1. Project On
Short term financial analysis of cement industry
in India
Submitted by
Praneswar nayak
Roll-no -11 MCO- 043
Under the guidance of
DR. Kishore Kumar Das
As a partial fulfillment for award of master degree in commerce
School of commerce & management studies
Department of commerce
Ravenshaw University
2. DECLARATION
I, Praneswar Nayak hereby declare that the project Work entitled “Short term
financial analysis of cement industry in India “is the original work done by me for
fulfillment of my master degree of commerce under the guidance of Prof. Kishore
kumar Das ,Department of commerce.
Signature of student
Praneswar Nayak
Roll no-11MCo-043
3. ACKNOWLEDGEMENT
I owe a great many thanks to a great many people who helped and supported me
during the preparing of this project
My deepest thanks to Prof.Dr. KIshore ku. Das Guide of the project for guiding
and correcting various documents of mine with attention and care. He has taken
pain to go through the project and make necessary correction as and when
needed.
I would also thank my Institution and my faculty members without whom
this work would have been a distant reality. I also extend my heartfelt thanks to
my family and well wishers.
Praneswar Nayak
Department of commerce
Roll no: - 11MCO043
4. Chapter 1: Introductory
Introduction
Scope & purpose study
Objective of the study
Methodology
Literature review
Chapter 2: Industrial profile
Chapter 3: Short term financial analysis of cement industry in India
Theoretical overview & analysis
Chapter 4: Epilogue
Findings of the study
Suggestions and Recommendation
Conclusion
Bibliography
6. INTRODUCTION
The cement industry presents one of the most energy-intensive sectors within
the Indian economy and is therefore of particular interest in the context of
both local and global environmental discussions. Increases in productivity
through the adoption of more efficient and cleaner technologies in the
manufacturing sector will be effective in merging economic, environmental,
and social development objectives. A historical examination of productivity
growth in India’s industries embedded into a broader analysis of structural
composition and policy changes will help identify potential future
development strategies that lead towards a more sustainable development
path. Issues of productivity growth and patterns of substitution in the cement
sector as well as in other energy-intensive industries in India have been
discussed from various perspectives. Historical estimates vary from indicate
improvement to a decline in the sector’s productivity. The variation depends
mainly on the time period considered, the source of data, the type of indices
and econometric specifications used for reporting productivity growth.
Regarding patterns of substitution most analyses focus on inter fuel
substitution possibilities in the context of rising energy demand. Not much
research has been conducted on patterns of substitution among the primary
and secondary input factors: Capital, labour, energy and materials. However,
analyzing the use and substitution possibilities of these factors as well as
identifying the main drivers of productivity growth among these and other
factors is of special importance for understanding technological and overall
development of an industry.
7. Scope & purpose study
The present study “Short term financial analysis of cement industry in
India” analyses the profitability of the Indian cement industry and analyze the
current financial position of the industry. The study attempts to determine the
efficiency and effectiveness of management in each segment of working
capital. Since the various methods of will be critically reviewed
The importance of the study is emphasized by the fact that the manner
of administration of current asset and current liabilities determined to a very
large extent the success or failure of a business. The efficient and effective
management of working capital is of crucial importance for the success of a
business, which involves the management of the current assets and the
current liabilities. The business concern has therefore to optimize the use of
available resources through the efficient and effective management of the
current assets and current liabilities. This will enable to increase the
profitability of the concern and the firm could be able to meet its current
obligation will in time.
Objective of study:-
The main objective of study is to know the short term financial position of
Indian cement industry
Methodology
Short term financial analysis is the evaluation of firms past, present and
anticipated future financial performance and financial condition. The section
illustrates how financial information are collected and analyzed.
Data Period: the company wise information has been collected on a
number of variables during the pried from 2007-2011 covering five years.
8. Source of Data: The basic data for this current study has been collected from
the secondary source. The data was collected from the following companies’
website:
ACC limited
Ultratech cement limited
India cement limited
Ambuja cement limited
OCL limited
Frame Work of Analysis: To find out short term financial position and
solvency in cement industry of India, the ratio analysis is used.
Tools of Analysis
1.Current ratio: Current ratio is the ratio between current assets and current
liabilities. The firm is said to the comfortable in its liquidity position, if the
current ratio is 2:1
Current assets
Current ratio = ----------------------------
Current liabilities
2. Cash ratio: It is the ratio between absolutes liquid assets and current
liabilities. It supplements the information given by current ratio. The standard
of the cash ratio is 1:1.
