Synopsis On Profitability Analysis Using Financial Ratio

SYNOPSIS ON PROFITABILITY ANALYSIS USING FINANCIAL RATIO: A COMPARATIVE STUDY OF AUTOMOBILE COMPANIES (BAJAJ AUTO, TVS MOTORS, TATA MOTORS & MARUTI UDYOG LIMITED)

SUBMITTED BY:

VINITA SOMANI MBA V SEMESTER Enrollment No. : 070530811 PROJECT GUIDE:

MR. BRAJESH AGRAWAL

INDIRA GANDHI NATIONAL OPEN UNIVERSITY YEAR: 2009

SYNOPSIS PROFITABILITY ANALYSIS USING FINANCIAL RATIO: A COMPARATIVE STUDY OF AUTOMOBILE COMPANIES (BAJAJ AUTO, TVS MOTORS, TATA MOTORS & MARUTI UDYOG LIMITED) (A)

RATIONALE BEHIND THE STUDY:

Profitability analysis is the process of identifying the financial strengths and weaknesses of a firm with respect to profitability. In this study profitability in day-to-day and long-term transaction will be studied. Ratio analysis is a widely used tool of financial analysis. Ratio analysis is often underrated but is extremely helpful in providing valuable insight into corporation financial health. Public is pouring lot of money in the stock market and new issues are coming very rapidly. Public and the management of the companies need to assess financial health of the company periodically. Analysis of financial data is based on five parameters namely, sales, assets, net income, stockholders equity and number of employees. Stockholders are concerned whether income will be sufficient to cover interest and the management is interested in the future success of operations under their leadership. For these reasons, one must have various analytical tools to assist in interpreting the key relationships and trends and to predict the potential future success. Ratios normally pinpoint business strengths and weaknesses in two ways: Firstly: The ratio provide an easy way to compare today’s performance with the past and Secondly: Ratios depict the areas in which a particular business is competitively advantageous or disadvantageous. There are several different categories of ratios and each category focuses on a different area. Some of the ratio which can b used in analyzing the financial health of an establishment are as under:

(a)

(b) (c) (d) (e) (f)

Profitability Ratio: (1) Return on Investment or Net Profit to Capital (2) Gross Profit Ratio (3) Operating Ratio (4) Net Profit Ratio (5) Interest-coverage Ratio Liquidity Ratio Debt Ratio Activity Ratio Debt Coverage Ratio Turnover Ratio etc. AUTOMOBILE COMPANIES: (1) BAJAJ AUTO LIMITD: The Company’ main object is to

manufacture and marketing of ‘Bajaj’ scooters, motorcycles and three-wheelers and spare parts thereof. The company is producing less maintenance vehicles which are the best for Indian Markets. Bajaj Auto Ltd. of India has been manufacturing scooters for four decades and has become the largest scooter manufacturer in the world. (2) TVS MOTORS COMPANY: TVS Motor Company Limited, part of the TVS Group, is one of India’s leading two-wheelers manufactures. With a turnover of over Rs. 2800 crores [USD 574.94 million], the Company manufactures a wide range of motorcycles, scooters, mopeds and scooter TTS. Little wonder, it boasts of more than 9.5 million happy customers (3) TATA MOTORS: Tata Motors Limited is India’s largest automobile company. It is the leader by far in commercial vehicles in each segments, and the second largest in the passenger vehicles market with wining products in the compact, midsize car and utility vehicle segments. The company is the world’s fifth largest medium and heavy bus manufacturer. (4) MARUTI UDYOG LIMITD: Maruti Udyog Ltd (MUL), is the largest car manufacturing in the county with a market share of over 80 percent in the car industry. It is a joint sectors corporation setup by the Government of India and Suzuki Motor Corporation, Japan. Although the company is a clear leader, it faces threats from new entrants into car industry.

