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49843624 project-report-on-financial-statement-analysis-of-kajaria-ceramics-ltd


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49843624 project-report-on-financial-statement-analysis-of-kajaria-ceramics-ltd

  1. 1. A REPORT ON “FINANCIAL ANALYSIS OF KAJARIA CERAMICS LTD” A Project report submitted in the partial fulfillment of the requirement for the degree Of Master of Business Administration (MBA) KAJARIA CERAMICS LTD.Submitted To: Submitted By:Mr. AMRENDRA TIWAREE SYED MOHD. ZIYALecturer- MBA 3rd semester (Finance)D.A.M.S. College Roll No. 0904870089 DAYANAND ACADEMY OF MANAGEMENT STUDIES GOVIND NAGAR, KANPUR (AFFILIATED TO G.B.T.U. LUCKNOW, U.P.) 0
  2. 2. CERTIFICATE This is certify that Mr. Syed Mohd Ziya worked during the period w.e.f.15.07.2010 to 14.08.2010 on the development of the project “Financial analysis ofKajaria Ceramics Limited”, in the partial fulfillment of the requirement for thedegree of MBA (Master of Business Administration) under my guidance &supervision. To the best of my knowledge, the matter represented in this project isa bonafide & genuine piece of work. During her association with the project I found him to be sincere &motivated individual. He has shown keen interest in this project & him conductwas excellent. I wish him all success in his career. Place: Rajesh Sharma ASST. GEN. MANAGER Date: 25-8-2010 (P & A) Kajaria Ceramics Ltd. Sikandrabad 1
  3. 3. Guided by: Mr. Rajesh Sharma ASST. GEN. MANAGER (P & A) Kajaria Ceramics Ltd. Sikandrabad DECLARATIONI, SYED MOHD ZIYA, S/O Mr. SYED SHAKEEL AHAMED is a bonafiedstudent of M.B.A. at DAYANAND ACADEMY OF MANAGEMENT STUDIES.My enrollment number is 0904870089. I hereby declare that present summerinternship report titled Account of assets is my original work. I conducted thisstudy at KAJARIA CERAMICS LTD. SIKANDRABAD during 15july, 2010 to14 Aug, 2010. This report has not been submitted earlier either with DAYANANDACADEMY OF MANAGEMENT STUDIES and any other educationalorganization as an essential requirement for the award of any Diploma/ Degree.Date- 17/Aug/2010 Signature: - (SYED MOHD ZIYA) 2
  4. 4. PREFACE Someone has rightly said that practical knowledge is far better thanclassroom teaching. During this project I fully realized this and I came toknow about how a retailer chooses among a varied range of productsavailable to him. The subject of my study is Financial Analysis of Kajaria CeramicsLtd., which has slowly but steadily evolved from a beginner to acorporate giant earning laurels and kudos throughout. The report contains first of all brief introduction about thecompany. Finally there comes data presentation and analysis in the endof my project report. I also put forward some of my suggestion hopingthat they will help Kajaria Ceramics Ltd. Move a step forward to beingthe very best. 3
  5. 5. ACKNOWLEDGEMENT I acknowledge my deep sense of gratitude for giving me this opportunity toundergo my project with Kajaria Ceramics Ltd. At this moment of successfulcompletion of the project, I would like to express my sincere thankfulness andindebtedness to all those who extended their kind help by spending their precioustime in explaining the various intricacies of the subject and suggesting the correctapproach to me. To start with I would like to thank not once but twice Mr.Ashok Kajaria(Chairman) and Mr. Rishi kajaria (M.D.) whose contribution to the project isbeyond my capacity of expression. I would like to thank Mr. ARUN LATH (GM), Mr. ANIL PRABHAKAR(AGM A/C), & Mr. Deepak Gupta (Dpt. MGR), who had been my project guidefor their understanding, gracious and constructive advice which played a major incompletion of this project. At last but not least I would also like to thanksMr. AMRENDRA TIWAREE (Lecturer) Guide for providing insights aboutperforming our work. This Project has been a great learning outcome for me andwithout his help it would not have possible for me to this project. 4
  6. 6. CONTENTS INTRODUCTION OF K.C.L1. KCL - AN OVERVIEW Company profile Marketing pattern Company‟s business mission & objectives Board of directors KCL contribution in India Bankers Major competitors Technician collaborations Internal control system2. AWARDS WON3. SWOT ANALYSIS OF KCL4. POLICIES ADOPTED Quality policy (ISO 9001:2000) Environmental policy (ISO 14001) Health & safety policy (OHSAS) ISO 18001 Social accountability policy5. PRODUCT PROFILE OF KCL6. MANUFACTURING PROCESS7. RESEARCH & DEVELOPMENT Methodology Utility of the research Extensive literature survey Collection of data & analysis of data8. PERFORMANCE OF THE COMPANY9. FINANCE OVER VIEW Organization Chart of Finance Department 5
  7. 7. 10. KCL FINANCIAL REPORT Balance Sheet Profit & Loss11. FINANCIAL ANALYSIS Introduction Objective of Study Types of Financial Analysis Utility of Financial Analysis Financial Ratios & Utility12. INTRODUCTION OF RATIO ANALYSIS Introduction Nature Uses of Financial Statements of Different Parties Advantages of Ratios Role of Financial Ratios Objective of the Study13. CLASSIFICATION OF RATIOS Traditional Classification Functional Classification Classification According To Nature Classification According To Importance14. CONCLUSTION15. RECOMMENDATIONS LIST OF CHARTSChart.1 Turnover (Sales)Chart.2 Net ProfitChart.3 CapacityChart.4 Production 6
  8. 8. EXECUTIVE SUMMARY Kajaria Ceramics Limited, FMCG with a turnover of Rs.766.75 croremanufacturing and selling ceramic Floor & Wall Tiles under the brand name"Kajaria". It is the first tile company in India accredited with ISO 9002Certification and recipient of one of the Global Growth company award from the"World Economics Forum". The company has its corporate office at New Delhiand Regional offices at Ahmedabad, Bangalore, Calcutta, Mumbai and Chennai.Today kajaria is a well established name in the corporate world. From a modestbeginning of 3,000 sq.mts per day, the company today produces over 33,000sq.mts of tiles every day, clearly demonstrating Kajaria‟s growing strength over theyears and also indicating rising customer preference for the brand. Manufacturing,standards, technology user trends, competitiveness, customer preference all haveplayed a vital role in shaping Kajaria success story. Besides this, the companyenjoys a reputation of rendering products thats at par with international standards. Within 11 years of operation, Kajaria has moved very close to its vision ofbecoming a leader worldwide. Kajaria Ceramics has grown at a breathtaking paceduring the last decade in turnover, profits and foreign earnings. With the new plantat Bhiwadi, Rajasthan becoming fully operational, it has almost doubled itscapacity from 80,000 TPA 1, 50,000 TPA. The first plant in Sikandrabad U.P.already has the distinction of always producing over 100% of its capacity. 7
