Ltd Hsp Financial Analysis

FINANCIAL ANALYSIS OF INTERNATIONAL TRACTORS LIMITED NASRALA HOSHIARPUR Submitted to: Lovely Institute Of Management Punjab Technical University Jalandhar In partial fulfillment of the requirement for the award of degree of

MASTER OF BUSINESS ADMINISTRATION (MBA) (2001-2003)

Supervised by:

Submitted by:

Ms. Puneet Sikand

NEEL KAMAL SHARMA

Lecturer in LIM,

MBA – 4th Semester

Phagwara.

Univ. Roll No. 14422216

LOVELY INSTITUTE OF MANAGEMENT Affiliated to

PUNJAB TECHNICAL UNIVERSITY

JALANDHAR

BIBLIOGRAPHY

R.K. SHARMA and SHASHI K. GUPTA, “Management Accounting and Business Finance”, Kalyani Publishers, Ludhiana, 2000. I.M. PANDEY, “Financial Management”, Vikas Publishing house private limited, New Delhi, 2000. DILEEP PRAKASH, “Global Outsourcing”, Business World, May 12th 2003, PP 30-39. ICFAI, “Financial Management” ICFAI Press Hyderabad. C.R. KOTHARI, “Research Methodology, Methods & Techniques” Wishwa Parkashan New Delhi, 1999. S.D. GUPTA, “Statitical Methods” Sultan Chand & Sons, New Delhi, 2001. Balance sheets, “International Tractors Limited from 1998 – 2002”. (Four years Balance Sheets). Financial statements, “International Tractors Limited” a) Profit and loss account from 1999 – 2002. b) Balance sheets from 1998 – 2002.

CERTIFICATE This is to certify that the project report entitled “Financial Analysis of International Tractors Limited”, submitted by Mr. NEEL KAMAL SHARMA in partial fulfillment for the award of Master of Business Administration (MBA) of Punjab Technical University, Jalandhar is a bonafide research work carried out under my supervision and guidance and no part of this project has been submitted for any other degree / diploma. The assistance and help received during the course of the investigation has been fully acknowledged.

Dated: ____________

Ms. Puneet Sikand (Lecturer) Lovely Institute of Management, Jalandhar.

ACKNOWLEDMENT It is difficult to acknowledge precious a debt as that of learning as it is the only debt that is difficult to repay except through gratitude. First and foremost I wish to express my profound gratitude to the almighty, the merciful & compassionate with those grace & blessings. I have been able to complete this work. It is my profound privilege to express my sincere thanks to Dr. Sanjay Modi, Director LIM Phagwara, for giving me an opportunity to work on the project and giving me full support in completing this project. I am very thankful to my guide Ms. Puneet Sikand (Lecturer in LIM, Phagwara) for his full support in completing this project work. Last but not least, I would like to thank my parents & my friends for their full cooperation & continuous support during the course of this assignment.

(NEEL KAMAL SHARMA)

CONTENTS

Certificate Acknowledgement

Table of contents

Page No.

Executive summary

1

Introduction to the Project

5

Introduction to the company

12

Data Presentation, Analysis and Interpretation

17

Conclusion & Suggestions

63

Bibliography Annexure

EXECUTIVE SUMMARY 1. Chapter 1 1.1. SCOPE 1.2. OBJECTIVE OF THE STUDY 1.3. RESEARCH METHODOLOGY 1.4. LIMITATIONS OF THE STUDY 1.5. LIMITATIONS OF THE RATIO ANALYSIS 1.6. TECHNIQUES USED 1.7. CONCLUSION

1

EXECUTIVE SUMMARY a. SCOPE OF THE STUDY The main objective of carrying out this project is an effort to study Financial Analysis of International Tractors Limited at Hoshiarpur. The study that I concluded is Financial Analysis of International Tractors Limited is limited to analysis of Secondary data only. All the information used for analysis of financial analysis of the firm has been collected from Firms Balance sheet. 1.2

OBJECTIVE OF THE STUDY

The main objective of the study concluded is that to make comparative analysis or the financial position and I have made my all endeavors to find out the factors affecting the financial health of the company. 1.3

RESEARCH METHODOLOGY

For carrying out the study of this particular topic the data has been collected basically by two major sources. These are: (a)

Primary sources

The primary sources consist of the basic information collected from the staff people of various departments, the officers as well as the managers of the international tractors limited. It has been collected by consulting. (b)

Secondary sources

The secondary sources consist of the data and information collected from the annual reports, magazines, journals, and the scheduled ledgers of international tractors limited. 1.4

LIMITATIONS OF THE STUDY

Although there was many limitations that come across during this study but the major limitation that was faced by me was that the major portion of my collected data was from the secondary sources.

2

1.5

LIMITATION OF THE RATIO ANALYSIS

The ratio analysis is one of the most powerful tools of the financial analysis. Though ratios are simple to calculate and easy to understand, they differ from some serious limitations. a) Limited use of a single ratio A single ratio usually does not convey much of the sense. To make a better interpretation a large number of ratios have to be calculated, which is likely to confuse the analyst than help him in making any meaningful conclusions. b) Lack of Adequate standards There are no well-accepted standards or rules of thumb for all ratios, which can be accepted as norms. It renders interpretations of ratios difficult. c) Window dressing Financial statements can easily be window dressed to present a better picture of profitability to the outsiders. Hence one has to be very careful while making decisions from ratios calculated from such financial statements. d) Price level changes While making ratio analysis no consideration is given to the price level and this makes the interpretations of the ratios invalid.

1.6

TECHNIQUE USED

Although the ratio analysis has so many limitations but this is best techniques, which is used internationally, used for measuring the strength and weaknesses of the company. This is modern method, which shows the overall profitability of the company, to know the better results the ratios are compared with the ratios of the other companies.

3

1.7

CONCLUSION After analyzing the ratios of the INTERNATIONAL TRACTORS LIMITED the

interpretation is made in the form of graphical presentation and also in the form of the text. In conclusion part it is effort to know overall strength and weaknesses of the company and the suggestions are maintained in the form of liquidity, solvency, profitability ratios of the company. Some other useful suggestions to the ITI is also given.

