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Financial analysis

PROJECT REPORT ON

A STUDY ON FINANCIAL ANALYSIS


SUBMITTED TO BANGALORE UNIVERSITY Submitted by

GURUMURTHY D R
Reg. No: 08AHCO8010

Faculty Supervisor

Mr.PRASAD.M
B com, MBA

B.E.S DEGREE COLLEGE JAYANAGAR, 4TH T BLOCK BANGALORE-11

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DECLARATION

I hereby declare that the project report entitled A STUDY ON FINANCIAL ANALYSIS has been prepared during the academic year 20010-2011 under the guidance of Mr.PRASAD.M (Faculty Guide). This project report is based on my independent and original work and has been submitted to B.E.S Degree College as partial fulfillment for the award of BACHLOR OF BUSINESS MANAGEMENT. I further declare that this is the result of my own efforts and have not submitted it to any other university or institution.

Place: Bangalore Date

Signature GURUMURTHY D R (08AHCO8010)

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CERTIFICATE
This is to certify that Mr. GURUMURTHY.D.R is a good Student of this institution studying in final year BBM degree bearing Reg. No.08AHC08010. This is to certify that his project work entitled FINANCIAL

ANALYSIS TOWARDS FINE COMPONENTS AND TOOLS PVT LTD is in partial fulfillment for the award of Bachelor of Business
Management Degree of Bangalore University under the guidance of Mr.PRASAD.M, Faculty B.E.S Degree College is his original work. This report does not form a part of any other degree / diploma of Bangalore University or any other University.

Date: Place: BANGALORE

( T.NARAYANAPPA) PRINCIPAL

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GUIDE CERTIFICATE

This is to certify that Mr. GURUMURTHY.D.R has satisfactorily completed his project work titled FINANCIAL ANALYSIS

TOWARDS FINE COMPONENTS AND TOOLS PVT LTD under


my guidance and supervision. This project study report is being submitted in partial fulfillment of the requirements for the award of the degree of Bachelor of Business Management to Bangalore University. This report does not form a part of any other degree/diploma of Bangalore University or any other university.

Date: Place: BANGALORE

Mr.PRASAD.M (PROJECT GUIDE)

Prof.K.M.NAGARAJ (DEPT HEAD)

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ABSTRACT

The term Financial Analysis also known as analysis and interpretation of financial statements refers to the process of determining financial strength and weaknesses of the firm by establishing strategic relationship between the items the balance sheet, profit and loss account and other operative data. Myers- Financial statement analysis is largely a study of relationship among the various financial factors in a business is disclosed by a single set of statements, and a study of the trend of these factors as shown in a series of statement. The FINE COMPONENTS AND TOOLS PVT LTD has done business differently right from the inception and that is what has helped us to achieve break-through in whatever tools and product category we have ventured. The company low key, but focused, style of management has earned the plaudits amidst investors, employees, vendors and dealers, as also worldwide recognition.

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ACKNOWLEDGEMENT
First and foremost I acknowledge my gratitude to the Almighty who sustained me with the powerful blessings through various persons at all stages of my training.

I would like to express my sincere thanks to Mr.PRASAD.M MY internal guide for his cooperation during the course of the training.

express

my

whole

hearted

thanks

to

our

(Principal)

Prof.

T.NARAYANAPPA and Prof K.M NAGARAJ (HOD) of BBM department of B.E.S DEGREE COLLEGE for providing me with necessary facilities for carrying out this successfully.

I take this opportunity to express my powerful and whole hearted thanks to all executives and employees of FINE COMPONENTS PVT LTD PVT LTD.

Finally I express my sincere thanks to my beloved parents and my friends for their co- operation to finish this work successfully.

DATE: PLACE:

GURUMURTHY D R REG: 08AHCO0810

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TABLE OF CONTENTS

CONTENTS

Page No.

Chapters
Chapter-1 Chapter-2 INTRODUCTION RESEARCH AND METHODS Chapter-3 Chapter-4 COMPANY PROFILE DATA ANALYSIS AND INTERPRETATION Chapter-5 FINDINGS AND SUGGESIONS BIBLIOGRAPHY

10-33

DESIGNS 34-37

38-52 53-90

91-93

94

ANNEXURE

95

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INTRODUCTION
Finance:
Finance is that business activity that is concerned with the organization and conversion of capital funds in meeting financial needs and overall objectives of a business enterprise.

Financial Analysis can be defined as a study of relationship between many factors as disclosed by the statement and study of the trend of these factors.
The basis for financial planning, analysis and Decision-making is the financial information. Financial information is needed to predict, compare and evaluate the firms earning ability. It is also required to aid in economic decision-making investment and financial statement or accounting reports. The financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the balance sheets and profit & Loss account. It is the study of the performance of the unit and therefore is aimed at the financial performance in and individual unit.

SCOPE OF FINANCE What is finance? What are a firms financial activities? How are they related to the firm other activities? Firms create manufacturing capacities for production of goods; some provide services to customers. They sell their goods or services to earn profit. They raise funds to acquire manufacturing and other facilities. Thus, the three most important activities of a business firm are:

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Production. Marketing. Finance. A firm secures whatever capital it needs and employs it in activities, which generate return on invested capital.

FINANCE FUCTIONS It may be difficult to separate the finance functions from production, marketing and other functions, but the functions themselves can be readily identified. The functions of raising funds, investing them in assets and distributing returns earned from assets to shareholders are respectively known as financing decision, investment decision and dividend decision. A firm attempts to balance cash inflows and outflows while performing these functions. This is liquidity decision, and we may add it to the list of important finance decision or functions. Thus finance functions include: Long-term asset-mix or investment decision. Capital-mix or financing decision. Profit allocation or dividend decision. Short-term asset-mix or liquidity decision. A firm performs finance functions simultaneously and continuously in the normal course of the business. They do not necessarily occur in a sequence. Finance functions call for skilful planning, control and execution of a firms activities.

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Purpose of financial statement analysis: The purpose of financial statement analysis depends upon the need of person who is analyzing these statements. These varying needs may be:-

To know the earning capacity or profitability of the firm. To know the solvency position of firm. To know the financial strength of the business. To make comparative study with other firms. To know the capability of payment of interest and dividend. To know the trend of the business. To know the efficiency of the management. To provide useful information to the management.

OBJECTIVES To analyze the liquidity position of the firm. To analyze the solvency position of the firm. To study and analyze the overall profitability of the firm. To study and analyze the changes in working capital and fund flow position.
y y y y

y y y y

To relate the various items of profit and loss account with sales. To compare the assets and liabilities of the current year and previous year. To study the and analyze the capital structure of the firm. To determine the efficiency with which the current assets are managed.

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SPECIFIC AREA OF THE TOPIC CHOOSEN:
Financial statement analysis with reference to Comparative statements, Ratio analysis, Fund Flow analysis, Common size statement The term financial analysis, also known as analysis and interpretation of financial statements, refers to the process of determining financial strength and weaknesses of the firm by establishing strategic relationship between the items Of the balance sheet, profit and loss account and other operative data. Analyzing financial statements, according to Metcalf and Titard, is a process of evaluating the relationship between component parts of a financial statement to obtain a better understanding of a firms position and performance. In the words of Myers, Financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set-of statement, and a study of the trend of these factors as shown in a series of statements.

INTRODUCTION TO THE TOPIC


Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing between the items of the balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements, such as comparative statements, trend analysis, common-size statements, schedule of changes in working capital, funds flow and cash flow analysis, cost-volume-profit analysis and ratio analysis. B.E.S Degree College Page 12

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MEANING AND CONCEPT OF FINANCIAL ANALYSIS

MEANING
The term financial analysis, also known as analysis and interpretation of financial statements, refers to the process of determining financial strength and weaknesses of the firm by establishing strategic relationship between the items Of the balance sheet, profit and loss account and other operative data. Analyzing financial statements, according to Metcalf and Titard, is a process of evaluating the relationship between component parts of a financial statement to obtain a better understanding of a firms position and performance. In the words of Myers, Financial statement analysis is largely a study of relationship among the various financial factors in a business as disclosed by a single set-of statement, and a study of the trend of these factors as shown in a series of statements. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. Just like a doctor examines his patient by recording his body temperature, blood pressure, etc. before making his conclusion regarding the illness and before giving commenting upon the financial health or weaknesses of an enterprise. The analysis and interpretation of financial statements is essential to bring out the mystery behind the figures in financial statements. Financial statement analysis is an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the future earnings, ability to pay interest and debt maturities (both current and long-term) and profitability of a sound dividend policy.

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CONCEPTS
The background information given in the previous paragraphs gives an overview of the meaning of financial statement. The concept financial statement as used today refers basically in these statements: Comparative statements Ratio analysis Fund Flow analysis Common size statement

COMPARATIVE STATEMENTS
The comparative financial statements are statements of the financial position at different period; of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. From practical point of view, generally, two financial statements (balance sheet and income statement) are prepared in comparative form for financial analysis purpose. Not only the comparison of the figure of two periods but also be relationship between balance sheet and income statement may show: 1. Absolute figures (rupee amounts) 2. Changes in absolute figures (increase or decrease in absolute figures) 3. Absolute data in term of percentages 4. Increase or decrease in terms of percentages

1.

COMPARATIVE BALANCE SHEET The comparative balance sheet analysis is the study of the trend of the same

items, groups of items and computed items in two or more balance sheets of the same business enterprise on different dates. The changes can be observed by comparison of the balance sheet at the beginning and at the end of a period and changes can help in forming an opinion about the progress of an enterprise. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show increase in figures. The fourth column may be added for giving percentages of increases or decreases. B.E.S Degree College Page 14

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2. COMPARATIVE INCOME STATEMENT The comparative income statement gives an idea of a business over a period of time. The changes in absolute data in money values and percentages can be determined to analyze the profitability of the business. It has also four columns. First two columns give figures of various items for two years. Third and fourth columns are used to show increase or decrease in figures in absolute amounts and percentages respectively.

