Namrata Project Final Copy.docx

A PROJECT REPORT ON “ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS:

RATIO ANALYSIS” ON “LARSEN AND TOURBO LTD.” SUBMITTED TO UNIVERSITY OF PUNE FOR THE PARTIAL FULFILLMENT OF THE DEGREE BACHELOR OF BUSINESS ADMISISTRATION 2011-2012 BY

BHOJWANI NAMRATHA MUKESH B.Y.K. (SINNAR) COLLEGE OF COMMERCE, NASHIK T.Y. BBA ROLL NO: 13 UNIVERSITY SEAT NO: GUIDED BY: MS. MEGHA KUKREJA (SUBJECT TEACHER)

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ACKNOWLEDGEMENT The satisfaction euphoria that accompanies the successful completion of any work would be incomplete unless we mention the name of the person(s), who made it possible, whose constant guidance and encouragement served as a beckon of light and crowned our efforts with success. I consider it a privilege to express through the pages of this report, a few words of gratitude and respect to those who guided and inspired in the completion of this project. Firstly I’d like to express my respect, deep gratitude and regards to the Principal Mr. Dhanesh Kalal and our Head of Department Prof.B.W. Khalkar, My sincere thanks to my project guide and subject teacher Ms Megha Kukreja and all the other faculty members, for guiding me throughout the project. Lastly, words fall short to express my sincere gratitude and thanks to my family and friends who knowingly or unknowingly encouraged and constantly assisted me in every work. However, I accept the sole responsibility for any possible errors of omission and would be extremely grateful to the readers of this project report if they bring such mistakes to my notice.

Namratha Mukesh Bhojwani

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Sr. No a. b. c. d. 1. 2. 3. 4. 5. 6. 7. 8.

Contents Title Page Certificate By The College Acknowledgement Contents Introduction Organizational Profile L & T Product/Service Profile Ratio Analysis Data Analysis And Interpretation Findings And Recommendation Summary And Conclusion Annexure

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Pg. No. i ii iii 4 8 12 19 23 50 52 53

C ha p t e r 1

INTRODUCTION Project work is not a new methodology. Its benefits have been widely recognized for many years in the teaching of subjects like Science, Geography, and History. Some teachers have also been doing project work in their language lessons for a long time, but for others it is a new way of working. Projects allow students to use their imagination and the information they contain does not always have to be factual.

1.1 NEED AND IMPORTANCE OF PROJECT: The analysis and interpretation of financial statements is useful in achieving several objectives: 1) The evaluation of past performance. 2) The assessment of current status. 3) The prediction of future potential. 4) Take the right decisions to maximize profits and resources. Being basically historical in nature, the financial statements are more convenient for the first two purposes. However, most readers of the financial statements are interested in the future, i.e. by the Company’s ability to grow and prosper and the availability of the company to adapt to varying conditions. Properly used, the analysis of financial statements can provide a basis for projecting future and clues about how the company will respond to these future situations. In short, financial analysis serves the following purposes • • • • • •

Measuring the profitability Indicating the trend of achievements Assessing the growth potential of the business Comparative position in relation to other firms Assess overall financial strengths Assess solvency of the firm

From an external perspective, allows presenting the situation and possible evolution of the entity to all external users: Interested Parties are as follows• • • • • •

Investors Management Trade unions Lenders Suppliers and trade creditors Tax authorities 4

• • • •

Researchers Employees Govt. and their agencies Stock exchange

Through the analysis of financial statements, we can respond to key questions in the running of the institution: 1. 2. 3. 4. 5. 6. 7.

What is the ability to pay short and long period for the entity? Is it excessive inventory investment? How Working Capital Account and how it is invested? “Fixed assets are underutilized? Does the performance you get is balanced with the investment? Are profits properly invested? In what areas the company is demonstrating success or failure?

1.2 OBJECTIVES OF PROJECT 1. To evaluate the performance of the company in determining the important aspects of a business such as liquidity, solvency, operational efficiency, overall profitability, capital gearing etc. 2. To point out the financial conditions of business whether it is very strong, questionable or poor and enables the management to take necessary steps. 3. To analyze the current financial position of the company and provide suggestions for growth and improvement. 4. To focus on facts on a comparative basis and facilitate drawings of conclusions relating to the performance of a firm. 5. To compare the financial statements of two years in order to analyze, compare and evaluate the performance of the company in terms of various ratios.

1.3 RESEARCH METHODOLOGY Research framework: This study is based on the data about L & T for a detailed study of its financial statements, documents and system ratios and finally to recognize and determine the position of the company. Types of data which helped to prepare this report: 1. First type is the primary data which was collected personally to be used and studied to prepare and reach the objectives already mentioned. 2. The secondary data which was already prepared so these data was only used to reach the aims and objectives of this project. These data has been collected from the financial reports of the company. How the data was collected: 5

The sources of collecting the primary data was through interviews, observation and questionnaire, however the secondary one was collected from the financial statements already available to the employees of the company and some of which was published. 1.3.1 Personal Interview: Personal Interview method requires a person known as the interviewer asking questions generally in a face to face contact to the other person or persons. In some cases, I had the chance to ask my questions personally from the Head of Accounts department and Head of HR Department regarding the information I needed. Different questions and information I could collect during these two methods are: 1. 2. 3. 4. 5.

The beginning and history of the L & T. Numbers of staff working for different departments. The mission & vision of the company. Areas of operations Other company related information.

1.3.2 Printed and Digital Sources: The secondary data I collected was through the study of the financial statements already existed in the company in form of printed files or digital files reserved in the company for further references. I had chosen these files because of the reliability and suitability of this information which I was also sure about the accuracy of them. These files consist of: 1. 2. 3. 4. 5.

Annual report of the company Financial balance sheets Income statements Financial reports Different reports prepared by Finance Department

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1.4 LIMITATIONS OF THE PROJECT: The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations. 1. Limitations of financial statements: Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements. 2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations. 3. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 4. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. 5. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. 6. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpret and different people may interpret the same ratio in different way. 7. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

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C ha p t e r 2

ORGANIZATIONAL PROFILE

2.1 BUSINESS OVERVIEW: Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India's private sector. More than seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision

2.2 HISTORY: The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry.

Henning Holck-Larsen

Soren Kristian Toubro

(4.7.1907 - 27.7.2003)

(27.02.1906 - 4.3.1982)

Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity. 8

2.3 EARLY DAYS: 1. Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark, would not have dreamt, as they were learning about India in history classes that they would, one day, create history in that land. 2. In 1938, the two friends decided to forgo the comforts of working in Europe, and started their own operation in India. All they had was a dream. And the courage to dare. 3. Their first office in Mumbai (Bombay) was so small that only one of the partners could use the office at a time! 4. In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. 5. Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognised as a reliable fabricator with high standards. 6. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand. 7. Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected. 2.4 THE JOURNEY: 1. In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and glass. 2. In 1945, L&T signed an agreement with Caterpillar Tractor Company, USA, for marketing earthmoving equipment. At the end of the war, large numbers of warsurplus Caterpillar equipment were available at attractive prices, but the finances required were beyond the capacity of the partners. This prompted them to raise additional equity capital, and on 7th February 1946, Larsen & Toubro Private Limited was born. 3. Independence and the subsequent demand for technology and expertise offered L&T the opportunity to consolidate and expand. Offices were set up in Kolkata (Calcutta), Chennai (Madras) and New Delhi. In 1948, fifty-five acres of undeveloped marsh and jungle was acquired in Powai. Today, Powai stands as a tribute to the vision of the men who transformed this uninhabitable swamp into a manufacturing landmark. 2.5 PUBLIC LIMITED COMPANY: 1. In December 1950, L&T became a Public Company with a paid-up capital of Rs.2 million. The sales turnover in that year was Rs.10.9 million. 2. Prestigious orders executed by the Company during this period included the Amul Dairy at Anand and Blast Furnaces at Rourkela Steel Plant. With the successful completion of these jobs, L&T emerged as the largest erection contractor in the country. 9

3. In 1956, a major part of the company's Bombay office moved to ICI House in Ballard Estate. A decade later this imposing grey-stone building was purchased by L&T, and renamed as L&T House - its Corporate Office. 4. The sixties saw a significant change at L&T - S. K. Toubro retired from active management in 1962. 5. The sixties were also a decade of rapid growth for the company, and witnessed the formation of many new ventures: UTMAL (set up in 1960), Audco India Limited ( 1961), Eutectic Welding Alloys (1962) and TENGL (1963). 2.6 EXPANDING HORIZONS: 1. By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1973 had become one of the Top-25 Indian companies. 2. In 1976, Holck-Larsen was awarded the Magsaysay Award for International Understanding in recognition of his contribution to India's industrial development. He retired as Chairman in 1978. 3. In the decades that followed, the company grew into an engineering major under the guidance of leaders like N. M. Desai, S.R. Subramaniam, U. V. Rao, S. D. Kulkarni and A. M. Naik. 4. Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence. 5. For an institution that has grown to legendary proportions, there cannot and must not be an 'end'. Unlike other stories, the L&T saga continues.....

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2.7 VISION: The L&T vision reflects the collective goal of the company. It was drafted through a large scale interactive process which engaged employees at every level, worldwide.

2.8 AWARDS AND ACCOLADES:     

The Economic Times named Mr. A.M. Naik "Business Leader of the Year" for 2008. L&T is among the top 100 Most Trusted brands of India as published in The Brand Trust Report. Mr. A.M. Naik was also awarded the Padma Bhushan by the President of India in 2009. L&T Won Best Innovation in Logistics-Transportation award on 20 May 2011 from India International Logistics Forum. L&T Won The Financial Express-EVI Green Business Leadership Award for 201011. The award was received from Dr.A.P.J. Abdul Kalam.

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C ha p t e r 3

L & T PRODUCT/SERVICE PROFILE: 3.1TURNKEY PROJECTS 3.1.1 L&T's Hydrocarbon: L&T's Hydrocarbon Business delivers 'design to build' world-class engineering and construction solutions on turnkey basis in oil & gas, petroleum refining, chemicals & petrochemicals and fertilizer sectors. In-house expertise and experience, synergized with strategic partnerships enables it to deliver single point solution for every phase of a project – right from the front end design through engineering, fabrication, project management, construction and installation up to commissioning. The key aspects of business philosophy are: on-time delivery, cost competitiveness, and high quality standards with focus on best in class HSE practices. Integrated strengths coupled with experienced highly-skilled engineers and workmen, are the key enablers in delivering critical and complex projects in India and in select countries overseas. 3.1.2 L&T Power L&T Power is an Independent Company (IC) of Larsen & Toubro, with a mandate to integrate L&T’s varied offerings in the thermal power sector. The Company is uniquely positioned to combine rich and diverse strands of experience in engineering, manufacturing and project execution with strong management focus on providing turnkey solutions. 3.1.3 Water Technology and projects: Hydrocarbon Mid & Downstream SBG provides a wide range of EPC solutions for turnkey projects – green fuel / fuel quality up-gradation, residue upgradation; cracker complex, polyolefin’s & aromatics projects for petrochemical industry; hydrogen, fertilizers, gas processing, reformers & cracking furnaces; cross-country oil & gas pipelines, gas gathering stations and crude oil terminals. Projects are executed on a turnkey basis with detailed engineering support drawn from L&T-Chiyoda Limited – an associate company of L&T. Range:     

Refinery projects. Petrochemical projects. Fertilizers. Gas processing projects. Modular process plants.

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3.2 CONSTRUCTION: 3.2.1 Infrastructure Projects: The Infrastructure IC undertakes construction of Heavy Civil projects through four strategic Business Units, meeting international standards of quality. EPC services are offered for transportation infrastructure projects as well as hydel and nuclear power projects. The BUs include:    

Road & Runways Bridges, Metros & Ports Hydel Nuclear & Defence

3.2.2 Buildings & Factories: The Buildings & Factories IC is equipped with the domain knowledge, requisite expertise and wide-ranging experience to undertake Engineering, Procurement and Construction (EPC) of all types of building and factory structures. The IC carries out its activities through three strategic Business Units for better focus on business volume and strategic growth in respective segments of its operations.    

Institutional & Commercial Buildings Factories Residential Buildings Construction Enabling Service Cell (Formwork)

3.2.3 Power Trans. & Dist. Projects: The Power Transmission & Distribution Projects (PTDP) IC offers design and construction services for all types of industrial and project electrification works as well as for power transmission and distribution projects in the domestic markets. It also extends comprehensive services for construction of buildings and urban Infrastructure projects in the Gulf Markets. PTDP IC has established a strong presence with a high reputation for execution of prestigious projects in the Gulf Region.

3.2.4 Metallurgical & Matl. Handling Projects: MMH&W IC undertakes turnkey construction contracts for projects in Minerals & Metals sector, Bulk Material Handling and Water & Utilities Projects. It is a leader in all its areas of operations. In addition, it has a well established structural steel fabrication unit - L&T Construction Workshops Limited at Kancheepuram to meet the customized needs of its customers. 3.2.5 L&T Realty: L&T Realty, the face of Larsen & Toubro’s real estate business, has pan-India presence with a portfolio of trend-setting real estate developments covering 40 million sq ft across the country.