  9. 9. The companys dedicated Research and Development efforts have alsoproved to be catalytic in its leadership position. These include development of special effects floor tiles and development ofFLOOR BORDERS matching PEI_V Tiles having high abrasive resistance. Inhouse R & D has also enable Kajaria to imbibe innovations and technical methodsof production based on Monoporosa Technology. Kajaria has always been alert to changing market trends and preferences, byproducing tiles in myriad designs and colours‟. Infect Malaria is the only tilecompany in the country to have an impressive range of over 400 designs with amany as 50 different variation in Group 5 category, demonstrating out commitmenttowards customer satisfaction. Kajaria also continued to improve itscommunication process with architects, Builders, masons and interior decoratorsand designers in order to update their products information and provide themconvenient access to its diverse brands, designs, and colours. Using the effectivetechnique of sampling with frequent and regular communication throughpamphlets, products folders and catalogues helped to keep the Kajaria brand on thetop_of_mind scale among the priority target customers. In additional, the companyemphasis on participating in national and local exhibitions also enabled it toenhance its visibility and reach on a continuous basis, throughout the year. Thisalso helped to inspire and influence product usage at a more rapid pace. 8
  10. 10. Kajarias dominating presence in the country has been further consolidatedby a uniquely engineered network of dealers. These highly visible retail outletshave sprung up not only in all major cities and towns but even in the most strategicmarket locations. A huge force of sub dealers cover and breadth of the country. Thetremendous advantage from this marketing strength has been the easy access to andavailability of Kajarias entire of the customers. In addition, the vast range andchoice enables customers to select their own designs and create their ownindividual combinations in exclusive preferences and tastes. With the tremendous spurt taking place in the realm of informationtechnology, Kajaria is reaping the benefits from the new medium, by hosting itsown website on the internet. The Kajaria website provides wealth of informationon its entire range of wall and floor tiles, borders including detailed information onthe various specifications. Exquisitily designed, the website contains the full rangeof visually appealing graphics on designs, colours and size. With access to thisfacility, customers can avail the tremendous benefits of e-commerce of Kajariatiles, and even place their orders for quick delivery. 9
  11. 11. 10
  12. 12. COMPANY PROFILE & OVERVIEW The company was incorporated in December, 1985 with an object of settingup Ceramic Tile Plant with an initial capacity of 12,000 MT at Sikandrabad (U P)in technical collaboration with Todagres SA, Spain. The company had started thecommercial production on 12th August, 1988. Since then, the company hasexpanded its capacity at its existing location for floor tiles twice during 1990-91and 91-92 by 14,000 MT each taking its floor tile capacity 40,000 TPA. In 1993-94, the company added Wall Tile capacity of 20,000 TPA with Monoporosatechnology which was expanded to 40,000 TPA in 1995-96. The company set up agreen field Plant at Village Gailpur (Rajasthan) of 70,000 MT capacity for themanufacture of Monocuttra Wall tiles in March, 1998. The company carried outthe modernization of its existing Plant at Sikandrabad in January, 99, which hasresulted increase in capacity from 80,000 MT to 90,000 MT and enhancing the lifeof the Plant. The total present capacity of the company is 170,000 MT. Both the Plants have adopted single firing technology (Monoporosatechnology), which is the most latest, cost efficient and more productivetechnology. The company is marketing its products since inception under thebrand name of „Kajaria‟ which is a well-known brand within the industry in Indiaand abroad. The company has also been selected as one of the top performingGlobal Growth Company from India by World Economic Forum in 1997. Kajaria 11
  13. 13. is the first ceramic tile company in India and may be 5th in the world accredited with ISO 9002 certification for its quality system. During the year the company has also been accredited with the “ISO 14001” certification for the Environmental Management System for manufacturing Ceramic Tiles. The company is the No. 1 preferred company for ceramic tiles in India. The company has also been given OHSAS 18001 certificate by M/s. TUV Suddeutschland, Germany. The Certificate has been given for the commitment of the company for fulfilling international standards in Occupational Health and Safety Management System - Specification. Kajaria Ceramics is the first ceramic tile company in the world to get this certification. Kajaria has an all India network of 600 dealers. Kajaria is selling 80% of itsproducts to the retail consumer and 20% to the projects. Since last year companyhas franchised exclusive tile Shoppe & tile galleria on all India bases. It displays themock bathroom & kitchen with various combinations of tiles. It helps in selection ofthe product/ design for the floor & walls. These also have customer support staff,which advises on sizes, combinations & laying techniques. The company has opened 11 retail European styled showrooms located invarious parts of the country. Kajaria Ceramics has also opened a showroom inMelbourne, Australia. The company is the largest exporter of ceramic tiles from India and accounts for 40% of total exports of ceramic tiles from India. The Company‟s exports are mainly to Australia, Sri Lanka, Bahrain, UAE, Saudi Arabia and Oman. The 12
  14. 14. company has won 7 exports award including the National Export award given inMay 2000. The company has closed the Financial Year 2009-10 with a turnover of Rs7667.54 million as against the turnover of Rs 6911.99 million in the correspondingfinancial year. The turnover is high mainly because of increase in demand indomestic market, effective cost control measures, better cash management andreduction in the interest rate. The company has closed the turnover of the 1stquarter of 2009-10 is 1598.8 million which ends on 30th of June. 13