It has been noticed that the oval profit margin of the firm I satisfactory but there appears to be a setback in the liquidity position of the firm which has prompted me to take this project for an in-depth study. (B)

OBJECTIVES OF THE STUDY (1) (2) (3) (4) (5)

(6)

To evaluate financial health, Profitability, liquidity and operational efficiency of the establishment. To have an inter-firm (Bajaj Auto, TVS Motor, Tata Motors and Maruti Udyog Limited) comparison measure efficiency and help the management to take remedial measures. To establish trend analysis for planning and forecasting for a 5 years period. To help the investers in taking investment decisions and to help the banks and financial institution in taking lending decision. To assess the ability of the firm to meet its short-tm as well as long-term obligations to its creditors and also to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. To develop a software programmes to visually see the liquidity status of the firm on day-to-day.

(C)

RESEARCH METHODOLOGY CARRYING OUT THE STUDY:

(1)

SOURCES OF DATA:

TO

BE

USED

FOR

(a)

Primary data: Primary data required for study will be collected through direct interaction with financial executives of the establishment. Since a good rapport has been maintained the management has assured timely guidance and assistance and availability of relevant information through ledger and files etc.

(b)

Secondary data: Secondary data will consist of annual reports, publications, audited financial statement issued, day-to-day working files and budgets for different years. Which will be obtain from following sites? • www.bajajauto.com

• • • •

(c)

(2)

www.tvsmotors.com www.tatamotors.com www.marutiudyoglimited.com www.automartindia.com

Interview with key Personnel: Data will also be collected by interviewing the key personnel of the firm. The problems of the firm relating to the liquidity will be discussed with them along with sources of finances and future prospects.

METHODOLOGY: The Profitability ratios and the elements of profitability ratios will be plotted to analyze the tend over a five-year period and to have a comparison with firms of similar nature to find areas that need improvement. In the process of Ratio Analysis, four types of comparisons will be made: (1) (2) (3) (4)

Trend Ratios i.e. comparison of the same firm over time suitable graphs will be plotted. Inter-firm comparison (Bajaj Auto, TVS Motor, Tata Motors and Maruti Udyog Limited). Comparison of items in the financial statement of the firm. Comparison with standards or plans.

Classifications of the types of ratios to be calculated are: (1) (2) (3) (4)

Profitability Ratios. Liquidity Ratios. Leverage Ratios. Activity Ratios.

Bar graphs will be plotted show in year-wise various elements of current assets and current liabilities.

Pie diagram showing composition of elements of current assets to the total current assets – comparison of the same with the earliest year and the latest year. The study, comparisons and the calculation of the ratios will be done from the data collected from the above mentioned methods for last five years. (D)

EXPECTED CONTRIBUTION FOM THE STUDY:

The company is facing liquidity problem due to shortage of working capital finances. From this study we will com to know the strengths of the company and weak points of the company. The study can provide many solutions to overcome the Profitability problems and increase their profits. My project analysis will go a long way in improving the liquidity of the firm. Necessary comments and recommendations will be included in the project report. (E)

LIMITATIONS OF THE STUDY:

Ratio Analysis is subject to certain limitations. For e.g. in the matte of inter-firm comparison the procedure adopted by various firms may vary. The Second limitation comes from price level variation caused by inflation. Therefore Ratio Analysis fails to yield strictly comparable/dependable results. Thirdly, ratios are only a post mortem result of what ha happened between two balance sheet dates. Additionally the trend analysis fails to provide an empirical forecast about the future in view of the ever-changing social, economic and international scenario. Fourth, financial analysis is based upon only monetary information and non-monetary factors are ignored. Fifth, it does not consider changes in the price level. And last one, as the financial statement are prepared on the basis of the Going Concern Concept, it does not give exact position. Thus accounting concept and conventions cause serious limitations to financial analysis. (F)

SCOPE FOR FUTURE WORK: The study can be extended to other firms in the same industry.

Vinita somani MBA V SEMESTER

Enrollment No.070530811

Mr. Brajesh agrawal Project Guide