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Leveraging the parent company’s project execution and management expertise, L&T Realty is setting up large, mixed-use communities that include Corporate offices, Retail, Hospitality, Leisure & Entertainment and Residences. Each of the development is designed to be an urban destination for new India to work, shop, live and collaborate. 3.3 ENGINEERED PRODUCTS AND SYSTEMS: 3.3.1 Refinery: L&T offers all critical equipment and systems for refineries and gas cracker plants. The range includes high pressure, high temperature reactors like hydrocrackers, DHDT & DHDS reactors for ‘clean fuel’ projects, and other critical equipment. These are manufactured in various grades of low alloy steels (including Cr–Mo-Vanadium) of clad or overlaid construction. L&T has the qualifications and vast experience in carrying out single-layer and double-layer overlay of equipment using ESSC (ESW) and SAW processes. Reactor internals are generally fabricated in-house and also assembled in reactors as per customer requirements. L&T is a licensee of ABB Lummus Heat Transfer NV, USA, for helixchangers and also licensee of Exxon Mobil Research Engineering (EMRE) for anti-vibration baffles for heat exchangers (dimpled baffle) technology.

3.3.2 Oil & Gas: L&T offers all critical equipment and systems for oil & gas projects. Having successfully executed orders for large tubular reactors (1500 MT), L&T is geared and qualified to take up the challenge of manufacturing the futuristic gas-to-liquid reactors for the oil & gas sector, in addition to traditional products such as test and production separators (separate or skidmounted). L&T markets High Pressure reciprocating pumps from Gardner Denver, USA, packaged skid-mounted / mobile pumping systems for crude transportation, well-servicing and wireline winches for oilfield duties. 3.3.3 Petrochemicals: The product range comprises reactors, vessels, heat exchangers and equipment for various services including high-pressure, high-temperature, hydrogen service, cryogenic application, etc. Major equipment supplied include multi wall reactors, ‘Pacol’ and ‘Hydro bon’ reactors, polypropylene and polyethylene reactors, transfer line and ultra-sensitive exchangers and continuous polymer-ization reactors / finishers, methanol converters, heli-towers, bayonettype heat exchangers, screw-plug exchangers and a range of high pressure heat exchangers and pressure vessels and equipment for cryogenic application. The process / thermal and mechanical design of all heat transfer equipment is also carried out with in-house developed software including Finite Element Analysis, detailed FIV analysis and also members of HTRI and HTFS. 3.3.4 Fertiliser: L&T's Heavy Engineering has contributed significantly to the growth of the Fertiliser industry in India and abroad. The division has supplied critical Equipment for over 50 Ammonia and Urea projects. L&T's Heavy Engineering has contributed significantly to the growth of the Fertiliser industry in India and abroad. It has supplied critical Equipment for over 50 Ammonia and Urea projects. 14

3.3.5 Coal Gasification: With rising cost of oil and natural gas, Syn-gas from coal gasification is becoming a costeffective alternative feedstock for fertilizers, chemicals (methanol, etc.), power and coal liquefaction plants. 3.3.6 Aerospace: L&T offers design, manufacture and supply of components, subsystems and systems for aerospace applications. L&T’s precision manufacturing facilities are geared to meet the exacting demands of aerospace manufacture. State-of-the-art facilities give L&T the capability to achieve high accuracy levels in the manufacture of systems and subsystems of satellites and launch vehicles in metals and in advanced composites. L&T carries out inhouse development of welding procedures for exotic materials and special machining processes for space application. 3.3.7 Thermal Power Plant : L&T offers complete condensing and feed heating systems. It supplies balance of plant in the turbine island (other than turbine generator) which includes equipment like :     

Circular Surface Condensers Rectangular Surface Condensers HP Feed Water Heaters LP Feed Water Heaters Deaerators

3.3.8 Nuclear Power Plant : A pioneer in the field of manufacturing technology development, equipment manufacture and site / plant services for the Indian nuclear power plant program, L&T is a recipient of the prestigious ‘INS Industrial Excellence Award’ for outstanding contribution in the nuclear power plant sector. L&T has been accredited by ASME to use ‘N’ and ‘NPT’ stamps for construction of class 1, 2, 3 & MC vessels, class 1, 2, 3 piping systems, class 2 & 3 storage tanks, class CS core support structures & class 1, 2 & 3 shop assemblies and to supply ferrous and non-ferrous material as Material Organization (MO). L&T manufactures reactor vessels for Pressurized Heavy Water Reactors (PHWRs) and Fast Breeder Reactors (FBRs) designed technology and critical equipment & systems for heavy water plants, fuel re-processing plants and plasma reactors. L&T’s product range includes Steam Generator Assemblies (SGA), end shields, calandria, reactor roof slabs, Control Rod Drive Mechanisms (CRDMs), SS thermal insulation panels, primary heat transport systems, fuel rod sub-assemblies, fuel transfer arms, fuelling machine carriages and trolleys, steam separators / mist eliminators, heavy water upgrading columns, exchange unit towers and internals, high-pressure heat exchangers, high and low level waste storage tanks and special equipment for in-service inspection. L&T offers onsite integration and installation of massive structure of reactor main vessel, reactor safety vessel, end shield, calandria, coolant channels assembly and reactivity devices for new and operating plants. Life extension services for existing PHWRs include in service inspection and coolant channel replacement for operating nuclear power plants. L&T is actively involved in the prestigious International Thermonuclear Experi-mental Reactor (ITER) project. 15

3.3.9 Defence: We have been issued industrial licenses for a wide range of products, after Government of India’s decision to open up Defence production to the private sector. The licenses issued cover design, development, construction/ manufacturing and assembly of :     

Warships, Submarines, Weapon platforms (off-shore, floating and submerged), Highspeed boats and crafts etc. Radars, Sonar systems, associated subsystems, Electronic Warfare equipment and System Sensors. Arms and Armament including Weapon Launchers. Armored and Combat vehicles, including associated systems, sub-systems such as Turrets, Turret mounts, Bridge laying systems on tanks, etc. Airborne assembly systems & equipment for Aircrafts, Helicopters and Unmanned Aerial Vehicles (UAV) and equipment for aviation sector

3.4 HEAVY ENGINEERING: L&T is claimed to be among the top five fabrication companies in the world. The Heavy engineering division manufactures and supplies custom designed and engineered critical equipment and systems to the needs of core-sector industries and the defence sector. It is the preferred supplier of equipment for a select range of products, globally. L&T has a shipyard capable of constructing vessels of up to 150 metres long and displacement of 20000 tonnes at its heavy engineering complex at Hazira. The shipyard is geared up to take up construction of niche vessels such as specialized Heavy lift Cargo Vessels, CNG carriers, Chemical tankers, defense & para military vessels and other role specific vessels. Construction of specialized mid size vessels is being undertaken and capacity is being augmented by additional infrastructure such as ship lift system and additional outfitting workshops to extend the activities to ship repairs. The focus will be on construction of commercial vessels, warships for the navy and the coast guard.