4

ABOUT THE PROJECT 2. Chapter 2 2.1. INTRODUCTION 2.2. MEANING 2.3. OBJECTIVE 2.4. TYPES OF FINANCIAL ANALYSIS 2.5. PROCEDURE OF FINANCIAL ANALYSIS STATEMENTS 2.6. METHODS OF FINANCIAL ANALYSIS

5

Literature Survey 2.1

Introduction

Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of the managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However the information provided in the financial statements is of immense use in decision – making through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strength & weaknesses of the Firm by property, establishing relationship between the items of the Balance Sheet and the Profit and Loss Account. 2.2

Meaning

The term “Financial Analysis” also known as analysis and interpretation of financial statements refer to the process of determining financial strength and weaknesses of the firm by establishing strategic relationship between the items of the balance sheet, profit and loss account and other operative data. According to Metcalf and Titard, “Analyzing financial statements is the process of evaluating the relationship between the component parts of the financial statements to obtain a better understanding of a firm’s position and performance.” In the words of Myers, “Financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set of statements, and a study of the trend of these factors as shown in a series of statements”. 2.3

Objective

The purpose of objective of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. Just like a doctor examines his patient by recording his body temperature, blood pressure etc. before making his conclusion regarding the illness and before giving his treatment, a financial analyst analysis the financial statements with various tools of analysis before commenting upon the financial wealth or weaknesses of an enterprise. The analysis and interpretation of financial statements is essential to bring out the mystery behind the

6

figures in financial statements. Financial statements analysis is an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the future earnings, ability to pay interest and debt maturities (both current and the long term) and profitability of a sound dividend policy. 2.4

Types of financial analysis

However, we can classify various types of financial analysis into different categories depending upon (i) the material used, and (ii) the method of operation followed in the analysis or the modus operandi of analysis. Types of Financial Analysis

On the basis of material used

External analysis

(i)

On the basis of modus operandi

Internal analysis

Horizontal analysis

Vertical analysis

On the basis of Material used: a. External analysis b. Internal analysis

a. External analysis This analysis is done by outsiders who do not have access detailed internal accounting records of the business firm. These outsiders include investors, potential investors, creditors, potential creditors, government agencies, credit agencies, and the general public. For financial analysis, these external parties to the firm depend almost entirely on the published financial statements.

7

b. Internal analysis The analysis conducted by persons who have access to the internal accounting records of a business firm is known as internal analysis. Such an analysis can therefore, be performed by executives and employees of the organization as well as government agencies which have statutory powers vested in them. Financial analysis for managerial purposes is the internal type of analysis that can be affected depending upon the purpose to be achieved. (ii)

On the basis of modus operandi a. Horizontal analysis b. Vertical analysis

a. Horizontal analysis Horizontal analysis refers to the comparison of financial data of a company for several years. The figure for this type of analysis are presented horizontally over a number of columns. The figures of the various years are compared with standard or base year. A base year is a year of analysis is also called ‘Dynamic analysis’ as it is based on the data from year to year rather than on data of any one year. b. Vertical analysis Vertical analysis refers to relationship of the various items in the financial statements of one accounting period. In this type of analysis the figures from financial statements of the year are compared with a base selected from the same years statement. It is also known as ‘static analysis’. Common size financial statements and financial ratios are the two tools employed in vertical analysis. Since vertical analysis considers data for one time period only. It is not very conducive to a proper analysis of financial statements. 2.5

Procedure of financial statement analysis. There are three steps involved in the analysis of financial statements. These are (i)

selection (ii) classification (iii) interpretation.

8

The first step involves selection of information (data) relevant to the purpose of analysis of financial statements. The second step involved is the methodical classification of the data and the third step includes drawing of inferences and conclusion. The following procedure is adopted for the analysis and interpretation of financial statements: 1. The analyst should acquaint himself with the principles and postulants of accounting. He should know the plans and policies of the management so that he may be able to find out whether these plans are properly executed or not. 2. The extent of analysis should be determined so that the sphere of work may be decided. If the aim is to find out the earning capacity of the enterprise then analysis of income statement will be undertaken. On the other hand, if financial position is to be studied then Balance sheet analysis will be necessary. 3. The financial data given in the statements should be re-organized and re-arranged. It will involve the grouping of similar data under same heads, breaking down of individual components or statements according to the nature. The data is reduced to a standard form. 4. A relationship is established among financial statements with the help of tools and techniques of analysis such as ratios, trends, common size, funds flow etc. 5. The information is interpreted in a simple and understandable way. The significance and utility of financial data is explained for helping decision taking. 6. The conclusions drawn from interpretation are presented to the management in the form of reports. 2.6

Methods or devices of financial analysis: -

The analysis and interpretation of financial statements is used to determine the financial position and results of operations as well. A number of methods or devices are used to study the relationship between different statements. The following methods of analysis are generally used: 1. Comparative statements 2. Trend analysis

9

3. Common size statements 4. Funds flow analysis 5. Cash flow analysis 6. Ratio analysis 7. Cost volume profit analysis These are explained as follows: 1. Comparative statements The comparative financial statements are statements of the financial position at different periods of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. Any statement prepared in a comparative form will be covered in comparative statements. From practical point of view. Generally, two financial statements (Balance Sheet and the Income Statement) are prepared in comparative form for financial analysis purposes. 2. Trend analysis The financial statements may be analyzed by computing trends of series of information. This method determines the direction upwards or downwards and involves the computation of the percentage relationship that each statement items bears to the same in the base year. The information for a number of years is taken up and one year, generally taken for the base year. In figures for the base year are taken as 100 and trend ratios for other years are calculated on the basis of the base year. The analyst is able to see the trend of the figures, whether upward or downward. 3. Common size statements The common size statements, balance sheet and the income statements are shown in analytical percentages. The figures are shown as percentages of total assets, total liabilities and the total sales. The total sales are taken as 100 and different assets are expressed as a percentage of the total. Similarly various liabilities are taken as a part of the total liabilities. These statements are also known as component percentage as 100

10

percent statements because every individual item is stated as a percentage of the total 100. 4. Funds flow analysis The fund flow statement is a statement, which shows the movement of the funds and is the report of the financial operations of the business undertaking. It indicates various means by which funds were obtained during a particular period and the ways in which these funds were employed. In simple words, it is a statement of sources and application of funds. 5. Cash flow analysis Cash flow statement is a statement, which describes the inflow (sources) and outflow (uses) of the cash and cash equivalents in an enterprise during the specified period of time. Such a statement enumerates net effects of the various business transactions on cash and its equivalents and takes into account receipts and disbursements of cash. A cash flow statement summarizes the causes of changes in cash position of a business enterprise between the dates of the two balance sheets. 6. 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 helping in making certain decisions. However ratio is not end itself. It is only a means of better understanding of financial strengths and weaknesses of a firm. A ratio is a simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of the two mathematical expressions. 7. Cost volume profit analysis Profit is the most important measure of a firm’s performance. In the free market economy, profit is a guide for allocating resources efficiently. An analysis of the effects of various factors on profit is an essential step in financial planning and decision-making. The analytical techniques used to study the behavior of profit in response to the changes in the volume costs and price is called the Cost Volume Profit (CVP) analysis.

