Professional Documents
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AT
RASTRIYA ISPAT NIGAM LIMITED
VISAKHAPATNAM
A Project report submitted in partial fulfillment of the requirements for the award of
`
Sri.K.SANYASI RAO
ASST. GENERAL MANAGER (F&A) Visakhapatnam Steel Plant Visakhapatnam Project Guide
VARAHA LAKSHMI NARASIMHA SWAMY EDUCATIONAL TRUST GROUP OF INSTITUTIONS, NARAVA 2009-11
K.SANYASI RAO ASST. GENERAL MANAGER (F&A) RASTRIYA ISPAT NIGAM LIMITED Visakhapatnam Steel Plant
DECLARATION
I, EMANY VSNV CHANDRA here by solemnly declare that the project report entitled a study on the Ratio Analysis. Submitted by me is a bonifide work done and it is not submitted to any other university or published anytime before. This project work is in partial fulfillment of the requirements for the award of the Master of Business Administration from VARAHA LAKSHMI NARASIMHA SWAMY EDUCATIONAL TRUST GROUP OF INSTITUTIONS, NARAVA.
ACKNOWLEDGEMENT
The satisfaction that accompanies the successful completion of any task would be incomplete with out mentioning people who made it possible and whose encouragement and constant guidance crowned my effort with success. I wish to express my deep sense of gratitude to Dr P SRINIVAS RAO, DIRECTOR, VARAHA LAKSHMI NARASIMHA SWAMY EDUCATIONAL TRUSTS GROUP OF INSTITUTIONS for permitting me to do the project. I am grateful to external project guide SRI K.SANYASI RAO and I am also thankful to SRI G.TRINADHA RAO, DEPUTY MANAGER, HRD & PROJECT WORKS in VISHAKAPATNAM STEEL PLANT for his co-operation and in providing the information of the company needed by me. I especially thank all those who have helped me directly or indirectly. I express my profound thanks to my affectionate parents for their constant encouragement throughout my educational career.
CHAPTER 1
GENERAL INTRODUCTION
The end products of the business transactions are the Financial Statements comprising the position statement or Balance Sheet and the Income Statement or Profit and Loss Account. Financial statements are the basics for the decision making by the Management and as well as all other Stakeholder who are interested in the affairs of the firm such as investors, creditors , customers ,suppliers , financial institutions , employees ,potential investors , govt., and the general public. In this project an attempt is made to know the financial performance of RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPATNAM STEEL PLANT through Ratio Analysis.
(a) (b)
Collection of required data from Annual Reports of Visakhapatnam Steel Plant. Reference from Text Books and Journals relating to Financial Management.
CHAPTER-II
Japan remained the largest exporter of semi-finished and finished steel products in 2002 followed by Russia and Ukraine. Other significant recent developments in The Development of Steel Industry in India should be viewed in conjunction with the type and system of Government that has been ruling the country. However, its production in significant quantity started only after 1900. The growth of steel industry can be studied by dividing the period into pre and post independence era. By 1950, the total installed capacity of ingot steel production was 1.5 million tons per year. In a short span of about 3 decades or so the capacity was increased 11 folds to about 16 MT by the 90s.
1.1
S No 1. 2. 3. 4. 5. 6. 7. 8.
Growth Osier Marshall heather constructed the first manufacturing plant at port-motor in Madras Presidency. James Erskin founded the Bengal Frame Works. Jamshedji TATA initiated the scheme for an integrated Steel Plant Formation of TISCO TISCO started production TISCO was founded Formation of My sore Iron and Steel initiated at Bhadravathi in Karnataka. First Five-Year Plan - The Hindustan Steel Limited (HSL) was born in the year 1954 with decision of setting up three plants each with 1 million tones ingot steel per year at
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Rourkela, Bhilai, and Durgapur. TISCO started its 9. 1956-1961 expansion programmed. Second Five-Year Plan - A bold decision was taken up to increase the ingot steel output in India to 6 million tones per year and its production at Roukema, Bhilai and 10. 11. 12. 13. 1961-1966 1964 1966-1969 1969-1974 Durgapur Steel Plant started. Third Five-Year Plan During the plan the three Steel Plants under HSL & TISCO were expanded. Bokaro Steel Plant came into existence Recession Period Till the expansion programs were actively existed during this period Fourth Five-Year Plan Salem Steel Plant started. Licenses were given for setting up of many Mini Steel Plants and re-rolling mills Government of India. Plants in south are each in Visakhapatnam and Karnataka. SAIL 14. 1974-1979 was formed during this period on 24th January 1973. Fifth Five-Year Plan The idea of setting up the fifth integrated Steel Plant, the first re-based plant at Visakhapatnam took a definite shape. At the end of the Fifth Five-Year Plan the total installed capacity from six 15. 16. 1979-1980 1980-1985 integrated plants was up to 10.6 million tons. Annual Plan - The Erstwhile Soviet Union agreed to help in setting up the Visakhapatnam Steel Plant. Sixth Five-Year Plan Work on Visakhapatnam Steel Plant started with a big bang and top priority was accorded to start the plant. Schemes for modernization of Bhilai Steel Plant, Rourkela Steel Plant, Durgapur steel plant and TISCO were initiated. Capacity at the end of Sixth FiveYear Plan from six integrated plants stood 11.50 million 17. 1985-1991 tons. Seventh Five-Year Plan Expansion works at Bhilai and Bokaro Steel Plant completed. Progress of Visakhapatnam Steel Plant picked up and the nationalized concept has been introduced to commission the plant with 30 MT liquid steel 18. 1992-1997 capacities by 1990. Eight Five-Year Plans The Visakhapatnam Steel Plant was commissioned in 1992. The cost of plant has become 11
around 8755 cores. Visakhapatnam Steel Plant started the production and modernization of other steel plants is also 19. 1997-2002 duly engaged. Ninth Five-Year Plant Restructuring of Visakhapatnam Steel Plant and other public sector undertakings.
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2002-2007
Tenth Five-Year Plan Steel industry registers a growth of 9.9%.Visakhapatnam steel plant has high regime targets and achieved the best of them.
(1951 to 1956):
No new steel plant came up, as the first plan was mainly agriculture oriented. However, IISCO was allowed to expand form 1MT/year to 2 MT/year of ingots, and from 0.5 MT/year to 1.0 MT/year of steel. And, the First Five-Year Plan contemplated a new Steel Plant to be erected in Public Sector. Thus the Hindustan Steel Limited (HSL) was born on 19 th Jan 1954 with the decision of setting up three steel plants each with one million tons ingot steel per year at Rourkela, Bhilai and Durgapur. Though TISCO and IISCO were scheduled to expand, TISCO started its expansion program.
During this period, additional steel producing capacity was added and a decision was taken to increase the ingot steel output in India to 6 million tons per year. The three one million ton steel plant one each at Rourkela, Bhilai and Durgapur
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were completed during this period. They started production during the end of this plan.
In addition to the above BSP and DSP each were having the capacity to produce 300,000 tons of pig iron for sale.
