Financial Statement Analysis

Sinhgad Business school In Partial Fulfilment of Requirements For the Award of Degree of POST GRADUATE DEPLOMA IN MANAGEMENT DECLARATION D E C LARAT I O N I, the undersigned, hereby declare that the Project Report entitled “Financial Statement Analysis of ZUARI CEMENTS Ltd. ” written and submitted by me to the University of Pune, Pune in partial fulfilment of the requirements for the award of degree of Master of Business Administration under the guidance of Mr. Manoj Kumar Sahoo (Deputy Manager Finance)and Mr. Vishnu Murthy (Manager Finance) is my original work and the conclusions drawn therein are based on the material collected by myself.

Place : Pune Date: 20-jul-2008 Student

Brijesh kumar verma Research

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GUIDE’S CERTIFICATE

C E RT I F I CAT E This is to certify that the Project Report entitled “ FINANCE STATEMENTANALYSIS” which is being submitted herewith for the award of the degree of Master of Business Administration of University of Pune, Pune is the result of the original research work completed by Mr BRIJESH KUMAR VERMA under my supervision and guidance and to the best of my knowledge and belief the work embodied in this Project Report has not formed earlier the basis for the award of any degree or similar title of this or any other University or examining body. Place :SITAPURAM (Donda padu) Date: 20-Jul-2008

(Name of the Guide) Mr. Manoj kr. Sahoo Research Student Brijesh kr. verma

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CONTENT PAGE CONTENTS Page No ACKNOWLEDGMENT

1-2

LIST OF TABLES

4

LIST OF FIGURES

5

CHAPTER I: Introduction

6-19

CHAPTER II: Profile of the organization

20-35

CHAPTER III: Research Design and Methodology

36-39

CHAPTER IV: Data Presentation, Analysis and interpretation

40-82

CHAPTER V: Recommendations

83-84

BIBLIOGRAPHY:

85-86

ANNEXURE:

87-100

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LIST OF TABLES

LIST OF TABLES Table No.

Title of the Table

Page No.

Table No. 1.1

Cement statistics

30

Table No. 1.2

Regional distribution of cement in 2006

35

Table No. 1.3

Region wise share of consumption

35

Table No. 1.4

Profit before tax

47

Table No. 1.5

Profit after tax

48

Table No. 1.6

Turnover

49

Table No. 1.7

Current ratio

55

Table No. 1.8

Quick ratio

57

Table No. 1.9

Debt equity ratio

59

Table No. 1.10

Proprietary ratio

60

Table No. 1.11

Debt to total assets ratio

61

Table No. 1.12

Interest coverage ratio

62

Table No. 1.13

Stock turnover ratio

63

Table No. 1.14

Inventory holding period

64

Table No. 1.15

Debtor turnover ratio

65

Table No. 1.16

Debtor collection period

66

Table No. 1.17

Working capital turnover ratio

67

Table No. 1.18

Total assets turnover ratio

68

Table No. 1.19

Fixed assets turnover ratio

69

Table No. 1.20

Cash ratio

70

Table No. 1.21

Net profit ratio

71

Table No. 1.22

Gross profit ratio

72

Table No. 1.23

Return on capital employed

74

Table No. 1.24

Return on equity share holder fund

75

Table No. 1.25

Return on total assets

76

Table No. 1.26

Reserve to total capital ratio

77

Table No. 1.27

Debt ratio

78

Table No. 1.28

Capitalization ratio

79

Table No. 1.29

Internal growth ratio

80

Table No. 1.30

Sustainable growth ratio

81 Page

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LIST OF & CHARTS

LIST OF CHARTS Chart No.

Title of the Chart

Page No.

Chart No. 2.1

Indian presence of Zuari cement

23

Chart No. 2.2

Market network of Zuari cement

28

Chart No. 2.3

India’s cements scenario

31

Chart No. 2.4

GDP at cost of factor

32

Chart No. 2.5

Growth of the sector

33

Chart No. 2.6

Expected growth

34

Chart No. 2.7

Trend of sales and net income of ZCL

44

Chart No. 2.8

Trend of profit before tax of ZCL

45

Chart No. 2.9

Trend of profit after tax of ZCL

46

Chart No. 2.10

Profit before tax

47

Chart No. 2.11

Profit after tax

48

Chart No. 2.12

Turnover

49

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INTRODUCTION

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INTRODUCTION

Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by property establishing relationships between the item of the balance sheet and the profit and loss account. There are many users of a company’s financial statement like Trade creditors, lender, Investor and management. They analyse the financial statement according to their need. The first task of the financial analyst is to select the relevant information to the decision under consideration from the total information contained in financial statement. The second step is to arrange the information in a way to highlight significant relationship. The final step is to interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation. The financial statement provides a summarised view of financial position and operation of a firm. Therefore, much can be learnt about a firm from a careful study of its financial statements. The analysis of financial statements is an important aid to financial analysis. The analysis of financial statements is a process of evaluating the relationship between component pats of financial statements to obtain a better understanding of the firm’s position and performance. The traditional financial statements comprising the balance sheet and profit and loss account is that they do not give all the information related to the financial operation of a firm. Nevertheless, they provide some extremely useful information to the extent that the balance sheet mirrors the financial position on a particulars date in terms of the structure of assets, liabilities and owner’s equity, and so on profit and loss account show the result of operations during a certain period of time in terms of the revenue obtained and the cost incurred during the year. Financial statements are the main and often the only source of information to the lenders and the outside investors regarding a business’s financial performance and condition. In addition to reading through the financial statements, they use certain ratios calculated from the figures in the financial Statement to evaluate the profit performance and financial position of the business. These key ratios are very important to managers as well, to say the least. The ratios are part of the language of business. It would be embarrassing to a manager to display his or her ignorance of any of these financial specifications for a business.

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FINANCIAL STATEMENT ANALYSIS

A Financial statements paint a picture of the transactions that flow through a business. Each transaction or exchange - for example, the sale of a product or the use of a rented a building block - contributes to the whole picture. Let's approach the financial statements by following a flow of cash-based transactions. In the illustration below, we have numbered four major steps:

http://www.investopedia.com/university/financialstatements/default.asp

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Financial statement is an organised collection of data. Its purpose is to convey an understanding of various financial aspects of business firm. It may show a position at a moment as in the case of activities over a given period of time in the of an income statements. The firm’s financial statement includes. •

Balance sheet

•

Income statement

•

Statement of cash flow

•

Statement of retain earning

Balance sheet: The balance sheet summarizes assets & liabilities owned by a firm – value of assets and mix of financing debt & equity to finance these assets up to a point of time. It some time, called “Statement of financial position” or “A statement of financial position of an enterprise as on a particular date. In theory the balance sheet of a private limited company or a public limited company should be able to tell us all about the company’s financial structure, and liquidity, the extent to which its assets and liabilities are held in cash or in a near cash form (for example, bank accounts and deposits). It should also tell us about the assets held by the company, the proportion of current assets and the extent to which they may be used to meet current obligations. An element of caution should be noted in analyzing balance sheet information. The balance sheet is an historical document. It may have looked entirely different six months or a year ago, or even one week ago. There is not always consistency between the information included in one company’s balance sheet with that.

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Balance Sheet Terminology

•

Fixed Assets – Assets held for more than one year. Typically Include: • • •

•

Other Assets – Assets that are not current assets or fixed assets • • •

•

Patents Copyrights Goodwill

Current assets typically include: • • • •

•

Machinery and equipment Buildings Land

Cash Accounts Receivable (Payments due from customers who buy on credit) Inventory (Raw materials, work in process, and finished goods held for eventual sale) Other expenses (Prepaid expenses are those items paid for in advance)

Debt (Liabilities) • •

Money that has been borrowed and must be repaid at some predetermined date Debt Capital • • •

•

financing provided by a creditor Current or short-term debt and long-term debt Current or short-term must be repaid within the next 12 months

Current Liabilities: •

Accounts payable •

Credit extended by suppliers to a firm when it purchases inventories Page

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•

Accrued expenses •

•

Short-term notes •

•

Short term liabilities incurred in the firm’s operations but not yet paid for

Borrowings from a bank or lending institution due and payable within 12 months

Long-Term Debt •

Loans from banks or other institutions for longer than 12 months

•

Equity

•

Includes the shareholder’s investment • •

•

Treasury Stock •

•

Preferred stock Common stock

stock that was once outstanding and has been re-purchased by the company

Retained Earnings •

cumulative total of all the net income over the life of the firm, less common stock dividends that have been paid out over the years

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INCOME STATEMENT Income Statement provides information regarding revenues and expenses of the firm and resulting profit or loss during a particular period. This statement is extremely useful to the end uses of business operations. While the balance represents the financial status of an enterprises at a particular point of time, the income statement summaries the results of operations for the given accounting period.