Comparative Balance Sheet Analysis


Comparative balance sheet analysis is a method used to analyze a company's balance sheet, a financial statement showing assets, liabilities, and equity. There are three methods for comparative balance sheet analysis. A horizontal analysis compares a company's performance over a period of time. A vertical analysis compares the financial strength of two different companies. Ratio analysis involves the use of equations to perform a deeper examination.

The Balance Sheet


1. A balance sheet is a financial statement that lists a companys assets, liabilities, and equity. Total assets must always equal liabilities plus equity. For example, one of the companys assets might be its office building. The total value of the office building might be $2 million (asset). The company may have taken out a loan for the building for $1.5 million (liability) and paid $500,000 in cash (equity). As the company pays down the loan, the liability portion will grow smaller while the equity will grow larger.

Assets
2. Assets are the companys possessions for which to perform its operations. Assets are divided into short-term and long-term assets. Short-term assets, sometimes referred to as liquid assets, are those that will be converted to cash within a year. Typical short-term assets include cash, accounts receivable (money owed to the company for sales), and inventory. Longterm assets include office space, land, manufacturing facilities, and equipment, usually grouped together under the name plant, property, and equipment (PP&E).

Liabilities
3. Liabilities are the companys obligations that the company must pay. Shortterm liabilities are those obligations owed within a years time. Typical shortterm liabilities include accounts payable (owed to others for purchases), accruals (unpaid expenses), and payments owed on short-term debt within B.E.S Degree College Page 15

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the year (current portion of long-term debt). Long-term liabilities usually only include the companys debt that is not due for more than a year. Long-term debt is sometimes named notes payable.

Equity
4. Equity is the portion of total assets not financed short or long-term liabilities. By definition, it is the portion of the companys assets owned outright by the owners. Equity includes the cash owners have invested into the company and profit saved for later use. Typical names for equity are common stock, preferred stock, retained earnings (saved profits), and additional paid-in capital (money invested by the owners).

Horizontal Balance Sheet Analysis


5. Horizontal Balance Sheet Analysis is the side-by-side comparison of two time periods for the same company, usually comparing one year to another. Analysis asks the following questions: Has inventory increased or decreased? If it has increased, is it due to higher anticipated sales or a unanticipated reduced sales, resulting in a stockpile? Has accounts receivable increased? If so, is the increase due to increase sales last year, or are current customers taking longer to pay? Has the company increased its long-term debt? If so, is it due to anticipated growth or to fund current obligations it is unable to pay? Answers to these questions assist the analyst in determining whether the company is growing or struggling.

Vertical Balance Sheet Analysis


6. Vertical Balance Sheet Analysis shows the balance sheet in terms of percentage. Each balance sheet item is shown as a percentage of total assets. This is also called a common-size balance sheet. The purpose of a vertical balance sheet is most often used to compare two companies of different size. The following questions may be answered in a vertical analysis: What proportion of total assets is in liquid form (i.e. in short-term assets)? The answer indicates which company has more flexibility in paying its obligations. How much inventory does the company keep on hand? The answer indicates which company might have more efficient operations for turning over its inventory. What is the proportion of total long-term debt to total assets? The answer would indicate which company is more heavily indebted.

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Ratios Analysis:
Accounting Ratios Definition, Advantages, Classification and Limitations:

The ratios analysis is the most powerful tool of financial statement analysis. Ratios simply mean one number expressed in terms of another. A ratio is a statistical yardstick by means of which relationship between two or various figures can be compared or measured. Ratios can be found out by dividing one number by another number. Ratios show how one number is related to another.. Profitability Ratios: Profitability ratios measure the results of business operations or overall performance and effectiveness of the firm. Some of the most popular profitability ratios are as under:
y Gross profit ratio y Net profit ratio y Operating ratio y Expense ratio y Return on shareholders investment or net y Return on equity capital y Return on capital employed (ROCE) Ratio y Dividend yield ratio y Dividend payout ratio y Earnings Per Share (EPS) Ratio y Price earnings ratio

worth

Liquidity Ratios: Liquidity ratios measure the short term solvency of financial position of a firm. These ratios are calculated to comment upon the short term paying capacity of a concern or the firm's ability to meet its current obligations. Following are the most important liquidity ratios.
y Current

ratio y Liquid / Acid test / Quick ratio

Activity Ratios: Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales. Following are the most important activity ratios:
y Inventory y y

/ Stock turnover ratio

Debtors / Receivables turnover ratio Average collection period


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y y y y

Creditors / Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio Over and under trading

Long Term Solvency or Leverage Ratios: Long term solvency or leverage ratios convey a firm's ability to meet the interest costs and payment schedules of its long term obligations. Following are some of the most important long term solvency or leverage ratios.
y y y y y y y

Debt-to-equity ratio Proprietary or Equity ratio Ratio of fixed assets to shareholders funds Ratio of current assets to shareholders funds Interest coverage ratio Capital gearing ratio Over and under capitalization

Financial-Accounting- Ratios Formulas:

A collection of financial ratios formulas which can help you calculate financial ratios in a given problem.
Limitations of Financial Statement Analysis:

Although financial statement analysis is highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios.
I. Purposes and Considerations of Ratios and Ratio Analysis

Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry. There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.
y

If you are making a comparative analysis of a company's financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time span. Page 18

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y

When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms. When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures. Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as nonrecurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios. Carefully examine any departures from industry norms.

II. Types of Ratios

Income Profitability Liquidity Working Capital Bankruptcy Long-Term Analysis Coverage Leverage
III. Income Ratios Turnover of Total Operating Assets Net Sales = Turnover of Total Operating Assets Ratio Total Operating Assets*

Obviously, an increase in sales will necessitate more operating assets at some point (sales may rise without additional investment within a given range, however); conversely, an inadequate sales volume may call for reduced investment. Turnover of Total Operating Assets or sales to investment in total operating assets tracks over-investment in operating assets . *Total operating assets = total assets - (long-term investments + intangible assets) Note: This ratio does not measure profitability. Remember, over-investment may result in a lack of adequate profits.
Net Sales to Tangible Net Worth Net Sales = Net Sales to Tangible Net Worth Ratio Tangible Net Worth*

This ratio indicates whether your investment in the business is adequately proportionate to your sales volume. It may also uncover potential credit or management problems, usually called "overtrading" and "under trading." Overtrading, or excessive sales volume transacted on a thin margin of investment, presents a potential problem with creditors. Overtrading can come from considerable B.E.S Degree College Page 19

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management skill, but outside creditors must furnish more funds to carry on daily operations. Under trading is usually caused by management's poor use of investment money and their general lack of ingenuity, skill or aggressiveness. *Tangible Net Worth = owner's equity - intangible assets
Gross Margin on Net Sales Gross Margin* = Gross Margin on Net Sales Ratio Net Sales

By analyzing changes in this figure over several years, you can identify whether it is necessary to examine company policies relating to credit extension, markups (or markdowns), purchasing, or general merchandising (where applicable). *Gross Margin = net sales - cost of goods sold Note: An increase in gross margin may result from higher sales, lower cost of goods sold, an increase in the proportionate volume of higher margin products, or any combination of these variables.
Operating Income to Net Sales Ratio Operating Income = Operating Income to Net Sales Ratio Net Sales

This ratio reveals the profitability of sales resulting from regular business as well as buying, selling, and manufacturing operations. Note: Operating income derives from ordinary business operations and excludes other revenue (losses), extraordinary items, interest on long-term obligations, and income taxes.
Acceptance Index Applications Accepted = Acceptance Index Applications Submitted

Obviously, a high sales volume that comes from just two or three major accounts is much riskier than the same volume coming from a large number of customers. Losing one out of three major accounts is disastrous, while losing one out of 150 is routine. A growing firm should try to spread this risk of dependency through active sales, promotion, and credit departments. Although the quality of customers stems from your general management policy, the quantity of newly opened accounts is a direct reflection on your sales and credit efforts. Note: This index of effectiveness does not apply to every type of business.

IV. Profitability Ratios

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Closely linked with income ratios are profitability ratios, which shed light upon the overall effectiveness of management regarding the returns generated on sales and investment.
Gross Profit on Net Sales Net Sales - Cost of Goods Sold = Gross Profit on Net Sales Ratio Net Sales

Does your average markup on goods normally cover your expenses, and therefore result in a profit? This ratio will tell you. If your gross profit rate is continually lower than your average margin, something is wrong! Be on the lookout for downward trends in your gross profit rate. This is a sign of future problems for your bottom line. Note: This percentage rate can and will vary greatly from business to business, even those within the same industry. Sales, location, size of operations, and intensity of competition are all factors that can affect the gross profit rate.
V. Net Operating Profit Ratios Net Profit on Net Sales EAT* = Net Profit on Net Sales Ratio Net Sales

This ratio provides a primary appraisal of net profits related to investment. Once your basic expenses are covered, profits will rise disproportionately greater than sales above the break-even point of operations.
*EAT= earnings after taxes

Note: Sales expenses may be substituted out of profits for other costs to generate even more sales and profits.
Net Profit to Tangible Net Worth EAT = Net Profit to Tangible Net Worth Ratio Tangible Net Worth

This ratio acts as a complementary appraisal of net profits related to investment. This ratio sizes up the ability of management to earn a return.