During this period, the three steel plants under HSL, TISCO, and IISCO were expanded as shown below. However, these could be completed only by 1968 1969.
The ambling expansion program taken up during the Third Five-Year Plan could not be completed during that period. All the expansion programs were actively executed during this period
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initially with a capacity of 2 MT/year of ingots. Steel authority of India Ltd., was also formed during this period on 2nd Jan 1973. problems of Iron and Steel Industry. Central Research and Development Organization was set up in June, 1973 to tackle the research and development
Work in expansion of Bhilai and Bokaro Plant was progressed. Bokaro's intermediate stage of 2.5 MT completed. Many of the units were commissioned e.g. a) Salem steel plant was commissioned b) on 31.9.81 work on Vizag Steel Plant started with a bang and c) top priority was accorded to modernize the plant at TISCO. Schemes for modernization of BSP, RSP, DSP, and IISCO were initiated at the end of sixth five-year plan. The capacity from six integrated steel plants stood at 11.56 MT.
Almost all the units in the expansion work of Bhilai and Bokaro to 4 MT completed. Progress of Vizag Steel Plant picked up and the rationalized concept has been introduced to commission the plant with 3 MT liquid steel capacities by 1990.
All units of Vizag Steel Plant were commissioned by July, 1992. Government of India has given permission to set up Mini Steel Plants in Private Sectors.
National Development Council under Central Government has deposited Rs. 859.200 corers in ninth five year plan that targets an overall 6.5% growth gross domestic production and will necessitate a 7% growth in the remaining years of plan.
Global Scenario:
As per IISI In March 2005 World Crude Steel output was 92.8MT when compared to March 2004 (87.2 MT), the change in percentage was 6.5%. China remained the worlds largest Crude Steel producer in 2005 also (27.5MT) followed by Japan (9.6MT) and USA (8.1MT). India occupied the 8th position (8.8MT) USA remained the largest importer of semi-finished and finished steel products in 2002 followed by China and Germany. the global steel scenario have been: Under the auspices of the OECD (Organization for Economic Co-operation & Development) the negotiations among the major steel producing countries for a Steel Subsidy Agreement (SSA) held in 2003 with the objective to agree on a complete negotiating text for the SSA by the middle of 2004. It also set subsidies for the Steel Industry of a ceiling of 0.5% of the value of production to be used exclusively for Research & Development. The global economy witnessed a gradual recovery from late 2003 onwards. China has become one of the major factors currently driving the world economy. 15
As a result of these economic developments IISI has projected an increase by 6.2% or 53 million metric tones in 2004 in the global consumption of finished steel products. IISI has split the growth into two separate areas, China and the Rest of the World (ROW). Steel consumption in China has been estimated to increase by 13.1% or 31 met in 2004. USA has repealed the safeguard measures on import of steel as a result of a ruling, by a WTO Dispute Resolution Panel, which held these measures to be illegal under the WTO regime.
India is uniquely placed to become a very large producer and consumer of finished steel products in the world. Substantial reserves of high grade iron ore, low wage rates, technical and managerial skills of a high order have all enabled India to gain this stature, by becoming 10th largest producer of steel in the world. Unfortunately for the Indian steel industry, the price and distribution controls to which it was subjected till about economic liberalization process began in the early 1990s did not permit the large integrated steel plants to modernize their steel manufacturing facilities or to upgrade their technologies to the state of art levels from time to time.
With the economic liberalization that was initiated in 1992, Indian Steel Industry has to accept the inevitable i.e. to appreciate the implications of low import duty rated, face foreign competition and some how improve its strengths and competitive edge to produce good quality products at lower prices and learn to survive in the market place. Following liberalization, the steel Industry is well set on the path of globalization. The dynamics of the World Steel Industry has a close relation with Indian steel Industry. Presently in India, Steel products are being produced from four different sources viz.,
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Integrated Steel Plants Mini Steel Plants Re-rolling Mills Alloy & Special Steel Plants
Integrated Steel Plants have larger capacity and produce Steel from basic raw materials and the other three categories mentioned are characterized by low investment and low break-even point.
Bhilai Steel Plant Bokaro Steel Plant Durgapur Steel Plant Indian Iron and Steel Company (IISCO) Tata Iron and Steel Company (TISCO) Visakhapatnam Steel Plant (VSP)
To facilitate sustained growth in exports to attain a share of 1% of global merchandise trade. To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumables and capital goods required for augmenting production and providing services. To enhance the technological strength and efficiency of Indian agriculture, industry and services, thereby improving their competitive strength while generating new employment opportunities, and to encourage the attainment of internationally accepted standards of quality. To provide consumers with good quality goods and services at internationally competitive prices while at the same creating a level playing field for the domestic producers
Imports of foreign technology as well as foreign direct investment are freely permitted up to certain limits under an automatic route. Ministry of Steel plays the role of facilitator, providing broad directions and assistance to new and existing steel plants, in the liberalized scenario.
STEEL:
The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/green field steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies.
At present, total (crude) steel making capacity is over 34 million tons and India, the 8th largest producer of steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international quality standards. As per the ratings of the prestigious World Steel Dynamics, Indian HR products are classified in the Tier II category quality products- a major reason behind their acceptance in the world market. EU, Japan has qualified for the top slot, while countries like South Korea, USA share the same class as India.
In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit in the secondary sector. Post liberalization, the AIFIs has sanctioned 21 new projects with a total capacity of approx 3.9 million tones. Of these, 16 units have already been commissioned. The production of millions in 2002-0n ton3. During the year 2003-04, the production of Pig Iron was 5.221 million tones.
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Market Scenario:
After liberalization, with huge scale addition to steel making capacity. Apparent consumption of steel increased from 14.84 million tons in 1991-92 to 30.265 million tons in 2003-04. The production of steel in 2003-04 is 36.193 million tons as against 33.67 million tons in 2002-03 thereby registering 7.5% growth. The demand of steel has been firmed up both at home as well as internationally. Efforts are being made to boost demand particularly in rural areas and also to increase exports.
Production:
Steel industry was de-licensed and decontrolled in 1991 and 1992 respectively. India is the 8th largest producer of steel in the world. In 2003-04, finished steel production was 36.193 million tones. Pig iron production in 2003-04 was 5.221 million tons. Sponge iron production was 8.085 million tons during 2003-2004. The annual growth rate of crude steel production in 2002-2003 was 8% and in 2003-2004 was 6%. Last 4 years production performance is as under:-
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Demand- Availability of iron and steel in the country is projected by Ministry of Steel annually. Gaps in Availability are met mostly through imports. Interface with consumers by way of Steel Consumer Council exists, which is conducted on regular basis. Interface helps in redressing availability problems, complaints related to quality.
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Import duty on several raw materials used by the steel sector like non-coking coal, met coke and nickel has been reduced to 5%. Import duty on coking coal has been reduced to Nil.