Income Statement Terminology

•

Revenue (Sales) •

•

Cost of Goods Sold (COGS) •

•

Expenses related to marketing and distributing the product or service and administering the business

Financing Costs •

•

The cost of producing or acquiring the goods or services to be sold

Operating Expenses •

•

Money derived from selling the company’s product or service

The interest paid to creditors and the dividends paid to preferred stockholders

Tax Expenses •

Amount of taxes owed, based upon taxable income

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STATEMENT OF CASH FLOW The statement of cash flows may be the most intuitive of all statements. We have already shown that, in basic terms, a company raises capital in order to buy assets that generate a profit. The statement of cash flows "follows the cash" according to these three core activities:

(1) Cash is raised from the capital suppliers - cash flow from financing, (2) Cash is used to buy assets - cash flow from investing and (3) Cash is used to create a profit - cash flow from operations.

However, for better or worse, the technical classifications of some cash flows are not intuitive. Below we recast the "natural" order of cash flows into their technical classifications:

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http://www.investopedia.com/university/financialstatements/default.asp

REASONS FOR ANALYSIS • INVESTMENT DECISIONS • CREDIT DECISIONS • PERFORMANCE • VALUATION (INVESTMENT) • LEGAL LIABILITY AMOUNT (CREDIT & PERF.) • GOING CONCERN DECISIONS (CREDIT & PERF.) • UNREASONABLE RETURNS (PERFORMANCE)

Tools of Financial Analysis:

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A financial analysis can adopt the following tools for analysis of the financial statements. These are also found as methods of financial analysis. •

Comparative Financial Statements

•

Common size Financial Statements

•

Trend Percentages

•

Fund Flow Analysis

•

Ratio Analysis

•

Comparative Financial Statements : Comparative Financial Statements refer to statements of financial position of business. Which are prepared in such a way so as to provide a time perspective to various elements embodied in such statement, these statements mainly include two types of analytical statements, Viz. “Comparative Balance Sheet, Income Statements”. Comparative statements mainly show the following information for analytical purpose.

o Actual data in absolute money values as given in the financial statements for the under consideration. o Increases and decreases in various items in money values. o Increases or decreases in various items of percentages. Comparative financial statements facilitate easy comparison by presenting relevant figures for two or more period of each firm side by side.

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•

Common size Financial Statements : The main limitation of comparative financial statements is that they failed to show the changes that have taken place from year to year in relation to the total assets, total liabilities and capital or total net sales. This information is eliminated by common size analysis. Common size financial statements are those statements in which items reported in the financial statements are converted into percentages taking some common base. In the common size income statements the net sales is assumed to be 100% and other items are expressed as percentages of sale. Similarly in the common size balance sheet, the total assets or total liabilities are assumed to be 100% and other items are expressed as a percentage of this total. “Common size” statements are also called component percentages or 100% statement. Because each statement is reduced to the total of 100 and each individual item is expressed as a percentage of this total.

•

Trend percentages : Comparative the past data over period with a base year is called trend analysis. Under this method, percentage relationship that each statement item bears to the same items in the base year is calculated. Any year –the earliest year involved in comparison, or the latest year or any intervening year – may be taken as the base year. The trend percentages are calculated only for some important items, which can be logically connected with each other. The concerned item in the base year is taken to be equal to as 100 and then based on this trend percentages for the corresponding items in other year are calculated. This method is horizontal type analysis of financial statements. The trend ratio is shown in comparative financial statements. Trend analysis is useful tool for the management since it reduces the large amount of absolute data into a simple and easily readable form.

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•

Funds Flow Analysis : Another significant technique of financial analysis is fund flow statement designed to highlight changes in the financial position of business concerned between two points of time, which generally confirmed the beginning and ending of the dates of the financial statements, for whatever period of examination is relevant. The significant funds flow statements, referred to as the statement of changes in the financial position or statement of process and uses of funds drawing on the information contained in the basic financial statements show the sources of funds and application of funds during the period. Funds flow analysis provides an structure of assets liabilities and owner’s equity. The funds flow statement is a method by which we study the net funds flow between two points in time. These positions confirm the beginning and ending of the dates of financial statements, for whatever period of examination.

•

Ratio Analysis: Ratio analysis is a powerful tool and widely used to financial analysis, which is process of identifying the financial strength and weakness of the firm by properly establishing relationships between the items of balance sheet and profit and loss account. It can be used to compare the risk and return relationships of firm of different size. The term ratio refers to the numerical or quantitative relationship between two items/variables. This relationship can be expressed as percentages, fraction and proportion of numbers. These alternative method of expressing items which are related to each other are, for purpose of financial analysis, referred to as ratio analysis.

Nature and significance of ratio analysis: Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for Page 17 of 88

helping in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding if financial strengths and weakness of a firm. Calculation of more ratios does not serve any purpose, unless several appropriate ratios are analyzed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements, but the analysis has to select same keeping in mind the objective of analysis.

Need For Ratio Analysis: The need for ratio analysis arises due to following facts: Business facts shown in financial statements do not carry any importance individuality. Their importance lies in the facts that they are inter related. Hence there is need for establishing relationship between various but related items. Ratio analysis as a tool for the interpretation of financial statements is significant because ratio help the analysts to have a deep into the data given in statements figures in their absolute forms shown in financial statements are neither significant nor comparable. So, ratio provides power to speak.

The objectives of study: 1. To know the financial position of the ZCL. 2. To find out true and fair view of the business. 3. To find out various assets mix and the capability of the business to meet its long-term & short-term liabilities. 4. To study about working environment, planning & strategies, business policy, various methods & technologies for better output & optimum utilization of resources. 5. To understand the management of human assets, finance, marketing & production for achieving the desired goals. 6. To have in depth study regarding Analysis of the financial statement of ZUARI CEMENT LIMITED.

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PARTIES INTERESTED IN RATIO ANALYSIS: Ratio analysis serves the purpose of various parties interested in financial statements. Primarily the object of ratio analysis and interpreting the financial statements is to get adequate information useful for the performance of various function like planning, coordinating, controlling, communication and forecasting etc., the interested parties are:

1. Share holder/investors: Investor in the company will like to assess the financial position of the concern where he is going to invest. His first would be security of his investment and then a return in the form of dividend or interest. So, investors concentrate on the firm’s financial structure to the extent in influences the firm’s earning ability and risk.

2. Trade creditors: They are interested in firm’s ability to meet their claims over a very short period of time. So their analysis is confined to evaluation of firm’s liquidity position. 3. The long-term creditors: They are concerned with the firm’s long-term future solvency and survival. They analyze the firm’s profitability over a period of time, its ability to generate cash, to be able to pay interest and repay the principle and relationship between various sources of funds.

4. Employees: The employees are interested in financial position of the concern especially profitability. Their wages and amount of fringe benefits are related to the volume of profits earned by the concern. The employees make use of information available in financial statements.

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5. Government: Government is interested to know the overall strength of industry. Various financial statements published by industrial units are used to calculate ratios for determining short-term, long-term and overall financial position of the concern. Government may base its future policies on the basis of industrial information available from various units.

6. Management: Management of the firm require these statements for its own evaluation and decision making. Moreover, it is responsible for the overall performances of the firm maintaining its solvency so as to able to meet short-term and long-term obligations to the creditors and at the same time ensuring an adequate rate of return, consistent with safety of funds to its owner. Financial analysis may not provide exact answer to these questions but it will indicate what can be expresses future.

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COMPANY PROFILE

COMPANY PROFILE Zuari Cement Limited earlier known as Sri Vishnu Cement Ltd, is an ISO 9002 company incorporated in 1984 with a mission to provide comfortable houses at affordable price. It is a public limited company with a paid-share capital of Rs.23.23 crores. It is one of the italcementi group company, governed by the board of directors headed by the chairman Mr. SAROJ KUMAR PODDAR. Zuari cement is now fully owned by the italcementi group, the 4th largest cement producer in the world and the biggest in the Mediterranean region. With net sales of five billion Euros in 2005 and a capacity of 70 million tones, Italicementi has a strong presence in over 19 countries. Now in India, with is inherent strengths, Italcementi is all set to give the building industry, cement that’s truly international. Italicementi believes in customer satisfaction through continuous quality improvement. This belief reflects in the group’s Quality Management Page 21 of 88

System that complies with ISO 9001: 2000 standards. This system covers all the processes. Across all the group companies, to ensure that the end product delivered to customers is nothing short of world class.

FUTURE PLAN OF ZUARI CEMENT LIMITED •

The company plans to upgrade its clinker production from 2700 tpd to 3400 tpd.

