchal, “Finance is the axis around which all the economic activities are having their merry -go-round”. Financial management is an applies branches of general management. It looks after the finance function of business. It itself constitutes a sub-system of the business enterprises. Inter-related very closely with the production, marketing & personnel function or sub system. Financial management is the custodian of corporate funds. It has to plan, organize and control the finance of an enterprise

5.1

There is three Major Decision

Investment Decision

Working Capital Management

Capital Budgeting Decision

Financing Decision

Capitalization

Capital Structure

Dividend Policy Decision

D/P Ratio

Retained Earnings

5.2

Financial Planning A Firm should be managing efficiently and effectively. This implies that the firm should be able to achieve its objective by minimizing the use of recourses. Thus managing implies coordination and control of the efforts the firm for achieving the organizational objective. Growth in sales is an important objective of most firms. An increase in a market share will leads to higher growth. The firm would needs assets to sustain the higher growth in sales. It may have to invest additional plant and machinery to increase its production capacity therefore they need more current assets and the fixed assets and more fund for same and increase sales also leads to increase in debtor therefore fund is blocked there fore required a huge fund which will get by proprietor or by borrowing. And determining the sources of fund is called financial planning. “Financial planning aims to match need of the company with those of investors with a sensible gearing of short term and long term fixed interest securities. Working on these notes KADVANI FORGE LTD. Has framed a very promising financial plan prepared in light of future trends. KADVANI FORGE LTD. Has considered following critical element: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Financial pattern & condition Assets position and technological changes Earning capacity and market condition Policy for administration of capital Advance programming of financial recourses Capacity of generate internal funds Position of financial control system Capital market analysis Prospects of growth and allocation for contingencies

5.3

Capitalization Capitalization is the sum total of all kinds of long-term securities issued by a company and surplus which is not meant for distribution. In this regards the company can be overcapitalized to under aggregate value of shares and debentures excluded the true value fixed assets. Under capitalization is a situation where real worth of assets excise their value. The details of capital of KADVANI FORGE LTD. Are as follows:

Capitalization Capital 1. Authorized capital 2. Issued &subscribe capital 3. Borrowing a. Secured b. Unsecured 4. Reserves and surplus (subsidy) 5. Fixed assets 6. Net Current Assets 7. Investment

Amount 40,000,000 30,000,000 45,629,247 41,004,654 100,000 56,061,635 53,382,129 -------------

Over Capitalization Total amount of capital should be enough to meet its present and future i.e. it must be capitalized. The company is said to be overcapitalization if its earning are less in relation to its capital investment or we can also say that when the real value or the market value of share is less than its book value. The company is said to be overcapitalized

Under capitalization Under capitalization is a situation opposite over capitalization co. is said to be under capitalized if its earning are more in relation to its capital investment or we can also say that when the real value or the market value of shares is equa l or more than its book value, than the co. is said to be undercapitalized. This type of company has very high position according to the finance point of view.

Fair Capitalization Fair capitalization means co. gets the return as his expected earning or we can say that the real value or market value is equal to its book value. Therefore it is considered as the idea situation for the company.

5.4

Capital Structure Capital structure refers to the mix of long term sources of fund, such as debenture, long term debt, preference share capital, equity share capital, reserves and surplus. In technical terms this finance mix is called optimum capital structure because combination of debt and equity leads to maximum value of firm. KADVANI FORGE LTD. Has got combination of both equity capital as well as borrowed capital. Borrowed Capital KADVANI FORGE LTD. Has arranged borrowing capital, through multiple financing raining from long term borrowing to short term loans details of which is given under. Statement of it is shown below: KADVANI FORGE LTD. Having only a equity share capital KADVANI FORGE LTD. Have issued 3000000 equity shares of Rs 10 Each issued subscribed and paid up share capital Enclosure no –1 (schedule 1,2 & 3)

5.5

Management of Fixed assets Long-term investment decisions are capital budgeting decisions. Capital budgeting decision expected flow of benefits over a longer period of time. Fixed assets are those, which are permanent in nature and are not easily convertible into cash. Fixed assets are distinguished from current assets on the basis of the length of length of the physical & economical life and their convertibility in cash and their place occupy in the business cycle. Fixed assets has fixed cost burden having long term & huge investment and thus bearing on the operational efficiency of the firm. They must be managed properly, and effectively otherwise it may create danger for the survival of the firm. So, such decisions are taken only after seeing the profitability of such assets and the fixed assets are holding. Plant & machinery furniture & fixture etc. and the management of such assets are done according to present government laws & company’s position. In the company list prepared for all the fixed assets and any addition of dispositio n given effect by the top authority. The management after consulting appropriate engineers takes any decisions regarding these assets. Depreciation on these assets are provided by the written down value method. In KADVANI FORGE LTD. Capital budgeting decision rest with top management. The fixed assets position of the company is given as under Depreciation The company has provided depreciation on the Written down Value (WDV) basis as per the rates provided in schedule XIV of the companies act, 1956. Depreciation on addition to fixed assets is provided for as and when the assets is put use. Enclosure no-2 (schedule –4)