Customs Duty:
The peak rate of Custom Duty has been reducing sharply during the last 5 years. In the interim budget for 2004-05, announced in January2004 the peak rate was reduced from 25% to 20%. In 2004 the Customs Duty on carbon steel items and pig iron was further reduced to 5%. The custom duty on scrap was nil. Import duty on coking coal has been reduced to nil, and on metallurgical coke reduced to 5%.
Excise Duty:
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The Government has taken a number of steps to ensure the availability of iron and steel items which inter-alias includes reduction in Excise Duty by 16% with addition to Educational Cess 2% on 16%.
DF LEVY:
This was a levy started for funding modernization, expansion and development of steel sector. The fund, inter-alias, supports: 1) Capital expenditure for modernization, rehabilitation, renewal & replacement of Integrated Steel 2) Research & Development 3) Rebates to SSI Corporations 4) Expenditure on ERU of JPC SDF levy was abolished on 21.4.94 Cabinet decided that corpus could be recycled for loans to Main producers Interest on loans to Main Producers is set aside for promotion of R&D on steel etc. An Empowered Committee has been set up to guide the R&D effort in this sector. plants. diversification,
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CHAPTER-III
COMPANY PROFILE
The Government of India has decided to set up an integrated Steel Plant at Visakhapatnam to meet the growing domestic needs of steel. Visakhapatnam Steel
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Plant was the effect of the persistent demands and mass movements. It is another step towards increasing the countrys steel production. The decision of the Government to set up an integrated steel plant was laid down by the then Prime Minister Smt. Indira Gandhi. The Prime Minister laid the foundation stone on 20th January 1971. The consultant, M/s M N Dastur & Co (Pvt) Ltd. submitted a technoeconomic feasibility report in February 1972, and detailed project report for the plant, with an annual capacity of 3.4 million tones of liquid steel. The Government of India and USSR signed an agreement on 12th June 1979 for the co-operation in setting up 3.4 million tones integrated Steel Plant. The project was estimated to cost to Rs.3, 897.28 crores based on prices as on 4th Quarter of 1981.However, on completion of the construction and commissioning of the whole Plant in 1992, the cost escalated to Rs.8, 755 crores based on prices as on 2nd Quarter of 1994. Unlike other integrated Steel Plants in India, Visakhapatnam Steel Plant is one of the most modern steel plants in the country. The plant was dedicated to the nation on 1st August 1992 by the then Prime Minister, Sri.P.V.Narasimha Rao. New technology, large-scale computerization and automation etc, are incorporated in the Plant at the international levels and attain such labour productivity, the organizational manpower has been rationalized. The manpower in the VSP has been limited to17, 500 employees. The plant has the capacity of producing 3.0 million tones of liquid steel and 2.656 million tones of saleable steel. It has set up two major Blast Furnaces, the Godavari and the Krishna, which are the envy of any modern steel making complex. The economy of a nation depends on core sector industries like iron and steel. Steel is the basic input for construction, machines building and transport industries. Keeping in view the importance of steel the following integrated steel plant with 25
foreign collaborations was constructed in the public sector in the post independence era.
ORGANIZATION CHART
Director (Commercial) ED (MM) Addl. GM (Mktg) Addl. GM (Mktg) - Services & Exports
Director (Personnel) DGM (M&HS) I/C GM (P&A) Addl. GM (P&IR) DGM (Trg) DGM (HRD) DGM (Legal Affairs) GM (Works)
Addl. GM (QATD) Addl. GM (Audio & Telco) Addl. GM (Services) Addl. GM (Steel) Addl. GM (C, S & C)
ACM (Cordon)
VISION:
To be a continuously growing world-class company. We shall: Harness our growth potential and sustain profitable growth.
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Deliver high quality and cost competitive products and be the first choice of customers. Create an inspiring work environment to unleash the creative energy of people. Achieve excellence in enterprise management. Be a respected corporate citizen, ensure clean and green environment and develop vibrant communities around us.
Mission:
To attain 16 million tone liquid steel capacity through technological up -gradation, operational efficiency and expansion, to produce steel at international standards of cost and quality, and to meet the aspirations of the stakeholders.
Core Values:
Commitment Customer satisfaction Continuous improvement Concern of environment Creativity and innovation.
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in large quantities cheaply, so that Mild Steel is now used for most purposes for which wrought iron was formerly used. This was only the first of a number of methods of steel production. The Gilchrist-Thomas process (or basic Bessemer process) was an improvement to the Bessemer process, lining the converter with a basic material to remove phosphorus. Another was the Siemens-Martin process of open hearth steelmaking which like the Gilchrist-Thomas process complemented, rather than replaced, the original Bessemer process. These were rendered obsolete by the Linz-Donawitz process of basic oxygen steel making, developed in the 1950s, and other oxygen steelmaking processes. One third of world's steel is currently produced in China. Arcelor-Mittal is however the production. White-hot steel pouring out of an electric arc furnace.
HRD POLICY
focus
Blast furnaces have been used for two millennia to produce pig iron, a crucial step in the steel production process, from iron ore by combining fuel, charcoal, and air. Modern methods use coke instead of charcoal, which has proven to be a great deal
competence needs Revolution. more efficient and is crediting with Identifying contributing to the British Industrial
Once the iron is refined, converters are used to create steel from the iron. During the late 19th and early 20th century there were many widely used methods such as the Bessemer process and the Siemens-Martin process. inputs However, basic oxygen Providing training steelmaking, in which pure oxygen is fed to the furnace to limit impurities, has generally replaced these older systems. Electric arc furnaces are a common method of reprocessing scrap metal to create new steel. They can also be used for converting pig iron to steel, but they use a great deal of electricity (about 440 kWh per metric ton), and are thus generally only economical when there is a plentiful supply of cheap electricity.
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HUMAN RESOURCES
HRD PHILOSOPHY IN VISAKHAPATNAM STEEL PLANT
Employees of the organization are greatest and most valuable resources. Whole on the one hand, HRD should appropriately harness the employee potential for the attainment of the company objectives, the company on the other, as its corporate responsibility, should create an enabling climate where in human talent gets the best opportunity for self expression, all round development and fulfillment. People are more than mere resources and therefore it will be the companys sincere endeavor to treat people with all the respect and that is warranted when employees are seen as more mere instrumentalities. HRD as a management function will be given a place of strategic priority, along with function like production, maintenance, materials on finance in the overall scheme of management action in the company. HRD does not refer to training alone, nor it is just a new name for training. In RINL/VSP HRD refers to creative and innovative initiatives in several management functions for the development and growth of employees HRD should eventually be a core philosophy of all management actions and should not remain merely a departmental / sectional activity. All functional and divisional heads responsible for various activities of the company will imbibe the HRD spirit and suitability integrate HRD into their plans, decisions and actions
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Visakhapatnam Steel Plant (Vizag Steel) is an ISO 9001, ISO 14001, and OHSAS 18001, certified public sector organization in India. It is the only steel plant in India, had all the three certificates. This paper reviews key aspects like hazard identification and risk assessment(HIRA) carried out in 50 departments for physical, chemical and Biological hazards, risk control measures taken, dissemination of occupational risk management information to 17,000 workforce as a part of OHSAS 18001 certification process. We summarize the role of occupational health services department in hazard identification, risk assessment and risk control at various working environments with an emphasis on continual improvement and occupational risk management.