Indian Presence Page 22 of 88

Italcementi invested USD120m since 2001 to acquire 2 plants with 3,2 mt capacity and a 7%a)- 8%b) share of the South India market...

Italcementi plants in South India

January 2001: acquisition of 50% of Zuari Cement (Yerraguntla) Capacity 1.950 kt Net Sales 2005: USD82,6m

Sitapuram

Yerraguntla

January 2002: acquisition (through Zuari Cement) of Sri Vishnu Cement (Sitapuram) Capacity 1.250 kt Net Sales 2005: USD39,5m

a) on total market b) on CMA market

Chart no. 2.1 SOURCE: ITALCEMENTI ppt.

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VISION OF ZUARI CEMENT Main aim of zuari cement to further develop its presence in the country…  It has taken time to fully assimilate the complexities of operating in the country (challenging cement market, strong price pressure, changing fiscal environment)  The high expertise of local human resources allows today to maintain only one expatriate as General Manager in the organization, and various plans are underway to capitalize Group wide on Indian resources  Several important industrial investments 40 MW steam coal second clinker line - grinding centre in Chennai

are underway: power plant in Yerraguntla

 The Group is continuously seeking opportunities for further growth in the Country through acquisitions

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MARKET NETWORK OF ZUARI CEMENT LIMITED

Chart no. 2.2

Source: www.Zuaricement.com

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INDIAN CEMENT INDUSTRY CURRENT SCENARIO

The Indian cement industry is the second largest producer of quality cement, which meets global standards. The cement industry comprises 130 large cement plants and more than 300 mini cement plants.The industry's capacity at the end of the year reached 188.97 million tonnes which was 166.73 million tonnes at the end of the year 2006-07. Cement production during April to March 2007-08 was 168.31 million tonnes as compared to 155.66 million tonnes during the same period for the year 2006-07.Despatches were 167.67 million tonnes during April to March 2007-08 whereas 155.26 during the same period. During April-March 2007-08, cement export was 3.65 million tonnes as compared to 5.89 during the same period.

Technological Advancements

Modernization and technology up-gradation is a continuous process for any growing industry and is equally true for the cement industry. At present, the quality of cement and building materials produced in India meets international standards and benchmarks and can compete in international markets. The productivity parameters are now nearing the theoretical bests and alternate means. Substantial technological improvements have been brought about and today, the industry can legitimately be proud of its state-of-the-art technology and processes incorporated in most of its cement plants. This technology up gradation is resulting in increased capacity, reduction in cost of production of cement.

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Future Outlook Considering an expected production and consumption growth of 9 to 10 per cent, the demand-supply position of the cement industry is expected to improve from 2008-09 onwards, resulting in an expected price stabilization. The cement industry is poised to add 111 million tones of annual capacity by the end of 200910 (FY 10), riding on the back of an estimated 141 outstanding cement projects.

Major Players The major players in the cement sector are : • • • • • • • • • • • • •

Ultratech Cement Century Cements Madras Cements ACC Gujarat Ambuja Cement Limited Grasim Industries India Cements Limited Jaiprakash Associates and JK Cements. Holcim Lafarge Heidelberg Cemex Italcementi

Cement Statistics (million tonnes) 2006-07

2007-2008

(Apr-Mar) (a)

Production

155.66

168.31

(b)

Despatches (Including Export)

155.26

167.67

(c)

Export

3.65

5.89

(d)

Cap. Uti.(%)

96

94

Table

no.1.1 Source: Cement Manufacturers’ Association

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Policy Initiatives

FDI Policy: the cement sector has been gradually liberalized. 100 per cent FDI is now permitted in the cement industry. http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/Cement.htm

INDIA’ CEMENT SCENARIO India is the second largest national cement market worldwide, driven by an emerging economy and a buoyant population … Population:

1.080 m

Pop. CAGR '99-'04:

1,5% 610 US $

GDP per head: GDPa) CAGR ’99 - ’04: b)

GFI CAGR ’99 - ’04:

5,7 % 6,9 %

Cement sector ‘04: 55

Companies: c)

127

Plants : c)

Production Capacity (mt): Cement Consumption: million tons: Kg/inhab:

146

119,4c) 110

a) Gross Domestic Product b) Gross Fixed Investment c) CMA plants with production capacity > 200 kt, 2005 est. 131 mt

Chart no. 2.3 Source: macroeconomic data, EIU January ’05

cement data, Cement Manufacturers Ass.

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With a construction sector showing solid growth, overcome in recent years only by the growth of Services...  Construction sector accounts today for 5% of Indian GDP  Strong growth in recent years driven by non-residential (incentives to FDI)  Increasing weight of residential (easier access to financial credit, strong development of major cities)

GDP at cost of factors by origin (index 1993-94=100) Grafico 6 - Pil al costo dei fattori per industria di origine (numero indice 1993-94=100) 220

Agricolture Agricoltura Construction

190

Costruzioni

Industry Industria Servizi

160

Services PIL

130

100 1993-94

1996-97

1999-00

2002-03

Fonte: Ministry of Statistics

Chart no. 2.4 Source: Ministry of Statistics

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...and is expected to further grow due to high development rates and infrastructure programs...

Legenda Stato avanzamento lavori al 30 novembre 2005 Golden qua drilater*:

Infrastructures development supported by private/public partnerships: National Highway Development Plana) National Marine Development Programb) Airports development c) Relaunch of railways d)

NS & EW corridor: Lavori completati Lavori in corso Progetti da assegnare * Completato al 90%. Fonte: Governo indiano

Creation of 52 thousands km of new highways and modernisation of secondary roads Modernisation of 180 Indian ports New airports (Hyderbad, Bangalore) and modernisation of existing (New Delhi, Bombay) New 9 thousand km railway corridor

Chart no. 2.5

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... with a positive impact on cement demand growth in the medium and long term India cement demand, mt/year 200

Period

180 1973 - 83 160

1983 - 93 1993 - 03

CAGR % 6.7 7.2 7.6

Long term expected growth CAGR 5,5%

140 120 100 80 60 40 20

19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12

0

Actual data

Structural Curve

Chart no. 2.6 SOURCE: ITALCEMENTI GROUP

CEMENT INDUSTRY IN ANDHRA PRADESH: Andhra Pradesh, a south Indian state has a huge reserve of limestone and these are being exploited by major plants and mini plants. Limestone the prime raw material for cement industry is available inexhaustible quantities in Andhra Pradesh. Raw materials required for cement manufacturing are coal, bauxite; gypsum and fly ash are available in Andhra Pradesh. One fourth of the cement grade reserves of the country are from Andhra Pradesh. Coming to the production of cement, Madhya Pradesh is the largest cement producing state in India next stands Andhra Pradesh, which is 18% of total country production.

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REGION WISE CAPACITY, PRODUCTION AND CONSUMPTION:

Regional distribution in 2006 Capacity Million Tonne

Production

Share of Total

Million Tonne

Share of Total

North

29.59

18.8

30.17

21.3

East

22.85

14.5

19.54

13.8

South

50.76

32.3

44.88

31.7

West

28.94

18.4

24.93

17.6

25.0

15.9

22.28

15.7

Central

Source: Industry report

Table no.1.2 In terms of regional concentration, the Southern region accounts for 32 per cent of installed capacity, followed by Western region. MP is traditionally considered a part of the Western region although as much as 65 per cent of cement output from this state serves the Northern and Eastern regions.

Region wise share of consumption (in %) Region/Zone

2005

2006

South

30

26

East

17

17

North

19

20

Central

16

17

West

18

20

Total

100

200

Source: KR Choksey report

Table no.1.3

http://www.indiabiznews.com/biznews/categoryNewsDesc.jsp?catId=11648Cement Industry – 1

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RESEARCH METHODOLOGY

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RESEARCH METHODOLOGY Research In Common Parlance Refers To Search For Knowledge. Data had been collected by primary and secondary methods. Research Methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. The study of research methodology gives the student the necessary training in gathering material and arranging them. According to Hudson Maxim, “All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to inquiry, and inquiry leads to invention”. Research is an academic activity and as such the term should be used in technical sense. Research is, thus an original contribution to the existing stock of knowledge making for its advancement.

DATA COLLECTION The task of data collection begins after a research problem has been defined and research design/ plan chalked out. While deciding about the method of data collection to be used for the study, the researcher should keep in mind two types of data. •

Secondary data

My study is based on secondary data.