5.6

Working Capital Management Working capital is regarded as lifeblood of business. It is defined as “The excess of current assets over Current liabilities”. Working capital may be gross or net, permanent to temporary working capital. KADVANI FORGE LTD. Deals with the various forging products. Hence to smooth up the operating cycle cautiously raw material are required. Looking to the nature of production process also, working capital management assumes critical important. For up of amount of working capital executives takes into account volume sales, receivables, turnover time period, liquidity, current assets position and production cycle. Technological changes and risk factor, cash reserves are also considered.

Account Receivable

Cash

Raw Material

Debtor

Working Capital Cycle

Semi-Finished Goods

Credit Sales

Finished Goods

Current Assets Position Particular Current Assets Less: Current Liabilities Net current assets (WC)

As on 31-3-2002 62468993 9086864 53382129

5.7

As 0n 31-32001 63059955 13628891 49411064

Working capital is increase in the current year due to the there is decrease in the current liabilities. Current liabilities and assets is as follows Enclosure no –3 (schedule 5 & 6)

Management of Components of Working capital A) Inventory Management To the finance manager, inventory connotes “The value of raw material, consumables, spares, work in progress, finished goods and scraps. Inventory is stock of goods and major current assets. Inventory manage ment can becomes “cancer” for a Organization

Norms for inventory Raw Material Work in Progress Alloy Inventory Other Dies And chemicals

Level 30 Days 15 to 20 Days 10 Days 45 to 60 Days

Position of Inventory – Enclosure no –4 (schedule No-5)

B) Receivables Management Receivables are assets, which are created as a result of sale of goods, or services in ordinary coerces of business. There is “Debt owned to the firm by the customers arising from sale of goods or services”. Trade credit is an “Indispensable instrument of a accelerating sales”. Thus trade credit management of account receivables management encircles the theme of the point where Return on investment (ROI) is less than the cost of funds, Receivables carry with them risk and return. Costs are capital, delinquency and default cost. Determination of Size of Receivables

Credit Collection

Operating Efficiency

Volume of credit sales

Credit Policy

Collection Period

5.8

Profits

Terms Of credit Markets

KADVANI FORGE LTD. Provides a credit periods of 45 days if purchases are made in bulk and after that they start charging int.

C) Cash Management Cash management is one of the key area of working capital Management apart from being most liquid assets it governs the entire business KADVANI FORGE LTD. Has a favorable cash position because there is a balance between cash and cash demanding activities. Cash inflow and outflow estimates are made by “cash Management System” (CMS) internal audit system and costing department cash and bank balance position is quite favorable. Cash And Bank balance Description HDFC Bank Cash on Hand Total

31-3-2002 707071 85595 792666

31-3-2001 109998 100000 209998

5.9

Capital Budgeting Capital budgeting is a process of making decision regarding investment in fixed assets, which are not meant for the sales such as buildings, machineries or furniture etc. The word investment refers to the expenditure, which is required to be made on connection with the acquisition and development of long-term facilities including fixed assets. It refers to a process by which management select those investment proposals which are worthwhile for investing available funds. According to Prof. Lynch that capital budgeting consists of planning and budgeting of available capital for the purpose of maximizing the long-term profitability. The finance manager is ultimately responsible for minimization of cost i.e. right allocation & utilization. For right allocation capital budgeting decision is a most important i.e. right allocation & utilization. For right allocation capital budgeting decision is most important i.e. all allocating the given capital in most profitable option so this project is known as capital budgeting.

Management of Profit The main objective of any organizations is to run the business with a view to earn profit. Profit is the primary object of the business. It measures not only to success of products but also the development of market. It implies comparison of business operations between two specific dates, which are usually separated by an interval of one year. We may considered management of profits as the planning, co-ordination and control of the capital engaged in the business in such a way so as to earn regular, adequate and increasing return on capital. The necessary for the maintenance and preservation of capital provided by the owners of the business, creation of necessary reserves to meet the seen and unseen liabilities of the concern and to provide the margin of safty and payment of dividend to the owners at a fair rate. KADVANI FORGE LTD. Earns good profit and with good profitability. Earn the profit at an increasing rate. They also create a reserves and surplus to meet viable and unviable liabilities of the company. But in initial year company earns very less profit. Then also now it is sufficient profit in the company.