Objectives:
Expand plant capacity to 6.3mT by 2008-09 with the mission to expand further in subsequent phases as per the corporate plan Sustain gross margin to turnover ration > 25% Be amongst top five lowest steel producers in the world by 2009-10 Achieve higher levels of customer satisfaction than competitors Be recognized as an excellent business organization by 2008-09 Instill right attitude amongst employees and facilitate them to excel in their professional, personal and social life.
Quality Policy:
Employees of Visakhapatnam Steel Plant are committed to supply their customers quality products and services. To accomplish this Visakhapatnam Steel Plant will: Manufacture products as per specification and standards agreed with the customer.
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Follow clearly documented procedures for achieving expected quality standard of products and services. Continuously strive to improve quality of all material, processes and products. Maintain an enabling environment, which encourages actives involvement of all employees to pursue continuous improvement of quality.
First integrated steel plant to receive ISO 9002 certification for all its products.
Major Units:
ANNUAL CAP. (000T) 2,261 5,256 3,400 3,000 710 850 850
DEPARTMENTS COKE OVERNS SINTER PLANT BLAST FURNACE STEEL MELT SHOP LMMM WRM MMSM
UNITS (3.0 MT STAGE) 3 Batteries each of 67 ovens & 7 Mts Height 2 Sinter machines of 312 Sqm grate area each 2 Furnaces of 3200 cu m volume each 3 LD Converters each of 150 Cum. Volume and size 4 strand bloom casters 4 Stand finishing Mill 2 x 10 Stand finishing Mill 6 Stand finishing Mill
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YEAR 31-3-1997 31-3-1998 31-3-1999 31-3-2000 31-3-2001 31-3-2002 31-3-2003 31-3-2004 31-3-2005 31-3-2006 31-3-2007 31-3-2008 31-3-2009 31-3-2010
EXECUTIVES 2617 2617 2617 2683 4027 4203 4308 4533 4512 4629 4674 4967 5218 5263
NON-EXECUTIVES 14570 14572 14087 13593 13104 12823 12586 12222 12101 11932 11727 11449 12007 12567
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16000 14000 12000 10000 8000 6000 4000 2000 0 EXECUTIVES NONEXECUTIVES
31-3-1997 31-3-1998 31-3-1999 31-3-2000 31-3-2001 31-3-2002 31-3-2003 31-3-2004 31-3-2005 31-3-2006 31-3-2007 31/03/2008 31/03/2009 31/03/2010
Profile as on 31.03.2010:
-14.34% -10.33%
-11.65% -24.33% -39.35%
E ngineering D iplom a G raduation/P G IT I Literates
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AWARDS:
1. ISO 9002 for SMS and all the down stream units a unique distinction in the steel industry. 2. Indira Priya Darshini Vriksha Mitra award 1992-93, Nehru memorial national award for pollution control 1992-93 & 1993-94. 3. 4. 5. 6. 7. 8. 9. 10. EEPC export excellence award 1994-95. CII (Southern Region) energy conservation award 1995-1996. Continuously growing peacock (1st prize) national quality award 1996. Steel ministries trophy Best safety performance 1996. IIM national quality commitment award 1997. Gold star award for excellent performance in productivity. Udyog excellence gold medal for excellence in steel plant. Excellence award for out standing performance in productivity management, quality and innovation. 11. 12. 13. 14. ISPAT Suraksha Puraskar (1st prize) for largest accident free period 1991-94. PM Trophy for the year 2002-03 as the Best Integrated Steel Plant World quality commitment international star award in 2004 Cll-GBC National Award in 2005 37
Safety innovation award in 2006 Organizational excellence award in 2006 National Energy Conservation Award in 2006 Enterprise Excellence Award 2007 Viswakarma Rashtriya Puraskar 2007 Best Quality Circles implementing Organization Award -2007
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CHAPTER-IV
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The term ratio refers to the numerical or quantitative relationship between two items/variables. This relationship can be expressed as: 1. Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of Rs.25,000 and Sales of Rs.1,00,000), 2. Fraction (Net profit is 1/4th of Sales) and 3. Proportion of numbers (the relationship between Net profits and Sales is 1:4). These alternative methods of expressing items, which are related to each other, are, for purpose of financial analysis, referred to as ratio analysis. It should be noted that computing the ratios does not add any information already inherent in the above figures of profits and sales. What the ratios do is that they reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them. The rationale of ratio analysis lies in the fact that it makes related information comparable. A single figure by itself has no meaning but when expressed in terms of a related figure, it yields significant inferences. For instance, the fact that the Net profits of a firm amount to, say Rs. Ten Lakhs throws no light on its adequacy or otherwise. The figure of Net profit has to be considered in relation to other variables. How does it stand in relation to sales? If, therefore, Net profits are shown in terms of their relationship with items such as Sales, Assets, Capital employed, Equity capital and so on, meaningful conclusions can be drawn regarding their adequacy. To carry the above example further, assuming the capital employed to be Rs.50 lakh and Rs.100 lakh, the Net profit are 20% and 10% each respectively. Ratio analysis, thus, as a quantitative tool, enables analysts to draw quantitative answers to questions such as; are the Net profits adequate? Are the assets being used efficiently? Is the firm solvent? Can the firm meet its current obligations and so on?
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As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that presents facts on a comparative basis and enables the drawing inference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect to the following aspects. 1. 2. 3. 4. 5. 6. Liquidity position Long-term solvency Operational efficiency Overall profitability Inter-firm comparison, and Trend analysis
1.
Liquidity position:With the help of ratio analysis conclusions can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short-maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans. Common liquidity ratios include The Current ratio, Quick ratio and The operating Cash flow ratio.
2.
Long-term solvency:Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This aspect of the financial position of a borrower is of concern to the long-term creditors, security analysts and the present and potential owners of a business. The long-term solvency is measured by the leverage/capital structure and profitability ratios, which focus on earning power and operating efficiency. Ratio analysis reveals the strength and weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded
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proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its consistent with the risk involved. It includes Debt-equity ratio, Cash coverage ratio, the times interest earned ratio etc.
3. Operating Efficiency:Another dimension of the usefulness of the ratio analysis, relevant from the view point of management, is that it throws light on the degree of efficiency in the management and utilization of its assets. measure this kind of operational efficiency. The various activity ratios
4.
Overall Profitability:Unlike the outside parties, which are interested in one aspect of financial position of a firm, the management is constantly concerned about the over-all profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short-term as well as long-term obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.
5.
Inter-firm Comparison:Ratio analysis not only throws light on the financial position of a firm but also serves as a stepping stone to remedial measures. This is made possible due to inter-firm comparison and comparison with industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry average. An inter-firm comparison would demonstrate the firms position vis--vis its competitors.