Collection of secondary data These are those data which have been already collected by someone else and which have already been passed through the statistical process. When the researcher utilizes secondary data, then he has to look into various sources from where they can obtain them. Secondary data may either be published data or unpublished data. Published data are available in: a) b) c)

Various publications of the central, state and local govt. Books magazines and newspapers Reports and publications of various associations connected with Business and industry, banks, stock exchanges. Page

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d)

Reports prepared by research scholars, universities, economist etc, in different fields.

Unpublished data are available from: Dairies, letters, unpublished biographies and autobiographies and also may be available with scholars and research workers, trade associations, labour bureaus and other public/ private individuals and organizations. •

Here Secondary data was collected through: • •

•

Annual reports and Website of ZCL

Secondary data was collected through annual report 2002 to 2006 Consider.

SWOT ANALYSIS:STRENGTH:•

Largest manufacturer of Portland cement in southern region.

•

Large availability of resources like lime stone, power etc.

•

Technology enhancement

WEAKNESS:•

Marginal profits.

•

Continues Stability in price.

•

Increasing trend in price of major raw material like power and machinery.

OPPORTUNITIES:•

Introduction of new market of both export & domestic. Page

35 of 88

•

Establish new plant in other region.

•

Continues focus in cost reduction.

•

Focus on process establishment ‘system’ by using 6 sigma methodologies.

THREATS:•

Limited market.

•

Huge competition.

•

No subsidies from government.

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DATA PRESENTATION, ANALYSIS AND INTERPRETATION

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Comparative Financial Statements Analysis

•

Zuari cement had a very little profit in 2002 due to not proper utilization of fixed cost.

•

It faced 3 year continuously losses in which in 2003 it had a very huge loss due to increase in expenditure against decrease in sales.

•

In 2003 it increased its reserve to Rs. 1558.2 lacs, when ZCL had takeover the Sri Vishnu Cement.

•

From 2004 it started optimum utilisation of its fixed cost and resultant got less loss in 2004 & 2005 as compare to 2003.

•

From 2004 it enhanced its marketing strategies and marketing network, by which its sales increased 10% in 2004, 25% in 2005 and 47% in 2006.

•

In 2003 reserve was increased but this reserve had not been used in the following year 2003, 04, 05 and 2006 in the fixed assets.

•

In 2003 ZCL had 50% less sundry debtor as compare to 2002 which increased bad debt for the company. But it again increased 50% in 2004 as compare to 2003 it resultant decreased in bad debt. The debtor decreased 35% in 2006as compare to 2005.

•

In 2005 manufacturing expenses increased 30.32% while sales increased only 24.53% but loss reduced due to decrease in shot-term and long-term expenses.

•

In 2006 ZCL maintained its finished goods stock that is -72%, which is the main reason of maximizing its profit.

Page 38 of 88

See annexure no.3.1

COMMON SIZE FINANCIAL STATEMENTS

•

Annexure no.3.2 shows the percentage figures that bring out clearly the relative significance of each group of items in the aggregative position of the firm for the following year that are as follows.

•

In the 2003 the ZCL had loss. This declining can mainly be traced to the increase of 96.74% in the manufacturing expenses reflecting diminishing in efficiency of manufacturing operations. The increase in financial overheads (Interest) by .19% during the 2003 can be traced to the repayment of a part of long-term loans.

•

In the 2003 the common size balance sheet show that current assets as a percentages of total assets have decreased by 17 percent over previous year. This decrease was shared by debtors 12% and inventory 5%; the share of cash & bank balance and loan comparatively remained unchanged at 11%. Fixed assets also decrease as a percentage of total assets by 12% over the previous year. This decrease was shares by gross block 11%.

•

The proportion of current liabilities (mainly due to creditors) was also lower at 16.69% in the 2003 compared to 30.67% in the previous year. These facts signal overall increase in the liquidity position of the firm. Further the share of long term debt has also declined and owner’s equity has gone up from 50.27% in the previous year to 31.46% in the 2003.

•

In the 2004 the ZCL had improved its loss that is -5.97%in 2004 as compared to -10.59% in the 2003. This development can mainly be traced to the decrease manufacturing expenses 91.90%in 2004 as compare to 96.74% in the 2003 reflecting improvement in efficiency of manufacturing operations. The decrease in financial overheads (Interest) by 1.59% during the 2004 can be traced to the repayment of a part of long-term loans. Page

39 of 88

•

In the 2004 the common size balance sheet show that current assets as a percentages of total assets have increase by 3% over previous year. This increase was shared by debtors 3%; the share of cash & bank balance and loan comparatively slightly changed. Fixed assets also decrease as a percentage of total assets by 7% over the previous year. This decrease was shares by gross block 14%.

•

The proportion of current liabilities (mainly due to creditors) was also lower at 15.60% in the 2004 compared to 16.69% in the previous year. These facts signal overall increase in the liquidity position of the firm. Further the share of long term debt has also raise and owner’s equity has gone down from 44.58% in the 2004 as compare to 50.27% in the 2003.

See annexure no. 3.2 • In the 2006 the EAT of ZCL improved that was 5.38%in 2006 as compared to -2.71% in the 2005. This development can mainly be traced to the decrease manufacturing expenses 90.42%in 2006 as compare to 96.28% in the 2005 reflecting improvement in efficiency of manufacturing operations. •

In the 2006 the common size balance sheet show that current assets increase as a percentages of total assets by 19.18% over previous year. This increase was shared by decrease in debtors by 6.36%; the share of cash & bank balance and loan comparatively increased by 24.89% as compare to previous year and some slightly changed in inventory. Fixed assets also decrease as a percentage of total assets by 4.61% over the previous year. This decrease was shares by gross block 3.96%.

•

In 2006 an investment was made of Rs.102 lacs because unsecured load was 25% more than the previous year. Further the share of loan funds has also raise and owner’s equity has gone down from 44.91% in the 2006 as compare to 46.93% in the 2005.

See annexure no. 3.2

Page 40 of 88

TREND PERCENTAGES Trend analysis is a form of comparative analysis, but instead of examining the entire balance sheet and income statement for two years, this form of analysis involves examination of selected financial statement information over longer period of time(usually at least 5 year and much as 10-20 years). See annexure no. 3.3

Trend of sales and net income of zuari cement limited for the year2002-03-04-05-06

Page 41 of 88

250 200 150

SALES (% ) NET INCOME (% )

100 50 0 SALES (% )

2002 2003 2004 2005 2006 100 97.77 107.5 133.9 197.3

100 97.77 106.8 132.9 196.1 NET INCOME (% ) Chart no. 2.7 We can see that Zuari’Net income and sales slightly decreased in the year of 2003 but it increased steadily over the 5-year period. The 2006 net income is almost two times as much as the 2002 amount. This is kind of performance that management and stockholder seek.

Trend of Profit & loss before tax of Zuari cement limited for the year 2002-03-04-05-06

Page 42 of 88

4000 2000 0 Profit & loss Before Tax(% )

-2000 -4000 Profit & loss Before Tax(% )

2002 2003 2004 2005 2006 100 -3385 -1029 -1299 3969

Chart no. 2.8 We can see that Zuari’ Loss Before Tax was in very worst situation in the year 2003 but it continuously improved and in the 2006 profit was 30 times as much as the 2002 amounts. Now we can say how fast zuari convert its self to loss making to profit making company by reducing the operating cost and optimum utilization of fixed cost.

Trend of manufacturing & other expenses against sales of Zuari Cement limited for the year of 2002-03-04-05-06

Page 43 of 88

400 200 Sales(%) 0 Sales(%)

200 200 200 200 200 100 98 108 134 197

Manufacturing & other exp.(%)

Manufacturing 100 112 116 151 210 & other exp.(%)

Chart no. 2.9

The following chart depict that Zuari cement limited has not control its manufacturing expenses. We can see that expenses are increasing more than its sales during the year.