11

ABOUT THE COMPANY 3. Chapter 3 3.1. A SONALIKA GROUP PROFILE 3.2. INTERNATIONAL TRACTORS LIMITED 3.3. COMPANY PROFILE 3.4. THE TOP BRASS 3.5. ITL DEALERS 3.6. COMPANY SHAREHOLDIGNS 3.7. NUMBER OF MODELS 3.8. REGIONAL OFFICES 3.9. JOINT VENTURE

12

SONALIKA GROUP OF INDUSTRIES 3.1

A SONALIKA GROUP PROFILE

SONALIKA GROUP OF INDUSTRIES was established as a small-scale unit about three decades ago. Fabricate and assemble harvesting machines at Hoshiarpur. Gradually over a period of time the company developed itself into a major force in agricultural harvesting machines. And today is the largest group of the manufacturer of machines. The group has progressed well in short period of time with increase in its product ranges. The group has maintained an increasing record of continues profitability since its inception. Different groups of Sonalika Group. SONALIKA AGRO INTERNATIONAL TRACTORS. 3.2

INTERNATIONAL TRACTORS LIMITED.

INTERNATIONAL TRACTORS LIMITED was established on 14th October, 1996 for manufacture of tractors. It is situated at village Chak Gujran, Hoshiarpur with its head office at Delhi. The unit is spread over 13 acres of the land. The unit international tractors are presently holding 18 % of the market share. Authorized capital of the ITL as on 31.03.2002 is 60000000. Issued & subscribed capital on ITL is 60000000.

3.3

COMPANY PROFILE

Name of the Company

:

M/s International Tractors Limited.

Location

:

Village Chak Gujran, Jalandhar Road, Hoshiarpur (PUNJAB)

Brand Name

:

SONALIKA

Product

:

TRACTORS

Established on

:

14.10.1996

Present production

:

60 Tractors per day

13

Installed capacity

:

200 Tractors per day

Total Area

:

13 Acres of Land.

Employees

:

890 (direct)

ITL Certificates

:

9001 and 14001 certification.

CHAIRMAN

:

SH. L.D. MITTAL

MANAGING DIRECTOR

:

SH. A.S. MITTAL

JOINT MANAGING DIR.

:

SH. D.K. MITTAL

DIRECTOR

:

SH. S.K. MITTAL

VICE PRESIDENT

:

SH. J.K. PALIWAL

3.4

3.5

THE TOP BRASS

ITL DEALERS IN ALL OVER INDIA  PUNJAB  UTTAR PRADESH  MADHYA PRADESH  ORISSA  BIHAR  HARYANA  MAHARASHTRA  ANDHRA PRADESH  KARNATAKA  TAMIL NADU  RAJASTHAN  WEST BENGAL and  NEPAL

14

3.6

COMPANY SHAREHOLDINGS  80 % Sonalika Group  20 % Renault Agriculture

3.7

NUMBER OF MODELS

International tractors manufacturers 12 models of tractors. These models are:  DI – 725 (SC)  DI – 730 (SC)  DI – 730 III  DI – 732 III  DI – 35 (I)  DI – 740 (SC)  DI – 740 (DC)  DI – 745 (SC, DC, I)  DI – 750 (SC)  DI – 750 III (SC, DC)  DI – 55 (DC)  DI – 60 (SC, DC) TOTAL NUMBER OF DEALERS IN INDIA, NEPAL, SRILANKA, AND BANGLADESH is 548 3.8

REGIONAL OFFICES  DELHI  KANPUR  PATNA  BHOPAL  AHMEDABAD

15

3.9

JOINT VENTURE

International tractors have signed a joint venture agreement with Renault Agriculture of France, a leading manufacturer of cars and tractors. This is a technical, financial, commercial and exports collaboration. Renault Agriculture of France is the world leader of Tractor manufacturing and was rated as world number one Tractor Company at the year’s award in Italy. INDO – FRANCE COLLABORATION MAJOR FEATURES: International tractors Ltd. signed an MOU with Renault Agriculture, a 100 % subsidiary of Renault Group of France to manufacture and market tractors of the Renault agriculture design in India and neighboring countries. Renault agriculture has three factories and 1833 people working for it and is represented by 52 countries across the globe. The MOU was signed by Mr. L.D. Mittal (chairman) and Mr. B. Morange (M.D. Renault Agriculture). HIGHLIGHTS OF THE AGREEMENT 1. Renault will open European and Asia markets for Sonalika. 2. Joint participation in international marketing strategies. 3. Renault agriculture will take minority equity stake of 20% in present ITL and that will remain under its managerial control.

16

DATA PRESENTATION ANALYSIS AND INTERPRETATION 4. Chapter 4 4.1. INTRODUCTION 4.2. MEANING 4.3. STEPS INVOLVED IN THE RATIO ANALYSIS 4.4. GUIDELINES FOR USE OF RATIOS 4.5. CLASSIFICATION OF RATIOS 4.6. CALCULATION OF RATIOS a) RATIO MATRIX b) GRAPHICAL PRESENTATION c) INTERPRETATION

17

DATA PRESENTATION ANALYSIS AND INTERPRETATION RATIO ANALYSIS 4.1

INTRODUCTION The ratio analysis is one of the most powerful tools of the financial analysis. It is

the process of establishing and interpreting various ratios (quantitative relationship between figures and groups of the figures). It is with the help of ratio that the financial statements can be analyzed more clearly and decisions made from such analysis. 4.2

MEANING A ratio is a simple arithmetical expression of the relationship of one number to

another. It may be defined as the indicated quotient of two mathematical expressions. According to the Accountant’s Handbook by Wixon, Kell and Bedford, a ratio is an expression of the quantitative relationship between the two numbers. According to the Kohler, a ratio is the relation of the amount, a, to another b, expressed as the ratio of a to b; a:b (ais to b) or as a simple fraction, integer, decimal fraction & percentage. In simple language ratio is one number expressed in terms of the another and can be worked out by dividing one number into the other. 4.3

STEPS INVOLVED IN THE RATIO ANALYSIS 1. Selection of relevant data from the financial statements depending upon the objective of the analysis. 2. Calculation of appropriate ratios from the above data. 3. Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparison with the ratio of the industry to which the firm belongs. 4. Interpretation of the ratios.