6.
Trend Analysis:-
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Ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of a trend analysis of ratios lies in the fact that the analysis can know the direction of movement, i.e., whether the movement is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the present level may be satisfactory but the trend may be a declining one.
Ratio Analysis-Limitations:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from various limitations. The operational implication of this is that while using ratios, the conclusions should not be taken on their face value. Some of the limitations, which characterize ratio analysis, are i. ii. iii. Difficulty in comparison. Impact of Inflation, and Conceptual Diversity
i.
Difficulty in comparison:One serious limitation of ratio analysis arises out of the difficulty associated with there comparability. by various firms.
comparison. But such comparison is vitiated by different procedures adopted Differences in basis of inventory valuation (e.g.:- last in first out, average cost and cost);
Different depreciation methods (i.e. straight line Vs. written down basis);
Estimated working life of assets, particularly of plant and equipment; Amortization of deferred revenue expenditure such as preliminary expenditure and discount on issue of shares;
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Capitalization of lease; Treatment of extraordinary items of income and expenditure; and so on.
Secondly, apart from different accounting procedures, companies may have different accounting procedures, implying differences in the composition of assets, particularly current assets. For these reasons, the ratios of two firms may not be strictly comparable.
ii.
Impact of Inflation:The second major limitation of the ratio analysis is associated with price level changes. This is a weakness of the traditional financial statements, which are based on historical cost. An implication of this feature of the financial statements as regards ratio analysis is that assets acquired at different periods are, in effect, shown at different prices in the balance sheet, as they are not adjusted for changes in the price level. As a result, ratio analysis will not be strictly comparable.
iii.
Conceptual Diversity: The factor that influences the usefulness of ratios is that there is difference of opinion regarding the various concepts used to compute the ratios. There is always room for diversity of opinion as to what constitutes shareholder`s equity, debt, assets, profit and so on. Finally, ratios are only a post-mortem analysis of what has happened between two balance sheet dates. For one thing the position in the interim period is not revealed by ratio analysis. Moreover, they give no clue about the future. In brief, ratio analysis suffers from some serious limitations. The analysis should not be carried away by its over simplified nature, easy computation with high degree of precision. The reliability and significance attached to ratios will largely depend upon the quality of data on which they
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are based. They are as good as the data itself, nevertheless, they are an important tool of financial analysis.
Ratio Analysis-Conclusion:
Calculating a large number of ratios without determining their need in the present context may confuse the things instead of solving them. Only those ratios should be selected which can throw proper light on the matter to be discussed. Unless otherwise the ratios calculated are compared with certain standards one will not be reach at conclusions. These standards may be a rule of thumb as in current ratio (2:1), may be industry standards, may be projected ratios etc. 46
The comparison of calculated ratios with the standards will help the analyst in forming his opinion about financial situation of the concern.
The ratios are only the tools of analysis but their interpretation will depend upon the caliber and competence of the analyst. He should be familiar with various financial statements and the significance of changes etc.
A wrong interpretation may create havoc for the concern since wrong conclusions may lead to wrong decisions. The utility of ratios is linked with expertise of the analyst.
The ratios are only guidelines for the analyst; he should not base his decisions entirely on them. He should study any other relevant information, situation in the concern, general economic environment etc., before reaching final conclusions. The study of ratios in isolation may not always prove useful. The
interpretation should use the ratios as guide and may try to solicit any other relevant information which helps is reaching a correct decision.
Ratio Analysis-Types:
Several ratios, calculated from the accounting data, can be grouped into various classes according to financial activity or function to be evaluated. As stated earlier, the parties interested in financial analysis are short-term and long-term creditors, owners and management. Short-term creditors` main interest is in the liquidity position or the short-term solvency of the firm. Long-term creditors`, on the other hand, are more interested in the long-term solvency and profitability of the firm. Similarly, owners concentrate on the firms profitability and financial condition. Management is interested in evaluating every aspect of the firms performance. They have to protect the interests of all parties and see that the firm grows profitably. In view of the requirements of the various users of ratios, we may classify them into the following four important categories:
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LIQUIDITY RATIOS:
It is extremely essential for a firm to be able to meet its obligations as they become due. Liquidity ratios measure the firms ability to meet current obligations.
In fact, analysis of liquidity needs the preparation of cash budgets and cash and Fund Flow statements; but liquidity ratios, by establishing a relationship between cash and other current assets to current obligations provided a quick measure of liquidity. A firm should ensure that it does not suffer from lack of liquidity, and also that it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in a poor creditworthiness, loss of creditors` confidence, or even in legal tangles resulting in the closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing. The firms funds will be unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance between high liquidity and lack of liquidity. The most common ratios, which indicate the extent of liquidity or lack of it, are: 1. CURRENT RATIO 2. QUICK RATIO 3. CASH RATIO
1.
CURRENT RATIO:
The current ratio is calculated by dividing current assets by current liabilities.
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Current assets include cash and those assets, which can be converted into cash within a year, such as Marketable Securities, Debtors and Inventories. Prepaid expenses are also include in current assets as they represent the payments that will not be made by the firm in future. Current Liabilities include Creditors, Bill payable, Accrued expenses, Short-term bank loan, and Income Tax Liability and Long-term debt maturing in the current year.
The current ratio is a measure of the firms` short-term solvency. The higher the current ratio, the larger is the amount of rupees available per Rupee of current liability, the more is the firms` ability to meet current obligations and the greater is the safety of funds of short-term creditors.
2.
QUICK RATIO:
The Quick ratio is calculated by dividing quick assets by quick liabilities. Quick assets
Quick Ratio = Quick liabilities Quick assets or Liquid assets mean those assets which are immediately convertible into cash without much loss. All current assets except prepaid expenses and inventories are categorized in liquid assets. Quick liabilities means those liabilities, which are payable within a short period. Normally, Bank overdraft and Cash credit facility, if they become permanent mode of financing are in quick liabilities.
As this ratio concentrates on cash, marketable securities and receivables in relation to current obligation, it provides a more penetrating measure of liquidity than current ratio.
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3.
CASH RATIO:
The cash ratio is calculated by dividing cash + marketable securities by
current liabilities Cash Ratio = Cash + Marketable Securities Current liabilities Since cash is most liquid asset, a financial analyst may examine cash ratio and its equivalent to current liabilities. Trade investment or marketable securities are equivalent of cash; therefore, they may be included in the computation of cash ratio.
LEVERAGE RATIOS:
The short-term creditors like bankers and suppliers of raw material are more concerned with the firms` current debt-paying ability. On the other hand, long-term creditors like debenture holders, financial institutions etc., are more concerned with the firms` long-term financial strength. In fact, a firm should have strong short-as well as long-term financial position. To judge the long-term financial position of the firm, financial leverage, or Capital structure, ratios are calculated. These ratios indicate mix of funds provided by owners and lenders. As a general rule, there should be an approximate mix of debt and owners equity in financing the firms` assets. The manner in which assets are financed has a number of implications. First, between debt and equity, debt is more risky from the firms` point of view. The firm has a legal obligation to pay interest on debt holders, irrespective of the profits made or losses incurred by the firm. If the firm fails to debt holders in time, they can take legal action against it to get payment and in extreme cases, can force the firm into liquidation. Secondly, use of debt is advantageous for shareholders in two ways: a. They can retain control of the firm with a limited stake and
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b. Their earnings will be magnified, when the firm earns a rate of return on the total capital employed higher than the interest rate on the borrowing funds. The process of magnifying the shareholders return through the use of debt is called financial leverage or financial gearing or trading on equity.