3.5 ELECTRICAL & AUTOMATION 3.5.1 Switchgear Products: Larsen & Toubro is among the major manufacturers of low voltage switchgear in the World, with the scale, sophistication and range to meet global benchmarks. In addition to its leadership position in the Indian market established over a decade ago, L&T has a growing presence in international market. L&T switchgear conforms to international design standards, KEMA certification and CE markings, attest to quality and reliability. The company's continuous investment in upgrading capabilities has led to a technology base at par with the finest in electrical industry worldwide. State of art manufacturing facilities at Mumbai & Ahmednagar conform to the principles of lean manufacturing, six sigma and value engineering. Testing facilities include a 85 kA short circuit test station. Each of L&T's manufacturing facilities reflect the company's overriding concern for the environment.

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3.5.2 Electrical Systems: L&T is the market leader for switchboards in India. It manufactures custom-built switchboards with conventional as well as intelligent protection, control and communication to meet the power distribution and motor control needs of key industries. It’s Power Control Centers (PCC) and Motor Control Centers (MCC) are installed at major and prestigious plants in India. L&T manufactures maximum number of panels every year and has a steady market share. It associates with its customers at the project conceptualization stage and the association continues even after the project is commissioned. The range of custom-built switchboards comprises fully drawout PCCs and MCCs, distribution boards and control panels. Its PCC type TF is rated up to 6000A and houses L&T-made Air Circuit Breakers to take care of power distribution. The MCC type TQ is rated up to 5000A.Marine Business has developed marinised switchgear, switchboards, distribution boards, starters and control systems for application onboard Naval Ships as well as commercial ships. 3.5.3 Metering Solutions: L&T is India's leading manufacturer of electronic energy meters and protection relays. Our metering solutions cover both industrial and domestic segments, in both single and three phase configurations. We also offer total protection solutions in all three segments of the power system - generation, transmission and distribution. L&T’s metering product range includes electronic trivector meters, single- and three-phase energy meters, availability based tariff (ABT) meters, intelligent panel meters, demand controllers, card-based prepaid meters and GSM modems, all of which are designed and developed by in-house R&D. We also undertake design and manufacture of automatic meter reading solutions that involve meter networking, collecting meter data and transporting such data to a central station for display, analysis and report generation using suitable costeffective media. An innovative addition to the family of protective relays is the state-of-theart releases for air circuit breakers, offering better features in the form of reliable protection and coordination in low tension feeders.

3.6 MEDICAL EQUIPMENT & SYSTEMS: Larsen & Toubro (L&T)’s Medical Equipment & Systems (MED) Strategic Business Unit better known as “L&T Medical” was established in 1987 as a part of the Company’s endeavour to expand into emerging areas. 3.6.1 CONTROL & AUTOMATION: Control & Automation (C&A) Business Unit of Larsen & Toubro is a comprehensive industrial automation solution provider. C&A has been effectively providing discrete and turnkey automation solutions for a wide variety of industries since 1972. C&A specializes in Engineering, Procurement and Comissioning (EPC) of customized automation solutions for diverse industry types.

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3.7 INFORMATION TECHNOLOGY: Larsen & Toubro Infotech: L&T Infotech focuses on information technology and software services. Its clients include industry leaders like Marsh & McLennan, Standard Life,Travelers, Chevron, Freescale, Hitachi, Ingram Micro, Infineon, Sanyo, Lafarge, ABSA. P&G, Johnson and Johnson,CitiGroup, Barclays, eCORPUS, Marathon, Texas Instruments, Qualcomm, LG and Samsung among others.It offers services and solutions for the following industries: banking and financial services, insurance, energy and petrochemicals, manufacturing. Larsen & Toubro Infotech Limited, a 100 per cent subsidiary of the L&T, offers software and services with a focus on Manufacturing, BFSI and Communications and Embedded Systems. It also provides services in the embedded intelligence and e Engineering space. 3.8 L&T MACHINERY & INDUSTRIAL PRODUCTS: L&T manufactures, markets and provides service support for critical construction and mining machinery – surface miners, hydraulic excavators, aggregate crushers, loader backhoes and vibratory compactors; supplies a wide range of rubber processing machinery and injection moulding machines; and manufactures and markets industrial valves and allied products and a range of sophisticated application-engineered welding alloys. This division provides solutions to :            

Construction & Mining Equipment Material Handling Crushing Systems & Equipment: Hydraulic Equipment Valves Rubber Processing Machinery Plastics Processing Machinery Paper Machinery Welding Products Castings Wind-mill Components Cutting Tools

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CHAPTER 4

RATIO ANALYSIS 4.1 THEORY: The most important task of a financial manager is to interpret the financial information in such a manner, that it can be well understood by the people, who are not well versed in financial information figures. The technique by which it is so done, known as ‘Ratio Analysis’. ‘Ratio’ is a relationship between two or more variables, expressed in (i) percentage, (ii) rate and (iii) proportion. Ratio analysis is an important technique of financial analysis. It depicts the efficiency or short-fall of the organization in the form of trend analysis. Different ratios appeal to different people. Management, having the task of running a business efficiently, will be interested in all ratios. A supplier of goods on credit will be particularly interested in liquidity ratios, which indicate the ability of the business to pay its bills. Existing and future shareholders will be interested in investment ratios, which indicate the level of return that can be expected on an investment in the business. Major customers, intent on having a continuing source of supply, will be interested in the financial stability, as revealed by the capital structure, liquidity and profitability ratios. Debenture and loan stock holders will be interested in the ability of a business to pay interest, and ultimately to repay the capital. A banker, giving only short-term loans, will be interested mainly in the liquidity of the business, and its ability to repay those loans. The overall advantage of ratios is that they enable valid comparisons to be made between businesses of varying size, and in different industries. All the problems of a business can’t be solved by ratio analysis. It will merely give a general indication of a trend, at the same time spotlighting any divergence from normality. This knowledge, however, should enable management to correct whatever may be going wrong in the business. 4.2 STEPS IN ‘RATIO ANALYSIS’ Step 1: Collection of information, which are relevant from the financial statements and then to calculate different ratios accordingly. Step 2: Comparison of computed ratios with the past ratios of the same organization or with the industry ratios. Step 3: Interpretation, drawing of inferences and report-writing

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4.3 CLASSIFICATION OF RATIOS

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4.4 CHART SHOWING APPLICATION OF DIFFERENT RATIOS: For Testing

A. Profitability

B. Liquidity and Solvency

C. Capital Structure

D. Activity

E. Management Efficiency

Ratio Concerned 1. Gross Profit Ratio 2. Net Profit Ratio 3. Operating Ratio 4. Return on Capital Employed 5. Dividend Ratio 6. Earnings per Share 7. Dividend per Share 1. Current Ratio 2. Liquid Ratio 3. Absolute Liquid Ratio 4. Proprietary Ratio 5. Assets to Proprietorship Ratio 6. Debt-Equity Ratio 7. Capital Gearing Ratio 1. Capital Gearing Ratio 2. Equity Capital Ratio 3. Long-term Loans to Net Worth 1. Debtors Turnover Ratio 2. Creditors Turnover Ratio 3. Stock Turnover Ratio 4. Fixed Asset Turnover Ratio 5. Current Asset Turnover Ratio 6. Total Asset Turnover Ratio 7. Working Capital Turnover Ratio All concerned ratios

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Interested Parties Shareholders Creditors (Long Term) Government Purchasers of Enterprise Employees

Creditors(Short Term) Investors Moneylenders

Shareholders and Outsiders

Management Shareholders Creditors (Long and Short Term) Customers

Management

4.5ADVANTAGES OF RATIO ANALYSIS Ratio analysis is a very important and useful tool for financial analysis. It serves much purpose and is helpful not only for internal management but also for prospective investors, creditors and other outsiders. The following are the important uses (advantages) of ratio analysis: i.

ii. iii.

iv.

v. vi. vii. viii. ix.

x.

xi. xii.