GRAPHICAL ANALYSIS

Page 44 of 88

Profit/loss before tax of Zuari cement limited The following chart depict that zuari cement had very small profit before tax in the year of 2002 and It faced continuous losses over next three year. In the year 2006 it made 30 times profit as much as the 2002 profit amount. See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Profit/loss before tax(in lacs)

34.65

-1172.81

-356.62

-449.93

1375.39

Table no.1.4

1500 1000 500 0

Profit/loss before tax(In Lacs)

-500 -1000 -1500 2002

2004

2006

Chart no. 2.10

Profit/loss after tax

Page 45 of 88

The following chart depict that zuari cement had very small profit after tax in the year of 2002 and It faced continuous losses over next three year. In the year 2006 it made 30 times profit as much as the 2002 profit amount. See annexure no. 3.4

Year\value

2002

2003

2004

Profit/loss after tax

22.54

-1292.15 -795.69

2005

2006

-449.93

1317.39

Table no.1.5

1500 1000 500 0

Profit/loss after tax

-500 -1000 -1500

2002 2003 2004 2005 2006

Chart no. 2.11

Turnover of ZCL Page 46 of 88

We can see that turnover of zuari cement are steadily increasing every year from 2003 to 2006 it reduced in 2002 as the 2.23%. it is twice in the year 2006 as compare to 2002 amounts. See annexure no. 3.4

Year\Value

2002

2003

2004

2005

2006

Turnover

12481.1 4

12202.8 3

13351.5 4

16583.4 3

24469.89

Table no.1.6

25000 20000 15000 Turnover

10000 5000 0

2002

2003

2004

2005

2006

Chart no. 2.12

Page 47 of 88

RATIO ANALYSIS In order to assess how your business is doing, you'll need more than single numbers extracted from the financial statements. Each number has to be viewed in the context of the whole picture. For example, your income statement may show a net profit of $100,000. But is this good? If this profit is earned on sales of $500,000, it may be very good; but if sales of $2,000,000 are required to produce the net profit of $100,000, the picture changes drastically. A $2,000,000 sales figure may seem impressive, but not if it takes $2,000,000 in assets to produce those sales. The true meaning of figures from the financial statements emerges only when they are compared to other figures. Such comparisons are the essence of why business and financial ratios have been developed. Various ratios can be established from key figures on the financial statements. These ratios are very simple to calculate — sometimes they are simply expressed in the format "x:y," and other times they are simply one number divided by another, with the answer expressed as a percentage. However, these simple ratios can be a powerful tool because they allow you to immediately grasp the relationship expressed. When you routinely calculate and record a group of ratios at the end of every accounting period, you can assess the performance of your business over time, and compare your business to others in the same industry or to others of a similar size. By doing so, you won't be alone — banks routinely use business ratios to evaluate a business that's applying for a loan, and some creditors use them to determine whether to extend credit to you. When you compare changes in your business's ratios from period to period, you can pinpoint improvements in performance or developing problem areas. By comparing your ratios to those in other businesses, you can see possibilities for improvement in key areas. A number of sources, including many trade or business associations and organizations, provide data for comparison purposes; they are also available from commercial services. Your accountant may be a good source of information on how your business compares to similar ones in your particular locale. There are dozens and dozens of financial ratios that you can look at, but many will have little or no meaning for your business. In the following sections we'll concentrate on those that are most commonly considered to have the most value for making small business decisions. The ratios fall into four categories:

Page 48 of 88

•

liquidity ratios

•

efficiency ratios

•

profitability ratios

•

solvency ratios

ADVANTAGES OF RATIO ANALYSIS:Financial statement like profit and Loss account and balance sheet are prepared at the end of the year do not always conveys to the reader the real profitability and financial health of the business. They contain various facts and figures and it is for the reader to conclude, whether these facts indicate a good or bad managerial performance. Ratio analysis is the most important tool of analysis these financial statements. The figures then speak of liquidity, solvency by a profitability etc. of the business enterprises. Some important object and advantages derived by a firm by the use of accounting ratios are:•

Helpful in analysis of financial statement

•

Simplification of accounting data

•

Helpful in Comparative Study

•

Helpful in locating the weak spots of the business

•

Helpful in forecasting

•

Estimation of ideal standards

•

Fixation of ideal Standards

•

Effective Control

•

Study of financial soundness

Page 49 of 88

LIMITATIONS OF RATIO ANALYSIS:Ratio analysis is a very important tool of financial analysis. But despite it’s being indispensable, the ratio analysis suffers from a number of limitations. These limitations should be kept in mind while making use of the ratio analysis: •

False accounting data gives false ratios

•

Comparison not possible if different firms adopt different Accounting policies

•

Ratio analysis becomes less effective due to price level changes

•

Ratio may be misleading in the absence of absolute data

•

Limited use of a single Ratio

•

Window dressing

•

Lack of proper standards

•

Ratios alone are not adequate for proper conclusion

Page 50 of 88

CLASSIFICATION OF RATIOS:According ratios or financial ratio has been classified in various ways according to different purposes in view. However, we shall discuss the classification according to annual financial statement and according to objectives. •

Classification of ratio on the basis of financial statement:- Ratio is calculated on The basis of information given in the financial statement, which is as follows: •

Balance sheets Ratios or position statement ratios:- These are the ratios which explain the numerical relationship between two figures in the balance sheet, e.g. the Ratio of current assets to current liabilities or the ratio between capital and total Assets, This is also called financial ratio. The most common amongst the balance Sheet ratios are:

•

•

Current Ratio

•

Liquid ratio or Acid Test Ratio

•

Proprietary Ratio

•

Capital gearing Ratio

•

Fixed Assets to Current Assets Ratio.

Income statement Ratio or profit and loss Account Ratios: -These explain the numerical relationship between two items of group of items of the profit and loss A/c. The items should refer to the same statement. The more common ratios under this head are:

•

Operating Ratio

•

Gross profit Ratio

•

Net profit Ratio Page

51 of 88

•

•

Expenses Ratio

•

Stock Turnover Ratio

Composite Ratio: - These ratios are based on the figures of positions. Statement as well as income statement e.g.

•

•

Fixed assets

•

Return on capital employed ratio, etc.

Classification of ratios on the basis of objectiveRatio can be classified into four groups on the basis of objective:-

•

Liquidity ratios

•

Solvency ratios

•

Activity ratios

•

Profitability ratio

•

Investment ratio

Page 52 of 88

•

LIQUIDITY RATIO:-

Liquidity refers to the ability of a firm to meet its short-term financial obligations when and as they fall due. Thus a liquidity ratio measures the firm’s ability to fulfil short-item commitment out of its liquid assets.

•

CURRENT RATIO OR WORKING CAPITAL RATIO:-

This ratio explains the relationship between current Assets and current liabilities of a business. “Current assets” include those assets, which can be converted into cash within a year’s time, and Current liability includes those liabilities, which are repayable in a year’s time. The formula for calculating the ratio is:Current Assets Page 53 of 88

Current Ratio

= Current Liabilities

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

0.92

1.68

1.67

1.24

1.14

Current Assets

3819.9 3

2674.5 9

3215.4 5

3673.5 7

5571.9 2

Current liabilities

4157.8 2

1595.2 2

1923.2 5

2954.1 9

4904.1 8

Table no.1.7

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

In 2002 ZCL had .92 paisa to pay Rs 1 which is very worst situation from the creditor point of view. However, a ratio of less than 1 : 1 would certainly undesirable in any industry as at least some safety margin is required to protect the interest of creditors and to provide cushion to the firm in adverse circumstances.

In 2003 and 04 ZCL had 68 percent more capacity to pay its short term liabilities that even with a drop-out of 68 percent in the value of current assets, ZCL can meet its obligation. Company must maintain at least this percent of liquidity every year.

In 2005 and 06 company’s current ratio fell down that is 1.24: 1 and 1.14: 1 that is sufficient to pay its short term liabilities but from the investor point of view the margin of safety is very less in the both year though company must increase its liquidity position for paying its short term obligation.

Page 54 of 88

These low numeric values of ratio do not indicate a good sign from investor’s especially for sundry creditors. Company has to concentrate on company’s liquidity problem.

•

QUICK RATIO OR ACID-TEST RATIO:Page

55 of 88

Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately. ‘Liquid assets’ means those assets, which will yield cash very shortly. All current assets except stock and prepaid expenses are included in liquid assets. Stock is excluded from liquid assets because it has to be sold before it can be converted into cash. Prepaid expenses are to be excluded from the list of liquid assets because they are not expected to be converted into cash. Liquid assets thus include cash debtors, bill receivable and short-term securities. As such the Quick ratio is calculated by dividing liquid (Quick current assets) by current liabilities: -

Liquid Assets Quick Ratio = Current Liabilities See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

0.61

1.06

1.20

0.92

0.90

Liquid Assets

2530.5 3

1689.2 5

2303.8

2723.1 2

4429.4 3

Current Liabilities

4157.8 2

1595.2 2

1923.2 5

2954.1 9

4904.1 8

Table no.1.8

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION In 2003 and 04 ZCL had ability to meet their cash demand but in 2002, 05 and 2006 the numeric value of ratio is less than their ideal value which shows that company was suffering from cash problem. This data of ratio is not good for those creditors who give short-term loan to company. Generally, an acid test or quick ratio of 1:1 is considered satisfactory as ZCL can easily meet all current claims.

Page 56 of 88

•

LEVERAGE RATIO OR SOLVANCY RATIO:Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. Companies with high fixed costs, after reaching the breakeven point, see a greater increase in operating revenue when output is increased compared to companies with high variable costs. The reason for this is that the costs have already been incurred, so every sale after the breakeven transfers to the operating income. On the other hand, a high variable cost company sees little increase in operating income with additional output, because costs continue to be imputed into the outputs. The degree of operating leverage is the ratio used to calculate this mix and its effects on operating income.