Leverage ratios may be calculated from the balance sheet to determine the proportion of debt in total financing. Many variations of these ratios exist; but all these ratios indicate the same thing-the extent to which the firm has relied on debt in financing assets. Leverage ratios are also computed from the profit and loss items by determining the extent to which operating profits are sufficient to cover the fixed charges.
PROPRIETARY RATIO:
This ratio states relationship between share capital and total assets. Proprietors equity represents equity share capital, preference share capital and reserves and surplus. The latter ratio is also called capital employed to total assets. EQUITY SHARE CAPITAL Proprietary Ratio = TOTAL TANGIBLE ASSETS
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ACTIVITY RATIOS:
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Funds 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 managers 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. Activity ratios, thus, involve a relationship between sales and assets. A proper balance between sales and assets generally reflects that assets are managed well. Several activity ratios can be calculated to judge the effectiveness of asset utilization.
The average inventory is the average of opening and closing balance of inventory. In a manufacturing company inventory of finished goods is used to calculate inventory turnover. Cost of goods sold Inventory Turnover Ratio = Average inventory
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be converted into cash over a short period and, therefore, are included in current assets. The liquidity position of the firm depends on the quality of debtors to a greater extent. Debtors turnover ratio indicates the velocity of debt collection of a firm. Un simple wards it indicates the number of times average debtors are turned over during a year. Credit Sales Debtors Turnover Ratio = -------------------------------Avg. Accounts Receivable
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PROFITABILITY RATIOS:
A company should earn profits to Survive and Grow over a long period of time. Profits are essential, but it would be wrong to assume that every action initiated by management of a company should be aimed at maximizing profits, irrespective of social consequences.
Profit is the difference between revenues and expenses over a period of time (usually a year). Profit is the ultimate Output of a company, and it will have no future if it fails to make sufficient profits. Therefore, the financial manager should continuously evaluate to the efficiency of the 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 owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principle regularly. Owners want to get a required rate of return on their investment. This is possible only when the company earns enough profits.
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Generally two major types of profitability ratios are calculated. PROFITABILITY IN RELATION TO SALES PROFITABILITY IN RELATION TO INVESTMENT
1.
This shows profits relative to sales after the deduction of production costs, and indicates the relation between Production costs and selling price. A high gross profit margin relative to the industry average implies that the firm is able to produce at relatively lower cost.
A high gross profit margin ratio is a sign of good management. A gross margin ratio may increase due to any of the following factors. i. ii. iii. Higher sales prices, cost of goods sold remaining constant, Lower cost of goods sold, sales prices remaining constant, A combination of variations in sales prices and costs, the margin widening, and
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iv.
The analysis of these factors will reveal to the management that how a depressed gross profit margin can be improved. A low gross profit margin may reflect higher cost of goods sold due to the firms` inability to purchase raw materials at favorable terms, inefficient utilization of plant and machinery, resulting in higher cost of production. The ratio will also be low due to fall in prices in the market, or market reduction in selling price by the firm in an attempt to obtain large sales volume, the cost of goods sold remaining unchanged. The financial manager must be able to detect the causes of a falling gross margin and initiate action to improve the situation. Sales Cost of goods sold (Or) Gross profit Gross Profit Margin Ratio = Sales
use of favorable condition, such as rising selling prices; fall in costs 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 will. An analyst will be able to interpret the firms profitability more meaningfully if he/she evaluates both the ratios-gross margin and net margin-jointly. To illustrate, if the gross profit margin has increased over years, but the net profit margin has either remained constant or declined, or has not increased as fast as the gross margin, this implies that the operating expenses relative to sales have been increasing. decline due to fall in sales price or increase in the cost of production. Profit after Tax Net Profit Margin Ratio = Sales The increasing expenses should be identified and controlled. Gross profit margin may
This ratio is expressed as cash profit to sales. Cash profit Cash Margin Ratio = Sales X 100
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Before Interests and Taxes. The purpose of computing this ratio is to find out the overall operational efficiency of the business concern. operations per rupee of sales. This ratio is expressed as operating profit to sales. It measures the const of
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RETURN ON INVESTMENT:
The term investment refers to Total Assets. The funds employed in Net assets are known as Capital Employed. Net assets equal net fixed assets plus current assets minus Current liabilities excluding Bank loans. Alternatively, Capital employed in equal to Net worth plus total debt. The conventional approach of calculating return on investment (ROI) is to divide PAT by Investment. Investment represents pool of funds supplied by shareholders and lenders, while PAT represents residual income of shareholders; therefore, it is conceptually unsound to use PAT in the calculation of ROI. Also, as discussed earlier, PAT is affected by capital structure. efficiency of firms. EBIT (1-T) It is, therefore more appropriate to use one of the following measures of ROI for comparing the operating
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ROI (or) ROTA = Total Assets EBIT (1-T) ROI (or) RONA = NET Assets
Where ROTA and RONA respectively Return on Total assets and Return on Net assets.
Net profit after interest & tax RETURN ON NET WORTH = ---------------------------------------*100 Shareholders funds
RETURN ON CAPITAL:
The ROCE is the second type of ROI. The term capital employed refers to long-term funds supplied by the creditors and owners of the fund. It can be computed
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in two ways. First, it is equal to non-current liabilities (long-term liabilities) plus owners equity. Alternatively, it is equivalent to Net Working Capital plus Fixed Assets. Thus, the Capital Employed provides a basis to test the profitability related to the sources of long-term funds. A comparison of this ratio with similar firms, with the industry average and overtime would provide sufficient insight into how efficiency the long-term funds of owners and creditors are being used. The higher the ratio, the more efficient is the use of Capital Employed. NET PROFIT AFTER TAX/EBIT ROCE = X 100 Average Total Capital Employed
NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e., Fixed assets before deducting depreciation.
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CHAPTER-V
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Liquidity ratios:
Current assets Current ratio= ------------------------------------------Current liabilities
12000 10000 8000 6000 4000 2000 0 Current assets Current liabilities
INTEPRETATION:
2005-06 2006-07 2007-08 2008-09 2009-10 The current ratio during the study period that is from 2005- 2006 to 20092010, it has been observe that ,in the year 2005 to 2006 it is very high that is 5.20. The current ratio has been decreasing, but the company is able to maintain higher current ratio than that of ideal ratio.
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As the current ratio is higher than the ideal current ratio, the liquidity position is said to be good.