5.10

Financial Highlights In year 2000-2001 the profit was 71795 in current year, which is, 79286 most probably increase of 12% in initial starting in first year the profit is very less because there is problem in exports of goods. Than in next year it increases at higher rate and after that the profitability is at increasing rate. In previous year Machinery is of 42348679, which increase at 56061635 there, is higher increase in the machinery therefore there is also decrease in the profit and company also make a debt to meet the cost of the machinery. The company recorded a higher turnover at Rs.1350.44 Lakhs compared to Rs.1283.61 Lakhs in the previous year. The company reported a higher profit. The company has increase its higher production capacity by installing of new hammer having a capacity of 6.25 tons During the year under review the company has received additional sanction of working capital from Bank of India to the tune Rs.175 Lakhs. Companies working capacity is also increase by 8.33% therefore investment in current assets is decrease and a liabilities also some what increase that is the result of increase in the working capital.

Foreign Earning & Export Earning in Foreign Exchange Exports of Foreign at FOB Value

Amount

2001-2002

2000-2001

Rs.(Indian Rupees)

41,47,921

97,14,921

$ (US )

86,744

2,16,211

5.11

Accounting Policies The accounts are prepared under the historical cost convention and materially comply with mandatory accounting standards issued by the Institute of chartered Accountant of India. The significance accounting policies followed by the company are as stated below. 1) Fixed Assets Capitalization at the acquisition cost including directly attribute cost of bringing the assets to their working condition for intended use. 2) Depreciation The company has provided depreciation on the written down value basis as per the rates provided in schedule XIV of the companies Act.1956. Depreciation on the addition to fixed assets is provided for as when the assets are put to use. 3) Inventories The method of valuation of various categories is as Follows: A) Raw material and stores are values at cost B) Finished goods and scrape are valued at cost or net realizable value whichever is lower C) Year end inventory of finished goods has been valued inclusive of excise duty amounting to the Rs.7,83,660/- in accordance with the revised guidance note on “Accounting treatment of Excise Duty” Issued by The institute of chartered accountant of India. This change in accounting policy had no impact on the profit for the year. 4) Revenue Sales of alloy forging are accounted at the point of Dispatch. 5) Foreign currency Transaction Any exchange difference on export sales arising from the transaction undertaken by the company is dealt with the profit and loss account. 6) Miscellaneous Expenditure Written Off Company formation expenses are written off U/s. 35D of the Income Tax Act, 1961 over a period of 10 years. Director do not recommend any dividend for the year ended on March 31,2002

5.12

RATIO Analysis A ratio is an arithmetical relationship between two figures Financial Ratio analysis is a study of ratios between various items or group of items in Financial Statement. Ratio are Classified From different point of view as under A. ON THE BASIS OF FINANCIAL STATEMENT a) Profit & Loss A/C Ratio b) Balance Sheet Ratio c) Combine Ratio B. VIEW POINT OF MANAGEMENT a) Profitability Ratio b) Activity or Turnover Ratio c) Financial Ratio I. Liquidity Ratio II. Position Ratio III. Leverage Ratio In KADVANI FORGE LTD. Prepared ratio on basis of Management view point.

5.13

Profitability Ratio Profitability reflects the final result of business operation. This ratio indicates profitability of a firm, every management expects higher profitability in the business ultimate aim to a firm is to make profit therefore the ratio should be computed frequently and compared with ratio of previous years. Profit is the difference between revenue-expense over period of time. Profit is the ultimate output of a company manager should continuously evaluate the efficiency of it company in terms of profit. The profitability ratios are calculated to measure the operating efficiency of the company. Ion KADVANI FORGE LTD. Is in the path of profitability through their efficiency. Following Ratios of profitability calculated by KADVANI FORGE LTD. Is as under.

(a) Gross Profit Ratio The Gross Profit Ratio reflects the efficiency with which management produces both unit of product. This ratio indicates the average spread between the cost of good sold and revenue. It shows the percentage by which the selling price can fall and the percentage by which the cost of good sold can increase before gross profits can be nullified. The ratio of Gross Profit of KADVANI FORGE LTD. Is as Under. Gross Profit Ratio = (Gross Profit / Sales)*100

1999-2000

2000-2001

2001-2002

=(16077365/123172061)*100 =(181083/128361104)*100 =(2105691/135043541)*100 = 13.05 % =14.14 % =15.59

The ratio should be higher which indicates higher profitability of the firm. This ratio of the company increase 1.09% is the good sign of the company In KADVANI FORGE LTD. Is in the path of profit. So it shows that the High Gross Profit is a sign of good management.