Cash + marketable securities
Cash Ratio = ---------------------------------------
Current liabilities
3. Debtor turnover ratio: Debt or turnover ratio indicates the number of
debtor turnover each year. Higher the value of debtor turnover, the more
efficient is the management of credit.
Credit Sales
Debtors Turnover Ratio = -------------------------------
Average Debtors
9. 4. Net working capital ratio: Net working capital ratio is the difference
between the current assets and current liabilities excluding short-term bank
borrowing. It is sometimes used as measure of firm’s liquidity.
Net working capital
Net working capital Ratio = ----------------------------------------
Net assets
III) HYPOTHESIS:-
There is no any significant difference between Profitability
Trends of Cement Industry of India.
Literature review
Factor Analysis was first applied to financial ratios by Pinches, Mingo and
Caruthers (1973) in an attempt to develop an empirically-based classification
of financial ratios. Since then, researchers are using Factor Analysis as a mean
of eliminating redundancy and reducing the number of financial ratios needed
for empirical research. Hamdi and Charbaji (1994) applied Factor Analysis to
42 financial ratios of International Commercial Airlines for the year of 1986
to reduce them to underlying factors. Tan, Koh and Low (1997) used the actor
Analysis on 29financial ratios of the companies listed on the Stock Exchange
of Singapore (SES) from 1980 to 1991 to derive 8 underlying factors. Öcal,
Oral, Ercan Erdis and Vural (2007) applied Factor Analysis on 25 financial
ratios of Turkish construction industry during 1998 to 2001 to derive 5
underlying factors. Dr, Bandyopadhyay and Chakraborty (2010) made an
empirical study on the 44 financial ratios of selected companies from Indian
iron & steel industry and derived 10 underlying factors. Application of Cluster
Analysis on financial ratios is also not a new one. Few researchers have done
it before. Wanga and Leeb (2008) applied a new clustering method based on a
fuzzy relation between financial ratio sequences. They also conducted an
empirical study on 24 financial ratios of four Taiwan shipping companies
using Cluster Analysis. De, Bandyopadhyay and Chakraborty (2010) also
validated the results derived from the Factor Analysis by the Cluster Analysis.
Morris and Shin (2010) conceptually defines the liquidity ratio as “realizable
cash on the balance sheet to short term liabilities.” In turn, “realizable cash” is
defined as liquid assets plus other assets to which a haircut has been applied.
Ration analysis is one of the conventional way that use financial statements to
evaluate the company and create standards that have simply interpreted
10. financial sense (George H.Pink, G. Mark Holmes 2005). A sudden stop in an
organization is generally defined as a sudden slowdown in emerging market
capital (cash) inflows, with an associated shift from large current account
deficits into smaller deficits or small surpluses. Sudden stops are “dangerous
and they may result in bankruptcies, destruction of human capital and local
credit channels” Calvo, 1998.
According to many university researchers (Basno & Dardac, 2004), the
required liquidity for each business depends on the balance sheet situation of
the business. In order to evaluate the liquidity state, special importance is held
by the way in which there are classified organizational assets and liabilities
(Basno & Dardac, 2004). Liquidity risk is seen as a major risk, but it is the
object of: extreme liquidity, "security cushion" or the specialty of mobilizing
capital at a "normal" cost (Dedu, 2003)
The International Accounting Standards (IFRS, 2006) indicate the fact that
liquidity refers to the available cash for the near future, after taking into
account the financial obligations corresponding to that period. Liquidity risk
consist in the probability that the organization should not be able to make its
payments to creditors, as a result of the changes in the proportion of long
term credits and short term credits and the uncorrelation with the structure
of organization's liabilities (Stoica, 2000).Liquid assets should have the
following attributes: diversified, residual maturities appropriate for the
institution’s specific cash flow needs; readily marketable or convertible into
cash; and minimal credit risk. (2005 The Bank of Jamaica Publish: February
1996). Liquidity lines and funding facilities may also have a role within an
institution’s liquidity programmed by helping an institution protect itself
against temporary difficulties that might occur when honoring cash outflow
commitments. (2005 The Bank of Jamaica Publish: February 1996).