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4.4

GUIDELINES FOR USE OF RATIOS

The calculation of ratios may not be difficult task but their use is not easy. Following guidelines or factors may be kept in mind while interpreting various ratios. 1. ACCURACY OF FINANCIAL STATEMENTS: The ratios are calculated from the data available in financial statements. The reliability of ratio is linked to the accuracy of information in these statements. Before calculating ratios one should see whether proper concepts and conventions have been used for preparing financial statements or not. 2. OBJECTIVE OR PURPOSE OF ANALYSIS: The type of ratios to be calculated will depend upon the purpose for which these are required. If the purpose is to study current financial position then ratios relating to the current assets and current liabilities will be studied. The purpose of user is also important for the analysis of ratios. 3. SELECTION OF RATIOS: Another precaution in ratio analysis is the proper selection of appropriate ratios. The ratios should match the purpose for which these are required. 4. USE OF STANDARDS: The ratios will give an indication of financial position only when discussed with reference to certain standards. Unless otherwise these ratios are compared with certain standards one will not be able to reach at conclusion. 5. CALIBRE OF THE ANALYST: The ratios are only the tools of the analysis and their interpretation will depend upon the caliber and competence of the analyst. He should be familiar with various financial statements and the significance of change etc. 6. RATIO PROVIDE ONLY A BASE: The ratios are only guidelines for the analyst; he should not base his decision entirely on them. He should study any other relevant information, situation in the concern, general economic environment etc. before reaching final conclusions.

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4.5

CLASSIFICATION OF RATIOS

The ratios have different use for different people. Therefore ratios can be classified into different categories. Various ratios can be divided into following categories depending upon their use. Traditional classification Traditional classification or classification according to the statement, from which ratios are calculated is as follows:  Profit and loss account  Balance sheet ratios  Inter statement ratios Classification according to the nature of ratios In this type of ratios more emphasis is given to the nature of ratios, whether these pertain to sales, earning, inventory etc.  Liquidity or solvency ratio  Debtors ratio  Creditors ratio  Sales ratio  Earning ratios  Cost of expenses ratio According to importance of ratios Under this type of ratios, ratios can be divided into two categories as following: Primary ratios: 1. Return on capital employed Secondary ratios: 1. Production cost ratios 2. Distribution cost ratios 20

3. Selling cost ratios According to users of the ratios Ratios for management

Ratios for shareholders

Ratios for creditors

Return

Earning per share

Current ratios

Gross profit ratios

Yield ratios

Liquid ratios

Current ratios

Payout ratios

Debt equity ratio

on

capital

employed

21

Functional classification The four most important financial dimensions, which a firm would like to analyze, are:  Liquidity ratios  Leverage ratios  Activity ratios  Profitability ratios A. LIQUIDITY RATIOS: Liquidity refers to the ability of the concern to meet its current obligations and when these become due. The short – term obligations are met by realizing amounts from current, floating or circulating assets. A firm should ensure that it does not suffer from lack of liquidity and also that it does not have excess of liquidity. The failure of the company to meet its obligations due to lack of sufficient liquidity will result in poor creditworthiness, loss of creditors confidence, or even in legal tangles resulting in the closure of the company. A very high degree of the liquidity is also bad, idle assets earn nothing. The firm’s funds will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between the high liquidity and lack of liquidity. The most common ratios which indicates the extent of liquidity or lack of it are: •

Current ratio

•

Quick ratio

•

Absolute ratio 1. CURRENT RATIO

The current ratio is calculated by dividing current assets by liabilities with the help of following formula: Current ratio =

Current Assets Current Liabilities

This ratio is an indicator of the firm’s commitment to meet its short-term liabilities. Current assets means assets that will either be used up or converted into cash within a years’ time or norms, operating cycle or the business, whichever is longer. Current liabilities means liabilities payable within a year or during the operating cycle of business, whichever is longer, out of existing current assets or by creation of other current liabilities. An ideal current ratio is (2:1). The ratio of 2 is considered as a safe margin of solvency due to the fact that if the current assets are reduced to half i.e. 1 instead of 2, then also the creditors will be able to get their payable in full. Some of the current assets and current liabilities are as follows: Current Assets

Current Liabilities

Marketable Securities

Bank overdraft

Sundry Debtor (less provision)

Income tax

Billing Receivable

Payable

Advances (recoverable) Pre-paid expenses Book debts outstanding for more than 6 months and loose tools should not be included in current assets. 2. QUICK RATIO: (Acid Test Ratio or Liquid Ratio) This ratio establishes a relationship between quick or liquid assets and current liabilities. Quick Ratio

=

Quick Assets Quick Liabilities

Quick Assets = Current Assets – Inventories (i.e. stock) – prepaid expenses An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is (the most liquid asset).

Generally, a quick ratio is (1:1) is considered to represent a satisfactory current financial condition. A quick ratio of (1:1) or more does not necessarily imply sound liquidity position of dead stock is fairly low. 3. ABSOLUTE LIQUID RATIO / CASH RATIO: As all book debts may not be liquid, and cash may be immediately needed to pay operating expenses and moreover, inventories are not absolutely non-liquid. To a measurable extent, inventories are available to meet current obligation. It would be appreciated that a company with a lower quick ratio may be quite solvent in case its inventory has a ready market; its realizable value is even above the book value and the portion. Since cash is the most liquid asset, a financial analyst may examine the ratio of cash and its equivalent to current liabilities. An absolute liquid ratio of (0:5:1) may be adequate. The higher the ratio, the more solvent is the business. B. LEVERAGE RATIO (Test of long term solvency) Solvency of a business means its ability to meet its long – term liabilities debenture holder; mortgagors and other long – term depositors are primarily interested in ascertaining whether the company is having adequate profit to pay its interest obligation regularly. They would very much like to study the financial structure, the contribution of long-term depositors, vie a vie the owner to the total capital employed. 1.

DEBT – EQUITY RATIO

The ratio is also called ‘External Internal Equity Ratio’. It indicates the comparative claims of outsiders and owner in the concern’s total equities the claim of depositors, mortgagors, bondholders, suppliers, and other creditors are matched with those of owner, i.e. shareholders or proprietors. The management has to keep healthy balance between the two equities: external and internal. Debt Equity Ratio

=

Total Debt Net worth

TOTAL DEBT

NET WORTH

Debentures and Bonus

Equity share capital

Loan and Mortgage

Pref. Share capital

Security deposit with company

Reserve capital & Revenue

Fixed Deposit / Unsecured loans

Profit and Loss (Cr.)

All Current Liabilities These funds are available at the rate of the interest generally lower than the market rate. They are used along with share capital funds; the entire balance is then left for distribution among shareholders. If the proportion of outside fund is quite high, the company is technically said to be highly leveraged. In case the ratio is 1, it is considered quit satisfactory. High – Debt Company is able to borrow funds on very restrictive terms and conditions. 2. EQUITY RATIO / PROPRIETORY RATIO It is variant of debt – equity ratio. It is an important test to judge the long-term solvency of a concern. It establishes relationship between the proprietor or shareholder’s funds and the total assets. It may be expressed as: Equity ratio

=

Proprietor’s funds Total Assets

Proprietor’s fund or Net worth = Equity Share Capital + Reserve and Surplus + Preference Share Capital. Total Assets = Total Equities or Total Resources of the concern. If we take the total assets as 100, the percentage of proprietor’s funds indicates the contribution made by the owners towards total assets. The nearer the percentage of proprietor’s funds to 100, the larger is their contribution and the greater is the securities for creditors, depositors, mortgagors, and debenture holders.