There are 5 types of leverage ratio:-

Page 57 of 88

•

DEBT-EQUITY RATIO:This ratio expresses the relationship between external liabilities and shareholder’s funds. It indicates the proportion of funds, which are provided by outside creditors in comparison to shareholders funds. This ratio is calculated to ascertain the soundness of the long-term financial policies of the firm.

a) External Equities – These include all the long-term and short-term debts

such as, Debenture, Mortgage Loan, Bank Loan, Public Deposits and all the Current Liabilities. b) Internal Equities- These includes Equity share capital, Preference Share

Capital, Reserves and credit balance of Profit & Loss A/c.

Total Debt Debt-Equity Ratio

= Equity& Net worth

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

3.15

1.32

1.59

1.69

1.83

Total Debt

7526.1 2

5362.7 8

6465.9 2

6857.9 5

7421.8 8

Net worth

2386.9 2

4058.6 3

4058.6 4

4058.6 4

4058.6 4

Table no.1.9

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

Page 58 of 88

In Zuari Cement Limited., the value of debt-Equity ratio is more than 1. On the other hand, return to company is not high so that debt become beneficial for company. It is a burden on company. In 2002 company shows very high ratio but a high debt equity ratio has serious implications from the firms’ point of you.

The high ratio would lead inflexibility in the operations of the firm, as creditors would be able to borrow funds only under restrictive conditions; a firm faces difficulty in raising funds in future.

In 2003 ZCL had 1.32:1 ratio between debt and equity which depict that Company financed its debt in very less proportion to equity.

•

PROPRIETORY RATIO:This is the ratio, which shows the relationship of internal equity with the total assets. This ratio indicates the proportion of total funds provided by a firm from internal sources it is calculated as under:-

Equity (Shareholder’s Funds) Proprietory Ratio =

Internal Equity or

Equity + Debts

Total Equity or Total Assets

See annexure no. 3.4

Year

2002

2003

2004

2005

2006

Ratio

0.24

0.43

0.39

0.37

0.35

Equity

2386.9 2

4058.6 3

4058.64

4058.64

4058.64

Equity+De bt

9913.0 4

9421.4 1

10524.5 6

10916.5 9

11480.5 2

Table no.1.10

Page 59 of 88

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION In Zuari cement limited, proprietary ratio is less than 1 or 50%. This low value of ratio indicates the unsound financial position of company. It is not good for long term prospect. Company has to take certain steps to equity portion of this ratio.

•

DEBT-TOTAL ASSET RATIO:-

Total debt comprises of long-term debt & current liabilities &Total Asset comprises of permanent capital & current assets.

While calculating total assets all the intangible assets appearing on the assets side of the balance sheet should be deducted such as preliminary expenses Underwriting Commission, Debt balance of P&L A/c etc. This ratio indicates the proportion of total funds acquired by a firm by outside sources.

Total Debt Debt-asset ratio

= Total Asset

See annexure no. 3.4

Year

2002

2003

2004

2005

2006

Ratio

0.99

0.66

0.71

0.79

0.82

Total Debt

7526.1 2

5362.7 8

6465.9 2

6857.9 5

7421.8 8

Total Assets

7586.2 3

8074.1 6

9104.3 2

8647.3 9

9036.5 0

Page 60 of 88

Table no.1.11

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

It is appreciable ratio for Zuari cement Ltd. that it had less than 1 in all the five year which shows that ZCL is financially very strong, because this ratio should be less than 1 or 50%. This shows that company has strong financial position. If company has more total assets then it is good for their long-term financing.

• INTEREST COVERAGE RATIO The interest coverage ratio is a measurement of the number of times a company could make its interest payments with its earnings before interest and taxes; the lower the ratio, the higher the company’s debt burden. Earnings before interest & tax Interest coverage ratio = Total interest

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

1.04

-0.46

0.46

0.18

3.35

EBIT

834.0 6

-368.1

309.5 9

96.5

1960.57

T.Interes t

799.4 1

804.7 1

666.2 1

546.4 3

585.18

Table no.1.12 Page 61 of 88

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION In 2004 and 05, interest coverage ratio of Zuari Cement Ltd. was .46 and .18 which is very low below standard for investor’s point of view. In the 2003 Company has negative interest coverage ratio which shows that company is not able to pay its interest obligation. It also shows that company has weak short-term financial health. In the year 2002, interest coverage ratio of ZCL was 1.04 which also low below Standard for investor’s point of view. But in the year 2006, the ratio was 3.35:1 that is good for both company and investor, because every investor seek to greater return from a company.

• ACTIVITY RATIO OR TURN-OVER RATIO:-

These ratios measure how well the facilities at the disposal of the being utilized. These ratios are known as turnover ratio as they indicate the rapidity with which the resources available to the concern are being used to product sales. In other, words these ratio measure the efficiency and rapidity of the resources of the company, like stock, fixed assets, working capital debtors etc. these ratio are generally calculated on the basis of sales or cost of sales some of the important activity ratios are discussed below: -

• STOCK TURNOVER RATIO :-

This ratio indicates the relationship between the cost of goods sold during the year and average stock kept during that year. Page 62 of 88

Cost of Goods Sold Stock Turnover Ratio

= Average Stock

Cost of goods sold = (Opening Stock +Purchase +Direct Exp. - Closing Stock) Or = Sales – Gross Profit Average stock can be calculated as follows: -

Opening Stock + Closing Stock Average Stock = 2 See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

3.19

5.17

6.41

8.51

10.54

COGS

10506.9 5

11767.6 7

12154.7 2

15850.0 6

22060.0 9

A.Inv.

3291.68

2274.74

1896.99

1862.1

2092.94

Table no.1.13 Source: compiled from the annual report of zuari cement limited.

12 Months Inventory holding period = Inventory turn over ratio

See annexure no. 3.4

Year

2 002

2 003

2 004

2 005

2006

Holding period(month)

3 .76

2 .32

1 .87

1 .41

1.14 Page

63 of 88

Months Inv.turnover ratio

12

12

12

12

12

3 .19

5 .17

6 .41

8 .51

10.54

Table no.1.14 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

Zuari Cement limited had appreciably increased their stock turnover ratio from 2002 to 2006. It was approx. three times more than the 2002. It proves that their sales increase during this period. Stocks are converted into sells quickly even the profit margin increases.

We can see that the inventory holding period also continuously decreased every year. It was 3.76 in the year 2002, reached 1.14 in 2006 then we can assume that its sales increased every year.

Page 64 of 88

• DEBTOR’S TURNOVER RATIO :This ratio indicates the relationship between credit sales and average debtors during the year:-

Net Credit Sales Debtors Turnover Ratio

= Average Debtors + Average B/R

Bills receivable are added in Debtors for the purpose of calculation of this ratio. Average debtors are calculated by adding the debtors and B/R at the beginning of a period as well as at the end of the period and by dividing the total by 2. While calculating this ratio provision for bad and doubtful debts is not deducted from total debtors so that it may not give a false impression that debtors are collected quickly.

If the amount of credit sales is not given in the question, the ratio may be calculated by taking the figure of total sales.

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

4.62

5.79

9.46

8.49

12.62

Net credit sales

12304.3 4

12030.0 7

13231.6 6

16476.7 9

24280.2 3

Opening debtors

1824.42

1681.42

790.8

1215.41

1452.34

Closing debtors

1681.42

790.8

1215.41

1452.34

942.97

A.debtor+A.B/R

2665.13

2076.82

1398.51

1941.58

1923.83

Table no.1.15 Source: compiled from the annual report of zuari cement limited. Page 65 of 88

12 Months Debtor Collection Period = Debtor Turnover Ratio

See annexure no. 3.4

Year

2 002

2 003

2 004

2 005

2006

Month s

2 .60

2 .07

1 .27

1 .41

0.95

12

12

12

12

12

4 .62

5 .79

9 .46

8 .49

12.62

12 (months) Debtor turnover ratio

Table no.1.16

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

Page 66 of 88

In Zuari cement Ltd., Debtors turnover ratio was continuously increased which is good for a company. It indicates that company operate its functions either on cash basis or collection of account receivable is efficient. Here company is facing low risk of bad debt.

We can see that the Debtor collection time period of Zuari Cement Ltd. continuously decreased from 2002 to 2006. It indicates that company give less credit time to its debtor that is beneficial for the company.

• WORKING CAPITAL TURNOVER:-

It is a measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.