(b) Net Profit Ratio Net profit Ratio established a relationship between net profit and sales and it indicates management efficiency in manufacturing administering and selling the product. This is the over all measure of the firm’s ability to turn each rupee sales in to net profit. This ratio indicates the firm’s capacity to which stands adverse economic condition. The Net Profit Ratio of the KADVANI FORGE LTD. Is as under –

Net Profit 1999-2000 2000-2001 2001-2002 Ratio = (Net =(445588/123172061)*100 =(71795/128361104)*100 =(79286/135043541)*100 Profit / = 0.36 % = 0.06 % =0.06 % Sales)*100 5.14

Above calculation we can easily measure that net profit ratio of current year decrease by 0.30% in KADVANI FORGE LTD. It indicates that due the increase in operating expenses. In KADVANI FORGE LTD. Decrease in Net Profit Ratio due to two Reasons. 1. Company deduct Depreciation 12% More 2. Current Year they make provision for Tax Rs. 6000. current year ratio remain same because there is prop senate increase in sales, profit, expenses etc. Therefore there is slight chance in ratio. If company can decrease its operating expenses they should earn more net profit but company tries to improve their hard working management.

(C ) Return on Equity The Return on Equity measure the Profitability of Equity funds invested in the firm. It is regarded as a very important measure because it reflects the productivity of the ownership capital employed in the company. The Ratio of Return On Equity of KADVANI FORGE LTD. Calculated ad under. Return On 1999-2000 Equity = (Profit =(445588/30000000)* After Tax / 100 Paid up = 1.49 Eq.Share Capital)*1 00

2000-2001

2001-2002

=(71795/30000000)* 100 = 0.24

=(79286/30000000)* 100 =0.26

Above calculation In KADVANI FORGE LTD. Current year Return on Equity is decrease due to the reason minimization in profit in this year we can analysis that company can not used the maintain profit it can be increase profit of the company. They gave more efficient result to use of the resources of owners. So that market value of share is increase.

(d) Return on Capital Employed This Ratio also known as Return on Investment (ROI). The term inve stment may refer to total asset or net assets. The funds employed in net assets are as “Capital Employed”. This ratio indicates overall profitability of the company on his financial resources. The management is invested to keep this ratio high. The ratio so KADVANI FORGE LTD.is as under Return on Capital Employed = (Earning Before Tax / Capital

1999-2000

2000-2001

2001-2002

=(8872084/83440087)*100 =(8526531/95871317)*100 =(9568926/116733901)*100 = 8.89 % = 10.63 % =11.05 %

5.15

E’yed)*100 EBIT = Earning Before Tax & Interest EBIT = Net Profit + Tax + Interest 1999-2000 = 445588 + 8426496 = 8872084 2000-2001 = 71795 + 6000 + 8448735 = 8526530 2001-2002 = 79286 + 6500 + 9483139 = 9568926 Capital Employed = Share Holder Fund + Loan Fund 1999-2000 = 30000000 + 53440087 = 83440087 2000-2001 = 30000000 + 65871317 = 95871317 2001-2002 = 30100000 + 86633901 = 116733901 Above calculation we can analysis that KADVANI FORGE LTD. Ratio is increasing by 1.74 and in second year 0.42 it is good sign for company it should be happen due to the reduce long term liability. Investment is decrease.

(e) Return on Total Assets This ratio indicate how much company earn on its total assets that is fixed assets , current assets it shows that how total assets should be use effectively. The ratio of KADVANI FORGE LTD. Is as under Return on Total 1999-2000 2000-2001 2001-2002 Assets = (Profit =(8526530/82242792)*100 =(8872084/105408634)*100 =(9568926/118530628)*100 Before = 10.32 = 8.42 =8.07 % Interest & Tax / Total assets)*100 EBIT = Earning before interest & Tax 1999-2000 = 8526530 2000-2001 = 8872084

5.16

2001-2002 = 9568926 Total assets = Current Assets + Fixed Assets 1999-2000 = 41274644 + 40968148 = 82242792 2000-2001 = 42348679 + 63059955 = 105408634 2001-2002 = 56061635 + 62468993 = 118530628 Above calculation we can analysis that a ratio decrease up to 1.95 % it due to the reason of decrease profit and increment in total assets it should be improved by i ). Increase Profitability ii ). Decreasing total assets of company In current year ratio 0s 8.07 because of there is decrease in current assets and high increase in fixed assets but then also profit is increase.