Net Operating Profit Rate Of Return EBIT = Net Operating Profit Rate of Return Ratio Tangible Net Worth

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Your Net Operating Profit Rate of Return ratio is influenced by the methods of financing you utilize. Notice that this ratio employs earnings before interest and taxes, not earnings after taxes. Profits are taken after interest is paid to creditors. A fallacy of omission occurs when creditors support total assets. Note: If financial charges are great, compute a net operating profit rate of return instead of return on assets ratio. This can provide an important means of comparison.
Management Rate of Return Operating Income = Management Rate of Return Ratio Fixed Assets + Net Working Capital

This profitability ratio compares operating income to operating assets, which are defined as the sum of tangible fixed assets and net working capital. This rate, which you may calculate for your entire company or for each of its divisions or operations, determines whether you have made efficient use of your assets. The percentage should be compared with a target rate of return that you have set for the business.
Earning Power Net Sales X Tangible Net Worth Net Sales EAT = Earning Power Ratio

The Earning Power Ratio combines asset turnover with the net profit rate. That is, Net Sales to Tangible Net Worth (see "Income Ratios") multiplied by Net Profit on Net Sales (see ratio above). Earning power can be increased by heavier trading on assets, by decreasing costs, by lowering the break-even point, or by increasing sales faster than the accompanying rise in costs. Note: Sales hold the key.
VI. Liquidity Ratios

While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financial managers who must meet obligations to suppliers of credit and various government agencies. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of your business.
Current Ratio Current Assets* = Current Ratio Current Liabilities*

Popular since the turn of the century, this test of solvency balances your current assets against your current liabilities. The current ratio will disclose balance sheet changes that net working capital will not.

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*Current Assets = net of contingent liabilities on notes receivable *Current Liabilities = all debt due within one year of statement data Note: The current ratio reveals your business's ability to meet its current obligations. It should be supplemented with the other ratios listed below, however.
Quick Ratio Cash + Marketable Securities + Accounts Receivable (net) = Quick Ratio Current Liabilities

Also known as the "acid test," this ratio specifies whether your current assets that could be quickly converted into cash are sufficient to cover current liabilities. Until recently, a Current Ratio of 2:1 was considered standard. A firm that had additional sufficient quick assets available to creditors was believed to be in sound financial condition. Note: The Quick Ratio assumes that all assets are of equal liquidity. Receivables are one step closer to liquidity than inventory. However, sales are not complete until the money is in hand.
Absolute Liquidity Ratio Cash + Marketable Securities = Absolute Liquidity Ratio Current Liabilities

A subsequent innovation in ratio analysis, the Absolute Liquidity Ratio eliminates any unknowns surrounding receivables. Note: The Absolute Liquidity Ratio only tests short-term liquidity in terms of cash and marketable securities.
Basic Defense Interval (Cash + Receivables + Marketable Securities) = Basic Defense Interval (Operating Expenses + Interest + Income Taxes) / 365

If for some reason all of your revenues were to suddenly cease, the Basic Defense Interval would help determine the number of days your company can cover its cash expenses without the aid of additional financing.
Receivables Turnover Total Credit Sales = Receivables Turnover Ratio Average Receivables Owing

Another indicator of liquidity, Receivables Turnover Ratio can also indicate management's efficiency in employing those funds invested in receivables. Net credit sales, while preferable, may be replaced in the formula with net total sales for an industry-wide comparison. Note: Closely monitoring this ratio on a monthly or quarterly basis can quickly underscore any change in collections. B.E.S Degree College Page 23

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Average Collection Period (Accounts + Notes Receivable) = Average Collection Period (Annual Net Credit Sales) / 365

The Average Collection Period (ACP) is another litmus test for the quality of your receivables business, giving you the average length of the collection period. As a rule, outstanding receivables should not exceed credit terms by 10-15 days. If you allow various types of credit transactions, such as a retail outlet selling both on open credit and installment, then the ACP must be calculated separately for each category. Note: Discounted notes which create contingent liabilities must be added back into receivables.
Inventory Turnover Cost of Goods Sold = Inventory Turnover Ratio Average Inventory

Rule of Thumb: Multiply your inventory turnover by your gross margin percentage. If the result is 100 percent or greater, your average inventory is not too high.
VII. Working Capital Ratios

Many believe increased sales can solve any business problem. Often, they are correct. However, sales must be built upon sound policies concerning other current assets and should be supported by sufficient working capital. There are two types of working capital: gross working capital, which is all current assets, and net working capital, which is current assets less current liabilities. If you find that you have inadequate working capital, you can correct it by lowering sales or by increasing current assets through either internal savings (retained earnings) or external savings (sale of stock). Following are ratios you can use to evaluate your business's net working capital.
Working Capital Ratio

Use "Current Ratio" in the section on "Liquidity Ratios." This ratio is particularly valuable in determining your business's ability to meet current liabilities.
Working Capital Turnover Net Sales = Working Capital Turnover Ratio Net Working Capital

This ratio helps you ascertain whether your business is top-heavy in fixed or slow assets, and complements Net Sales to Tangible Net Worth (see "Income Ratios"). A high ratio could signal overtrading.

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Note: A high ratio may also indicate that your business requires additional funds to support its financial structure, top-heavy with fixed investments.
Current Debt to Net Worth Current Liabilities = Current Debt to Net Worth Ratio Tangible Net Worth

Your business should not have debt that exceeds your invested capital. This ratio measures the proportion of funds that current creditors contribute to your operations. Note: For small businesses a ratio of 60 percent or above usually spells trouble. Larger firms should start to worry at about 75 percent.
Funded Debt to Net Working Capital Long-Term Debt = Funded Debt to Net Working Capital Ratio Net Working Capital

Funded debt (long-term liabilities) = all obligations due more than one year from the balance sheet date Note: Long-term liabilities should not exceed net working capital.
VIII. Bankruptcy Ratios

Many business owners who have filed for bankruptcy say they wish they had seen some warning signs earlier on in their company's downward spiral. Ratios can help predict bankruptcy before it's too late for a business to take corrective action and for creditors to reduce potential losses. With careful planning, predicted futures can be avoided before they become reality. The first five bankruptcy ratios in this section can detect potential financial problems up to three years prior to bankruptcy. The sixth ratio, Cash Flow to Debt, is known as the best single predictor of failure.
Working Capital to Total Assets Net Working Capital = Working Capital to Total Assets Ratio Total Assets

This liquidity ratio, which records net liquid assets relative to total capitalization, is the most valuable indicator of a looming business disaster. Consistent operating losses will cause current assets to shrink relative to total assets. Note: A negative ratio, resulting from negative net working capital, presages serious problems.
Retained Earnings to Total Assets

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Retained Earnings = Retained Earnings to Total Assets Ratio Total Assets

New firms will likely have low figures for this ratio, which designates cumulative profitability. Indeed, businesses less than three years old fail most frequently. Note: A negative ratio portends cloudy skies. However, results can be distorted by manipulated retained earnings (earned surplus) data.
EBIT to Total Assets EBIT = EBIT to Total Assets Ratio Total Assets

How productive are your business's assets? Asset values come from earning power. Therefore, whether or not liabilities exceed the true value of assets (insolvency) depends upon earnings generated. Note: Maximizing rate of return on assets does not mean the same as maximizing return on equity. Different degrees of leverage affect these separate conclusions.
Sales to Total Assets Total Sales = Sales to Total Assets Ratio Total Assets

See "Turnover Ratio" under "Profitability Ratios." This ratio, which uncovers management's ability to function in competitive situations while not excluding intangible assets, is inconclusive if studied by itself. But when viewed alongside Working Capital to Total Assets, Retained Earnings to Total Assets, and EBIT to Total Assets, it can confirm whether your business is in imminent danger. Note: A result of 200 percent is more reassuring than one of 100 percent.
Equity to Debt Market Value of Common + Preferred Stock = Equity to Debt Ratio Total Current + Long-Term Debt

This ratio shows you by how much your business's assets can decline in value before it becomes insolvent. Note: Those businesses with ratios above 200 percent are safest.
Cash Flow to Debt Cash Flow* = Cash Flow to Debt Ratio

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Financial analysis
Total Debt

Also, refer to "Debt Cash Flow Coverage Ratio" in the section on "Coverage Ratios." Since debt does not materialize as a liquidity problem until its due date, the closer to maturity, the greater liquidity should be. Other ratios useful in predicting insolvency include Total Debt to Total Assets (see "Leverage Ratios" below) and Current Ratio (see "Liquidity Ratios"). *Cash flow = Net Income + Depreciation Note: Because there are various accounting techniques of determining depreciation, use this ratio for evaluating your own company and not to compare it to other companies.
IX. Long-Term Analysis Current Assets to Total Debt Current Assets = Current Assets to Total Debt Ratio Current + Long-Term Debt

This ratio determines the degree of protection linked to short- and long-term debt. More net working capital protects short-term creditors. Note: A high ratio (significantly above 100 percent) shows that if liquidation losses on current assets are not excessive, long-range debtors can be paid in full out of working capital.
Stockholders' Equity Ratio Stockholders' Equity = Stockholders' Equity Ratio Total Assets

Relative financial strength and long-run liquidity are approximated with this calculation. A low ratio points to trouble, while a high ratio suggests you will have less difficulty meeting fixed interest charges and maturing debt obligations.
Total Debt to Net Worth Current + Deferred Debt = Total Debt to Net Worth Ratio Tangible Net Worth

Rarely should your business's total liabilities exceed its tangible net worth. If it does, creditors assume more risk than stockholders. A business handicapped with heavy interest charges will likely lose out to its better financed competitors.
X. Coverage Ratios Times Interest Earned EBIT = Times Interest Earned Ratio

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I EBIT = earnings before interest and taxes I = dollar amount of interest payable on debt The Times Interest Earned Ratio shows how many times earnings will cover fixed-interest payments on long-term debt.