  15. 15. MARKETING PATTERN We have a manufacturing unit at Sikandrabad, Distt. Bulandshahar [U.P.]and the other at Village- Gailput, Distt. Alwar (Raj.). We are manufacturing FloorTiles at Sikandrabad Plant & Wall Tiles at Gailpur Plant. We sell our goodsthrough dealers and also directly to Builders, Contractors and others. The pricesare charged as per price lists applicable for the particular area. On all theclearances the Excise Duty is being paid under Section 4A on M.R.P. lessabatement. The goods are delivering at the Factory gate to the Buyer/ on behalf ofthe Buyer to the transporter. The freight at actual is paid by the Dealer/Buyerdirectly to the transporter at destination. In few cases, the freight at actual is paidby us which is show separately in the Invoice and realized from the buyer/dealer. 14
  16. 16. COMPANY‟S BUSINESS MISSION & OBJECTIVES BUSINESS MISSION *********************** To maintain a leading position as suppliers of Ceramic Wall & Floor Tilesthe company utilizes its capabilities and resources to expand the business intoallied areas and other priority sectors of the economy like housing projects etc… BUSINESS OBJECTIVES ***************************** GROWTH Expectations to ensure a steady growth by enhancing the competitive edgeof Kajaria Ceramics Ltd. PROFITABILITY To provide a reasonable and adequate return on capital employed, primarilythrough improvements in operational efficiency, capacity utilization, productivityand generate adequate internal resources to finance the company‟s growth. 15
  17. 17. CUSTOMER FOCUS To build a high degree of customer confidence by providing increased valuefor his money through international standards of product quality, performance andsuperior services through dealer network. PEOPLE – ORIENTATION To enable each employee to achieve his potential, improve his capabilities,perceive his role and responsibilities and participate and contribute positively tothe growth and success of the company. To invest in human resources continuouslyand be alive to their needs. TECHNOLOGY Achieve technological excellence in operations by development ofindigenous technologies and efficient absorption and adaptations of importedtechnologies to suit business need and priorities and provide the competitiveadvantage to the company. IMAGE To fulfill and the comply the relevant legislation regulations and theexpectations which employees, customers and the country at large have fromKajaria Ceramics Ltd. 16
  18. 18. BOARD OF DIRECTOR (As on 15.07.2010)Mr. A. K. Kajaria : Chairman & Managing DirectorMr. D. D. Rishi : Jt. Managing DirectorMr. R. P. GoyalMr. D. P. BagchiMr. R. K. BhargavaMr. R. R. BagriMr. Chetan KajariaMr. Rishi KajariaMr. R. C. Rawat : V.P. (F&A) & Company Secretary Is the Compliance Officer of the Company. 17
  19. 19. Committees of the Board Audit CommitteeMr. R. P. Goyal : ChairmanMr. R.K. BhargavaMr. R.R. Bagri Share transfer and Investors Grievance CommitteeMr. R.R. Bagri : ChairmanMr. A. K. KajariaMr. D. D. Rishi Remuneration CommitteeMr. A. K. Kajaria : ChairmanMr. D.P. BagchiMr. R. K. BhargavaMr. R. R. Bagri Project Management CommitteeMr. A.K. Kajaria : ChairmanMr. D.D. rishiMr. Chetan KajariaMr. Rishi Kajaria 18
  20. 20. KCL CONTRIBUTION IN INDIACORPORATION OFFICEJ-1/B-1 (Extn.), Mohan Co-operative Industrial Estate,(Opp. Badarpur Thermal Power Station), Mathura Road,New Delhi – 110 044, India.Phone: 26946409, Fax: 91-11-26946407, 26949544Email: newdelhi@kajariaceramics.comWebsite: http://www.kajariaceramics.comREGIONAL OFFICEMUMBAI : No.201-208, Bonanza, 2nd Floor, Shri Mathura das VasanjiRoad, (Andheri Kurla Road), J.B. Nagar, Andheri (East), Mumbai-400 059Phone: 28203506, 28203507, Fax: 28203509,Email: mum@kajariaceramics.comKOLKATA: Central Plaza, 2/6, Sarat Bose Road, Flat No.807,Kolkata – 700 020Phone: 24754820, 24762647, and 24763179 Fax: 24748012Email: 19
  21. 21. AHMEDABAD:202, Anand Mangal-II, behind Femina Town, C.G.Road, Navrangpura,Ahmedabad.Phone: 26465515, 26465516 Fax: 26566669Email: ahm@kajariaceramics.comCHENNAI:28, North Usman Road, T.Nagar, Chennai-600 017Phone: 28144323, 28144324 Fax: 28144323Email: chn@kajariaceramics.comCOCHIN:No.52, 2nd Floor, North Square, Paramara Temple road, Ernakulum, Kerala.Phone: 2396433, 2393364 Fax: 2396433Email: coc@kajariaceramics.comREGISTERED OFFICEA-27 & 28, Industrial Area, Sikandrabad, (Distt) Bulandshahr [UP]Phone: (05735) 222819,222393, 223353 Fax: (05735) 222140Email:, 20
  22. 22. MANUFACTURING UNITSKAJARIA CERAMICS LTD.SIKANDRABADA-27/28/29, Industrial Area, Sikandrabad, [Distt.] Bulandshahr {UP}Tel; (05735-222393 / 222819 Fax ;( 05735)-222140KAJARIA CERAMICS LTD.GAILPUR19 KM Stone, Bhiwadi – Alwar Road, Village – Gailpur, Bhiwadi [Raj]Tel.; [01493] - 243142, 243143, 243507/8/9 Fax: [01493] -243510 21
  23. 23. BANKERS & SOLICITORSBANKERS: - State Bank of India Canara Bank State Bank of Mysore HDFC Bank Ltd. State Bank of Indore Oriental Bank of CommerceSOLICITORS:- Khaitan & Khaitan New Delhi 22
  26. 26. INTERNAL CONTROL SYSTEM The Company has well defined its internal controls in all areas of itsoperations. The Company has an independent internal audit activity, whichmeasures the efficiency, adequacy and effectiveness of other controls in theorganization. A summary of audit observations are placed before the AuditCommittee of the Board of Directors. The Audit Committee‟s recommendationsand directions are noted and action taken accordingly. The Company has welldefined the procedures to execute financial transactions. 25
  27. 27. AWARDS WON Kajaria Ceramics Limited has been awarded the "SuperBrand" Title. Kajaria is the only ceramics tile company who haswon the status of consumers "Super Brand”.Mr. Ashok Kajaria (Chairman & Managing Director) receiving theaward presented by Honorable Minster for Civil Aviation, Mr.Praful Patel The company has had a unique distinction of havingreceived the Presidents Award for achieving the highestexports in the industry. Kajaria Ceramics is the largest exporter of ceramic tiles inIndia and consistently winning the Export Awards.Mr. Chetan Kajaria with the National Export Award Presented byThe Prime Minister of India. 26
  28. 28. SWOT ANALYSIS OF KCLSTRENGTHSLow cost Producer of quality tiles. Flexible manufacturing set-up for longeruniformity of product and comprising to international standards fully adaptation,absorption of technology.WEAKNESSES & RISKS The ceramic tiles industry is dependent on the growth in the constructionand housing sector. In the Budget 02-03, tiles have been delisted from the SSIcategory and accordingly all manufacturers of tiles come in the excise net. Tosome extent they have arrived at the competitive level to the organized sector. Butdue to their negligible overheads, tax evasion and copies of designs of organizedsector that retains the potential to under cut the organized sector. There is a stiffcompetition within the organized sector which is putting pressure on the price also. 27