The efficient management of the broader measure of liquidity, working
capital, and its narrower measure, cash, are both important for a company's
profitability and well being. In the words of Fraser (1998) "there may be no
more financial discipline that is more important, more misunderstood, and
more often overlooked than cash
12. History of cement industry
The history of the cement industry in India dates back to the 1889 when a
Kolkata-based company started manufacturing cement from Argillaceous. But
the industry started getting the organized shape in the early 1900s. In 1914,
India Cement Company Ltd was established in Porbandar with a capacity of
10,000 tons and production of 1000 installed. The World War I gave the first
initial thrust to the cement industry in India and the industry started growing
at a fast rate in terms of production, manufacturing units, and installed
capacity. This stage was referred to as the Nascent Stage of Indian Cement
Company. In 1927, Concrete Association of India was set up to create public
awareness on the utility of cement as well as to propagate cement
consumption.
The cement industry in India saw the price and distribution control system in
the year 1956, established to ensure fair price model for consumers as well as
manufacturers. Later in 1977, government authorized new manufacturing
units (as well as existing units going for capacity enhancement) to put a
higher price tag for their products. A couple of years later, government
introduced a three-tier pricing system with different pricing on cement
produced in high, medium and low cost plants.
Cement Company, in any country, plays a major role in the growth of the
nation. Cement industry in India was under full control and supervision of the
government. However, it got relief at a large extent after the economic reform.
But government interference, especially in the pricing, is still evident in India.
In spite of being the second largest cement producer in the world, India falls in
the list of lowest per capita consumption of cement with 125 kg. The reason
behind this is the poor rural people who mostly live in mud huts and cannot
afford to have the commodity. Despite the fact, the demand and supply of
cement in India has grown up. In a fast developing economy like India, there is
always large possibility of expansion of cement industry.
13. Growth in domestic cement demand is likely to remain strong, with the
resumption in the housing markets, regular government spending on the rural
sector and infrastructure spend accomplished by rise in the number of
infrastructure projects implemented by the private sector. Furthermore, it is
expected that the industry players will continue to increase their annual
cement output in coming years and India’s cement production will grow at a
compound annual growth rate (CAGR) of around 12 per cent during 2011-12 -
2013-14 to reach 303 Million Metric Tons, according to Indian Cement
Industry Forecast to 2012. Cement Manufacturing Association (CMA) is
targeting to achieve 550 MT capacities by 2020. A large number of oversea
players are also expected to enter the industry in the coming years as 100 per
cent FDI is permitted in the cement industry. Our country is the second major
cement producing country following the China having a total capacity of
around 230 MT (including mini plants). However, on account of low per capita
consumption of cement in the country (156 kgs/year as compared to world
average of 260 kgs) there is an enormous potential for growth of the industry.
The demand for cement mainly depends on the level of development and the
rate of growth of the economy. There are no close substitutes for cement and
hence the demand for cement is price inelastic. During the October – 2011
14.78 MT were produced and 14.38MT was consumed. For the FY 2011 – 12
(Apr - Oct), MT 97.84 was consumed form the 98.91 MT produced. During the
first half of the year, there was marginally poor off take in cement demand due
to passive construction activity, which lead to excess supply, thus putting
downward pressure on realizations. This has been coupled with rise in input
costs, especially prices of coal and petroleum products. As a result, both the
top line and bottom line have been affected. This demand supply mismatch
scenario is expected to prevail for some time. Good agricultural income will
support demand.
Present scenario of Industry
India is the second major cement producing country following the China;
we have 137 large and 365 mini cement plants. Leading players in the
industry are Ultratech Cement, Ambuja Cement Limited , JK Cements, ACC
Cement, Madras Cements etc. Cement is an adhesive that holds the concrete
together and is therefore vital for meeting economy’s needs of Housing &
14. accommodation and necessary infrastructure such as roads & bridges,
schools, hospitals etc. Hence, the cement is one of the fundamental elements
for setting up strong and healthy infrastructure of the country and plays an
important role in economic development and welfare of the nation.
Cement industry is being segmented regionally i.e. Northern, Central,
Western, Southern and Eastern. Cement, being a bulk item transporting it
over long distances can prove to be uneconomical as it attracts very high
amount of freight. Thus, it has resulted in cement being largely a regional play
with the industry divided into five main regions. As it is a freight intensive
industry, the segment is completely domestic driven and exports account for
very negligible percentage of the total cement off take.
Southern region in the country is the biggest contributor in cement
production and it has a largest pie in capacity with 92.11MT. India has total
capacity of 226.90 MT as on March – 2010 comprised of Northern Region
48.27 MT, Central Region 26.01 MT, Eastern Region 31.89 MT, Western
Region 28.62 MT and as mentioned earlier Southern Region 92.11 MT.