XI. Total Coverage Ratios EBIT + I 1-h s = Total Coverage Ratio

I = interest payments s = payment on principal figured on income after taxes (1 - h) This ratio goes one step further than Times Interest Earned, because debt obliges the borrower to not only pay interest but make payments on the principal as well.

XII. Leverage Ratios

This group of ratios calculates the proportionate contributions of owners and creditors to a business, sometimes a point of contention between the two parties. Creditors like owners to participate to secure their margin of safety, while management enjoys the greater opportunities for risk shifting and multiplying return on equity that debt offers. Note: Although leverage can magnify earnings, it exaggerates losses.
Equity Ratio Common Shareholders' Equity = Equity Ratio Total Capital Employed

The ratio of common stockholders' equity (including earned surplus) to total capital of the business shows how much of the total capitalization actually comes from the owners. Note: Residual owners of the business supply slightly more than one half of the total capitalization.
Debt to Equity Ratio Debt + Preferred Long-Term = Debt to Equity Ratio Common Stockholders' Equity

A high ratio here means less protection for creditors. A low ratio, on the other hand, indicates a wider safety cushion (i.e., creditors feel the owner's funds can help absorb possible losses of income and capital).
Total Debt to Tangible Net Worth

If your business is growing, track this ratio for insight into the distributive source of

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funds used to finance expansion.
Debt Ratio Current + Long-Term Debt = Debt Ratio Total Assets

What percentage of total funds is provided by creditors? Although creditors tend to prefer a lower ratio, management may prefer to lever operations, producing a higher ratio.
Times Interest Earned Refer to "Coverage Ratios"

XIII. Common-Size Statement

When performing a ratio analysis of financial statements, it is often helpful to adjust the figures to common-size numbers. To do this, change each line item on a statement to a percentage of the total. For example, on a balance sheet, each figure is shown as a percentage of total assets, and on an income statement, each item is expressed as a percentage of sales. This technique is quite useful when you are comparing your business to other businesses or to averages from an entire industry, because differences in size are neutralized by reducing all figures to common-size ratios. Industry statistics are frequently published in common-size form. When comparing your company with industry figures, make sure that the financial data for each company reflect comparable price levels, and that it was developed using comparable accounting methods, classification procedures, and valuation bases. Such comparisons should be limited to companies engaged in similar business activities. When the financial policies of two companies differ, these differences should be recognized in the evaluation of comparative reports. For example, one company leases its properties while the other purchases such items; one company finances its operations using long-term borrowing while the other relies primarily on funds supplied by stockholders and by earnings. Financial statements for two companies under these circumstances are not wholly comparable.
Example Common-Size Income Statement 2008 Sales Cost of Sales Gross Profit Expenses Taxes Profit 100% 65% 35% 27% 2% 6% 2009 100% 68% 32% 27% 1% 4% 2010 100% 70% 30% 26% 1% 3%

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FUND FLOW ANALYSIS


Definition of Fund A question arises as to the definition of FUND. It means: y y Funds may mean change in cash only; Funds may mean change in working capital (the difference between current assets and current liabilities) only. A more comprehensive definition of funds may be given as follows: y Funds may mean change in financial resources, arising from changes in working capital items and from financing and investing activities of the enterprise, which may involve only non-current items. The funds flow statement analyses only the causes of changes in the firms working capital position. The cash flow statement is prepared to analyze changes in the flow of cash only. These statements fail to consider the changes in the firms total financial resources. They do not reveal some significant items that do not affect the firms cash or working capital position, but considerably influence the financing position and asset mix of the firm. The statement of changes in financial position is an extension of the funds flow statement or the cash flow statement. Therefore, to get better insights, a firm may prepare a comprehensive, all inclusive, statement of changes in financial position incorporating changes in the firms cash and working capital positions involving:

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y y y Changes in the firms working capital position, Changes in the firms cash position, and Changes in the firms total financial resources.

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Financial analysis
Meaning of Research:Research in common parlance refers to a search for knowledge .one can also define research as a scientific search for pertain information on a specific topic. In fact, research is an art of science investigation. The Advance Learners Dictionary of Current English lays down the meaning of research as a careful investigation or inquiry especially through search for new facts in any branch of knowledge. Redman and Mory degines research as a systematized effort to gain new knowledge. Some people consider research as a movement, a movement from known to unknown. It is actually a voyage of discovery. We all possess the vital instinct of inquisitiveness makes us probe and attain full and fuller understanding of the unknown. This inquisitiveness is the mother of all knowledge and the methods, which may employs for obtaining the knowledge of whatever the unknown, can be termed as research. Research is an academic activity and as such the term should be used in a technical sence. According to Clifford Woody research comprises defining problems, formulating hypothesis or suggested solutions; collection, organizing and evaluating data, making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. D.Slesinger and M. Stephenson in the Encyclopedia of social sciences define research as the manipulation of things, concepts or symbols for the purpose of generalizing or in the practice of an art. Objectives of research The purpose of research is to discover answers to questions through the application of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. Though each research study has its own specific purpose, we may think research objectives as falling into a number of following broad groupings: To gain familiarity with a phenomenon or to achieve new insights into it. To portray accurately the characteristics of a particular individual situation or a group. B.E.S Degree College Page 33 to extend, correct to verify knowledge, whether that knowledge that aids in construction

Financial analysis
To determine the frequency with which it is associated with the something else. To test a hypothesis of a casual relationship between variables.

Research Design
The formidable problem that follows the task of defining the research problem is the preparation of the design of the research project, popularly known as the research design. Decisions regarding what, where, when, how much, by what means concerning an inquiry or a research study constitute a research design. A research design is the arrangement of combine relevance to the research purpose with economy in procedure. In fact, the research design is the conceptual structure within which research is conducted: it constitutes the blueprint for the collection, measurement and analysis of data. As such the design includes an outline of what the researcher will do from writing the hypothesis and its operational implications to the final analysis of data.

RESEARCH METHODOLOGY
Basically project study is usually based on a research, which gives a concrete answer to a problem. This research may be Problem Solving or Problem Oriented. Both types of research are usually known as Applied Research. Marketing is a form of Applied research which proceeds with a certain problem, specifies alternative solutions and the possible outcomes of each alternative. It may be further named as Decisional Research. The Marketing Research methodology involves a number of interrelated activities, which overlap and do not rigidly follow a particular sequence. A marketing research involves the following major steps.

FORMULATING RESEARCH PROBLEM


The first step in research is formulating research problem. It is the most important stage in Applied Research as it rightly said A problem well defined is half solved.

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In this Project Report I have studied the concept of FINANCIAL ANALYSIS have carried the analysis of the same in FINE COMPONENTS AND TOOLS PVT LTD.

STATISTICAL TOOLS & TECHNIQUES


The statistical techniques like comparative balance sheet, common size balance sheet, and fund flow statement and Ratios have been in the study. These have been very useful in doing the interpretation and analysis of the data collected through secondary sources.

DATA REPRESENTATION
The result have presented with the help of pie-charts and bar diagrams which clearly represents that the research conducted is a Formal Research and the Research Design is a sound one.

DETERMINING THE SOURCE OF DATA


The next step is to determine the source of data to be used. The marketing research may be based on primary or secondary data or on both. In this report I have used the information gathered through secondary data which include mainly the Annual Reports of FINE COMPONENTS AND TOOLS PVT LTD

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EXECUTIVE SUMMERY
Fine Components & Tools Pvt. Ltd commenced business during the year 1986 as fine heat treaters and in 1989 it started as a manufacturer of sheet metal pressed components & automobile spare parts. Fine Components and Tools Pvt. Ltd as a supporting unit for job works for automobile industries and the promoters are Mr.C.Krishnamurthy and Mr.Gopinath. Company VISION is To achieve and maintain leadership in manufacturing of sheet metal pressed components. MISSION is Continuous customer satisfaction by producing good quality sheet metal parts with zero customer complaints and 100% on-time delivery. The project report includes the detailed information about the industry profile and the organizational structure of the company. The research work is done on the basis of working capital management. Ratio analysis was used for conducting the working capital analysis with the relevant data being obtained from the annual reports of the company and the answers obtained from the company officials through the interview schedule. Statement of the problem is that the efficiency of an every organization can be measured in terms of the success of working capital management. It is proposed to conduct a study on working capital management in a private industry, as it is understood that working capital management offers a challenging opportunity to the managers in such industry. The company selected is Fine Components and Tools Pvt. Ltd. The scope of the study is restricted to analyzing the working capital of Fine Components and Tools Pvt. Ltd; the reference period of the study in question is for five financial years from 2002 to 2007.Objective of the study is to study the overall organization structure of Fine Components & Tools Pvt. Ltd, to analyze the components of working capital, to study the changes in working capital over a period of five years, to evaluate the efficiency of working capital management and comment on the structural health of the working capital and to summarize the findings of the study and suggesting remedial measures wherever found necessary.

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Automobile Components and Spares
The automobile components and spares industry in India not only caters to Indian automobile manufacturing companies but also exports its products abroad. The approximate monetary value of Indian automobile components exports in 2006 was 5 billion United States dollars. Automotive spare, auto and used car parts is a lesser-known industry yet a big one. This industry has grown enormously not only in the Indian but global scenario. Outsourcing The Indian automobile companies rarely build the parts they use for manufacturing their vehicles. Automobile components and spares like interior trim panels, radios, and seats are some of the product examples that are manufactured elsewhere and brought to the main assembly plant for final fitments. Majority of Indian vehicle companies (like their global counterparts) manufacture automobiles that have approximately 65% external supplier made parts. Indian Automobile Parts Scenario The Indian automobile components and spares industry is highly disorganized and fragmented. Approximately 400 companies belong to the Original Equipment Manufacturers (OEM) category. Other companies (about 10,000 of them) operate in the unorganized sector. These low tier companies manufacture relatively unsophisticated car parts.