3. FUNDED DEBT TO TOTAL CAPITALISATION RATIO Funded debt to total capitalization ratio reveals what portion of total capitalization is provided by founded debt and is formulated as: Funded debt to total capitalization

=

Funded debt

* 100

Total capitalization Funded Debt = Debentures + Bonus + Mortgage Loan + Other Loan – Term Loans Total Capitalization = Proprietor’s Fund’s + Funded Debt This ratio depicts the extent of dependence on outside sources for providing long term finance 67% dependence may be reasonable for trading and industrial concerns. The less the better, for long-term solvency. Beyond 67% it would be too risky. A high percentage reduces the security for depositors. 4. FIXED ASSET RATIO: The ratio is expressed as follows: Fixed Asset Ratio

=

Fixed Asset Long Term Funds

The ratio should not be more than 1 if it is less than 1, it shows that a part of the working capital has been financed through long-term funds. This is desirable to some extent because a part of working capital is termed, as “Core Working Capital” is more or less of a fixed nature. The ideal ratio is .67. Fixed Assets = Net Fixed Assets (i.e. Original Cost – Depreciation to date) + Trade Investments Long Term Funds = Share Capital + Reserves + Long Term Loans. 5. DEBT SERVICE RATIO / INTEREST COVERAGE RATIO: Debit ratio discussed earlier is static in nature, and fails to indicate the firm’s ability to meet interest obligations. Debt-service means regular and timely permanent interest due on loans and debentures. Since interest is paid out of the earning), he more the earning available, (he less is the risk as to the payment of interest. The interest

coverage ratio is computed by dividing earnings before interest and taxes (EBIT) by interest changed: Interest Coverage

=

EBIT Interest

C. ACTIVITY RATIOS (Efficiency Ratio): 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 ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turned over into sales and assets. 1.

DEBTORS TURNOVER / RECEIVABLE TURNOVER RATIO:

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of companies. When the firm extends credits to its customers, book debts are expressed to be converted into cash over a short period acid, therefore, are included in current assets. The liquidity position to the firm depends upon the quality of debtors to a great extent. Debtors Turnover Ratio

=

Credit Sales Average debtors

Account Receivable = Sundry Debtors + Bills Receivable The higher the ratio, the better it is, since it would indicate that debts are being collected more promptly. For measuring the efficiency, it is necessary to set up a standard figure; ratio lower than the standard will indicate inefficiency. 2.

COLLECTION PERIOD / AVERAGE AGE OF DEBTORS VELOCITY:

Debtor’s collection period represents the time segment, which is generally required to recover the debts due from customers and amount realizable on bills. Debtor Collection Period

=

365 days Debtors Turnover Ratio

Debtor collection period measures the quality of debtors since it measures the rapidly or slowness with which money is collected from then. A shorter collection period implies prompt payment by debtors. It reduces the chances of bad debts. A longer collection period implies neither too liberal nor too restrictive. A restrictive policy results in lower sales, which will reduce profits. In general, the amount of the receivable should not exceed 3-4 month’s credit sales. 3.

TOTAL ASSETS TURNOVER RATIO:

Some analysis like to compute the total assets turnover. This ratio shows the firm’s ability in generating sales from all financial resources committed to total assets. Total Assets Turnover Ratio =

Sales Total Assets

D. PROFITABILITY RATIO: A Company should earn profits to survive and grow over a long period of time. Profit is the difference between revenues and expenses over a period of time. Profit is ultimate output of the company and it with has no future if it fails to make sufficient profits. Therefore, the financial manager should continuously evaluate the efficiency of its company in term of profits. The profitability ratios are calculated to measure the operating efficiency of the company. Besides management of the company, creditors and owner are also interested in the profitability of the firm. Owners want to get a reasonable return on their investment. This is possible only when the company earns enough profits. Profitability ratios, deals with two aspects ‘profits’ or earning and ‘expenses’ incurred to earn that profit. ‘Sales’ has been the main source of recovery of expenses and earning of profit. These ratios thus study the relationship of profits as well as expenses with sales. These have accordingly been divided into categories: A.

RATIO OF PROFIT TO SALES 1. Gross profit ratio 2. Net profit ratio

3. Operating net profit ratio B.

RATIO OF EXPENSES TO SALES

C.

RETURN ON INVESTMENT RATIO

(A).

RATIO OF PROFIT TO SALES

1.

Gross Profit Ratio: Gross profit is an important concept for a business. It is always the endeavor of

the business to increase this margin. Gross profit represents the margin between the ‘Net Sales’ and ‘Cost of Goods Sold’. The larger this gap, the greater is the scope of absorbing various expenses on administration, maintenance, arranging finance, selling and distribution and creating necessary provision for anticipated expenses, and yet leaving net profit for the proprietors or share holders. Gross profit ratio is an indicator of the extent of average mark-up on cost of goods. It is primarily a test of the efficiency of purchases and sales management. Its formulation is as below: Gross Profit Ratio

=

Gross Profit

*

100

Sales Gross Profit = Sales – Cost of Goods Cost of Goods = (Opening Stock + Net Purchase + Procurement Expenses + Production Expenses – Closing Stock) This ratio indicates the degree to which the selling price of goods per unit may decline without resulting in losses from operations to the firm. In case there is increase in the percentage of the gross profit as compared to the previous years it is an indicator of one or more of the following factors: 1. The selling price of the goods has gone up without corresponding increase in the cost of goods sold. 2. The cost of goods sold has gone down without corresponding decrease in the selling price of the goods. 3. Purchase might have been omitted or the sales figures might have been inflated.

4. The opening stock has been immediately or the closing stock has been overvalued. In case there is decrease in the rate of gross profit it may be due to one or more of the following reasons: 1. There may be decrease in the selling price of the goods sold without corresponding decrease in the cost of the goods sold. 2. There may be increase in the cost of the goods sold without corresponding increase in the selling price of the goods sold. 3. There may be omission of sales. 4. Stock at the end may have been undervalued or the opening stock may have been overvalued. There is no norm for judging the Gross Profit Ratio; therefore, the evaluation of business on its basis is a matter of judgement. However the gross profits should be adequate to cover operating expenses and to provide for fixed charges, dividends and building up of reserves. 2.

Net Profit Ratio / Net Profit Margin: Net Profit is obtained when operating expenses; interest and taxes are subtracted

from the gross profit. The net profit margin ratio is measured as follows: Net Profit Margin

=

Profit After Tax

* 100

Sales Net profit margin ratio establishes a relationship between the net profit and sales and indicates management’s efficiency in manufacturing administering and selling the products. This ratio is the overall measure of the firm’s ability to turn each rupee sales into net profit. This ratio also indicates the firm’s capacity to withstand adverse economic conditions. A firm with a high net margin ratio would be in an advantageous position to survive in the face of falling sales prices, risings cost of production or declining demand for the product. Similarly, a firm with high net profit margin can make better use of

favorable conditions. Such as rising sales prices, falling cost of production or increasing demand for the product. Such a firm will be able to accelerate its profits at a faster rate than a firm with a low net profit margin. 3.