Sales Working capital turnover

= Working capital

Working capital = Current Assets - Current Liabilities

Page 67 of 88

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

-36.42

11.15

10.24

22.90

36.36

Sales

12304.3 4

12030.0 7

13231.6 6

16476.7 9

24280.2 3

Current Assets

3819.93

2674.59

3215.45

3673.57

5571.92

C. Liabilities

4157.82

1595.22

1923.25

2954.19

4904.18

-337.89

1079.37

1292.2

719.38

667.74

Net working capital

Table no.1.17 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

In 2002 ZCL shows negative working capital that is not good for a company And turnover ratio also negative. It could not convert working capital in to sales due to which it made very little profit that year.

In 2005 and 2006 the working capital shows improvement that means it easily converted its W.C. in to sales. We can see the ratio was also increase. It indicates that company started proper use of its working capital for making profit.

These ratios concerned with the effective use of working capital & indicate the number of time capital was changed into sales. It can be seen in the year 2004 and 2006.

• TOTAL ASSET TURNOVER RATIO:-

This ratio expresses the relationship between total assets (fixed assets less depreciation & current assets) and net sales. It is calculated using the following formula:

Page 68 of 88

Net Sales Total Assets Turnover Ratio

= Total Assets

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

1.62

1.49

1.45

1.91

2.69

Sales

12304.3 4

12030.0 7

13231.6 6

16476.7 9

24280.2 3

A.Total Assets

7586.23

8074.16

9104.32

8647.39

9036.5

Table no.1.18

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

In 2003 and 2004 ZCL did not utilise its resources to increasing profit margin and sales of company and presence of idle capacity, but in 2002 and 2005 it slightly increase and show the efficiently utilization of fixed assets.

In 2006 the assets turnover ratio appreciable increased that indicates how efficiently ZCL utilised its assets to making a good profit as compare over the previous year.

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• FIXED ASSET TURNOVER RATIO:This ratio expresses the relationship between fixed assets less depreciation and net sales or cost of goods sold. The formula used for calculating this ratio is as follows: Net Sales or cost of goods sold Fixed Assets Turnover Ratio= Net Fixed Assets Net Fixed Assets = Fixed assets – Depreciation

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

2.42

2.67

3.00

4.16

6.52

Net Sales

12304.3 4

12030.0 7

13231.6 6

16476.7 9

24280.2 3

Fixed Assets

11339.1 6

11265.9 8

11461.1 1

11606.2 2

11771.2

Depreciation

6250.59

6763.18

7055.19

7642.64

8045.84

Net fixed Assets

5088.57

4502.8

4405.92

3963.58

3725.36

Table no.1.19 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION This ratio indicates that ZCL is efficiently utilising its fixed assets that is good signed for the company. The ratio is continuously increasing every year which indicates that sales are also increasing according to fixed assets. The ratio reached two and half time more in 2006 as compare the 2002. By which we can see that, how management took excellent steps for utilization of fixed assets.

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• Cash Ratio The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash; cash equivalents or invested funds there are in current assets to cover current liabilities. The formula used for this ratio is as follow.

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

0.036

0.186

0.217

0.184

0.097

Cash

148.14

296.54

418.27

543.39

477.23

C.L.

4157.8 2

1595.2 2

1923.2 5

2954.1 9

4904.1 8

Table no.1.20 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn't necessarily a bad thing, so don't focus on this ratio being above 1:1. It is not realistic for a ZCL to purposefully maintain high levels of cash assets to cover current liabilities. The reason being that it's often seen as poor asset utilization for ZCL to hold large amounts of cash on its balance sheet, as this money could be returned to shareholders or used elsewhere to generate higher returns.

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•

PROFITABLITY RATIO:The main object of every business concern is to earn profits. A business must be able to earn adequate profits in relation to the capital invested in it. The efficiency and the success of a business can be measured with the help of profitability ratios. We can understand more about these ratios by categorized it into the following two:-

I.

Ratios calculated on bases of sales - {Net Sales means (sales + Income from Service)} these are as follows:

•

NET PROFIT RATIO:-

This ratio measured the relationship net profits and sales of a firm. Net profit is the excess of revenue over expenses during a particular accounting period. The net profit ratio is determined by dividing the net profit by sales and expressed as percentage. The formula used is as follows:-

Net Profit after Interest & Tax Net Profit Ratio = Net Sales See annexure no. 3.4 Ratio (%) Net Income Sale

0.18

-10.74

-6.01

-2.73

5.43

22.54

-1292.1 5

-795.69

-449.93

1317.39

12304.3 4

12030.0 7

13231.6 6

16476.7 9

24280.2 3

Page 72 of 88

Table no.1.21 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

In ZUARI Cement limited’ net sales do not show appreciable rise &cost of production is continuously increases in the year 2002, 2003 and 2004 due to which there was slight profit margin in 2002 and considerable loss in 2003 and 04 but after that company shows some improvement in sales by which it had recovered loss in 2005 and 2006 it made it converted in profit. It is not good from shareholder’s point of view.

The ratio clearly indicate that ZCL’s selling and operating expenses is quite high in the year 2002 to 2005 that’s why it made loss during the year. ZCL must concentrate on these expenses.

•

GROSS PROFIT RATIO:-

A company's cost of sales, or cost of goods sold, represents the expense related to labor, raw materials and manufacturing overhead involved in its production process. This expense is deducted from the company's net sales/revenue, which results in a company's first level of profit, or gross profit. The gross profit margin is used to analyze how efficiently a company is using its raw materials, labor and manufacturing-related fixed assets to generate profits. A higher margin percentage is a favorable profit indicator.

Gross Profit Gross profit ratio

= Net sales

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See annexure no. 3.4

Year

2002

2003

2004

2005

2006

14.61

2.18

8.14

3.80

9.14

G.P.

1797.39

262.4

1076.94

626.73

2220.14

Sale

12304.3 4

12030.0 7

13231.6 6

16476.7 9

24280.2 3

Ratio (%)

Table no.1.22 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION The gross profit ratio indicate that in 2002 Zuari cement efficiently used raw material, labour and other manufacturing assets for generating profit. But in 2003, 04 and 2005 it was very less that means it was not able to proper uses of its resources. In 2006 the margin of gross profit was 9.14% that is quit high compare than previous three year. Company should consider of using raw material, labour and other manufacturing assets.

II.

Ratio calculated on basis of Capital – These are as follows:

•

RETURN ON CAPITAL EMPLOYED:-

This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is usually in percentage and is also known as ‘Rate of Return’ or Return on Capital Employed’ or ‘Yield on Capital’.

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The term ‘Investment’ here refers to long-term funds deployed in the enterprise. As defined earlier long-term funds are also known as capital employed which means total of shareholder funds and long term loans. Since the Capital employed includes shareholders funds and long-term loans, interest paid on long-term loans will not be deducted from profits while calculating this ratio. The ratio is computed as under.

Net Profit before Interest and Tax Return on Capital employed = Capital Employed Where, Capital Employed = Total Assets – Current Liabilities

See annexure no. 3.4

Year

2002

2003

2004

2005

2006

Ratio (%)

17.56

-6.59

5.43

2.06

44.63

EBIT

834.06

-368.1

309.59

96.5

1960.5 7

Total Assets

8908.5

7177.3 9

7621.3 7

7637.1 5

9297.2 8

Current Liabilities

4157.8 2

1595.2 2

1923.2 5

2954.1 9

4904.1 8

Capital employed

4750.6 8

5582.1 7

5698.1 2

4682.9 6

4393.1

Table no.1.23

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

In Zuari cement limited the return on capital employed was negative in the year 2003 and very less return in 2002, 04 and 05. This indicates that there Page 75 of 88

is not effective & efficient utilization of capital. This shows that effective utilization of long term fund is not takes place. But in 2006 management of ZCL Shows effective used of debt and equity that is good for the company because many investment analysts think that factoring debt into a company's total capital provides a more comprehensive evaluation of how well management using the debt and equity it has at its disposal.