It is an important and useful tool to exercise check upon the efficiency with which the working capital is being used (managed) in a business enterprise. Efficient Management of working capital. It helps the management of business concern in evaluating its financial position and efficiency of performance, It serves as a sort of health test of a business firm, because with the help of this analysis financial managers can determine whether the firm is financially healthy or not. A ratio analysis covering a number of past accounting (financial) periods clearly shows the trend of changes in the business position (i.e. whether the trend in financial position, income position etc. is upward, or down-ward or static). The progress or downfall of a business concern is clearly indicated by this analysis. Used to measure the trend of the Business. It helps in making financial estimates for the future (i.e., in financial forecasting). It helps the task of managerial control to a great extent. It helps the credit suppliers and investors in evaluating a business firm as a desirable debtor or as a potential investment outlet. With the help of this analysis ideal (standard) ratios can be established and these can be used for the purpose of comparison of a firm’s progress and performance. This analysis communicates important information regarding financial strength and standing, earning capacity, debt (borrowing) capacity, liquidity position, capacity to meet fixed commitments (charges), solvency, capital gearing, working capital management, future prospects etc. of a business concern. This analysis may be employed for the purpose of comparing the working result and efficiency of performance of a business enterprise with that of other enterprises engaged in the same industry (Inter-firm comparison). It helps the management of a business concern to discharge their basic functions of planning, coordinating, controlling etc. It serves as an instrument for testing management efficiency.

22

Chapter 5

DATA ANALYSIS AND INTERPRETATION 5.1 BALANCE SHEET: Particulars

in Rs. Cr.

Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net worth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deferred Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities 23

in Rs. Cr.

Mar '11

Mar '10

121.77 121.77 368.31 0 21,334.05 22.13 21,846.26 1,063.04 6,098.07 7,161.11

120.44 120.44 25.09 0 18,142.82 23.29 18,311.64 955.73 5,845.10 6,800.83

29,007.37

25,112.47

8,897.02 2,220.82 6,676.20 785 14,684.82 1,577.15 12,427.61 1,518.98 15,523.74 19,499.23 211.37 35,234.34 0 26,139.56 2,233.43 28,372.99 6,861.35 0 29,007.37

7,235.78 1,727.68 5,508.10 857.66 13,705.35 1,415.37 11,163.70 1,104.89 13,683.96 12,662.55 326.98 26,673.49 0 19,443.77 2,188.36 21,632.13 5,041.36 0 25,112.47

1,647.66

1,719.39

Book Value (Rs)

352.4

303.28

5.2 PROFIT AND LOSS ACCOUNT: Particulars

in Rs. Cr Mar '11

in Rs. Cr Mar '10

Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalized

44055.6 398.84 43656.7 1781.28 559.49 45997.5

37187.5 317.31 36870.2 2321.67 -422.99 38768.9

12372.3 355.45 2884.53 19886.1 2103.38 773.7 -37.87

9593.53 334.08 2379.14 16913.3 1854.23 325.58 -36.25

Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) Shares in issue (lakhs) Earnings Per Share (Rs) Equity Dividend (%) Book Value (Rs)

38337.6 5878.57 7659.85 1199.23 6460.62 575.81 23.41 5861.4 -49.05 5812.35 1858.47 3957.89 25965.3 0 882.84 112.82

31363.6 5083.58 7405.25 995.37 6409.88 383.65 30.95 5995.28 -45.13 5950.15 1577.02 4375.52 21770.1 0 752.75 110.25

6088.52 65.01 725 352.4

6021.95 72.66 625 303.28

24

5.3 LIQUIDITY RATIOS: 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔

5.3.1 Current Ratio = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (values in crores) Current Assets Current Liabilities Current Ratio

Mar’11 35234.34 28372.99 1.24:1

Mar’10 26673.49 21632.13 1.23:1

1.24 1.238 1.236 Mar'11

1.234

Mar'10

1.232 1.23 1.228 1.226 1.224 Current Ratio

Interpretation: This ratio indicates how the expected current claims are covered by current assets. The ideal ratio is 2:1 but here the ratio shows fewer amounts of current assets to pay the current liabilities.

25

𝑸𝒖𝒊𝒄𝒌 𝑨𝑺𝒔𝒆𝒕

5.3.2 Quick / Acid Test Ratio = 𝑸𝒖𝒊𝒄𝒌 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (values in crores) Quick Assets Quick Liability Quick Ratio

1.195

Mar’11 33657.19 28372.99 1.19:1

Mar’10 25258.12 21632.13 1.17:1

1.19

1.19

1.185

Mar'11

1.18

Mar'10 1.17

1.175 1.17 1.165 1.16

Quick Ratio

Interpretation: This ratio is a better tool to measure the ability to honor day to day commitments. The ideal ratio is 1:1, which means that the liquid assets should be equal to liquid liabilities. Here the liquid assets are slightly more than the liquid liabilities that mean the company has the ability to pay its short-term liabilities.

26

5.4 SOLVENCY RATIO 𝑳𝒐𝒏𝒈−𝑻𝒆𝒓𝒎𝑫𝒆𝒃𝒕

5.4.1 Debt-Equity Ratio = 𝑺𝒉𝒂𝒓𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑭𝒖𝒏𝒅∗ *Shareholders’ Fund = Share Capital + Reserves and Surplus. (values in crores) Long-Term Debt Shareholders Fund Debt-Equity Ratio

Mar’11 7161.11 21455.82 0.33:1

Mar’10 6800.83 18263.26 0.37:1

0.37 0.37 0.36 0.35 0.34

Mar'11 Mar'10 0.33

0.33 0.32 0.31 Debt-Equity Ratio

Interpretation: This ratio is calculated to measure the comparative proportion of borrowed funds and shareholders’ funds invested in the firm. The ideal ratio should be 2:1, but here the ratio is much more lower which means that the company is not taking any risk and is mainly used in shareholders’ funds for financing its requirements.