Operating Net Profit Ratio: Operating Net Profit means net profit from normal operations of a business, it is

calculate as: Operating Net Profit = Net Sales – (Cost of Goods Sold + All Operating Expenses) + Operating Sundry Income. Here, all operational expenses refer to office and administration expenses, repairs and maintenance, selling and distribution expenses and necessary provisions. Operational Sundry Income may be in the form of discount – earned, commission receiver etc. Non-Operating Income and non-operating expenses are not taken into account while ascertaining operating net profit. In case of net profit is given, it has to be adjusted by adding back non-operating and deducting then from non-operating incomes. Thus an alternative of finding out operating net profit is: The formula of operating net profit ratio is as under: Operating Net Profit =

Operating Net Profit * 100 Net Sales

Operating Net profit = Net Profit + Non-Operating Expenses – Non-Operational Income The higher the ratio, the more is the profitability.

(B)

RATIO OF EXPENSES TO SALES:

1.

Operating Expenses Ratio: Control over operational expenses is an important requisite for successful

management. Operating ratio indicates proportion of net sales that have been absorbed by the expenses on operation. This ratio relates to the total operating expenses (i.e. total expenses non-operating expenses) to net sales and is expressed in percentage. Its formulation is as below:

Operating Ratio

=

Total Operating Expenses

* 100

Net Sales Operating Expenses = Cost of Goods Sold + Office and Administration Expenses + Repairs, Maintenance & Depreciation + Selling and Distribution Expenses + Necessary Provisions A higher operating expenses ratio is unfavorable since it will leave a small amount of operating income to meet interest, dividends etc. certain expenses are within the management policy. The variations in the ratio, temporary or long-lived, can occur due to several factors: 1. Changes in sales price 2. Changes in the demand of the product 3. Changes in the administrative or selling expenses 2.

Individual (or specific) Expense Ratios: The operating expenses ratio indicates the average aggregated variations in

expenses, where some of the expenses may be increasing while others may be falling. Thus, to know the behavior of specific expenses items, the ratio of each individual operating expenses to sales should be calculated. Comparison of such results with corresponding results of the previous years would pinpoint such items of expenditure or group of expenses, which need control on the part of the management. Individual expenses ratios

=

Specific Expenses

* 100

Net Sales

(C)

RETURN ON INVESTMENT RATIO: 1. Return on Equity Capital: Return on equity capital is calculated by dividing net profit after tax by total equity capital. It is calculated as:

Return on equity capital

=

Profit after tax * 100 Equity capital

2. Return on Investment (ROI): It is calculated by dividing net profit after tax by shareholder’s funds. It is calculated as: Return on investment (ROI) =

Profit after tax * 100 Equity capital

3. Return on Capital Employed: Return on capital employed is considered to be the prime or principal ratio. It throws the light on the over – all profitability of the business, which means how much, earning the amount investment in the business, is yielding. Profit is the chief motive of organizing business enterprise. Maximization of profit is the natural instinct of every businessman. The success of the business is, therefore, judged by the extent of return on the amount invested in the business. The ratio of the return on investment has 2 components. 1. Capital employed 2. Return or profit 1. Capital employed: In general sense, ‘Capital Employed’ refers to the investment made in the business. Three possible definitions of the term capital employed are generally put forward and used by various authors in the analysis of financial statements. 1. Gross Capital Employed:

Comprises fixed assets plus current assets.

2. Net Capital Employed:

Comprises fixed assets plus current assets less

current liabilities. 3. Proprietors Net Capital Employed:

Comprises

debentures and other long-term borrowings.

net

capital

employed

plus

2. Return on profit To calculate a fair ratio of return on capital employed, there should be proper matching of 2 components of the ratio, i.e. capital employed and return. Any incomes from such assets are excluded from the profit. The Ratio is computed as

=

Net Profit (adjusted) * 100 Capital Employed

CALCULATION OF RATIOS 1. CURRENT RATIO Year Ratio

1998-99 1.22

99-2000 1.41

2000-01 1.37

2001-02 2.58

CURRENT RATIO 3 2.5 2 1.5 1 0.5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Current Ratio:

The current ratio of the company is increasing in all the years,

with the highest increase in the year 2001-2002. This is due to increase in the current assets of the company namely sundry debtors and the loans and the advances made by the company.

2. LIQUID RATIO Year Ratio

1998-99 0.82

99-2000 0.86

2000-01 0.83

2001-02 2.03

LIQUID RATIO 2.5 2 1.5 1 0.5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Liquid / Quick Ratio:

Sundry debtors and loan and advances also affect the

quick ratio of the company. The increase in these sundry debtors and the loans and advances may decrease the profitability of the company. Usually, a high acid test ratio / quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time. As a rule of thumb is 1:1 is considered satisfactory.

3. ABSOLUTE LIQUID RATIO Year Ratio

1998-99 0.27

99-2000 0.23

2000-01 0.21

2001-02 0.59

ABSOLUTE LIQUID RATIO 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1998-99

99-2000

2000-01

2001-02

YEARS

Absolute Liquid Ratio:

Absolute liquid ratio of the company is according to the

rule of thumb i.e. 0.5:1 in the year 2001-02 which is due to heavy cash & bank balances maintained by the company.

EFFICIENCY RATIOS 4. DEBTORS TURNOVER RATIO Year Ratio

1998-99 17.82

99-2000 10.21

2000-01 9.22

2001-02 8.02

DEBTORS TURNOVER RATIO 20 15 10 5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Debtors Turnover Ratio:

The Debtors turnover ratio, which shows that the number of

times the debtors are turned over during a year. But the debtor of the company is reducing which shows that the company is not properly managing its debtors. There is no rule of thumb, which may be used as a norm to interpret the ratio, as it may be different from firm to firm depending upon the nature of the business.

5. INVENTORY TURNOVER RATIO Year Ratio

1998-99 12.98

99-2000 9.90

2000-01 9.33

2001-02 10.89

INVENTORY TURNOVER RATIO 14 12 10 8 6 4 2 0 1998-99

99-2000

2000-01

2001-02

YEARS

Inventory turnover ratio:

The inventory turnover ratio shows how rapidly the

inventory is turning into receivables through sales. This ratio has been increased as compared to the last year 2000 - 2001. A high inventory turnover indicates the efficient management of inventory because more frequently the stocks are sold.