(f) Earning Per Share Ratio The profitability of the common shareholder’s investment can be measured by earning per share. This ratio indicates the how much company per equity share. Higher earning is desirable because it may result in higher dividend. The ratio of KADVANI FORGE LTD. Calculated as under Earning Per Share =Profit after-Tax / No. Of Equity Share

1999-2000 =445588/3000000 = 0.149

2000-2001 =71795/3000000 = 0.024

2001-2002 =79286/3000000 =0.026

Above calculation we can analysis that due the low profitability earning per share is decreasing Company can improve their situation by increase profitability of the Company. And in current year there is increase in ratio by 0.002, which is good sign.

Activity or Turnover Ratio Turnover ratio, activity ratio also called asset management ratio. It measure how efficiently the assets are employed by company. These ratio are based on the relationship between the level of activity represented by sales or cost of foods sold, and level of various assets. This ratio also indicates how speedily the company is doing business. If this ratio is higher it can be said that company’s business is fast that prior. The funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the larger the amount of sales Activity

5.17

ratio are employed to evaluate the efficiency with which firm managers and utilizes its assets.

(A) Total Capital Turnover Ratio This ratio indicates how efficiency the total capital use in business. It is indicate that capital is used efficiently and with result in higher profit. The ratio KADVANI FORGE LTD. Is as under Total Capital Turnove r Ratio Sales / Total Capital

1999-2000

2000-2001

2001-2002

=123172061/8344008 7 = 1.48

=128361104/9587131 9 = 1.34

=135043541/11673390 1 =1.16

Total Capital = Shareholder Fund + Loan Fund 1999-2000 = 30000000 + 5344087 = 83440087 2000-2001 = 30000000 + 65871317 = 95871317 2001-2002 = 30100000 + 8663301 = 116733901 Above calculation we can measure that Turno ver Ratio is decrease in 0.14 and 0.18 times so that due to the reason of increase loan fund and this situation is improved by I. II.

Increasing Sales Decreasing long term debt

(b) Fixed Assets turnover ratio This ratio indicates how efficiently fixed assets of the company are use in the business. It is higher ratio indicates that the efficient use of fixed assets with result in higher profit. This ratio serves as a secondary test of the adequacy of the sales volume. The ratio of KADVANI FORGE LTD. Is as under Fixed Assets Turnove r Ratio Sales / Fixed Assets

1999-2000

2000-2001

2001-2002

=123172061/4127464 4 = 2.98

=128361104/4234867 9 = 3.03

=135043541/5606163 5 =2.41

5.18

As per calculation this ratio is increase in comparison to last year because company sales increase & use of fixed assets is efficiently so that the reason behind that it ratio is increase at 0.05 %. Current year Ratio is decrease by 0.62 because of there is a increase in the fixed assets which is more in proportion of sales increase.

(c ) Working capital turnover ratio Assets are used to generate sales working Capital means the net asset when assets deduct by Current liability it means Working Capital. This ratio indicates how efficiently the Working Capital assets use in the business. It higher ratio indicates efficient use of working its mean increase sales. The sales of the KADVANI FORGE LTD. Calculate as under. Working Capital Turnover Ratio Sales / Working Capital

1999-2000

2000-2001

2001-2002

=123172061/37964752 =128361104/4911064 =135043541/53382129 = 3.24 = 2.06 =2.53

Working Capital = Current Assets – Current liability 1999-2000 = 40968148 – 3003396 = 37964752 2000-2001 = 63059955 – 13648891 = 49411064 2001-2002 = 62468993 - 9086864 = 53382129 As per calculation we analysis that Working capital turnover ratio is decrease because working capital is increase current year inventory increase in cost and bank balance as well as debtor increase in current year the ratio is increase considering the current year because of there is increase in sales.

(d) Inventory Turnover Ratio The inventory turnover ratio shows how rapidly the inventory is turning in to receivable through sales, generally a high inventory turnover ratio is indicative of good inventory management. The ratio of KADVANI FORGE LTD. As under Inventory Turnover Ratio Sales /

1999-2000

2000-2001

2001-2002

=123172061/8868976 =128361104/8769506 =135043541/8078851 5.19

Average Stock

= 13.89

= 14.64

=16.72

Average stock = (Opening stock + Closing Stock) / 2 1999-2000 = (872271 + 90152240) / 2 = 17737951 /2 = 8868976 2000-2001 = (8816301 + 8722711) / 2 = 17539012 / 2 = 8769506 2001-2002 = (9015240 + 7142463) / 2 = 8078851 As per calculation this ratio is increase this is good sign of efficient use of inventory. This ratio is increase due to increase sales.