LIQUID/QUICK RATIO:
Liquid assets Liquid ratio = --------------------------Current liabilities
INTERPRETATION:
It has been observed that the quick ratio of VSP is high compared with ideal ratio.
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As the quick ratio during the period of study is higher than that of then ideal ratio, the liquidity position is very good.
TABLE SHOWING YEAR WISE ABSOLUTE LIQUID RATIO (Rs. in crores) Particulars Cash & bank Absolute Assets Current liabilities ABSOLUTE LIQUID RATIO 2005-06 5621.70 5621.70 1587.86 3.5 2006-07 7194.68 7194.68 2104.30 3.42 2007-08 7699.11 7699.11 3191.62 2.41 2008-09 6624.17 6624.17 4181.32 1.58 2009-10 5415.54 5415.54 4307.84 1.26
8000 7000 6000 5000 4000 3000 2000 1000 0 2005-06 2006-07 2007-08 2008-09 2009-10
Ideal Ratio 0:5:1
Cash & bank Absolute Assets Current liabilities ABSOLUTE LIQUID RATIO
INTERPRETATION:
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The absolute liquid/ cash ratio of VSP is more than the ideal ratio. It means the company is enjoying high liquidity and secured position.
LEVERAGE RATIO:
Outsiders funds Debt Equity Ratio =---------------------------------------Shareholders funds
14000 12000 10000 8000 6000 4000 2000 0 2005-06 2006-07 2007-08 2008-09 2009-10 Outsiders funds Shareholders funds
INTERPRETATION:
Company is less dependent on outsiders funds. Its capital base is high and strong. 66
It can be concluded that the company is maintaining less percent of debt in its capital structure.
3500 3000 2500 2000 1500 1000 500 0 2005-06 2006-07 2007-08 2008-09 2009-10 EBIT Fixed interest rate Interest Coverage Ratio
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INTERPRETATION:
Companys Interest Coverage Ratio is very high and extraordinarily satisfactory. It indicates that greater ability of the firm to handle fixed charges. High interest coverage ratio does not indicate unutilized debt capacity in case of RINL, since the company is having its own funds.
PROPRIETARY RATIO:
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20000 15000 10000 5000 0 Share holders funds Total asse ts PROPRIETARY RATIO
INTERPRETATION:
Proprietary ratio is a test of long term financial position. Except for the year 2009-10, all other years showing higher ratio, this indicates sound long term financial position. It is also indicating the sufficient use is being made of equity to finance the business.
SOLVENCY RATIO:
Total Liabilities of outsiders Solvency ratio =------------------------------------------Total assets
(Rs. In Crores) PARTICULARS Secured loans Unsecured loans Total liabilities to outsiders Total assets Solvency ratio 2005-06 173.87 369.44 543.31 10511.00 5.1% 2006-07 604.45 312.51 916.96 12835.8 7.1% 2007-08 332.08 107.95 440.73 15276.51 2.8% 2008-09 907.72 100.04 1007.76 17733.43 5.68% 2009-10 407.28 825.27 650.58 18522.96 3.51%
INTERPRETATION:
Solvency ratio of VSP ltd during the year 2006-07 is high as compared to other years.
It solvency ratio is stable for last three years. It indicates the the solvency position of
VSP ltd is more satisfactory.
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TABLE SHOWING YEAR-WISE FUNDED DEBT TO TOTAL CAPITALIZATION RATIO (Rs. in crores)
Particulars Secured loans Unsecured loans Funded debt(A) Total Funds (B) Total capitalization (A/B)
14000 12000 10000 8000 6000 4000 2000 0 2005-06 2006-07 2007-08 2008-09 2009-10 Secured loans Unsecured loans Funded debt(A) Share holder funds (B) Total capitalization (A+B)
INTERPRETATION:
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During the year 2009-10, the funded debt to total capitalization is 9%.It is high as compared to other periods but in the real sense it is quite low. There is enough scope for the company to raise long term loans from outsiders.
ACTIVITY RATIO:
INVENTORY TURNOVER RATIO:
NET SALES Inventory Turnover Ratio =----------------------------AVG INVENTORY
(Rs. in crores)
PARTICULARS Net sales Avg inventory Inventory Turnover Ratio 2005-06 7305.71 1236.99 5.91 Times 2006-07 7932.66 1210.80 6.55 Times 2007-08 9088.37 1482.20 6.13 Times 2008-09 9128.38 1622.14 5.62 Times 200910 9809.15 2833.40 3.46 Times
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10000 8000 6000 Net sales 4000 2000 0 2005-06 2006-07 2007-08 2008-09 2009-10 Avg inventory
INTERPRETATION:
The Inventory Turn Over Ratio during the year 2009-10 was 3.46 Normally higher the ratio indicates the better inventory management. Higher ratio also indicates that the company is not able to met the customers demand properly.
(Rs. in crores)
Particulars 2005-06 2006-07 2007-08 2008-09 2009-10
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INTERPRETATION:
The inventory conversion period during 2009-2010 is 50 days. It means that the inventory has been disposed off or sold on an average of once in every 50 days.
TABLE SHOWING YEAR WISE DEBTORS TURN OVER RATIO (Rs. in crores)
Particular 2005-06 A. net sales 7305.71 b. average trade debtors 107.48 2006-07 7932.66 191.54 2007-08 9088.37 155.105 2008-09 9128.38 142.34 2009-10 9809.15 186.23
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68 times
41 times
59 times
64 times
53 times
12000 10000 8000 6000 4000 2000 0 2005-06 2006-07 2007-08 2008-09 2009-10 b. average trade debtors A. net sales
INTERPRETATION:
The debtor turnover ratio for the year 2009-10 is 54 It can be concluded that the management is efficient in converting the debtors into cash
(Rs. in crores)
PARTICULARS No of working days 2005-06 365 2006-07 365 2007-08 365 2008-09 365 2009-10 365
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60.97 5 days
41.48 9 days
58.59 6 days
55.68 6 days
67.12 5 days
100% 80% 60% 40% 20% 0% 2005-06 2006-07 2007-08 2008-09 2009-10 Debtors tournover ratio No of working days
INTERPRETATION:
The avg collection period during the year 2009-10, is 5 days: it represents the avg. no of days for which the firm has to wait before its receivables are converted into cash. During the period of study it has been observed that debt collection period varies from 5 to 9 days However, the avg. collection period during different periods is quite low. It indicates the better quality of debtors and the efficiency of the debt collection department.
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(Rs. in crores)
PARTICULARS a.net sales b. net working capital Working capital turnover ratio(a/b) 2005-06 7305.71 6664.14 1.10 times 2006-07 7932.66 8343.8 0.95 times 2007-08 9088.37 8612.97 1.05 times 2008-09 9128.38 7678.00 1.18 times 2009-10 9809.15 5242.82 1.87 times
10000 5000 0 2005- 2006- 2007- 2008- 200906 07 08 09 10 a.net sales a.net sales b. net working capital
INTERPRETATION:
The working capital turnover ratio during the year 2009-10 i 1.87 times. It shows that only 1.05 of net current assets are used to generate 1 rupee of sales. The higher working capital ratio indicates that the efficient utilization of working capital.