6. INVENTORY CONVERSION PERIOD Year Ratio

1998-99 28.12

99-2000 36.86

2000-01 39.12

2001-02 33.51

INVENTORY CONVERSION PERIOD 45 40 35 30 25 20 15 10 5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Inventory conversion period:

Inventory conversion period of the company on an

average slightly increasing as compared to the year 1998 - 1999.

7. CREDITORS TURNOVER RATIO Year Ratio

1998-99 7.56

99-2000 8.65

2000-01 5.52

2001-02 9.41

CREDITORS TURNOVER RATIO 10 8 6 4 2 0 1998-99

99-2000

2000-01

2001-02

YEARS

Creditors turnover ratio:

This ratio shows the time period of the company to pay its

debts. This company’s creditors ratio is increasing, which shows the company is efficiently managing its reserves by increasing its time period to pay its debts.

8. AVERAGE PAYMENT PERIOD Year Ratio

1998-99 48.28

99-2000 42.19

2000-01 66.12

2001-02 38.66

Days

Days

Days

Days

AVERAGE PAYMENT PERIOD 70 60 50 40 30 20 10 0 1998-99

99-2000

2000-01

2001-02

DAYS Average payment period:

Average payment period shows the average number of days

taken by the firm to pay its creditors. Average payment period of the company is decreased as compared to the previous year 2000 – 2001 that shows that the company is efficiently managing its creditors in the year 2001 - 2002.

SOLVENCY RATIOS 9. DEBT-EQUITY RATIO Year Ratio

1998-99 1.93

99-2000 1.23

2000-01 1.45

2001-02 0.57

DEBT - EQUITY RATIO 2.5 2 1.5 1 0.5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Debt equity ratio:

Debt equity ratio is calculated to measure the extent to which the

debt financing has been used in the business. A ratio of 1:1 may be usually considered to be satisfactory ratio although there cannot be any rule of thumb for all types of business.

10. FUNDED DEBT TO TOTAL CAPITALISATION Year Ratio

1998-99 10.89

99-2000 27.78

2000-01 17.96

2001-02 28.78

FUNDED DEBT TO TOTAL CAPITALISATION 35 30 25 20 15 10 5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Funded debt to total capitalization:

In this company this ratio is increasing

which is not better for the company. So the company should adopt the measures to reduce this ratio. There is no rule of thumb but still the lesser the reliance on outsiders the better it will be. If the ratio is smaller, better it will be up to 50% to 55% this ratio may be tolerable and not beyond.

11. EQUITY RATIO Year Ratio

1998-99 0.31

99-2000 0.37

2000-01 0.35

2001-02 0.50

EQUITY RATIO 0.6 0.5 0.4 0.3 0.2 0.1 0 1998-99

99-2000

2000-01

2001-02

YEARS

Equity ratio: Equity ratio is the proprietary ratio of the company, which shows the relationship between the shareholders and the fund to total assets of the company. In the company this ratio is varied in different years.

12. SOLVENCY RATIO Year Ratio

1998-99 0.61

99-2000 0.46

2000-01 0.51

2001-02 0.29

SOLVENCY RATIO 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1998-99

99-2000

2000-01

2001-02

YEARS

Solvency ratio:

Solvency ratio is the ratio of the total liabilities to total assets. In

the company the solvency ratio of the company is reducing which shows the satisfactory or stable is the long-term solvency position of the firm.

13. FIXED ASSETS TO NET WORTH RATIO Year Ratio

1998-99 0.79

99-2000 0.84

2000-01 0.72

2001-02 0.46

FIXED ASSETS TO NETWORTH RATIO 1 0.8 0.6 0.4 0.2 0 1998-99

99-2000

2000-01

2001-02

YEARS

Fixed assets to Net Worth ratio:

This ratio established the relationship between the

fixed assets and shareholders funds to the company. This ratio is on an average but is slightly decreasing in the last two years. There is no rule of thumb to interpret this ratio but 60 to 65 % is considered to be satisfactory ratio.

14. FIXED ASSETS TO LONG TERM FUND RATIO Year Ratio

1998-99 0.70

99-2000 0.61

2000-01 0.59

2001-02 0.33

FIXED ASSETS TO LONGTERM FUNDS RATIO 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1998-99

99-2000

2000-01

2001-02

YEARS

Fixed assets to long-term fund ratio:

This ratio indicates the extent to which the

total of fixed assets are financed by long term funds of the company. But at this company this ratio is declining which shows that the company is working on its short-term sources.

15. RATIO OF CURRENT ASSETS TO PROPRIETORS FUND Year Ratio

1998-99 236.92

99-2000 175.78

2000-01 199.98

2001-02 148.85

RATIO OF CURRENT ASSETS TO PROP. FUNDS 250 200 150 100 50 0 1998-99

99-2000

2000-01

2001-02

YEARS

Ratio of current assets to proprietors fund:

There is no rule of thumb is

established for this ratio but in this company this ratio is slightly varied between different years.

PROFITABILITY RATIO 16. NET PROFIT RATIO Year Ratio

1998-99 7.67

99-2000 8.60

2000-01 7.62

2001-02 12.49

NET PROFIT RATIO 14 12 10 8 6 4 2 0 1998-99

99-2000

2000-01

2001-02

YEARS

Net profit ratio:

Net profit ratio of the company is increasing which is a healthy

sign for the company. This ratio is increased due to the liberal credit policy of the company and increase in the sales of the company.

17. RETURN ON INVESTMENT Year Ratio

1998-99 53.69

99-2000 47.32

2000-01 44.48

2001-02 52.40

RETURN ON INVESTMENT 60 50 40 30 20 10 0 1998-99

99-2000

2000-01

2001-02

YEARS

Return on investment:

This ratio is one of the most important ratios used for

measuring the overall efficiency of the firm. As compared to the previous years this ratio is on an average but it is better to compare with the other similar firms for better results.

18. EARNING PER SHARE RATIO Year Ratio

1998-99 19.82

99-2000 29.95

2000-01 30.34

2001-02 46.44

EARNING PER SHARE RATIO 50 40 30 20 10 0 1998-99

99-2000

2000-01

2001-02

YEARS

Earning per share: Earning per share is good measure of profitability in this company. This ratio is increasing every year in this company, which shows the earning capacity of the invertors.

19. RETURN ON EQUITY CAPITAL Year Ratio

1998-99 198

99-2000 299

2000-01 303.49

2001-02 464.46

RETURN ON EQUITY CAPITAL 500 400 300 200 100 0 1998-99

99-2000

2000-01

2001-02

YEARS

Return on equity capital:

Return on equity capital, which is the relationship between

profits of a company and its equity capital. In this company this ratio is increasing every year.