Automobiles Components Automobile Spares Automobile Accessories

The India Advantage The Indian automobile spare parts manufacturing sector possess a distinct commercial advantage over its global counterparts. The lure of abundant availability of raw materials, technically skilled workforce and relatively lower labor costs has compelled many foreign companies to invest heavily in India. The country has seen investments equaling 9 billion US dollars in 2006. Most of the automobile spare parts companies are proximate to the main car assembly plant. This helps to lower transportation costs and also have the advantage of a quick turn-around time.

Global Acquisitions
The initial and continued success of larger Indian automobile parts manufacturing companies has emboldened them to buy companies abroad. Indian companies like Armtek Auto, Sona Koyo, Bharat Forge, and Sundaram Fasteners have purchased companies in Western Europe and America. B.E.S Degree College Page 38

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Sundaram Fasteners have taken over branded German automotive part manufacturer CDP to enable it to tap the highly profitable European car market.

Automobile History
The automobile history dates back to the late 18th century. Nicolas Joseph Cugnot, a French engineer is credited with inventing the first self-propelled automobile. Cugnot's vehicle used steam power for locomotion. The vehicle found military application in the French army. Cugnot's automobile was never commercially sold. In the beginning automobile industry was dominated by steam-powered vehicles. The vehicles were expensive and difficult to maintain. The incidence of frequent boiler explosions also kept potential purchasers away. Commercial history of automobiles started with the invention of gasoline powered internal combustion engines. The German inventor, Karl Benz constructed his first gasoline powered vehicle in 1885 at Mannheim, Germany. Commercial production of Benz cars started in 1888. Pan hard et Levassor of France was the first company to exclusively build and sell motor cars from 1889. The early 1900s saw many automobile manufacturing companies coming into existence in a number of European countries and the United States. The first mass produced automobile in the United States was the curved-dash Oldsmobile. It was a three-horsepower machine and sold 5,000 units by 1904. The economics of the US car market was disrupted by the arrival of Henry Ford and his Model T car. The Model T was the world's first mass produced vehicle- a million units were sold by 1920- a space of 10 years. Changing Faces of the Car Mass production of cars led to cheaper vehicles. This made cars more affordable to the common American and European citizen. The British automobile manufacturing history was revolutionized by assembly line production methods employed by two separate car makers- William Morris and Herbert Austin. Austin Seven was the world's first compact car. The Morris manufactured vehicles had engine mounted on front. The 1960s saw rapid developments in automobile manufacturing technology. A milestone in the history of automobiles was achieved by the invention of efficient fuel injection processes, independent suspensions and turbochargers. Pontiac Trans Am was the best selling car from 1969 to 1980. Computer Aided Design (CAD) was introduced for designing vehicles from the 1980s. Ford Taurus was the first vehicle to be built using CAD.

Auto Spare Parts


There are plenty of companies manufacturing automobile spares in India. For an automobile owner getting original automobile spares for his/her vehicle is no more a problem. Big names in automobile industry are taking care of after sales service in which automobile spares occupy a considerable place. You can also buy automobile parts in India from a roadside makeshift garage as well. But do they give you genuine automobile spares? If you buy automobile parts in India always go for genuine spares for the sake of your car's health.

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Assembly Flywheel Alternators  Batteries  Car Radiators  Car Thermostats  Clutch Plate  Water Pumps  Shock Absorbers  Suspension

COMPANY PROFILE
Fine Components & Tools Pvt. Ltd commenced business during the year 1986, as a manufacturer of pressed components & automobile parts. Fine Components & Tools Pvt. Ltd as a supporting unit for job works for IFB AUTOMOTIVE, DENSO KIRLOSKAR, IFB-AUTOLIVE, TOYOTA BOSHOKU INDIA, TOYOTA KIRLOSAR AUTO PARTS. In the year 1986 company started as fine heat treaters and in the year 1989 it as started as Fine Components and Tools Pvt. Ltd (unit I) and in the year 2004 another (unit-II) in Bommasandra industrial area. Fine Components & Tools Pvt.Ltd has integrated facilities with ability to finish product in house.

VISION
Achieve and maintain leadership in manufacturing of sheet metal pressed components.

MISSION
Continuous customer satisfaction by producing good quality sheet metal parts with zero customer complaints and 100% on-time delivery.

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PRAMOTERS AND MANAGEMENT TEAM
1. Mr C. KRISHNA MOORTHY 2. Mr K. GOPINATH 3. Mrs. K BHANUMATHI. Mrs. K KAVITHA VALUES y Continuous learning y Have passion for excellence y Be a part of the team

INFRASTRUCTURE
 Land: Fine components and tools pvt ltd has set up two plants at Bommasandra industrial area. The total area of each plant is summarized in the below table Plant Unit- I Unit- II  Power Plant Unit- I Unit- II Required power 750 KVA 660 KVA Power supplied by BESCOM 250 KVA 160 KVA Captive power generated 500 KVA 500 KVA Total area 4009 Sq mtrs 4362 sq mtrs Build up area 2100 sq mtrs 2783 sq mtrs Open space 1909 sq mtrs 1579 sq mtrs

 Water consumption and fuel consumption Water consumption Fuel consumption (Qty/month) Electricity consumption 16000 l (domestic water consumption in KLD) (HSD) 3720 lts 54285 kwh

No of chimney Mode of treatment


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Financial analysis
 Non hazardous solid y Paper waste  Category of waste and quantity generated per month y Oil waste y Diesel waste  Quantity stored at site 150 (Lts) TO 142 (Lts)  Man Power: Company has a very highly motivated and dedicated manpower. Total employees strength is 389, which inclusive of staff. Man power Unit- I Manager/ senior 11 Executives Executives 12 Junior executives 18 Workers 69 Labour class --TOTAL NUMBER OF EMPLOYEES Category Confirmed employees Trainees Contract TOTAL Unit- II --6 13 22 --Total 11 18 31 91 238 389

No. of employees 136 18 235 389

ACTIVITIES AT FINE COMPONENTS AND TOOLS PVT LTD: I. TOOL MAKING: a. Press tools & gauges (captive tool room with CAD/CAM) II. MANUFACTURING: a) Sheet metal pressed components b) Welded sub-assemblies c) Main assemblies III. FINE HEAT TREATERS a. Tool steel heat treatment

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DELIVERY CAPABILITTES
Fine components and tools pvt.ltd has a standing in the tool making industry for about 22 years delivering quality products. Company possesses the requisite ingredients to adhere to production plans and meeting delivery schedules.

CLIENT POFILE
Company has an impressive client list, which includes the biggest name in the auto industry viz.

    

IFB AUTOMOTIVE year of business 1992 IFB AUTOLIV ------------------- 1994 DENSO KIRLOSKAR ------------------- 1999 TOYOTA KIRLOSKAR AUTO PARTS -- 1999 TOYOTA BOSHOKU INDIA ------------- 2000

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PRODUCTION STRUCTURE
CHAIRMAN

MANAGING DIRECTOR

MANAGEROPERATIONS

PRODUCTION INCHARGE

EXECUTIVE -M/C MAINTENANCE

SHIFT INCHARGES

LINE INCHARGE

TOOL SETTERS

OPERATORS

HELPERS

The products manufactured by the company are  Upper Rail  Lower Rail Inner  Lower Rail  Bracket 2151  Shell  Bracket wire  Plate holder ALFA  Lever Reclines  Retainer seat track  Bearing housing  Plain washer  Lock CAM  End cover
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         Base plate PWR FR Main ARM PWR-LH/RH Release cam Shell & Weld nut Assy Retainer com. Inner Squab plate Cushion plate LH/RH Wire connector inner Assy LH/RH Nut assy seat belt LH/RH

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OBJECTIVES
     Increase overall productivity level to 80 % Tool setup time within 10 minutes 100 % on time delivery Maintain in process rejection -100 PPM

MACHINE MAINTENANCE  Maintain in-house breakdown to 30 hrs/month  Maximum down time of critical machines 2 working days

MILE STONE
1989 Established as SSI in Madivala (Press shop & Heat Treatment Unit) 1994 Established Tool room in Bommanahalli 1997 - Madivala press shop Shifted to Bommasandra Industrial Estate 1998 Increased press capacity from 11 to 20 1999 Heat Treatment Unit Shifted to Bommasandra 2000 Tool Room shifted & Expanded to Bommasandra with addition of CNC Division 2001 Certified for ISO 9002 Quality System 2002 Imported presses bought for pressing rail components 2003 Status from SSI to MSI 2004 Certified for ISO 9001:2000 2004 Establishment of Unit II in Bommasandra 2005- Additional Import of presses and Decoilers for New Rail Line in unit 2006 Quality Circle Formation. 2006- ISO/TS 16949:2002 & ISO 14001:2004 Certified

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FINANCE DEPARTMENT
STRUCTURE OF FINANCE DEPARTMENT
CHAIRMAN

MANAGING DIRECTOR

MANAGER - FINANCE

ACCOUNTANTS

INTRODUCTION
Fine components and tools pvt ltd is maintaining proper accounting system of the various related areas like production, purchase, stores, and HR divisions. The various accounting sections in the company come under the control of general manager (finance) who will submit the report to the directors of the company. There is close co-ordination and exchange of information between the accounting sections of the various divisions. All the transactions of the company will be accounted on accrual basis only. The staff and the officers working in various accounting sections of the division will carry out their work effectively and efficiently as for the guidelines of the company.

METHOD OF VALUATION
Method of valuation of closing stock employed in the previous year, raw materials and finished goods valued at cost and work-in-process at net realizable value.