  29. 29. OPPORTUNITIESStrong distribution network across the country and overseas market. With focus onretail marketing to build and establish exclusive showrooms across the country andoverseas markets. Using innovative display and communicating to customers throughexhibitions and trade shows for consistent brand building efforts. Nurturing and cultivating highly skilled human work force by motivatingand rewarding them.THREATS The Company is continuously on the path to over come any threats arisingfrom imports / competition amongst the tile manufacturers by making the productmore competitive in terms of price and quality, which has been possible byreducing the input costs and providing more value added items with dynamic rangeof designs and colours. 28
  30. 30. QUALITY POLICY (ISO 9001:2000) We are committed to excel in all areas of Management to be a leader in themanufacture of Ceramic Glazed Floor and Wall Tiles by complying with therequirements of our customers, National and International Standards. We shall achieve this through continual improvement in our QualityManagement System by increasing the productivity, reducing the costs, updatingand up-gradation of technology, optimum utilization of resources and activeinvolvement of all employees. 29
  31. 31. ENVIROMENTAL POLICY (EMS) (ISO 14001) KAJARIA CERAMICS LIMITED, Sikandrabad, Distt. Bulandshahr (UP)an ISO9001:2000 Company manufacturing Ceramic Glazed Floor & Wall Tiles,resolve to achieve excellence and leadership in protection the environment. We are committed to: Continual reduction in pollution, consumption of energy, raw material andconservation of other natural resources. Prevent Air, Land, Water, Noise pollution and Solid waste Comply relevant environmental legislation regulations and organizationsenvironmental standards. Provide awareness and training to all our employees on relevantEnvironmental Management issues. Its continual improvement and periodicalreview of the same. 30
  32. 32. HEALTH & SAFETY POLICY (OHSAS) (ISO 18001)We believe that safe working methods lead to better business performance,motivated work force and higher productivity.We shall create a safety culture in organization by:Continual improvement in Health and Safety PerformanceComplying with all current applicable OH & S legislation and organizationalstandards.Empowering the relevant employees to ensure safety in their working area.Promoting Safety & Health awareness among all employees, suppliers andcontractors.Periodically reviewing the policy.This policy shall be made available to the public. 31
  33. 33. SOCIAL ACCOUNTABILITY POLICY (SA) (SA 8000)Committed to:Conformance of national and international standards requirements w.r.t.Social Responsibility and Accountability.Improve its social performance continuously to ensure better quality of life. 32
  34. 34. PRODUCT PROFILE OF KCLPRODUCT SIZE INSTALLED CAPACITYFLOOR TILES 300 x 300 MM 9700000 M2(At Sikandrabad Unit) 395 x 395 MM 400 x 400 MMWALL TILES 200 X 200 MM 8300000 M2(At Gailpur Unit) 200 X 300 MM 250 X400 MM 33
  35. 35. PRODUCT DEVELOPMENT The Company has consistently pioneered and brought in the latestinternational quality products in India. During the year the Company launched30X40 cm and 30X45 cm in rectified wall tiles and 45X45 cm joint free floor tiles.It opened seven Kajaria world show room in 2008-09. This has set a new trend andhas inspired interior designers/architects to recast their designs to provide a bettercombination series to discerning customers. The Company has also added a seriesof new products namely Oasis/Bermuda/Ranger/Smoke. Leo/Diana/Alfa/Cedar etcwhich has been widely accepted by the customers in the market. 34
  36. 36. MANUFACTURING PROCESS Ceramic Floor Tile is mainly consists of two parts i.e. Body and Glaze.Body is a mixture of triaxial body i.e. made of three different and distinguishableRaw materials viz: Hard materials like Quartz or Siliceous material. Feldspar which acts as a flux on firing. Different clays to give suitable properties required in green and fired stages. All these materials are mixed in pre-determined quantitative proportions andwet milled in Ball mill. The Body slip thus prepared is duly sieved and de-magnetized and stored in under ground tanks and is converted into spray driedgranules in spray Drier. Similarly, Glaze is prepared by mixing and wet milling of differentconstituents like Frit, Feldspar powder, Quartz powder, China clay, Calcinedalumina, Zinc oxide and zirconium slicate in Ball mill depending upon the natureof Glazes to be produced. The spray dried granules are fed to the automatic hydraulic press to producetiles. These pressed tiles are bone dried in vertical drier by maintaining driertemperature in the range 100-110 Deg.Cent. The dried tiles then sent to Glaze Line 35
  37. 37. through belt conveyor for Glaze application. Glazing is done in two coatings eitherspraying by Disc or by campana depending upon the required surface followed byscreen printing and dry powder application as per design requirement. The Glazed Tiles are automatically loaded in the box car and then transferred tothe track for roller hearth kiln feeding. At the kiln entry tiles are unloaded and fedinto the kiln in pre-determined firing cycle and temperature. The firing temperatureis in the range between 1130 to 1160 Deg.Cent. Depending upon the firing cycle.At the kiln exit, the fired tiles are loaded in the box car and transferred to thesorting section for selection. In Sorting Section, tiles are sorted as First, Secondand Utility depending upon the visible faults and packed in corrugated boxes andsent to B.S.R. for dispatches.Name of main Raw material:  Clay‟s & Feldspar  Glaze material such as Quartz, Alumina, China Clay & Ball Clay  Frit  Stains & Pigments  Zirconium 36
  38. 38. RESEARCH AND DEVELOPMENT (R&D) (1) Specified Areas in which (R&D) carried out by the Company: Development of alternative basic Raw material / Glazes and its formulationfor cost reduction with standardization of method in preparation of Body /Glaze forlonger uniformity. Research for further indigenizing pigments/frits for achieving lower firingcycle and better quality/consistency with increase in the production of tiles. Installation of Surface Glaze Application Machine and upgraded B&T StorageHandling Machines at Kiln Feeding & Exit point. 37