(e) Debtor Turnover ratio The debtor’s turnover indicates the number of times on the average that debtor’s turnover each year. This ratio gives the quality of receivables. It indicates the wisdom or otherwise of the credit granting policies of a corporation as well as the effectiveness of its qualitative policy. Debtor turn over represents a valuable test of the collect ability and currency of receivable. Debtor Turnove r Ratio Sales / Average Debtor

1999-2000

2000-2001

2001-2002

=123172061/2226185 7 = 5.53

=128361104/2426492 6 = 5.28

=135043541/2444643 9 =5.53

Average Debtor = (Opening Debtor + Closing Debtor) / 2 1999-2000 = (22597185 + 21926529) / 2 = 44523714 / 2 = 22261857 2000-2001 = (21926529 + 26603323) / 2 = 48529852 / 2 = 24264926 2001-2002 = (22289555 + 26603323) /2 = 24446439 Collection Period = (Average Debtor * 360) / sales

5.20

1999-2000 = (22261857 * 360) / 123172061 = 65 days 2000-2001 = (24264926 * 360) / 128361104 = 68 days 2001-2002 = (24446439 * 360) / 135043541 = 65 DAYS As above calculation we can analysis that no as mush as decrease it indicates speedily collection from debtor with results in lower chances of bad debt and lower need of working capital within 65 or 68 days collector period is allowed for debtor. In the current year the ratio increase due to increase in debtor and collection period goes to 65 days.

(F) Creditor Turnover Ratio This ratio indicates how fast the firm Makes payment to suppliers if ratio is higher the indicates fast payment to supplier which result in increasing goodwill in the market. The ratio of the KADVANI FORGE LTD. Is as under. Creditor Turnover Ratio Credit Purchase / Average Creditor

1999-2000 =16099326/463184 = 3.47

2000-2001

2001-2002

=25177720/6753674 =34811751/8579814 = 3.72 =4.06

Average Creditor = (Opening creditor + Closing Creditor) / 2 1999-2000 = (11656880 + 1849267) / 2 = 13506147 / 2 = 6753074 2000-2001 = (7347100 + 1849267) / 2 = 9286367 / 2 = 4643184 2001-2002 = (7604600 + 9555029) / 2 = 8579814 Payment Period = 360 / Creditor Turnover Ratio 1999-2000 = 360 / 3.47 = 104 days 2000-2001 = 360 / 3.72 = 97 days

5.21

2001-2002 = 360/ 4.06 = 89 days As above calculation it should be analysis that creditor provide current year 97 days for payment and creditor turnover ratio is high as it indicate that payment to suppliers within 97 days which results increasing goodwill in market and in current year is goes to only 89 days which show good image of company in payment.

Liquidity Ratio Liquidity refers to the ability of a firm to meet its obligations in the short run. Usually one-year liquidity ratios are generally based on the relationship between current assets and current liabilities. This ratio indicates company’s liquidity that is cash and equivalent to cash recourses. This ratio indicates short-term solvency of the company while lending money for a short period or while selling good on credit. The liquidity ratio are useful in obtaining and indicating of a firm’s ability to meet its current liabilities, but it does not reveal how effectively the cash recourses can be managed this ratio should be taken in to consideration by KADVANI FORGE LTD. Are as Under

(A) Current Ratio An important test by which the financial health of a company can with reasonable reliability be judged in the concept of current ratio. The current ratio, a very popular financial ratio, measures the ability of the firm to meet its current liabilities current assets get converted in to cash in the operational cycle of the firm and provide the funds needed to pay current liabilities. The ratio of the KADVANI FORGE LTD. Calculated as under. Current Ratio Current Assets / Current Liability

1999-2000 2000-2001 2001-2002 =40968148/3003396 =63059955/13648891 =62468993/9086864 = 13.64:1 = 4.62:1 =6.87

This ratio should be 2:1 in the other words current assets should be double than liability that one can easily paid to creditor. The Ratio of KADVANI FORGE LTD. Previous year is 4.62:1 it is good sign for the company but as compared to previous ratio is decrease. Due to the reason of increased current liability. And in current year are 6.87.

(B) Liquid Ratio This Ratio is also known as quick ratio or acid test ratio. This ratio established a relationship between quick or liquid assets and current liabilities. An assets is liquid

5.22

if it can be converted in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset. This ratio indicate how for the company should have enough resources to pay current obligation on demand. The ratio of KADVANI FORGE LTD. Is as under. Current Ratio Liquid Assets / Liquid Liability

1999-2000

2000-2001

2001-2002

=24868822/3003396 =37882235/13648891 =27657242/90868993 = 8.28:1 = 2.78:1 =3.04:1

Liquid Assets = Current Assets – Stock 1999-2000 = 404968148 – 16099326 = 24868822 2000-2001 = 63059955 – 2517720 = 37882235 2001-2002 =62468993 – 34811751 =27657242 Liquid ratio should be 1:1 in other word they must be enough liquid asset to pay the creditor quickly ratio of the KADVANI FORGE LTD. Is more than 1:1 so it should paid quickly but company by to remove the maintain acid test ratio in future.