27

5.4.2 Proprietary ratio = (values in crores) Proprietary fund Total assets Proprietary ratio

𝐩𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐲 𝐟𝐮𝐧𝐝 𝐭𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬

X 100

Mar’11 21455.82 29007.37 73%

Mar’10 18263.26 25112.47 72%

0.732 0.73 0.728 0.726

Mar'11

0.724

Mar'10

0.722 0.72 0.718 0.716 0.714 Proprietary ratio

Interpretation: This ratio indicated the proportion of proprietors funds used for financing the total asset. The above ratio shows that the company is not utilizing its external funds adequately.

28

5.4.3 Current asset to fixed asset Ratio= (values in crores) Current asset fixed asset Current asset to fixed asset Ratio

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 𝑭𝒊𝒙𝒆𝒅 𝒂𝒔𝒔𝒆𝒕𝒔

Mar’11 35234.34 21361.02 1.64:1

Mar’10 26673.49 19213.45 1.38:1

1.65 1.6 1.55 Mar'11

1.5

Mar'10

1.45

1.4 1.35 1.3 1.25 Current Asset to Fixed asset

Interpretation: This ratio shows the proportion of current assets to fixed assets here the ratio shows that the amount of current assets is more than the amount of fixed assets.

29

5.5 PROFITABILITY RATIOS: 5.5.1 Gross Profit Ratio = (values in crores) Gross Profit Net Sales GP Ratio

𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

X 100

Mar’11 7659.85 43656.71 17.55%

Mar’10 7405.25 36870.19 20.08%

20.08

20.5 20 19.5 19 18.5 18

Mar'11 Mar'10

17.55

17.5 17 16.5 16 GP Ratio (%)

Interpretation: This ratio shows the margin left after meeting the purchases and manufacturing cost. Here the GP ratio is high enough to cover expenses like administrative, selling and distribution etc.

30

5.5.2 Net Profit Ratio = (values in crores) Net Profit Net Sales Net Profit Ratio

𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

X 100

Mar’11 3957.89 43656.71 9.07%

Mar’10 4375.52 36870.19 11.87%

11.87 12 9.07 10 8

Mar'11 Mar'10

6 4 2 0 Net Profit Ratio (%)

Interpretation: This ratio shows the earnings left for shareholders’, higher the ratio the better it is. The profitability of the firm has declined to 9.06% in March’11 from 11.86% in March’10

31

5.5.3 Operating Profit Ratio = (values in crores) Operating Profit Net Sales Operating Profit Ratio

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

X 100

Mar’11 5878.57 43656.71 13.47%

Mar’10 5083.58 38768.87 13.11%

13.47 13.5 13.4 13.3 13.2

Mar'11 13.11

Mar'10

13.1 13 12.9 Operationg Profit Ratio(%)

Interpretation: This ratio establishes the relation between the net sales and the operating net profit. Operating net profit is the profit arising out of business operations only; here the operating profit ratio shows the increasing trend.

32

5.5.4 Return on Equity Ratio = (values in crores) Net Profit Shareholders fund Return on equity

𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕,𝒕𝒂𝒙 𝒂𝒏𝒅 𝒑𝒓𝒆𝒇𝒆𝒓𝒓𝒆𝒏𝒄𝒆 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒕,𝒊𝒇 𝒂𝒏𝒚 𝑬𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔 𝒇𝒖𝒏𝒅

Mar’11 3957.89 21455.82 18.44%

X 100

Mar’10 4375.52 18263.26 23.95%

23.95 25 18.44 20 Mar'11 15

Mar'10

10 5

0 Return On Equity Ratio(%)

Interpretation: The funds available for equity shareholders’ in March’10 was more than that in March’11. This ratio shows the productivity of the owned funds. Here the productivity of the funds has decreased from the previous year. This ratio is also known as return on net worth.

33

5.5.5 Return on total assets = (values in crores) Net profit after tax Total Assets Return on total assets

𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒕𝒂𝒙 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

Mar’11 3957.89 29007.37 13.64%

X 100 Mar’10 4375.52 25112.47 17.42%

17.42 18 16

13.64

14 12

Mar'11

10

Mar'10

8 6 4 2 0 Return On Total assets(%)

Interpretation: This ratio is also called return on investment. The ratio compares the net profit after tax with total assets. The above ratio shows declining trend in terms of return on total asset.

34

5.5.8 Return on Capital employed =

𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅∗

X 100

Capital Employed = Equity + preference + reserves and surplus + long term debt – fictitious assets (values in crores) Net Profit Capital Employed Return on Employed

Mar’11 7084.04 28616.93 capital 24.75%

Mar’10 7021.6 25064.09 28.01%

28.5 28 27.5

27 26.5

Mar'11

26

Mar'10

25.5 25 24.5 24

23.5 23 Return on capital emploued

Interpretation: In Mar’10 28.01% capital was utilized whereas in Mar’11 the capital utilization percentage reduced to 24.75 %.

35

5.6 ACTIVITY/ TURNOVER/EFFICIENCY RATIOS: 𝒏𝒆𝒕 𝒔𝒂𝒍𝒆𝒔

5.6.1 Debtors turnover ratio = 𝒂𝒗𝒈.𝒅𝒆𝒃𝒕𝒐𝒓𝒔 (values in crores) Net sales Avg. debtors Debtors turnover ratio

Mar’11 43656.71 12427.61 3.5times

Mar’10 36870.19 11163.70 3.3 times

3.5 3.5 3.45 3.4

Mar'11 Mar'10

3.35

3.3

3.3 3.25 3.2 DTR (times)

𝟑𝟔𝟓 𝒅𝒂𝒚𝒔

DTR in (No. of Days) = 𝑫𝑻𝑹 (𝒊𝒏 𝒏𝒐.𝒐𝒇 𝒕𝒊𝒎𝒆𝒔) (values in crores) 365 days DTR in (no. of times) DTR in (No. of Days)

Mar’11 365 3.5 104

Mar’10 365 3.3 111

Interpretation: The above ratio indicates that the debtors have made payments 3.5 times and 3.3 times during the period. From this the average collection period is 104 and 111 days for the years Mar’11 and Mar’10 respectively. This shows that the collection period is long and needs to be reduced.

36

𝒄𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔

5.6.2 Fixed assets turnover ratio =𝒏𝒆𝒕 𝒇𝒊𝒙𝒆𝒅 𝒂𝒔𝒔𝒆𝒕𝒔 (values in crores) Cost of sales Net fixed assets Fixed assets turnover ratio

Mar’11 43656.71 21361.02 2.04:1

Mar’10 36870.19 19213.45 1.91:1

2.05 2 Mar'11

1.95

Mar'10

1.9 1.85 1.8 Fixed assets turnover ratio

Interpretation: This ratio is more important for manufacturing concerns, as it indicates the utilization of fixed assets. The above ratio shows that 2.04 rupees of sales are generated per rupee of investment in fixed assets.

37

𝒏𝒆𝒕 𝒔𝒂𝒍𝒆𝒔

5.6.3 Working capital turnover ratio =𝒏𝒆𝒕 𝒘𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 Net working capital=current assets – current liabilities.