  39. 39. (2) Benefits derived as a result of the above R & D The Company is able to reduce the cost of raw material, fuel & spare cost. Several new orders have been received by the Company due to this R&D inthe area of special purpose of laying wall & floor tiles. The product has become more effective and preferable to all type ofconsumers due to its products availability in wide range of floor & wall tiles.(3) Future plan of action: The Company has always been a leader in producing special effect Wall &Floor Tiles that shares the advantage of existing market scenario. Introduction of special effect of Wall & Floor tiles in larger sizes andoffering new look completely different from other manufacturers. Up-gradation and obtain the technique for producing the extra ordinary tileswhich would be staining resistance and excellent quality. 38
  40. 40. To improve Company‟s infrastructures and R&D team, so that all productsgo through an exhaustive Quality Control by use of cheaper and reliable inputsboth Imported and Indigenous. (4) Company is going to have the captive power co-generation plantbased on waste heat recoveries from Kiln & Spray Driers. 39
  41. 41. Expenditure on (R&D) ( Million) 2009-2010 2008-2009Capital -- --Recurring 0.82 0.20Total 0.82 0.20Total R&D expenditure as aPercentage Of total turnover. (%) 0.011 0.003 40
  42. 42. PERFORMANCE OF THE COMPANY During the year, the company has registered a turnover of Rs.7667.54Million as compared to Rs.6911.99 million in the previous year, showing a growthof more than 11%. Despite cut in Natural Gas supply at Sikandrabad Plant andsubstantial increase in fuel prices, the profit before interest, dep & tax hasincreased from Rs.127.5 million to Rs.514.4 million showing an increase of 304%,The profit for the year has been higher mainly on account of increased demand indomestic market, effective cost control measures, better cash management andreduction in the interest cost. The performance of the Company for the past years (since beginning) hasbeen shown graphically. 41
  43. 43. TURNOVER CHART (Rs. In Million) 09-10 7667.54 08-09 6911.99 07-08 5289.07 06-07 4368.03 05-06 3517.92 04-05 3003.96 03-04 2491.8 02-03 2102.4 01-02 2278.4 00-01 2359.3 99-00 2450.8YEAR 98-99 1939.4 97-98 1362.2 96-97 1302.1 95-96 1184.8 94-95 730.9 93-94 487.3 92-93 457 91-92 358.6 90-91 251.6 89-90 152.1 88-89 68.3 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 01- 02- 03- 04- 05- 06- 07- 08- 09- 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 (Rs. In Million) 68.3 152 252 359 457 487 731 1185 1302 13621939 2451 23592278 2102 24923004 3518 43685289 6912 7668 TURNOVER Rs. IN Million 42
  44. 44. NET PROFIT (Rs. In Million) 09-10 358.52 08-09 89.01 07-08 150.23 06-07 76.73 05-06 281.71 04-05 254.88 03-04 135.4 02-03 99.3 01-02 26.3 00-01 68.3 99-00 110.6YEAR 98-99 67.5 97-98 148.3 96-97 201.9 95-96 210.2 94-95 129.5 93-94 86 92-93 53 91-92 40.4 90-91 25.6 89-90 7.4 88-89 0.1 0 50 100 150 200 250 300 350 400 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 0 9-10 (Rs. In M illion) 0. 1 7.4 25. 6 40.4 53 86 129. 5 210.2 201. 9 148.3 67.5 110.6 68.3 26. 3 99. 3 135. 4 254. 88 281.71 76.73 150.23 89. 01 358. 52 NET PROFIT Rs. IN LAC 43
  45. 45. CAPACITY CHART 2010 238000 2009 170000 2008 2007 2006 2005 2004 150000 2003 2002 2001 2000 1999YEAR 1998 1997 90000 1996 1995 80000 1994 60000 1993 1992 40000 1991 1990 26000 1989 1988 12000.000 0 50000 100000 150000 200000 250000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 M Tonne 1200 2600 4000 6000 8000 9000 2E+0 2E+0 2E+0 MT UPTO 1988 SQ,MTR FROM 2010 44
  46. 46. PRODUCTION CHART GLPR SKBD 2003 63208 54642 2002 76198 97910 2001 76417 90682 2000 74599 92817 1999 72409 81696 1998 2063YEAR 91028 1997 84793 1996 80713 1995 56667 1994 40675 1993 40038 1992 32420 1991 25167 1990 15156 1989 8809 0 20000 40000 60000 80000 100000 120000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 GLPR 2063 72409 74599 76417 76198 63208 SKBD 8809 15156 25167 32420 40038 40675 56667 80713 84793 91028 81696 92817 90682 97910 54642 MT UPTO 2002 & SQ.MTR FROM 2003 45
  48. 48. KAJARIA CERAMICS LTD****** ANNUAL REPORT 2009-2010***** 47
  49. 49. BALANCE SHEET BALANCE SHEET AS ON 31 MARCH 2010 (Rs in Millions) PARTICULARS SCHEDULES 2009-10 2008-09SOURCES OF FUNDS :Shareholder Funds:Share Capital 1 147.17 147.17Reserves & Surplus 2 1746.23 1473.51 1893.40 1620.68Loan FundsSecured Loans 3 2588.28 2926.67Unsecured Loans 4 40.00 325.00 2628.28 3251.67Differed Tax Liabilities 5 548.52 534.55Total………………………………………………………………… 5070.20 5406.90Application of FundsFixed Assets:Gross Block 6 5435.46 5014.92Less : Accumulated Depreciation 1987.57 1738.39Net Block 3447.89 3276.53Capital Work-in-progress 25.43 --------- 3473.32 3276.53Investments 7 33.94 33.94Current Assets, Loans & AdvancesInventory 8 1402.55 1384.57Sundry Debtors 9 773.21 678.04Cash and Bank Balance 10 44.91 78.87Loans & Advances 11 755.76 826.82 (A) 2976.43 2968.30Less : Current Liabilities & ProvisionsCurrent Liabilities 12 1197.69 829.85Provisions 13 215.80 42.02 (B) 1413.49 871.87Net Current Assets (A-B) 1562.94 2096.43Total Assets………………………………….. 5070.20 5406.90 48
  50. 50. PROFIT AND LOSS (Rupees in Crores) PROFIT AND LOSS ACCOUNT AS ON 31 MARCH 2010 (Rs in Millions) PARTICULARS SCHEDULES 2009-10 2008-09INCOME :Sales (Gross) 7667.54 6911.99Less: Excise Duty On sales 312.18 263.16 7355.36 6648.83Other Income 14 8.24 9.96Increase / decrease in stocks 15 2.75 -109.47 7366.35 6549.32EXPENDITURE :Material Manufacturing & Other Expenses 16 4811.17 4,485.61Salaries, Wages and Amenities 17 612.84 504.87Repairs and Maintenance 18 51.63 46.67Administrative & Other Expenses 19 298.78 240.94Selling & Distribution Expenses 20 435.21 311.97Financial Charges 21 375.24 582.42Depreciation 267.06 249.37 6851.93 6421.85Profit Before Tax 514.42 127.47Provisions for:Income Tax 130.00 16.80Fringe Benefit Tax --- 8.00Deferred Tax 13.97 12.55Income Tax/Wealth Tax Adjustment 11.93 1.13Profit After Tax 358.52 88.99Balance as per last year 819.03 728.51Profit Available for Appropriation 1,177.55 817.50AppropriationProposed Dividend on Equity Shares 73.58 14.72Corporate Dividend Tax 12.22 2.50Transfer to General Reserve 100.00 ----Transfer from Debenture Redemption Reserve -2.40 -18.75Surplus carried Over 994.15 819.52 1,177.55 817.50Basic/Diluted Earnings per share (Rs.) 4.87 1.21 49
  51. 51. Significant Accounting Policies and Notes on Accounts 22 50