Rajasthan, Andhra Pradesh, Tamilnadu, Madhya Pradesh and Gujarat are the
prominent cement industry contributor states. The southern region generally
has an excess capacity trend in the past owing to profuse availability of
limestone, the western and northern regions are generally has more demand
than availability.
Some specifics of Indian cement industry
India ranks second in world cement producing countries.
Capacity utilization: In view of the fact that the industry operates on
fixed cost, higher the capacity sold, the wider the cost distributed on the
same base. But there have been instances wherein despite a healthy
capacity utilization, margins have fallen due to lower realizations.
Access and proximity to raw materials (limestone and coal) and
consuming markets are very important as it is extremely bulky
commodity
15. Sector is highly capital-intensive, a green field project for 1 MT on an
average requires capital expenditure of Rs 3 bn and 2 MT is considered an
ideal size for a company to have some kind of economies of scale. The
sector operates with a high level of fixed cost and therefore volume growth
is decisive to have good growth margins.
Raw materials like limestone and gypsum costs are usually lower than
freight and power costs in the cement industry. Excise duties imposed
by the government and labor wages are among the other chief cost
components involved in the manufacturing of cement.
Cement production and growth
Domestic demand plays a major role in the fast growth of cement industry in
India. In fact the domestic demand of cement has surpassed the economic
growth rate of India. The cement consumption is expected to rise more than
22% by 2009-10 from 2007-08. In cement consumption, the state of
Maharashtra leads the table with 12.18% consumption, followed by Uttar
Pradesh. In terms of cement production, Andhra Pradesh leads the list with
14.72% of production, while Rajasthan remains at second position.
The production of cement in India grew at a rate of 9.1% during 2006-07
against the total production of 147.8 MT in the previous fiscal year. During
April to October 2008-09, the production of cement in India was 101.04 MT
comparing to 95.05 MT during the same period in the previous year. During
October 2009, the total cement production in India was 12.37 MT compared
to a production of 11.61 MT in the same month in the previous year. The
cement companies are also increasing their productions due to the high
market demand. The cement companies have seen a net profit growth rate of
85%. With this huge success, the cement industry in India has contributed
almost 8% to India's economic development.
17. Before making analysis of short financial position of various cement industries in
India the following are be to discuss. So the followings are discuss about the ratios
by which the short term financial position are analyzed
Liquidity Ratio:-
It is extremely essential for a firm to be able to meet its obligation as they become
due. Liquidity ratios measures the ability of the firm to meet its current
obligations .A firm should ensure that it does not suffer from lack of liquidity and
also that it does not have excess liquidity. The failure of the company to meet its
obligations due to lack of sufficient liquidity, will result in a poor credit
worthiness, loss of creditor’s confidence etc. A very high degree of liquidity is also
bad; idle assets earn nothing. Therefore it is necessary to strike a proper balance
between high liquidity and lack liquidity.
The most common ratios which indicate the balance of liquidity are
(a) current ratio (b) quick ratio (c) cash ratio (d) interval measure (e) net working
capital ratio.
Importance of Liquidity Ratios:
Liquidity ratios are probably the most commonly used of all the business
ratios. Creditors may often be particularly interested in these because they
show the ability of a business to quickly generate the cash needed to pay
outstanding debt. This information should also be highly interesting since the
inability to meet short-term debts would be a problem that deserves your
immediate attention.
Liquidity ratios are sometimes called working capital ratios because that, in
essence, is what they measure. The liquidity ratios are: the current ratio and
the quick ratio. Often liquidity ratios are commonly examined by banks when
they are evaluating a loan application. Once you get the loan, your lender may
also require that you continue to maintain a certain minimum ratio, as part of
the loan agreement.
18. Current Ratio:-
Current ratio is the relationship between current asset and current liability.
This ratio is also known as working capital ratio which measures the other
general liquidity and is most widely used to make the analysis of short term
financial position of a firm. It is calculated by dividing the total current asset
by total current liability.
Current Ratio=Current Assets/current Liabilities
A relatively high current ratio is an indication that the firm is liquid and has
the ability to pay its current obligation in time as and when they become due.
The rule of thumb is 2:1 i.e. current asset as double the current liability is
consider being satisfactory.