INTERNAL AUDIT
Internal audit is done three times for Annum and MSSV & CO charted accountants do the auditing. Assessment year of the company is March 31ST

TYPES OF DEPPRECIATION The depreciation is done by two ways 1. Income tax act 2. Companies act of depreciation

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WORKING CAPITAL REQUIREMENT The company is availing working capital from BANK OF INDIA. COMPUTERISED ACCOUNTS The company uses TALLY package of different versions. ACCOUNTING POLICIES (significant) y Fixed assets are stated at cost y Depreciation at written down method y Bonus is on accrual basis y Gratuity and leave encashment liabilities are on account of payment basis y Interest receipts and discount receipts are accounts on receipt basis.

ENVIRONMENTAL POLICY
We at fine components & tools pvt ltd shall be committed to protect the environment & prevention of pollution by continual improvement. We shall achieve this by,  Adhering to all applicable environment related legal & statutory requirement.  Conserving energy and natural resources to the extent possible.  Reducing adverse impact on the environment from our operations.  Creating environmental awareness to all employees MAINTENANCE Company is having separate maintenance/quality department. Preventive maintenance is done for machines  Separate machine/tool maintenance department  In process, incoming, final checking department

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5 s house keeping

5 s can be defined as
 SEIRI (sorting out) Look around you are work area and yourself it is relay necessary for all items to be there? Separate the good re-workable items and rejected items. Reworks the workable items and dispose off-the rejected items  SEITON (systematic arrangement) Items must be placed in pre fixed location, so that they are easily accessible and can be easily used. Make sure that items can be clearly identified, by labeling them properly.  SEISO (spic and span) Seiso means keeping our work place and the machinery clean  SEIKETSU (serene atmosphere) Even a clean work place, with proper arrangement, will soon become dirty if seiri, seiton and seiso are not continuously practiced. Let keep our area neat and clean, including our uniform, through which we will achieve serene atmosphere.  SHITSUKE (stick to self discipline) Everyone should be disciplined to strictly follow the rules and maintain standards, while working.

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COMPARATIVE STATEMENTS
The comparative financial statements are statements of the financial position at different period; of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. From practical point of view, generally, two financial statements (balance sheet and income statement) are prepared in comparative form for financial analysis purpose. Not only the comparison of the figure of two periods but also be relationship between balance sheet and income statement may show:

i. ii. iii. iv.

Absolute figures (rupee amounts) Changes in absolute figures (increase or decrease in absolute figures) Absolute data in term of percentages Increase or decrease in terms of percentages

1.

COMPARATIVE BALANCE SHEET The comparative balance sheet analysis is the study of the trend of the same items,

groups of items and computed items in two or more balance sheets of the same business enterprise on different dates. The changes can be observed by comparison of the balance sheet at the beginning and at the end of a period and changes can help in forming an opinion about the progress of an enterprise. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show increase in figures. The fourth column may be added for giving percentages of increases or decreases.

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I) COMPARATIVE STATEMENT A) Comparative Balance Sheet Particulars 2006 2007 Increase/Decrease Assets Fixed Assets Investments Deferred Tax Assets (Net) Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance Loan and advances Total Assets Liabilities Shareholder Fund Loan Funds Current Liabilities - Liabilities - Provisions Total Liabilities Interpretation 1. 1968881237 2851504001 4892714 766521142 1860512457 69481654 337661837 7859455042 1893341411 3843437861 19845655 805661034 2228592486 22134657 457780835 9270793939 - 75539826 +991933860 +14952941 +39139892 +368080029 - 47346997 +120118998 +1411338897

%age

-3.84 +34.79 +305.62 +5.11 +19.78 -68.14 +35.57 +17.95

4427446105 1567876432 1640425867 223706638 7859455042

5364231022 1732223697 1978589143 19575007 9270793939

+936784917 +164347265 +338163276 -27956561 +1411338897

+21.16 +10.48 +20.61 -14.28 +17.95

Comparative Balance Sheet reveals that total Assets is increased during a year by 17.95%.

2.

There has been increase in shareholder funds by 21.16%.

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B) Comparative Income Statement Particulars 2009 2010 Increase/ Decrease (Rs). +1939367706 +1976688932 %age

Net Sales Less : Cost of Goods Sold (Material consumed, manufacturing expenses & personal expenses) Gross Profit

11369337410 9756380835

13308705116 11733069767

+17.06 +20.26

1612956575

1575635349

-37321226

-2.31

Less : Operating expenses (Administrative expenses, financial expenses, selling expenses & depreciation) Operating profit/loss Add: Other income Less:non operating exp. Net profit Before Tax Less : Tax provision for wealth tax, taxation, fringe benefit tax & deferred tax Net profit After tax

1147615431

1139418653

-8196778

-1.76

465341144 1077448184 906615865 636173463 -28757839

313168939 898158858 123047757 121132797 185742059

-29124448 -179289326 -783568108 +575154334 +214499898

-6.25 -16.64 -86.43 +90.41 +745.88

664931302

1025585738

+360654436

+54.24

Interpretation There has been decrease in the gross profit by 2.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold. But the non operating expenses decreases by 86.43% so net profit increases.

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II) COMMON SIZE STATEMENT A) Common Size Balance Sheet Particulars Assets 2009 Amount (Rs.) 2010 Amount (Rs.)

%age

%age

Fixed Assets Investments Deferred Tax Assets (Net) Current Assets Inventories Sundry Debtors Cash & Bank Balance

1968881237 2851504001 4892714

25.05 36.28 0.06

1893341411 3843437861 19845655

20.42 41.46 0.22

766521142 1860512457 69481654 337661837 7859455042

9.76 23.67 0.88 4.30 100.00

805661034 2228592486 22134657 457780835 9270793939

8.69 24.04 0.24 4.93 100.00

Loan and advances Total Assets Liabilities Shareholder Fund Loan Funds Current Liabilities Liabilities Provisions

4427446105 1567876432

56.33 19.95

5364231022 1732223697

57.86 18.69

1640425867 223706638 7859455042

20.87 2.85 100.00

1978589143 19575007 9270793939

21.34 2.11 100.00

Total Liabilities

Interpretation The investment in fixed assets, current assets and investment are same in both the years. The ratio of shareholders funds and the loan funds are do not change much.

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II) COMMON SIZE STATEMENT B) Common Size Income Statement Particulars Net Sales Less : Cost of Goods Sold (Material consumed, manufacturing expenses & personal expenses) Gross Profit Less : Operating expenses (Administrative expenses, financial expenses, selling expenses & depreciation) Operating profit/loss Add: Other income Less:non operating exp. Net profit Before Tax Less : Tax provision for wealth tax, taxation, fringe benefit tax & deferred tax Net profit After tax 2009 Amount (Rs.) 11369337410 9756380835 2010 Amount (Rs.) 13308705116 11733069767

%age 100.00 85.81

%age 100.00 88.16

1612956575 1147615431

14.19 10.09

1575635349 1139418653

11.84 8.56

1147615431 1077448184 906615865 636173463 -28757839

4.09 9.48 7.97 5.60 -2.53

1139418653 898158858 123047757 121132797 185742059

3.28 6.75 0.92 9.10 1.40

664931302

5.85

1025585738

7.71

Interpretation In 2009 the cost of goods sold is 85.81% of sales which increase to 88.16% in year 2010 resulting the decrease in gross profit from 14.19% to 11.84% but the company is successful in controlling non operating expenses i.e. 7.97% to 0.92% so net profit increases in 2010.

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Cash Flow Statement

Particulars Profit Before Tax Net Cash Flow Operating Activity Net Cash used in Investing Activity

2009 6361.73 8382.83

2010 12113.28 2996.85

Increase/ Decrease +5751.55 -5385.98

%age 90.41 -64.25

-4988.22

-3143.35

-1844.87

-36.98

Net Cash used in Financing Activity

-3471.47

-326.97

-3144.50

-90.58

Net Inc/Dec in Cash & Equivalent Cash and Equivalent at the Begin of the Year

-76.86 771.68

-473.47 694.82

+396.61 -76.86

+516.02 -9.96

Cash and Equivalent at the End of the Year

694.82

221.35

-473.47

-68.14

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Financial analysis
FUND FLOW ANALYSIS
Definition of Fund A question arises as to the definition of FUND. It means: y y Funds may mean change in cash only; Funds may mean change in working capital (the difference between current assets and current liabilities) only. A more comprehensive definition of funds may be given as follows: y Funds may mean change in financial resources, arising from changes in working capital items and from financing and investing activities of the enterprise, which may involve only non-current items. The funds flow statement analyses only the causes of changes in the firms working capital position. The cash flow statement is prepared to analyze changes in the flow of cash only. These statements fail to consider the changes in the firms total financial resources. They do not reveal some significant items that do not affect the firms cash or working capital position, but considerably influence the financing position and asset mix of the firm. The statement of changes in financial position is an extension of the funds flow statement or the cash flow statement. Therefore, to get better insights, a firm may prepare a comprehensive, all inclusive, statement of changes in financial position incorporating changes in the firms cash and working capital positions involving: Changes in the firms working capital position, Changes in the firms cash position, and Changes in the firms total financial resources.

y y y

Statement of Changes in Working Capital Particulars 2009 2010 Effect on Working Capital Increase Decrease Page 59

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Financial analysis
Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance 766521142 1860512457 69481654 (A) 2696515253 Current Liabilities - Liabilities - Provisions 1640425867 223706638 (B) 1864132505 Working capital (A-B) 832382748 1978589143 195750077 2174339220 882048957 882048957 435176482 49666209 435176482 27956561 338163276 805661034 2228592486 22134657 3056388177 39139892 368080029 47346997

Net increase in working 4966209 capital Total 882048957

Note : Provision should be taken as current liability

FUND FLOW STATEMENT Sources Raising of Loans Funds from operation Amount (Rs.) 164347265 1135177199 Applications Net Increase in Working Capital Purchase of Investment Purchase of Fixed Assets Loan of Advances given 1299524464 Amount (Rs.) 49666209 991933860 137805397 120118998 1299524464

WORKING NOTES

Adjusted Profit and Loss Account

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Particulars To Dep. on fixed Assets To Balance c/d Amount (Rs.) 213345223 4966018222 Particulars By Balance b/d By Deferred Tax By Fund from Operation (Bal. Figure) 5179363445 Amount (Rs.) 4029233305 14952941 1135177199 5179363445

FIXED ASSETS Particulars To Balance b/d Amount (Rs.) 1968881237 Particulars By Adjusted P & L A/c (Dep.) By Balance c/d Amount (Rs.) 213345223

To purchase on Fixed Assets (Bal. figure)

137805397

1893341411

2106686634

2106686634

Interpretation: As seen from the above analysis that there is increase in working capital which, indicate that company is having sufficient current assets to pay back the current liabilities in time. There is increase in amount of loans by 10.48% and it is being utilized in financing the fixed assets & investments.