Position Ratio This ratio also knows as capital structure ratio they indicate company long-term financial position Must be sound. This ratio indicates how much resources are, what is the company’s capital mix following ratio indicates companies long-term financial position.

(A) Debt equity ratio One of the most difficult components of financial planning is the choice between debt equity capital since both form of capital have obvious advantages to the firm. The decision is often the result of the conflicting opinion and evidence. This is a correlation between equity and debt. It indicates the cushion ownership fund available to debt- holders. The ratio of the KADVANI FORGE LTD. Calculated as under Debt Equity 1999-2000 2000-2001 2001-2002 Ratio Loan Fund / =53440087/30000000 =65871317/30000000 =86633901/30100000 Holder Fund = 1.78 = 2.20 =2.87

5.23

This ratio should be 2:3 to 3:4 if this ratio is lower than 2:3 it ind icates lower proprietor of loan fund, which is good for moneylender but the company, will not benefit of trading on equity but in KADVANI FORGE LTD. Ratio is high. It is good sign of management this ratio current year increase 0.58 times due to the reason of decrease loan fund and takes advantages of trading or equity. And in current rear it goes to 2.87 there is increase of 0.67.

(B) Proprietary Ratio This proprietary ratio indicates how much of the total assets of the company belong to share holder. Higher ratio indicates higher proportion belongs to share holder and lower proportion belongs to moneylender. In the other word shareholder fund is higher than loan fund the security of moneylender will be higher but benefit of trading or equity will be lower. Debt Equity Ratio Shareholde r Fund / Total Assets

1999-2000

2000-2001

2001-2002

=30000000/8224279 2 = 0.36

=30000000/10540863 4 = 0.28

=30000000/11853062 8 =0.25

This ratio should be 1:2 or 50% but in KADVANI FORGE LTD. Ratio is less than 50% because of higher assets as compare to total assets it should be improve by 1. Reducing Assets 2. Increase Share holder Fund

(c ) FIXED assets ratio This ratio indicates how much of fixed assets have been purchase out long-term fund. Fixed assets are permanent therefore they should be less than one if it is more than one it indicates some of the fix assets have been purchase out of short term liability which is not desirable. The ratio of KADVANI FORGE LTD. Calculated as under. Fixed Assets Ratio Fixed Assets / Long-term Fund

1999-2000

2000-2001

2001-2002

=41274644/83440087 =423486679/95871317 =56061635/116733901 = 0.49 = 0.44 =0.48

Long term Fund = Share Holder Fund + Loan Fund 1999-2000 = 30000000 + 5344087 = 8340087 2000-2001 = 30000000 + 65871317

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= 95871317 2001-2002 =30000000+86633901 = 116733901 As per calculation we can mention that the ratio of both year is less than one it is good sign of management. If company can maintain of 50% level it should be more preferable for company.

(D) Current Assets to fixed assets ratio This ratio indicates the proportion of current asset to fixed asset it no fixed specified standard of ratio. It is depend upon the nature of business. The ratio of the KADVANI FORGE LTD. Is as under Current Assets to 1999-2000 2000-2001 2001-2002 Fixed Assets Ratio Current =40768148/41274644 =63059955/42348679 =62468993/56061635 assets/fixed = 0.99 = 1.49 =1.12 assets As above calculation analysis that company current assets is increase in current year so that the ratio is increase

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Ratio of KADVANI FORGE LTD. NO.

(1) (A) (B) (C) (D) (E) (F)

(2)

RATIO

Profitability Ratio Gross Profit Ratio Net Profit Ratio Return On Equity Return On Capital Employed Return On Total Assets Earning Per Share

(A) (B) (C) (D)

14.14% 0.06% 0.24% 10.63% 8.42% 0.024%

15.59% 0.06% 0.26% 11.05% 8.07% 0.026%

1.48 2.98

1.34 3.03

1.16 2.41

3.24

2.60

2.53

13.89 14.64 16.72 5.53 times 3.72 times 5.53 times 3.47 times 3.72 times 4.06 65 days 68 days 65 days 104 days 97 days 88 days

Liquidity Ratio

(A) Current Ratio (B) Liquid Ratio

(4)