Mar’11 Net sales 43656.71 Net working capital 6861.35 Working capital turnover 6.36 ratio

Mar’10 36870.19 5041.36 7.31

7 6 5

Mar'11

4

Mar'10

3 2 1 0 working capital turnover ratio

Interpretation: The indication given by this ratio is the number of times working capital is turned around in a particular period. The above ratio shows that the working capital is turned around 6 to 7 times during the given periods.

38

𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔

5.6.4 Sales to capital employed ratio = 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅∗ * Capital employed = shareholders funds + long term liabilities (values in crores) Net Sales Capital Employed Sales to capital employed ratio

Mar’11 43656.71 7282.88 5.99:1

Mar’10 36870.19 6921.27 9.51:1

10 9

8 7

Mar'11

6

Mar'10

5 4 3 2 1

0 Sales to Capital Employes rario

Interpretation: This ratio indicated sales per rupee of capital employed. The above ratio indicates better utilization of capital employed which will result in higher amount of turnover.

39

5.6.5 Inventory turnover ratio= (values in crores) Cost of goods sold Stock Inventory turnover ratio

𝒄𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒔𝒐𝒍𝒅 𝒔𝒕𝒐𝒄𝒌

Mar’11 35996.86 1577.15 22.8 times

Mar’10 29464.94 1415.37 20.8 times

23 22.5 22

Mar’11

21.5

Mar'10

21 20.5 20 19.5 inventory turnover ratio 𝟑𝟔𝟓 𝒅𝒂𝒚𝒔

Inventory turnover ratio (in no. of days) = 𝑰.𝑻.𝑹 (𝒊𝒏 𝒏𝒐.𝒐𝒇 𝒕𝒊𝒎𝒆𝒔)

(values in crores) 365 days/ 12 months I.T.R (in no. of times) Inventory turnover ratio (in no. of days)

Mar’11 365 days 22.8 16 days

Mar’10 365 days 20.8 17.5 days

Interpretation: The indication given by this ratio is the no. of times the finished stock is turned over during a given accounting period. The above ratio shows that the stock was turned over 22.8 times during the accounting year 2011 and 20.8 times during 2010. This shows the rapid turnover of stock and a holding period of 16 and 17.5 day.

40

𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

5.6.7 Total assets turnover ratio=𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

(values in crores)

Mar’11

Mar’10

Net sales Total assets Total assets turnover ratio

43656.71 29007.37 1.50 times

36870.19 25112.47 1.46 times

1.5 1.5

1.49 1.48

Mar'11 Mar'10

1.47

1.46

1.46 1.45 1.44 Total asset turnover

Interpretation: This ratio shows relationship between total assets and net sales. Net sales are 1.5 times the total assets in March’11 and 1.46 times in March’10.

41

5.6.8 Equity to total assets ratio=

(values in crores) Equity capital Total assets Equity to total assets ratio

𝒆𝒒𝒖𝒊𝒕𝒚 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒕𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔

Mar’11 21455.82 29007.37 0.73:1

Mar’10 18263.26 25112.47 0.72:1

0.732

0.73 0.728 0.726

Mar'11

0.724

Mar'10

0.722 0.72 0.718 0.716 0.714 equity to total assets ratio

Interpretation: The above ratio shows that for 1 rupee of total asset 73 paisa of equity is required.

42

5.6.9 Operating expenses ratio = (values in crores) Operating expenses Net sales Operating Expenses ratio

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝒆𝒙𝒑𝒆𝒏𝒔𝒆𝒔 𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔

Mar’11 38337.63 43656.71 87.8 %

X 100 Mar’10 31363.62 36870.19 85.06%

88 87.5 87 86.5

Mar'11

86

Mar'10

85.5 85 84.5 84 83.5 Operating Expenses ratio (in %)

Interpretation: This ratio shows the relationship between operating expenses and net sales. Here it shows that operating expenses are 87.8 % in Mar’11 and 85.06 % in Mar’10, i.e. the operating expenses are very high compared to net sales.

43

5.7 COVERAGE RATIO 𝑬.𝑩.𝑰.𝑻

5.7.1 Interest coverage ratio =𝑰𝑵𝑻𝑬𝑹𝑬𝑺𝑻 E.B.I.T Interest

Interest coverage ratio

Mar’11 7084.04 1199.23 5.90:1

Mar’10 7021.6 995.37 7.05:1

7.2 7

Mar'11

6.8

Mar'10

6.6 6.4 6.2 6 5.8 5.6 5.4 5.2 interest coverage ratio

Interpretation: This ratio shows how much interest is payable compared to the E.B.I.T. This shows that the company has very less amounts of fixed interest bearing securities.

44

LIQUIDITY RATIOS Current Ratio Quick Ratio

1.24:1 1.19:1

1.23:1 1.17:1

1.24 1.24

1.23

1.22 1.19

1.2

Mar'11 1.17

1.18

Mar'10

1.16 1.14

1.12 Current Ratio

Quick Ratio

Interpretation: The current ratio and the quick ratio have slightly increased but the current ratio is less than the ideal ratio which is 2:1. The company should make a provision to increase the current assets.

45

SOLVENCY RATIOS Debt-Equity Ratio 0.33:1 Proprietary ratio 73% Current asset to fixed asset 1.64:1 Ratio

0.37:1 72% 1.38:1

1.64

1.8 1.6

1.38

1.4 1.2 1 0.73

0.8 0.6 0.4

0.33

Mar'11

0.72

Mar'10

0.37

0.2 0 debt-equity ratio

proprietory ratio

current assets to fixed assests ratio

Interpretation: The debt equity ratio has decreased which means that the company is mainly using its shareholders funds to finance its activities. The proprietary ratio which shows the percentage amount of funds used to acquire assets for the company. The current assets to fixed assets ratio shows that the company has more amounts of current assets than its fixed assets which may prove detrimental for its long term progress.

46

TURNOVER RATIOS Debtors turnover ratio Fixed assets turnover ratio Working capital turnover ratio Sales to capital employed ratio Inventory turnover ratio Total assets turnover ratio Equity to total assets ratio Operating Expenses ratio

3.5times 2.04:1 6.36

3.3 times 1.91:1 7.31

5.99:1

9.51:1

22.8 times 1.50 times 0.73:1 87.8 %

20.8 times 1.46 times 0.72:1 85.06%

Operating Expenses ratio Equity to total assets ratio Total assets turnover ratio Mar'10

Sales to capital employed ratio

Mar'11 Working capital turnover ratio Fixed assets turnover ratio Debtors turnover ratio 0

2

4

6

8

10

Interpretation: The debtor turnover ratio has slightly increased over the period but the company needs to shorten the collection period. The fixed assets turnover ratio has increased which is a good sign. The working capital turnover ratio indicates that the working capital was turned over more no. of times in 2010. The sales to capital employed ratio have decreased to 5.99 times from 9.51 which means that the sales are 5.99 times the capital employed. The total assets turnover is increased. For one rupee of total assets 73 paisa of equity is required. The operating expenses are very high and need to be controlled.