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Financial analysis

MEANING OF RATIO A ratio is a simple arithmetical expression of the relationship of one number to another. According to Accountants Handbook by Wixon, Kell and Bedford, a ratio is an expression of quantitative relationship between two numbers. According to Kohler, a ratio is the relation, of the amount a, to another, b, expressed as the ration of a to b, a:b (a is to b); or as a simple fraction, integer, decimal, fraction or percentage. Guidelines or precautions for use of ratio: Accuracy of financial statements: The ratios are calculated from the data available in financial statements. B.E.S Degree College Before calculating ratios one should see whether proper Page 62

Financial analysis
concepts and conventions have been used for preparing financial statements or not. These statements should also be properly audited by competent auditors. precautions will establish the reliability of data given in financial statements. The

1.

Objective or purpose of analysis: The type of ratios to be calculated will depend upon the purpose for which these are required. The purpose or object for which rations are required to be studied should always be kept in mind for studying various ratios. Different objects may require the study of different ratios. Selection of ratios: Another precaution in ratios analysis is the proper selection of appropriate ratios. The ratios should match the purpose for which these are required. Only these ratios should be selected which can throw proper light on the matter to be discussed. Use of standards: The ratios will give on indications of financial position only when discussed with reference to certain standard. These standard may be rule of thumb as in case of current ratio {2:1}and acid test ratio{1:1}, may be industry standards, may budgeted or projected ratios etc. Caliber of the analyst: The ratios are the only tools of analysis and their interpretation will depend upon the caliber and competence of the analyst. He should be familiar with various financial statements and the significance of changes etc.

2.

3.

4.

5.

Ratios provide only a base: The ratios are only guidelines for the analyst he should not base his decision entirely on them. He should study any other relevant information, situation in the concern, general economic environment etc. before reaching final conclusions.

Functional classification or classification according to tests In view of financial management or according to tests satisfied, various ratios have been classified as below: B.E.S Degree College Page 63

Financial analysis
Liquidity ratios: These are the ratios, which measure the short term Solvency or financial position of the firm and are calculated to comment upon

The short term paying capacity of concern or firms ability to meet its current obligations. The various liquidity ratios are: current ratio, liquid ratio and absolute ratio. 2. Long term solvency and leverage ratios: Long term solvency ratios convey firms ability to meet the interest cost and repayment schedule of its long term obligations, example debt equity ratio and interest coverage ratio. Leverage ration show the proportions of debt and equity in financing of the firm. 3. Activity ratios: Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because it indicates the speed with which assets are being turned over in to sales example debtor turnover ratio.

Classification according to significance or importance The Ratios have also been classified according to their significance or importance. Some ratios are more important than others and the firm may classify them as primary and secondary ratios. The British Institute of management has recommended the classification of ratios according to importance for inter firm comparisons. For inter firm comparisons, the ratios may be classified as primary and secondary ratios. The primary ratio is one which is of prime importance to a concern, thus return on capital employed is named as primary ratio. The other ratios which support or explain the primary ratio are called secondary ratio, e.g. the relationship of operating profit to sales or the relationship of sales to total assets of the firm.

Analysis Of Short-Term Financial Position The short-term obligation of a firm can be met only when there are sufficient liquid assets. If a firm fails to meet such current obligations, its goodwill in the market is likely to be affected beyond repair. Moreover a very high degree of liquidity will tie funds in current assets.

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Financial analysis
Therefore it is necessary to have a proper balance in regard to liquidity of the firm. Two types of ratio are calculated to measure short-term solvency of a firm. I) LIQUIDITY RATIOS II) EFFICIENCY RATIOS III) SOLVENCY RATIOS IV) PROFITABILITY RATIOS

I)

LIQUIDITY RATIO It refers to the ability of a concern to meet its current obligation as and when

these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assets. These should be convertible into cash for paying obligations of short term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay-off current liabilities, the liquidity position is satisfactory. On the other hand, if current liabilities may not easily met out of current assets then the liquidity position will be bad. To measure liquidity of a firm, the following ratios can be calculated: 1. Current ratio 2. Quick ratio 3. Absolute quick ratio

(i)

Current Ratio

It is also known as Working capital ratio. It is a measure of liquidity and used in making analysis of short term financial position. Current Ratio = Current Assets / Current Liabilities.

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Financial analysis

TABLE 1.1 (Current Ratio)

Year Current assets Current liabilities Current Ratio

2007 2696515253 1640425867 1.64

2010 3056388177 1978589143 1.54

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Financial analysis
Current assets Current liabilities

3500000000
Amount (Rs.)

3000000000 2500000000 2000000000 1500000000 1000000000 500000000 0 2009 Years FIGURE 1.1 2010

Current Ratio 2 1.5 1 0.5 0 2009 Years 2010

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Financial analysis
Interpretation : It is decreasing in the year 2010 because current liabilities are increased this year as compare to 2009. Overall this ratio is satisfactory as it is nearest to the thumb rule i.e. 2:1

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Financial analysis
(ii) Liquid Ratio Liquid Ratio is more rigors test of liquidity than the current ratio. It is the ratio between quick ratio & current liabilities. Quick ratio refers to all current assets except Inventory & prepaid expenses. Liquid Ratio = Liquid assets / Current Liabilities Liquid assets = Current Assets- Prepaid Exp Inventories

Year Liquid assets Current liabilities Liquid Ratio

2009 1929994111 1640425867 1.18

2010 2250727143 1978589143 1.14

TABLE 1.2(Liquid Ratio)

Liquid assets

Current liabilities

2500000000 2000000000
Amount (Rs.)

1500000000 1000000000 500000000 0 2009 Years 2010

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Financial analysis
Liquid Ratio 1.5

0.5

0 2009 Years FIGURE 1.2 Interpretation: As seen from the analysis this ratio is almost same in both the years quite satisfactory with a thumb rule i.e. 1.5 : 1. Companys current assets involved large amount of debtors in it. 2010

(iii)

Absolute Liquid Ratio Cash is the most liquid ratio asset. Absolute liquid assets include Cash in hand, Cash

at bank, marketable securities or temporary investments. Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities Absolute Liquid Assets = Cash + Bank + Marketable Securities

Year Absolute Liquid assets Current liabilities Absolute Liquid Ratio

2009 69481654 1640425867 0.04 TABLE 1.3(Absolute Liquid Ratio)

2010 22134657 1978589143 0.01

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Financial analysis
Absolute Liquid assets 2500000000 2000000000 1500000000 1000000000 500000000 0 2009 2010 Current liabilities

FIGURE 1.3 Absolute Liquid Ratio 0.06 0.05 0.04 0.03 0.02 0.01 0 2009 Years 2010

Interpretation : Viewing the trend of the cash ratio of both the years it can be said that this ratio is not satisfactory because cash and bank balance has been decreased very much in the year 2010 approx. 68%.

II)

EFFICIENCY RATIOS OR ACTIVITY RATIOS

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Financial analysis
Activity ratio measures the efficiency and the effectiveness with which a firm can manage its resources. These are known as the Turnover ratios , because they indicate the speed with which assets are converted into cash.

Major ratio given as under :

1. 2. 3 4.

Working capital ratio Inventory turnover ratio Debtor turnover ratio Creditor turnover ratio

1.

Working Capital Turnover Ratio It indicates the velocity of utilization of net working capital. It indicates the efficiency

with which working capital is being used by the company. Working Capital Turnover Ratio = Net Sales /Average working capital

Year Net sales Average working capital Working Capital Turnover Ratio

2009 11369337410 1170612956.5 9.71

2010 13308705116 1066944210 12.47

TABLE 2.1 (Working Capital Turnover Ratio)

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Financial analysis
Working Capital Turnover Ratio 15

10 Times 5

0 2009 Years FIGURE 2.1 Interpretation : Working capital turnover ratio is increasing as we can see from the above table becomes 12.47 in 2007 from 9.71 in 2006 due to increase in sales 2010

2.

Inventory Turnover Ratio It indicates whether the inventory has been efficiently used or not. It indicated the

number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory.

Inventory Turnover Ratio : Net Sales / Avg. Inventory at Cost

Year Net sales Average inventory at cost Inventory Turnover Ratio

2009 11369337410 708281512.5 16.05

2010 13308705116 786091088 16.93

TABLE 2.2 (Inventory Turnover Ratio)

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Financial analysis
Inventory Turnover Ratio 20 15 Times 10 5 0 2009 Years FIGURE 2.2 Interpretation : As seen from the analysis there has been slight increase in the ratio. Being a manufacturing concern company has to maintain large amount of inventories in different forms but on the other side sales are increasing so it is good sign for the company. 2010

3.