•

RETURN ON EQUITY SHARE HOLDER’S FUND:-

This ratio expresses the percentage relationship between net profit after interest and tax and proprietors funds or shareholders investment. This is also known as “Return on proprietor’s funds”. It is used to ascertain the earning power of shareholders investment. Proprietors or shareholders funds include preference share capital as well as equity shareholders funds which in turn comprises equity shares capital share premium, and reserves and surplus. The shareholders equity also refers to the Net worth of a company. The net profits are after deducting interest and tax but before deducting dividend on preference shares. It is the final income that is available for distribution as dividend to shareholders. The ratio is calculated by using the following formula:-

Net Profit after Interest and Tax Return on Equity share holder’Fund = Shareholder’s Fund

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See annexure no. 3.4

Year

2002

2003

2004

2005

2006

Ratio (%)

0.94

-31.84

-19.60

-11.09

32.46

22.54

-1292.1 5

-795.6 9

-449.9 3

1317.3 9

2386.9 2

4058.6 3

4058.6 4

4058.6 4

4058.6 4

Profit After tax Shareholder’s equity

Table no.1.24 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

In Zuari cement ltd. profitability on share capital & and long term fund is in negative in the year 2003 to 2005due to loss after tax i.e. shareholders loss their amount from principal. This decreases the value of company in market which may create finance problem in future. Investors move away from doing investment in company. In 2006 it give 32% return on equity that may be good sign for investor point of view.

•

RETURN ON TOTAL ASSET:-

Profitability can also be measured by establishing relationship between net profit and total assets. This ratio is computed by dividing the net profits after tax by total funds invested or total assets. Total assets mean all net fixed current assets and non-trading investments. Factious assets are excluded but intangible assets are not excluded. The ratio is expressed as formula.

Net Profit after Interest and Tax +Interest

Return on Total Assets

= Total assets Page

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See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio (%)

9.23

-6.79

-1.70

1.26

20.46

22.54

-1292.1 5

-795.6 9

-449.9 3

1317.3 9

Interest

799.41

804.71

666.21

546.43

585.18

T.Assets

8908.5 0

7177.3 9

7621.3 7

7637.1 5

9297.2 8

Net income +Interest

821.95

-487.44

-129.4 8

96.5

1902.5 7

Net income

Table no.1.25 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION

In Zuari cement Ltd. return on total assets are very pathetic in the 2003 to 2005. Company invests money in various operation but do not able to get back return from it. Here also company is continuously loosing. But in 2006 company quietly improved its position that break the standard form.

The thumb rule say that company ROA may not come less than 5%. That can be seen in the year 2002 and 2006. When company got better return on its assets.

•

INVESTMENT ANALYSIS:•

RESERVE-CAPITAL RATIO:Page

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This ratio explains the profit allocation policy of a company. It is calculated by dividing reserves by equity shares capital thus.

Reserve Reserve to Capital Ratio

= Equity Share Capital

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

0.01

0.63

0.63

0.63

0.63

15.00

1573.2 2

1573.2 2

1573.2 2

1573.2 2

2371.9 2

2485.4 1

2485.4 2

2485.4 2

2485.4 2

Reserve s Equity Share Capital

Table no.1.26 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION This data find out equity share is no more than different in three years. So company is not dealing or trading in share. Company didn’t have good reserves in 2002. But from 2002 it increased its reserve that was more than 50% of share capital which proves that company could face out from any financial problem. Now it maintained its reserve more than 50% in every year till 2006. It seems that company is now financially sound full.

• DEBT RATIO The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the Page 79 of 88

company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. Formula:

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

84.48

74.72

84.84

89.80

79.83

T.LIABILITIE S

7526.12

5362.7 8

6465.92

6857.95

7421.88

T.Assets

8908.50

7177.3 9

7621.37

7637.15

9297.28

Table no.1.27 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION The easy-to-calculate debt ratio is helpful to investors looking for a quick take on a company's leverage. The debt ratio gives users a quick measure of the amount of debt that the company has on its balance sheets compared to its assets. The use of leverage, as displayed by the debt ratio, can be a double-edged sword for companies. If the company manages to generate returns above their cost of capital, investors will benefit. However, with the added risk of the debt on its books, a company can be easily hurt by this leverage if it is unable to generate returns above the cost of capital. Basically, any gains or losses are magnified by the use of leverage in the company's capital structure.

• Capitalization Ratio

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The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth. Long-term debt is divided by the sum of long-term debt and shareholders' equity. This ratio is considered to be one of the more meaningful of the "debt" ratios – it delivers the key insight into a company's use of leverage. Formula:

See annexure no. 3.4 Year

2002

2003

2004

2005

2006

58.53

48.14

52.81

49.03

38.28

Long term debt

3368.3 0

3767.5 6

4542.6 7

3903.7 6

2517.7 0

Long term debt+Equity

5755.2 2

7826.1 9

8601.3 1

7962.4 0

6576.3 4

Ratio

Table no.1.28 Source: compiled from the annual report of zuari cement limited.

INTERPRETATION The company capitalization ratio shows the ZCL’s healthy financial condition because ZCL has more equity than its long term debts in the year 2002 to 2005 but it reduced in 2006 so company should concentrate on this.

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• Growth Ratio These ratio measure the rate at which a firm should grow. Growth rate in sales need additional investment support incremental sales both in terms of current assets (such as inventory and debtor) and productive capacity/long-term assets (such as plant and machinery). The firm’s growth rate is higher when external finance is used. It is lower when it used internally generated funds (retained earning) only finance to its assets. There are two types of growth rates: • •

Internal growth rate Sustainable growth rate

• Internal Growth Rate The IGR is the maximum rate at which a firm can grow (in terms of sales or assets) without external financing of any kind. To determine the IGR the following assumption are made: There is an increase in assets of the firm in proportion to the sales, The net profit margin after taxes is in direct proportion to sales, The firm has a target dividend payout ratio (retention ratio) which it wants to maintain, The firm wants to grow at a rate which is warranted by its retentions.

Formula ROA*b IGR = 1-(ROA*b) Where (i) ROA is the return on assets (ii)b is retention ratio(1-Dividend payout) See annexure no. 3.4 Year

2002

2003

2004

2005

2006

Ratio

-100.1 1

-99.85

-99.41

-100.8 0

-100.05

ROA* B

922.6 6

-679.1 3

-169.8 9

126.3 6

2046.37

-921.6 6

680.1 3

170.8 9

-125.3 6

-2045.3 7

1-(ROA*B)

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Table no.1.29

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION The following table shows the ZCL had negative internal growth rate, because firm has 100% retained earning. It is not registered company in the stock market.

• Sustainable Growth Rate The SGR is the maximum rate at which the firm can grow by using internal sources (retained earnings) as well as additional external debt but without increasing its financial leverage (debt – equity ratio). To determine SGR, the two additional assumptions are made: The firm has a target capital structure (D/E ratio) which it wants to maintain, The firm does not intend to sell new equity shares as it is a source of finance.

Formula ROE*b SGR = 1-(ROE*b) Where (i) ROE is the return on equity and (ii)b is Retention ratio (Dividend payout ratio) See annexure no. 3.4 Year Ratio ROE*B 1-ROE*B

2002

2003

2004

2005

2006

-101.0 7

-99.97

-99.95

-99.91

-100.03

94.43

-3183.7 1

-1960.4 8

-1108.5 7

3245.89

-93.43

3184.7 1

1961.4 8

1109.5 7

-3244.8 9 Page

83 of 88

Table no.1.30

Source: compiled from the annual report of zuari cement limited.

INTERPRETATION The following table shows the ZCL had negative Sustainable growth rate, because firm has 100% retained earning. It is not registered company in the stock market.

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RECOMMENDATIONS

Page 85 of 88

RECOMMENDATIONS

•

ZCL must increase its liquidity position for paying its short term obligation, because its margin of safety is very less from investor point of view during the year 2005 and 2006.

•

In 2005 and 2006 company was suffered from cash problem. So ZCL should consider in this area also.

•

The high leverage ratio would lead inflexibility in the operations of the firm, as creditors would be able to borrow funds only under restrictive conditions; a firm faces difficulty in raising funds in future.

•

The proprietary ratio is less than 1 or 50%. This low value of ratio indicates the unsound financial position of company. It is not good for long term prospect. Company has to take certain steps to equity portion of this ratio.

•

Company should consider of using raw material, labor and other manufacturing assets for its gross margin profit.

•

ZCL has more equity than its long term debts in the year 2002 to 2005 but it reduced in 2006 so company should concentrate on this.

•

The company should be moving ahead with strong performance and well conceived strategies for expansion, diversification and corporate transformation.

•

The company should be better utilization of human resources and improvement in work culture and productivity. Employees were motivated through competition, prizes and incentives declared by the company from time to time Page

86 of 88

•

Inventory is slow moving item. There is still a possibility of reduction in its holding days for ZCL the large part of current assets is in the form of inventory.

•

ZCL should raise its market share for establishing new plant in western region. There is also ample quantity of lime stone.

BIBLIOGRAPHY

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Bibliography BOOKS KHAN & JAIN and I. M. PANDEY (Financial management) WEBSITES www.zuaricement.com www.italcementgroups.com www.investopedia.com www.indiainfoline.com www.wikipedia.com www.indiabiznews.com www.bnet.com …………etc

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