  52. 52. Introduction Financial Analysis is the process of determining the operating & financialcharacteristics of a firm from accounting data & financial statement. The goal ofsuch analysis is to determine efficiency & performance of the firm management, asreflected in the financial records and reports. Its main aim is to measure the firm‟sliquidity, profitability and other indications that business is conducted in a rationaland orderly way. The basic financial statement Of the various reports that the companies issue to their shareholder, theannual report is by far the most important. Two types of information are given inthis report, first there is a text that describes the firms operating results during thepast year and discusses new development that will affect future operations. Secondthere are few basic financial statements –the income statement, the balance sheet,the statement of retained earnings and the sources and uses of funds statements. The financial statement taken together give an accounting picture of thefirm‟s operation and financial positions. 51
  53. 53. “Financial statement analysis is largely a study of relationship among thevarious financial factors in a business as disclosed by a single set of statements,and a study of trends of these factors as shown in a series of statements” --- John N. Myer “The analysis and interpretation of financial statement are an attempt todetermine the significance and meaning of the financial statement data so that theforecast may be made of the prospects for future earnings, ability to pay interestand debt maturities (both current & long term) and profitability of a sounddividend policy” --- R.D. and S. % Mc Muller Thus, analysis of financial statement means such a treatment of theinformation contained in the financial statement as to afford a full diagnosis of theprofitability and financial position of the firm concerned. 52
  54. 54. Nature of financial statement According to the American institute of certified public accountants “……………… financial statement reflected a combination of recordedfacts, accounting conventions and personal judgments.Objective of financial analysis The number and types of people interested in financial statements havechanged radically over a period of time. They need varied information andfortunately such information may be classified as relating to profitability, liquidityand solvency. The Project “ANALYSIS AND INTERPRETATION OF FINANCIALSTATEMENTS” is undertaken to fulfill the following objectives. To estimate the earning capacity To gouge the financial position and financial performance of the firm To determine the long terms liquidity of the funds as well as solvency To determine the debt capacity of the firm To decide about the future prospective of the firm 53
  55. 55. Types of Financial AnalysisFinancial analysis may be classified into different categories dependency upon  The material used  The method of operation followed in the analysis Graphical representation  Financial AnalysisThe material used the method of operation followed in the Analysis Internal External Horizontal Vertical Analysis Analysis Analysis Analysis 54
  56. 56. (a) According to material used Internal analysis – this is performed by the corporate finance andaccounting Department and is more detailed than external analysis. These departmentshave available more details and current information that is available to outsiders.They are able to prepare perform or future statements and are able to produce amore accurate and analysis of the firm‟s strength and weakness. External analysis – outsiders to the firm such as creditors, stock-holders orinvestment analysis perform this. It makes use of existing financial statement andinvolves a limited access to confidential information on a firm.(b) According to modus operation of analysis Horizontal analysis – this method of classified is based on the modusoperandi of analysis. Horizontal analysis refers to the comparison of the trend ofeach item in the financial statement over a number of years or companies. Thefigures of this type of analysis are presented horizontally over a number ofcolumns. Such a column represents a year of a company. This type of analysis isalso called „dynamic analysis‟ as it is based on data from year to year, rather thanon data of any one year 55
  57. 57. Vertical analysis – it is frequently used for referring to ratios developed forone data or one accounting period. Vertical analysis is also called static analysis.This is not very conductive to a proper analysis of the firm‟s financial position andits interpretation as it does not enable to study data in respective. This can only beprovided by a study conducted over a number of years so that comparison can beaffected. Therefore, vertical analysis is not very useful. 56
  58. 58. Financial Ratio & Utility A ratio may be defined as a fixed relationship in degree or number betweentwo numbers. In finance, ratios are used to point out relationship that is notobvious from the row data. Some uses financial ratios are following  (1) To Compare Different Companies in Some Industry: ratio can highlight the factors association with successful and unsuccessful firms. They canreveal strong firms and weak firms, overvalued undervalued firms. (2) To Compare Different Industries: Every industry has its own uniqueset of operating and financial characteristics. These can be identified with the helpof ratios. (3) To Compare Performance In The Different Time Periods: Over aperiod of years, a firm or a industry develop certain forms that may indicate futuresuccess or failure. If relationship changes in firms data over different time periods,the ratio may provide clues and trends of future problems. 57
  59. 59. Utility of Financial Analysis Following are the advantages of Financial Analysis With the help of ratios we can determine the ability of the firms to meet itscurrent-obligation.  Overall operating efficiency and performance of the firm.  Efficiency with which firms is utilizing its various assets in generating sales Revenue.  Ratios help in inter-firm and intra-firm comparison.  They help in determining the financial strength by highlighting the liquidity.  They are useful in comparison of performance.  They are also useful in forecasting purpose. 58
  60. 60. 59
  61. 61. INTRODUCTIONThe ever changing, external & internal environment in which the organizationoperates to achieve its goal has often leaded to change in the financial structure ofthe firm. This change may be in the assets structure, capital structure or any othersuch type of the change have often been found out of bring changes in the liquidityposition, level of activity & profitability of organization. To be aware of various positions parties concerned with the organization oftengo for the various type of analysis one of them being financial analysis, that isdone to know about the present performance of the firm in which they are eithergoing to invest or do business, with. The responsibility of management to lookafter the effective & efficient utilization of resources of the overall sound financialsituation of the organization, increase their requirement to have a detailed report onprobably each & every aspect of financial position which may be liquidity,activity, profitability. The presentation of an elaborate system of ratio analysis was made in 1909 byAlexander wall, who criticized the bankers for its lopsided development owing totheir decisions regarding the grant of credit on current ratios alone. 60