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PROFITABILITY RATIOS:
GROSS PROFIT RATIO:
Gross profit Gross profit ratio = ---------------------------------*100 Net sales TABLE SHOWING YEAR WISE GROSS PROFIT RATIO
(Rs. in crores)
PARTICULARS a. gross profit b. net sales Gross profit ratio(a/b) 2005-06 1921.00 7314.00 26.30% 2006-07 2271.00 7933.00 28.70% 2007-08 3027.00 9088.00 33.30% 2008-09 2115.00 9128.00 23.20% 2009-10 1326.00 9809.00 13.60%
12000 10000 8000 6000 4000 2000 0 2005-06 2006-07 2007-08 2008-09 2009-10 a.gross profit b. net sales
INTERPRETATION:
It has been observed that the gross profit ratio is in increasing tread upto 200708 and it is decreasing from 2008-09
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Sales are in increasing trend but the profit ratio is decreasing. It is due to increased cost of production.
(Rs. in crores)
PARTICULARS Operating profit Net Sales Operating profit ratio 2005-06 2011.21 7314.00 27.50% 2006-07 2339.21 7933.00 29.50% 2007-08 3325.19 9088.00 36.60% 2008-09 4988.12 9128.00 54.70% 2009-10 2450.50 9809.00 25.00%
10000 8000 6000 4000 2000 0 2005-06 2006-07 2007-08 2008-09 2009-10 Operating profit Sales Operating profit ratio
INTERPRETATION:
Company recorded higher operating profit during 2008-09 and in other years, it is more or less recorded same trends. It is indicates, the companys operational efficiency.
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(Rs. in crores)
PARTICULARS A.net profit B. net sales Net profit ratio(A/B) 2005-06 1252.37 7305.71 17.14% 2006-07 1363.43 7932.66 17.18% 2007-08 1942.74 9088.37 21% 2008-09 1335.57 9128.38 14.63% 2009-10 796.67 9809.15 8.12%
12000 10000 8000 6000 4000 2000 0 2005-06 2006-07 2007-08 2008-09 2009-10 A.net profit B. net sales
INTERPRETATION:
Net profit is in decline position from 2008-09 in comparative with 2007-08. Main attributable reason for the declining the profit is overall global meltdown Even in adverse market conditions, the company is able to earn net profits.
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RETURN ON SHAREHOLDERS INVESTMENT: Net Profit (After Interest & Tax) RO I= ----------------------------------------------------x 100 Share Holders Funds
(Rs. in crores)
PARTICULARS A.net profit B.share holders funds Return on investment(A/B) 2005-06 1252.37 8173.7 15.32% 2006-07 1363.43 9538.2 14.29% 2007-08 1942.74 11481.04 16.92% 2008-09 1335.57 12419.91 10.75% 2009-10 796.10 12885 6.18%
14000 12000 10000 8000 6000 4000 2000 0 2005- 2006- 2007- 2008- 200906 07 08 09 10 Return on investment(A/B) B.share holders funds A.net sales
INTERPRETATION:
Highest return on investment was recorded in 2007-08.
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It has been observed that the ROI is fluctuating from year to year. More reserves and surplus funds have been diverted to expansion activities
(Rs. in crores)
PARTICULARS A.net profit B.equity share capital Return on equity capital 2005-06 1252.37 4890.00 25.61 2006-07 1363.43 4890.00 27.88 2007-08 1942.74 4890.00 39.73 2008-09 1335.57 4890.00 27.31 2009-10 796.67 4890.00 16.29
100% 80% 60% 40% 20% 0% 2005-06 2006-07 2007-08 2008-09 2009-10 B.equity share capital A.net profit
INTERPRETATION:
Equity share capital is constant in in all the year whereas net profit is fluctuating.
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Even though the return on equity capital is in decreasing position, the rate of return in comparison with the marketing conditions is very satisfactory. Global market conditions, increasing in operating costs, decrease in net profits are the main reasons for the recording of low ratio.
Earning available to equity shareholders No.of equity shares Earning available to equity shareholders Earning per share
INTERPRETATION:
The earnings per share is declining year by year. The least rate of return is 11.40%
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Since the company is in expansion activity, the future earnings per share will increase.
(Rs. in crores)
PARTICULARS A.net profit B.capital employed (incl. term deposits) Return on capital employed 2005-06 1252.37 8493.00 14.80% 2006-07 1363.43 9427.00 14.50% 2007-08 1942.74 9935.00 19.55% 2008-09 1335.57 7892.00 17.00% 2009-10 796.67 5476.00 14.60%
100% 80% 60% 40% 20% 0% 2005-06 2006-07 2007-08 2008-09 2009-10 Retur on capital employed B.capital employed A.net profit
INTERPRETATION:
Even though the return on capital employed is declining, but it is satisfactory, considering the present market conditions and from the security point of view. 84
CHAPTER-VI
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SUMMARY:
Visakhapatnam Steel Plant was founded on 20th Jan 71 but became fully operational on 1st Aug 92. VSP is the first shore based integrated steel plant with new technology, large scale computerization and automation. The organizational manpower has been rationalized to operate it at international levels of efficiency and to attain international labor productivity. The production, commercial and financial performance has been improving with the passage of years. The financial analysis of VSP by the use of various techniques i.e. Ratio, Cash flow analysis shows that: 1) 2) 3) 4) 5) 6) 7) The liquidity position of the company is excellent. The company is zero debt/low debit company. The net worth of VSP is satisfactory It is noted that the inventory level is increasing. The profitability ratio is in decline state Liquidity position of VSP is very good. The company has accumulated funds which are available for expanding business operations and expansion works. 8) Security to share holders is evisaged
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SUGGESTIONS
The following suggestions will improve the financial position of the VSP.
PRODUCTION
1) Need for continuous up gradation of technology for improving the processes. 2) Effort should be made at cost savings particularly in spares and energy consumption. 3) Using the natural gas reserves of KG basin, Hot metal production capacity can be enhanced with the present BF facility with negligible investment.
FINANCE
1) Improving financial leverage ratio for better returns.
PERSONNEL:
1) Rationalization of existing man-power with effective training for future expansion of the plant. 2) 3) Improving efficiency through better HRD programs. Providing better motivation.
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4)
MARKETING
1) Continuously monitoring the indigenous sale, export sale ratio to capture the best of markets. 2) 3) Increasing the net realization by selling in the most profitable region. Identifying new markets and new application of the companys product. 4) Improving realization by identifying value added products and providing feedback to production department. 5) Value added products (high value items) are to be produced instead of selling semi-finished products in order to increase profit margin.
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BIBLIOGRAPHY
BOOKS:
1. Financial Management: Theory & Practice (4th Edition) Eugene F. Brigham and Michael C. Gerhardt
WEBSITES
http://vizagsteel.com http://www.indiansteel.com http://www.bee-india.nic.in.com http://www.answer.com 89