47

PROFITABILITY RATIOS GP Ratio Net Profit Ratio Operating Profit Ratio Return on equity Return on total assets Return on capital Employed

17.55% 9.07% 13.47% 18.44% 13.64% 24.75%

20.08% 11.87% 13.11% 23.95% 17.42% 28.01%

30.00% 25.00% 20.00% 15.00%

Mar'11 Mar'10

10.00% 5.00% 0.00% GP Ratio

Net Profit Operating Return on Return on Return on Ratio Profit equity total capital Ratio assets Employed

Interpretation: The gross profit margin and the net profit margin have decreased. The operating profit ratio shows the increasing trend. All the three ratios viz. return on equity, return on total assets, return on capital employed have decreased which means that the performance of the company has deteriorated from the previous year.

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COVERAGE RATIO

7.05 7.2 7 6.8 6.6

Mar'11

6.4 6.2

Mar'10

5.9

6 5.8 5.6 5.4 5.2 Interest coverage ratio

Interpretation: The above ratio indicates the declining trend of the coverage ratio as the E.B.I.T has decreased and the company has very less amounts of fixed interest bearing securities as compared to the E.B.I.T.

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Chapter 6

FINDINGS AND RECOMMENDATIONS 5.8 Summary of Ratios SR NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

RATIOS Current Assets quick ratio debt equity ratio proprietary ratio current assets to fixed assets Gross profit ratio net profit ratio return on capital ratio return on equity ratio return on total assets equity to total assets ratio inventory turnover ratio debtors turnover ratio turnover to fixed assets operating expenses ratio total assets turnover ratio fixed assets turnover ratio working capital ratio operating net profit ratio interest coverage ratio

Mar'11 1.24 1.18 0.33 0.73 1.64 17.55% 9.06% 24.75% 18.44% 13.64% 0.73 22.8 3.5 2.04 87.8% 1.50 2.04 6.36 13.47 5.9

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Mar'10 1.23 1.16 37 0.72 1.38 20.08% 11.86% 28.01% 23.95% 17.42% 0.72 20.8 3.3 1.91 85.06 1.46 1.91 7.31 13.11 7.05

INCREASE DECREASE 0.1 0.2 0.4 0.1 0.26 2.53% 2.8 3.26% 5.51% 3.78% 0.1 2.00 0.2 0.13 2.74 0.4 0.85 0.95 0.36 1.15

1. The Company’s’ current ratio is below the ideal ratio, the company should try to increase the amount of current asset so that it can easily pay out its liabilities. 2. The Liquid assets of the company are enough to pay the short term liabilities. 3. The company is mostly using its share holders fund for financing its activities. It should also utilize the various external funds available. 4. Current assets of the company are higher in amounts than the fixed assets, this shows that the huge amount of fund need to be invested in fixed asset. 5. The net profit of the company has deteriorated resulting in fewer amounts of profits available for shareholders compared to previous year. 6. The earnings per share have also reduced resulting in less amount of dividend per share. 7. The proprietary ratio shows lesser dependence on external funds. 8. Since the last few years, L & T has had a huge amount of cash locked up in its debtors (outstanding) cycle. As of FY10, the company has Rs. 11163 Cr. locked in outstanding on a sales turnover of Rs. 37000 Cr. which works out to a debtor’s cycle of 109 days. Also, the outstanding for more than six months is very high at Rs. 3163 Cr. which amounts to 28% of its total outstanding. For a company earning a net profit of Rs. 3315 Cr. such a high outstanding; especially the more than 6 months figure creates major cause for concern. Hence, in the wake of the first point, this high outstanding become a further reason to worry. 9. The operating expenses of the company are very high which indicate the operating inefficiencies of the company. 10. The sales of the company are very high as compared to the amount of capital employed.

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Chapter 7

SUMMARY AND CONCLUSION:

7.1 CONCLUSION BASED ON WORK:  Ratios make the related information comparable. A single figure by itself has no meaning, but when expressed in terms of a related figure, it yields significant interferences. Thus, ratios are relative figures reflecting the relationship between related variables. Their use as tools of financial analysis involves their comparison as single ratios, like absolute figures, are not of much use.  Ratio analysis has a major significance in analyzing the financial performance of a company over a period of time. Decisions affecting product prices, per unit costs, volume or efficiency have an impact on the profit margin or turnover ratios of a company.  Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company.  The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm¡¥s position and performance.  The first task of financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements. The second step is to arrange the information in a way to highlight significant relationships. The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation.  Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis. 7.2 CONCLUSION BASED ON LEARNING BENEFITS:  during this project I learned the following things :  How big MNC’S like L&T manage their funds.  to analyze and interpret the financial position of a company by using the technique of ratio analyses  Analyzed the performance of the company.  came to know about the company’s history , organizational profile , awards and accolades etc

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CHAPTER 8

ANNEXURE 8.1 BIBLIOGRAPHY: 8.1.1Websites:    

www.moneycontrol.com www.larsenandtourbo.com www.yahoomoney.com www.wikipedia.com

8.1.2 Reference books: Analysis of financial statements by Dr. N M.Vechalekar

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8.2 EXECUTIVE SUMMARY: Project Title: Analysis And Interpretation Of Financial Statements: Ratio Analysis Company Name: LARSEN AND TOURBO LTD.”

This project helped me to get the deeper understanding of the process of Financial Statement Analysis and how decisions are taken to strengthen the financial position. For this study two years ‘comparative Income Statement & Balance Sheet have been taken for calculating ratio analysis. Main objective in undertaking this project is to supplement academic knowledge with absolute practical exposure to day to day functions of the sector. Financial analysis which is the topic of this project refers to an assessment of the viability, stability and profitability of a business. This important analysis is performed usually by finance professionals in order to prepare financial or annual reports. These financial reports are made with using the information taken from financial statements of the company and it is based on the significant tool of ratio analysis. These reports are usually presented to top management as one of their basis in making crucial business decisions. The project is based on the company Larsen and Tourbo which is India’s largest engineering technology company. The company has vast scope as the infrastructure spending by the government and corporate expansion plans will continue to drive L&T’s business. The finance and IT subsidiaries of the company show a very strong performance, it is expected that the investment in subsidiary and associate companies is expected to grow. The company has a high degree of financial flexibility due to low gearing levels. The company is not using its external funds adequately and is using its shareholders’ funds to finance its major activities. L&T has huge amount of cash locked up in its debtors and it needs to shorten its collection period. Delay in realization of payments could adversely affect the working capital positions. The project concludes with the findings and recommendations for the company. L & T is one of the leading players in the Indian Engineering Industry. It is poised for good growth in future considering the government focus and spending on Infrastructure & power, its strategic plans and capacity expansions. But it needs to work on a plan to manage its operating inefficiencies

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