  62. 62. Wall, one of the foremost proponents of ratio analysis, pointed out that, inorder to get a complete picture, it is necessary to consider relationship in financialstatement other than that of current assets to current liabilities – relationship thatmight be measured quantitatively and used as checks on current ratio. Since then,comprehensive analysis by means of calculation of a series rapidly became „all therange‟. Based upon their wide range of requirement the general trend is of going forthe financial ratio analysis, which is also considered to be the most effective onecapable of giving detailed & accurate information, more detailed & accurate thanany other type of financial analysis. Financial ratio analysis is an arithmetic relationship between two figures. Financial ratio analysis is a study of ratio between various items of groups ofitems in financial statement. It also based upon various financial ratios, which arecalculated from the data provided in company‟s balance sheet & profit and lossaccount. As per I.M. Pandey “Financial ratio in the relationship between twoaccounting figures, expressed mathematically “. In addition to the analysis based on current year financial ratio comparisonwith previous year help us in establishing various methods. Which are furtherhelpful in predicting the future of the concern as well as present financial situation? 61
  63. 63. This report is submitted as a part of brief study of financial condition of“KCL”. This report has been prepared for the management purpose to make themaware of the unit in the various fields of finance. Detailed analysis is also a part of this report, which is based upon variousratios calculated & various trends seen. Each & every ratio has been analyzedbriefly & adequately followed by various inferences & suffusions based on thisanalysis, which is beneficial for the Top-level Management in the better financialcontrol & planning for future. This report is just a part of feedback to the Top-level Management for thevarious plans they made regarding allocation of financial resources etc, which wereimplemented, in the current financial year. This report can give a deep insight into various matters if any implementationof the plans for achieving the objective of the firms. Various other factors are there which limit the accuracy & correctness of thereport. Even then a great effort has been kind of analysis & interpretation onpersonal level. 62
  64. 64. NATURERatio analysis is a powerful tools a financial analysis. In financial analysis, a ratiois used as a benchmark.For evaluating the financial position & performance of the firm. The relationshipbetween two accounting figures, expressed mathematically, is known as a financialratio. Ratio helps to summarized large quantity of financial data & to makequalitative judgment about the firm‟s financial performance.This relationship is an index or yardstick, which permits qualitative judgments tobe, formed about the firm‟s ability to, meets its current obligations.It measured the firm‟s liquidity. The greater the ratio, the greater the firm‟sliquidity & vice-versa. The point to be note is that a ratio reflecting a quantitativerelationship helps to form qualitative judgments. Such is the nature of all financialratios. 63
  65. 65. USES OF FINANCIAL ANALYSIS FOR DIFFERENT PARTIES The analysis and interpretation of financial is an important accountingactivity. The end users of business statement are interested in these statementsprimarily as an aid to determine the financial position and the results of theoperations. There are different parties interested in the financial analysis of theirstatement and their aims and to different parties:To the financial executives : The first party interested in the financial statementsanalysis is the finance department of the business concern itself to the financialmanagers such analysis provides a deep insight into the financial condition of theenterprises and the view of the past performance which helps in future decisionmaking. The financial statements give vital information concerning the position ofthe enterprise as well the result of the operations.To the top management: The top management of the concern is also increase inthe analysis of these statements because it helps them reaching conclusionsregarding:Performance appraisal of overall business activities.Enquire about current financial position and long-term strategic planning.Queries concerning the relationship of earning to trends in sales etc.Queries concerning the relationship of earning to investment. 64
  66. 66. To the creditors: The analysis of these statements is very essential to thecreditors. Also some aspect of enterprises operations are of interested to creditorsin regard to liquidity of funds, soundness of financial structure, profitability of theoperations, effectiveness of working capital management etc.To the investors and others: Investors presents as well as prospects are alsointerested in the measurement of earning capacity of the securities. Investors havebeen increasingly concerned with the cash generation capability of an enterprise,primarily in term of the flexibility available to such enterprise to acquire otherbusiness and new assets on an advantage basis for Thai purpose. 65
  67. 67. ADVANTAGES OF RATIOSThe ratio analysis is one of the most powerful tools of financial analysis. It is useas a device to analysis and interprets the financial health of enterprise. Just like adoctor examines his conclusion regarding the illness and before giving histreatment, a financial analyst analyses the financial statement with various tools ofanalysis before commenting upon the financial bearlth or weakness of anenterprise. „A ratio is known as a symptom like blood pressure, the pulse rate orthe temperature of the individual‟. It is with help of ratios that the financialstatements can be analyzed and decision made from such analysis.HELPS IN DIVISION MAKING: Financial statements are prepared primarilyfor decision making, but the information provided in financial statements is not anend in itself and no meaningful conclusions can be drawn from these statementsalone. Ratio analysis helps in making decisions from the information provided inthese financial statements.HELPS IN FINANCIAL FORCASTING AND PLANNING: Ratios analysis isof much help in financial forecasting and planning. Planning is looking ahead andthe ratios calculated for a number of year‟s work as a guide for the future.Meaningful conclusions can be drawn for future from these ratios. Thus, ratioanalysis helps in forecasting and planning. 66