Significance of current ratio:
This ratio is a general and quick measure of liquidity of a firm. It represents
the margin of safety or cushion available to the creditors. It is an index of the
firm’s financial stability. It is also an index of technical solvency and an index
of the strength of working capital.
A relatively high current ratio is an indication that the firm is liquid and has
the ability to pay its current obligations in time and when they become due.
On the other hand, a relatively low current ratio represents that the liquidity
position of the firm is not good and the firm shall not be able to pay its current
liabilities in time without facing difficulties. An increase in the current ratio
represents improvement in the liquidity position of the firm while a decrease
in the current ratio represents that there has been a deterioration in the
liquidity position of the firm. A ratio equal to or near 2 : 1 is considered as a
standard or normal or satisfactory. The idea of having double the current
assets as compared to current liabilities is to provide for the delays and losses
in the realization of current assets. However, the rule of 2 :1 should not be
blindly used while making interpretation of the ratio. Firms having less than 2
: 1 ratio may be having a better liquidity than even firms having more than 2 :
1 ratio. This is because of the reason that current ratio measures the quantity
of the current assets and not the quality of the current assets. If a firm's
19. current assets include debtors which are not recoverable or stocks which are
slow-moving or obsolete, the current ratio may be high but it does not
represent a good liquidity position.
Limitations of Current Ratio:
This ratio is measure of liquidity and should be used very carefully because it
suffers from many limitations. It is, therefore, suggested that it should not be
used as the sole index of short term solvency.
1. It is crude ratio because it measures only the quantity and not the
quality of the current assets.
2. Even if the ratio is favorable, the firm may be in financial trouble,
because of more stock and work in process which is not easily
convertible into cash, and, therefore firm may have less cash to pay off
current liabilities.
Valuation of current assets and window dressing is another problem. This
ratio can be very easily manipulated by overvaluing the current assets. An
equal increase in both current assets and current liabilities would decrease
the ratio and similarly equal decrease in current assets and current liabilities
would increase current ratio
Quick Ratio:
It is an indicator of a company's short-term liquidity. The quick
ratio measures a company's ability to meet its short-term obligations with its
most liquid assets. The higher the quick ratio, the better the position of
the company.
The quick ratio is calculated as:
Also known as the "acid-test ratio" or the "quick assets ratio"
20. Significance of quick Ratio:-
The quick ratio/acid test ratio is very useful in measuring the liquidity
position of a firm. It measures the firm's capacity to pay off current obligations
immediately and is more rigorous test of liquidity than the current ratio. It is
used as a complementary ratio to the current ratio. Liquid ratio is more
rigorous test of liquidity than the current ratio because it eliminates
inventories and prepaid expenses as a part of current assets. Usually high
liquid ratios an indication that the firm is liquid and has the ability to meet its
current or liquid liabilities in time and on the other hand a low liquidity ratio
represents that the firm's liquidity position is not good. As a convention,
generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory.
Although liquidity ratio is more rigorous test of liquidity than the current ratio
, yet it should be used cautiously and 1:1 standard should not be used blindly.
A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity position
of the firm if all the debtors cannot be realized and cash is needed
immediately to meet the current obligations. In the same manner, a low liquid
ratio does not necessarily mean a bad liquidity position as inventories are not
absolutely non-liquid. Hence, a firm having a high liquidity ratio may not have
a satisfactory liquidity position if it has slow-paying debtors. On the other
hand, A firm having a low liquid ratio may have a good liquidity position if it
has a fast moving inventories.
Working Capital Turnover Ratio:
Working capital turnover ratio indicates the velocity of the utilization of net
working capital.
This ratio represents the number of times the working capital is turned over
in the course of year and is calculated as follows:
Formula of Working Capital Turnover Ratio:
Following formula is used to calculate working capital turnover ratio
Working Capital Turnover Ratio = Cost of Sales / Net Working Capital
21. The two components of the ratio are cost of sales and the net working capital.
If the information about cost of sales is not available the figure of sales may be
taken as the numerator. Net working capital is found by deduction from the
total of the current assets the total of the current liabilities.
Significance of working capital turnover ratio:
The working capital turnover ratio measures the efficiency with which the
working capital is being used by a firm. A high ratio indicates efficient
utilization of working capital and a low ratio indicates otherwise. But a very
high working capital turnover ratio may also mean lack of sufficient working
capital which is not a good situation
Inventory Turnover Ratio or Stock Turnover Ratio (ITR):
Every firm has to maintain a certain level of inventory of finished goods so as to be able to
meet the requirements of the business. But the level of inventory should
neither be too high nor too low.