Inventory Conversion Period

It is calculated to see the average time taken for clearing the stocks. Inventory conversion period = No. of days in a year /Inventory Turnover Ratio

Year No. of days in a year Inventory Turnover Ratio Inventory conversion period

2009 365 16.05 23 (days)

2010 365 16.93 22 (days)

TABLE 2.3(Inventory Conversion Period)

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Financial analysis
Inventory conversion period 25 20 15 Days 10 5 0 2009 Years FIGURE 2.3 Interretation: The companys inventory conversion period is approximate 25 days which indicates there is no fear of obsolesce of material. 2010

4.

Debtor Turnover Ratio This ratio indicates the velocity of debt collection generally higher the ratio means the

more efficient management of debtors or more liquid are debtors and vice verse.

Debtor Turnover Ratio = Total sales / Average Trade Debtors

Year Total Sales Average trade debtors Debtor Turnover Ratio

2009 11369337410 1844321481 6.17 TABLE 2.4(Debtor Turnover Ratio)

2010 13308705116 2044552471.5 6.51

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Financial analysis
Debtor Turnover Ratio 10 8 6 Times 4 2 0 2009 Years FIGURE 2.4 Interpretation: This ratio has been increased by 34% due to increase in sales but at the same time debtors are also increasing which is not feasible in long run. 2010

5.

Average Collection Period It represents the average number of days for which a firm has to wait before its

receivables are converted into cash.

Aver. Collection period =

Number of days in a year / Debtor Turnover Ratio

Year No. of days in a year Avg. Collection period Average Collection Period

2009 365 6.17 59 days

2010 365 6.51 56 days

TABLE 2.5(Average Collection Period)

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Financial analysis
Average Collection Period 60 50 40 Days 30 20 10 0 2009 Years FIGURE 2.5 2010

Interpretation : Companys average collection period is approximate 60 days or two months. It means companys is allowing sufficient time to debtors. It should not be very much increasing in the long run.

6.

Creditor Turnover Ratio This ratio indicates the velocity with which the creditors are turned over in relation to

purchases. Generally higher the ratio better it is or otherwise lower the creditor velocity, less favorable are the results.

Creditor Turnover Ratio = Annual Purchases / Average Creditors. Year Annual purchases Average creditors Creditor Turnover Ratio 2009 8450144997 1219309612 6.93 TABLE 2.6(Creditor Turnover Ratio) 2010 10318618457 1499180490.5 6.88

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Financial analysis
Creditor Turnover Ratio 20 15 Times 10 5 0 2009 Years 2010

FIGURE 2.6 7. Average Payment Period

Average Payment Period = No. of days in a year / Creditor Turnover Ratio Year No. of days in a year Creditor Turnover Ratio Average Payment Period 2009 365 6.93 53 (days) TABLE 2.7 (Average Payment Period) 2010 365 6.88 53 (days)

Average Payment Period 60 50 40 Days 30 20 10 0 2009 Years 2010

FIGURE 2.7

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Financial analysis
Interpretation: The payment track record of the company is properly designed such that timely payment is made to the suppliers. By analyzing the trend it can be said that creditors are paid with in two months this shows as and when payment is received from the debtors then it is being paid and more over company is enjoying credit policy by the creditors.

III)

SOLVENCY RATIOS The term solvency refers to ability of a concern to meet its long-term obligations.

The long-term indebtness of a firm includes debenture-holders, financial institutions providing medium and long-term loans and other creditors selling goods on installments basis .Long-term solvency ratio indicate a firms ability to meet the fixed interest and costs and repayment schedules associated with its long-term borrowings. Following solvency ratios have been used for this purpose:(1) Debt-equity ratio (2) Equity ratio (3) Solvency ratio (4) Fixed assets to net worth

(1)

Debt Equity Ratio It shows the relationship between external and internal equities & it is calculated to

measure the claim of outsiders and owners against companys assets The outsider's funds include all debts/ liabilities to outsiders, whether in form of debentures, bonds, mortgage or bills. The shareholders funds include equity + preference share capital included capital reserve, revenue reserve and reserves representing accumulated profits and surpluses.

Debt Equity Ratio = Long term Debts / Shareholders Funds*100

Year

2009

2010

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Financial analysis
Long term Debts Shareholders Funds Debt Equity Ratio 1567876432 4427446105 35.41 1732223697 5364231022 32.29

TABLE 3.1(Debt Equity Ratio) Debt Equity Ratio 40 30


Percentage

20 10 0 2009 Years FIGURE 3.1 2010

Interpretation : There has been a slight decrease in this ratio due to the fact that now the company is relying more on own funds then on outsiders funds. As such ratio has been improved and that amount is blocked in inventories.

(2)

Equity Ratio Establish the relationship between shareholders funds and total assets of the company,

the components of this ratio are

Equity Ratio = Shareholders Funds / Total Assets *100

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Financial analysis
Year Shareholders Funds Total Assets Equity Ratio 2009 4427446105 7516900491 59 TABLE 3.2(Equity Ratio) 2010 5367231022 8793167449 61

Equity Ratio 70 60
Percentage

50 40 30 20 10 0

2009 Years FIGURE 3.2

2010

Interpretation : Company is relying more shareholder funds than on loan funds. This is favourable point for the creditors as companys equity ratio in 2006 is 59% and in 2007 is 61% .

3.

Solvency Ratio This ratio indicates the relationship between total liabilities to outsiders & total assets

of the company. Solvency ratio = 100- Equity ratio

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Financial analysis
Year 2006 2007 Solvency Ratio 41 39 TABLE 3.3(Solvency Ratio) Solvency Ratio 50 40 Percentage 30 20 10 0 2009 Years 2010

FIGURE 3.3 Interpretation : .The ratio in 2006 is 41% and in 2007 is 39% , so it implies lower the ratio of total liabilities to total assets, more satisfactory/stable in the long term solvency position of the firm.

4.

Fixed Assets to Net Worth Ratio The ratio established the relationship between fixed assets and shareholders funds i.e.

share capital plus, reserves and surplus and retained earning The ratio can be calculated as follows Fixed Assets to Net worth Ratio = Fixed Assets (after Dep.) / Shareholder funds * 100

Year Fixed Assets (after Dep.) Shareholder funds

2009 1968881237 4427446105

2010 1893341411 5364231022

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Financial analysis
Fixed Assets to Net Worth Ratio 44.47 35.30

TABLE 3.4(Fixed Assets to Net worth Ratio)

Fixed Assets to Net Worth Ratio FIGURE 3.4 50 40


Percentage

30 20 10 0 2009 Years 2010

Interpretation: the companys fixed assets to net worth is 44.47% and 35.30% in years 2006 and 2007. It implies that owners funds are more than total fixed assets and a part of the working capital is provided by the shareholders.

IV

PROFITABILITY RATIOS

The following ratios are known as general profitability ratio 1) 2) 3) G.P. Ratio N.P. Ratio Return on Investment

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Financial analysis
1. Gross Profit Ratio Gross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Thus it is calculated by dividing the gross profit by sales. Gross Profit Ratio = Gross Profit / Sales * 100 Year Gross Profit Sales Gross Profit Ratio 2009 1612956575 11369337410 14.19 TABLE 4.1(Gross Profit Ratio) 2010 1575635349 13308705116 11.84

Gross Profit Ratio 20 15


Percentage

10 5 0 2009 Years 2010

FIGURE 4.1 Interpretation: There has been decrease in the Gross Profit by 2.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold.

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Financial analysis
1. Net Profit Ratio Net profit ratio established a relationship between net profit and sales. This ratio is the overall measure of firms profitability and is calculated as: Net Profit Ratio = Net profit after tax / Net Sales *100 Year Net profit after tax Net sales Net Profit Ratio 2009 664931302 11369337410 5.84 2010 1025585738 13308705116 7.71

TABLE 4.2(Net Profit Ratio) Net Profit Ratio 10 8


Percentage

6 4 2 0 2009 Years 2010

FIGURE 4.2 Interpretation : There has been decrease in the Gross Profit by 2.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold. The non- operating expenses decrease by 86.43% so net profit increases.

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Financial analysis
3. Return on Investment

Return on Investment = Profit Before interest and taxes / Total investment *100 Year Profit Before interest and taxes Total investment Return on Investment 2009 636173463 28515040014 22.31 TABLE 4.3(Return on Investment) 2010 1211327797 3843437861 31.52

Return on Investment 35 30
Percentage

25 20 15 10 5 0

2009 Years

2010

FIGURE 4.3 Interpretation: The Companys overall profitability is improving as return on investment increases from 22.31% to 31.52%.

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Financial analysis

B.E.S Degree College

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Financial analysis FINDINGS


1. Companies is utilizing long term loans to finance fixed assets and investments but it has started relying on own funds. 2. There is decrease in gross profit of the company due to increase in cost of goods sold but there is increase in net profits due to decrease in non operating expense. 3. Debtors are also increasing which is not good sign for the company in long run. 4. Current liabilities are increasing by 20.61%. Where as cash decreases very much by 68.14% 5. There is stability in equity share capital.

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Financial analysis

SUGGESTIONS
1. The Company is enjoying a good current position. It should take steps to further improve its position by repositioning the composition of current assets as large amount has been block in debtors and inventories.

2. Large amounts of funds are blocked in debtors. Company should reduce its debtors so that the blocked amount is properly utilized.

3. Inventory control is not proper. The Company has not defined the minimum and the maximum stock level scientifically. Therefore there is blockage of funds. Moreover, the safety stock level is also not defined. So the company should apply the proper Inventory Control System so that there is no wastage of funds.

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Sites: www.fct@airtelmail.com. www.google.com Book Management Accounting Author M N ARORA

Annual Reports of FINE COMPONENTS AND TOOLS PVT LTD at ending year 31ST MARCH 2009 AND 2010

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Financial analysis

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