13.05% 0.36% 1.49% 8.89% 10.37% 0.149%

Activity or Turnover Ratio

(A) Total Capital Turnover Ratio (B) Fixed Assets Turnover Ratio Working Capital Turnover (C) Ratio (D) Inventory Turnover Ratio (E) Debtor Turnover Ratio (F) Creditor Turnover Ratio Collection Period Payment Period

(3)

1999-2000 2000-2001 2001-2002

13.64:1 8.28:1

4.62:1 2.78:1

6.87:1 3.04:1

1.78 0.36 0.49 0.99

2.20 0.28 0.44 1.49

2.87 0.25 0.48 1.12

Position Ratio Debt Equity Ratio Proprietary Ratio Fixed Assets Ratio Current Assets to Fixed assets Ratio

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Leverage Analysis In literal terms, leverage is defined as, “ The action of lever, and the mechanical advantages gained by it”. Leverage is a process, which permits magnification of force. In financial terminology, leverage is defined as “ Employment of an asset or sources of fund for which the firm has to pay fixed cost for fixed return”. It is a process of magnification of earnings; Leverage is an excellent device for financial analysis. The higher the degree of leverage, the higher expected returns.

Leverage

Operating Leverage

Financial Leverage

Operating Leverage It is leverage associated with the investment activities “It results from the existence of fix charges or operating expenses in the income stream”. These expenses may be fixed, variable or semi variable cost. There are fixed over a certain level of sales volume the operating leverage is defined as: “The firm’s ability to use fixed operating costs to magnify the effect of changes in sales in its earning before interest and tad (EBIT)”.

The Degree of Operating Leverage (DOL) measures in Qualitative terms the extent ot the degree of operating leverage. DOL = % Change in EBIT % Change in Sales

YEAR Sales 2000-2001 2001-2002 Total Increase in sales EBIT 2000-2001 2001-2002 Total Increase in EBIT

AMOUNT

PERCENTAGE (%)

128,361,104 135,411,845 7,050,741

100% 105.50% 5.50%

8,526,530 9,568,926 1,042,396

100% 112.22% 12.22%

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DOL = % Change in EBIT % Change in Sales = 12.22 5.50 = 2.22 Degree of operating Leverage is favorable because it indicates that if sales increase by 1 times than EBIT increase by 2.22 times or if sales increase 100% than EBIT increase by 222% which is good and increase in sales leads more chance in EBIT.

Financial Leverage The Leverage associated with the financial activities of the firm called financial leverage. The sources of fund may be those carrying fixed financial charge and those not carrying the same. Long term debts including bonds and debenture and preference shares came under the first category. These have to be paid regardless of profit. Financial leverage is defined as: “The ability of a firm to use fixed financial charges to magnify the effects of changes in EBIT on firms EPS”. DFL = %Change in EPS % Change in EBIT YEAR EBIT 2000-2001 2001-2002 Total Increase in EBIT EPS 2000-2001 2001-2002 Total Increase in EPS

AMOUNT

PERCENTAGE (%)

8,526,530 9,568,926 1,042,396

100% 112.22% 12.22%

0.024 0.026 0.002

100% 108.33% 8.33%

DFL = %Change in EPS % Change in EBIT = 8.33 12.22 = 0.68

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KADVANI FORGE LTD. Has favorable degree of financial leverage which signifies that the mix of various sources of long term and short term, ownership and borrowed sources are appropriated to provide high income to equity owners and to increase EPS proportionately.

Combined Leverage Operating and Financial leverage together cause wide fluctuation in EPS for a given change in sales. If a company employs high levels of operating and financial leverage, even small change in the level of sales will have dramatic effect on EPS. A company with a cyclical sales will have fluctuating EPS: but the swing in EPS will be more pronounced if the company also used high amount of operating and financial leverage Degree of Combined Leverage (DCL) is as follow: DCL = DOL X DLF =% change in EBIT %Change in Sales

X %Change in EPS % Change in EBIT

= % Change in EPS % Change in sales = 8.33 5.50 = 1.15 In KADVANI FORGE LTD. The combined leverage is also favorable because it show a 1.15 which indicates that if there is 1 time change in sales than in EPS there is change is 1.15 times or 100% change in sales then 115% change in EPS. This show that proportionate change in EPS is more than Proportionate change in sales.

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Trend In Last Three Years Profit Year 1999 – 2000 2000 – 2001 2001 – 2002

Profit 445588 71795 79286

Graph Of Profit Profit 500000 400000

445588

300000 200000 100000 0

71795

79286

2

3

1

Sales Year 1999 – 2000 2000 – 2001 2001 – 2002

Sales 123,272,061 128,361,104 135,043,541

Graph Of Sales Sales 140000000 135000000 130000000 125000000

135043541 128361104 123272061

120000000 115000000 1

2

3

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