20. DIVIDEND PAYOUT RATIO Year Ratio

1998-99 0

99-2000 0.033

2000-01 0.313

2001-02 0.753

DIVIDEND PAYOUT RATIO 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1998-99

99-2000

2000-01

2001-02

YEARS

Dividend payment ratio:

This ratio is calculated to know the relationship between

dividend per share paid and the market value of the share. In the company this ratio is increasing year by year.

21. RETURN ON GROSS CAPITAL EMPLOYED Year Ratio

1998-99 23.07

99-2000 31.57

2000-01 29.85

2001-02 38.25

RETURN ON GROSS CAPITAL EMPLOYED 50 40 30 20 10 0 1998-99

99-2000

2000-01

2001-02

YEARS

Return on gross capital employed: Return

on

capital

employed

established

the

relationship between the profits and the capital employed. This ratio shows the overall profitability of the company. But the company has to increase this ratio to increase the profitability.

22. RETURN ON NET CAPITAL EMPLOYED Year Ratio

1998-99 59.67

99-2000 59.47

2000-01 62.06

2001-02 53.96

RETURN ON NET CAPITAL EMPLOYED 64 62 60 58 56 54 52 50 48 1998-99

99-2000

2000-01

2001-02

YEARS

Return on the net capital employed:

The term net capital employed comprises the

total assets used less current liabilities. This ratio is decreasing which is the good sign for the company.

LEVERAGE RATIOS 23. CAPITAL GEARING RATIO Year Ratio

1998-99 8.17

99-2000 2.59

2000-01 4.56

2001-02 0.71

CAPITAL GEARING RATIO 9 8 7 6 5 4 3 2 1 0 1998-99

99-2000

2000-01

2001-02

YEARS

Capital gearing ratio:

This ratio shows the relationship between the equity share

capital and the other fixed interest bearing loans. This company is low-geared company because long-term debt was less than the equity and reserves.

24. RATIO OF RESERVES TO EQUITY CAPITAL Year Ratio

1998-99 269.10

99-2000 554.08

2000-01 796.36

2001-02 1454.1

RATIO OF RESERVES TO EQUITY CAPITAL 1600 1400 1200 1000 800 600 400 200 0 1998-99

99-2000

2000-01

2001-02

YEARS

Ratio of reserves to equity capital: The ratio establishes relationship between the reserves and the equity capital. This ratio shows the better position of the company, which is highly increasing every year.

25. FINANCIAL LEVERAGE Year Ratio

1998-99 1.02

99-2000 1.04

2000-01 1.21

2001-02 1.80

FINANCIAL LEVERAGE 2 1.5 1 0.5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Financial leverage: Use of long-term debts along with equity shares is financial Leverage. This shows the capital structure of the company.

26. RATIO OF CURRENT LIABILITIES TO SHAREHOLDERS FUND Year Ratio

1998-99 1.93

99-2000 1.23

2000-01 1.45

2001-02 0.57

RATIO OF CURRENT LIABILITIES TO SHAREHOLDERS FUNDS 2.5 2 1.5 1 0.5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Ratio of current liabilities to shareholders fund: This ratio shows that the how much amount of current liabilities is financed from the fixed assets. This ratio is decreasing which is positive sign for the company.

27. AVERAGE COLLECTION PERIOD Year Ratio

1998-99 20.48

99-2000 35.74

2000-01 39.58

2001-02 45.51

AVERAGE COLLECTION PERIOD 50 40 30 20 10 0 1998-99

99-2000

2000-01

2001-02

YEARS

Average collection period: This ratio represents the average number of days for which it has to wait for its receivables are converted into cash. In this firm the ratio of average collection period is increasing which is not a good sign for the company’s profitability position.

28. WORKING CAPTIAL TURNOVER RATIO Year Ratio

1998-99 16.23

99-2000 10.60

2000-01 10.68

2001-02 4.59

WORKING CAPITAL TURNOVER RATIO RATIO 20 15 10 5 0 1998-99

99-2000

2000-01

2001-02

YEARS

Working capital turnover ratio:

This indicates the number of times the working

capital is turned over in the course of a year. Working capital turnover ratio is reducing of this company. So the company should have to improve it.

Chapter 5

CHAPTER 5 CONCLUSION & SUGGESTIONS The conclusion derived from the study of financial analysis of international tractors limited shows that the overall financial strength of the company is extremely good. Because the current assets exceeds the current liabilities in all the financial years of the company. But current assets of the company are heavily increased during the year 20012002 which boosted the current ratio of the company. The working capital position of the company is better in the financial year 2001-2002 as compared to the previous years. The overall profitability of the company is good. Suggestions: 1. Liquidity Ratios: Liquidity refers to the ability of the concern to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current floating or circulating assets. The liquidity position of the company is better as compared to the previous years. The ratios such as current ratio, liquid ratio and absolute liquid ratio has been increased as compared to the previous year 1998 – 1999, 1999 – 2000 and 2000 – 2001. This increases due to the sundry debtors, loan and advances and heavy cash and bank balances maintained by the company. Although company is heaving better liquidity position, but there is still a scope to improve it. 2. Solvency Ratios: The term solvency refers to the ability of a concern to meet its long-term obligations. Due to the heavy liquidity position maintained by the company. But the longterm position is not much better. All the ratios including equity ratio, fixed assets to net worth, fixed assets to the long-term funds ratios are decreasing. So the company is recommended to make the balance between liquidity and solvency position of the company.

3. Profitability Ratios: The primary objective of the business undertaking is to earn profits. Profit earning is considered essential for the survival of the business. The net profits of the company is increased as compared to the previous years but this is due to the increase in the credit sales of the company which shows that the company is adopting liberal credit policy to increase its profits but the company is also suffered from the increase in average days of collection so the company should maintain its credit policy to make a balance between the cash and credit sales and take some measures its average days of collection. For improving its collections, the company may adopt the services of the factors (factoring). 4. Efficient utilization of resources: The company is having better short-term financial position. It has more current assets as compared to the current liabilities, which will effect the overall profitability position of the company so the company should manage its current assets properly. 5. Management of debtors: The increase in the current assets is due to the increase in the debtors of the company. So the company is recommended to manage its debtors properly. Increase in debtors may create certain problems in the long-term run of the company. SOME GENERAL SUGGESTIONS FOR THE SUCCESS OF THE COMPANY: 1. Increasing the market area or developing the new market: The company is having better financial strength. So by efficiently using these resources company can increase the area of operation or develop new markets by adopting international standards. 2. Quality control: By providing good and the cost control measure with the objectives to attain the desired level of the sales volume.

3. Locational advantage: Punjab is the agricultural and higher crop producing state of the country and the company is operating in the rural area of the Hoshiarpur (Punjab). So it can take the locational advantage, as it is the tractor producing company in Punjab.

It is hoped that by adopting these suggestions ITL can achieve its desired place in the tractor industry of the Punjab as well as in the World.