A too high inventory means higher carrying costs and higher risk of stocks
becoming obsolete whereas too low inventory may mean the loss of business
opportunities. It is very essential to keep sufficient stock in business
Definition:
Stock turnover ratio and inventory turnover ratio are the same. This ratio is a
relationship between the cost of goods sold during a particular period of time
and the cost of average inventory during a particular period. It is expressed in
number of times. Stock turnover ratio/Inventory turnover ratio indicates the
number of time the stock has been turned over during the period and
evaluates the efficiency with which a firm is able to manage its inventory. This
ratio indicates whether investment in stock is within proper limit or not.
Components of the Ratio:
Average inventory and cost of goods sold are the two elements of this ratio.
Average inventory is calculated by adding the stock in the beginning and at
22. the and of the period and dividing it by two. In case of monthly balances of
stock, all the monthly balances are added and the total is divided by the
number of months for which the average is calculated.
Formula of Stock Turnover/Inventory Turnover Ratio:
The ratio is calculated by dividing the cost of goods sold by the amount of
average stock at cost.
(a) [Inventory Turnover Ratio = Cost of goods sold / Average inventory at
cost]
Generally, the cost of goods sold may not be known from the published
financial statements. In such circumstances, the inventory turnover ratio may
be calculated by dividing net sales by average inventory at cost. If average
inventory at cost is not known then inventory at selling price may be taken as
the denominator and where the opening inventory is also not known the
closing inventory figure may be taken as the average inventory.
(b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost]
(c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling
Price]
(d) [Inventory Turnover Ratio = Net Sales / Inventory]
Significance of ITR:
Inventory turnover ratio measures the velocity of conversion of stock into
sales. Usually a high inventory turnover/stock velocity indicates efficient
management of inventory because more frequently the stocks are sold, the
lesser amount of money is required to finance the inventory. A low inventory
turnover ratio indicates an inefficient management of inventory. A low
inventory turnover implies over-investment in inventories, dull business,
poor quality of goods, stock accumulation, accumulation of obsolete and slow
moving goods and low profits as compared to total investment. The inventory
turnover ratio is also an index of profitability, where a high ratio signifies
more profit, a low ratio signifies low profit. Sometimes, a high inventory
23. turnover ratio may not be accompanied by relatively high profits. Similarly a
high turnover ratio may be due to under-investment in inventories.
It may also be mentioned here that there are no rule of thumb or standard for
interpreting the inventory turnover ratio. The norms may be different for
different firms depending upon the nature of industry and business
conditions. However the study of the comparative or trend analysis of
inventory turnover is still useful for financial analysis.
Debtors Turnover Ratio | Accounts Receivable Turnover Ratio:
A concern may sell goods on cash as well as on credit. Credit is one of the
important elements of sales promotion. The volume of sales can be increased
by following a liberal credit policy.
The effect of a liberal credit policy may result in tying up substantial funds of a
firm in the form of trade debtors (or receivables). Trade debtors are expected
to be converted into cash within a short period of time and are included in
current assets. Hence, the liquidity position of concern to pay its short term
obligations in time depends upon the quality of its trade debtors.
Definition:
Debtors turnover ratio or accounts receivable turnover ratio indicates the
velocity of debt collection of a firm. In simple words it indicates the number of
times average debtors (receivable) are turned over during a year.
Formula of Debtors Turnover Ratio:
Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors
The two basic components of accounts receivable turnover ratio are net credit
annual sales and average trade debtors. The trade debtors for the purpose of
this ratio include the amount of Trade Debtors & Bills Receivables. The
average receivables are found by adding the opening receivables and closing
balance of receivables and dividing the total by two. It should be noted that
provision for bad and doubtful debts should not be deducted since this may
give an impression that some amount of receivables has been collected. But
24. when the information about opening and closing balances of trade debtors
and credit sales is not available, then the debtors turnover ratio can be
calculated by dividing the total sales by the balance of debtors (inclusive of
bills receivables) given. and formula can be written as follows.
Debtors Turnover Ratio = Total Sales / Debtors
Accounts receivable turnover ratio or debtors turnover ratio indicates the
number of times the debtors are turned over a year. The higher the value of
debtors turnover the more efficient is the management of debtors or more
liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient
management of debtors or less liquid debtors. It is the reliable measure of the
time of cash flow from credit sales. There is no rule of thumb which may be
used as a norm to interpret the ratio as it may be different from firm to firm.
Creditors / Accounts Payable Turnover Ratio:
Definition and Explanation:
This ratio is similar to the debtor’s turnover ratio. It compares creditors with
the total credit purchases.
It signifies the credit period enjoyed by the firm in paying creditors. Accounts
payable include both sundry creditors and bills payable. Same as debtor’s
turnover ratio, creditors turnover ratio can be calculated in two forms,
creditors turnover ratio and average payment period.
Formula:
Following formula is used to calculate creditor’s turnover ratio:
Creditors Turnover Ratio = Credit Purchase / Average Trade Creditors
Average Payment Period:
Average payment period ratio gives the average credit period enjoyed from
the creditors. It can be calculated using the following formula:
25. Average Payment Period = Trade Creditors / Average Daily Credit Purchase
Average Daily Credit Purchase= Credit Purchase / No. of working days in a
year
Or
Average Payment Period = (Trade Creditors × No. of Working Days) / Net
Credit Purchase
(In case information about credit purchase is not available total purchases may
be assumed to be credit purchase.)
ANALYSIS:
CURRENT RATIOS
ACC ULTRATECH AMBUJA OCL INDIA
YEAR LIMITED LIMITED CEMENT LIMITED CEMENT
LTD LTD
2011 0. 87 0.67 1.14 5.84 0.95
2010 0. 68 0.67 1. 0 7 0.66 1.28
2009 0. 67 0.67 0. 8 9 0.75 1.46
2008 0. 89 0.59 1. 2 6 0.95 1.13
2007 0. 86 0.58 1. 0 3 0.45 1.43
18
16
14
12 INDIA CEMENT LTD
10 OCL
8 AMBUJA CEMENT
6
ULTRATECH
4
ACC LIMITED
2
0
Year 2011 2010 2009 2008 2007
28. 60
50
40
30
20
10
0
year 2011 2010 2009 2008 2007
AMBUJA CEMENT
O CL
ACC LIMITED
ULTRATECH
INDIA CEMENT
ANALYSIS AND FINDINGS:
In ACC limited the current ratio is in increasing trend from2007-2008
i, e 0.86 to 0.89 that means the improvement in illiquidity position of
firm & after that, in 2009 there has been detoriation of firm in some
extent as it falls to 0.67 . In 2010 it also increases. For ultratech cement
current ratio increase from2007-2008 as 0.58 -0.59 and after that it is in
a constant position i,e 0.67 from 2009-2011 that means the current
assets increases following the current liability. The all companies have
not good current ratio because it is below the rule of thumb except the
OCL limited in2011 as its current ratio is 5.84.
India cements have its very satisfactory quick ratio & liquidity position
of India cements is also very good in all year. OCl also have good ratios
from 2008-2010.in 2011 OCL have huge quick ratio as 13.63 & it is
29. very good liquidity position and all other companies have low quick
ratio in all year except and inventories are not absolutely non-liquid and
its satisfactory because the inventory is fast moving.
Inventory turnover ratio of all companies has satisfactory and it
indicates efficient management inventory because more frequently
stocks are sold.
Debtor turnover ratio of all companies in all year are satisfactory
except the OCL limited in 2007 I,e 2.87 is very low as comparison to
other.in2007 of OCL limited has sales to the less liquidator debtor.
Overally short term financial position of all companies are satisfactory.
The management system of cement industries is very efficient.
Indian cement industries in a healthy position & it produce qualitative
cement.
SUGGESTIONS AND RECOMMENDATIONS
All companies should increase its productions as india develops its
infrastructural sites.
Management of companies is suggested to improve its current ratio.
The Government should frame policy for the benefits of cement
industries.
The Government should develop the R & D in cement industries.
30. Conclusion
The amount of profit earned measures the efficiency of a business. The greater
the volume of profit, the higher is the efficiency of the concern. The profit of a
business may be measured and analyzed by studying the profitability of
investments attained by the business. The study investigates the profitability
of the selected cement companies in India. The study uses various liquidity
and profitability ratios for assessment of impact of liquidity ratios on
profitability performance of selected cement companies. It is inferred from
the results profitability performance of selected cement companies is
satisfactory.
Bibliography
J. C. Van Home. J. M Wachowicz (JR). “Fundamental of
Management Accounting”. Prentice Hall of India (PHI).
Pandey, I.M.“Financial Management” New Delhi: Vikash publication
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