  68. 68. HELPS IN COMMUNICATING: The financial strength and weakness of a firmare communicated in a more easy and understandable manner by the use of ratiosthe information contained in a financial statements conveyed in a meaningfulmanner to the one for the whom it is meant. Thus, ratios help in communicatingand enhance the value of financial statements.HELPS IN COORDINATION: Ratios even helps in coordinating, which isutmost important in effective business management. Better communication ofefficiency and weakness of an enterprise results in better coordination in theenterprise.HELPS IN CONTROL: Ratio analysis even helps in making effective control ofthe business. Standard ratios can be based upon Performa Financial Statementsand variance or deviations, if any, can be founded by comparing the actual with thestandards so as to take corrective action at the right time. The weakness orotherwise, if any, come to the knowledge of the management which helps ineffective control of the business. 67
  69. 69. ROLE OF FINANCIAL RATIOAid in financial forecasting: Ratio analysis is very helpful in financialforecasting. Ratio relating to the past sales, profits & financial position from thebasis for setting future trends.Aid in comparison: With the help of ratio analysis ideal ratio can be composed &they can be used for comparing a firm progress & performance. Inter firmcomparison with the industry averages is made possible by ratio analysis.Financial solvency of the firm: Ratio analysis indicates the trend in financialsolvency of the firm. Solvency has to dimensions:Long-term SolvencyShort-term SolvencyLong term solvency refers to the financial viability of the firm while Short-termsolvency is the liquidity position of the firm.Communication values: Different financial ratios communicate the strength &financial standing of the firm to the internal & the external parties. They indicateoverall profitability of the firmOther uses: Financial ratios are very helpful in the diagnosis & financial health ofa firm. They highlight the liquidity, solvency, profitability & capital gearing etc.of the firm. They are useful tools of analysis of financial performances. 68
  70. 70. OBJECTIVE OF THE STUDYAn analysis of financial statements with the help of „ratio‟ may be termed as“Ratio Analysis”. It implies the process of computing determining & presentingthe relationship of the terms or group of items of the financial statements. It alsoinvolves the comparison & interpretation of these ratios & use of them for futureprojections.And the fund flow arises when the net effect of the transaction is to increase ordecrease the amount of working capital. Normally, a firm will have sometransactions that will change net working capital & some that will cause no changein net working capital include most of items of profit & loss account and thosebusiness events, which simultaneously effect both current & non-current balancesheet items.CLASSIFICATION OF RATIOSRatio may be classified in a number of ways to suit any particular purpose.Different kinds of ratio statement are selected for different types of situations.Mostly, the purpose for which the ratios are used and the kind of the data availabledetermine the nature of analysis. In general, the following basis of classification isin vogue. 69
  71. 71. (a) Traditional classification or classification according to the statementsfrom which ratios are derived:A basis of classification of ratios which readily suggests itself is according to thestatement to which the determinants of a ratio belong. From this angle, ratios areclassified as thus: (1) Balance Sheet Ratios: these ratios are also called financial ratios. They deal with the relationship between two items, or group of item, which are together in the balance sheet, example current ratio, liquid ratio, proprietary ratio, fixed assets ratio, capital gearing ratio, and debt equity ratio. (2) Profit & Loss Account Ratios: these ratios are also called operating ratios.The items used for the calculation of these ratios are usually taken out from theprofit and loss statement. Example operating ratio, expensive ratio, net profitratio, gross profit ratio, stock turnover ratio. (3) Inter-statement ratios or combined ratios: the information required forthe compilation of these ratios is normally drawn from both the balance sheet, andprofit & loss account. Example Return on capital employed, return onproprietors‟ funds or share holders‟ investment, and return on total investment,debtors Turnover ratio, creditor‟s turnover ratio, fixed assets turnover ratio,working capital turnover ratio. 70
  72. 72. (b) Classification according to tests satisfied or functional classification:-Robert N. Anthony suggested that ratios may be grouped the basis of certain testswhich satisfy needs of the parties having financial interest inventory the businessconcern. These tests are:Test of liquidityTest of profitabilityMarket tests(c) Classification from the point of view of financial management orclassification according to nature:This standard of classification envisages the organization of accounting ratios intofour fundamental types which are as follows;(1) LIQUIDITY RATIOSLiquidity refers to the ability of the firm to meet its obligations inventory the short-run, usually one year. Liquidity ratios are generally based on the relationshipbetween current assets and current liabilities (the sources for meeting short-termobligations). Example: Current ratio, Acid test ratio. 71
  73. 73. (2) LEVERAGE RATIOSCapital structure ratioEarnings ratioDividend ratioFinancial leverage refers to the use of debt finance. While debt capital is analysischeaper source of finance, it is analysis riskier source of finance. Leverage ratioshelps inventory assessing the risk arising from the use of debt capital. They arealso known as capital structure ratios. Example: Debt-to-equity ratio, fixed assetsto net work, interest coverage ratio.(3) ACTIVITY RATIOSThey are also called turnover ratios or asset management ratios. They measureshow efficiently the assets are employed by the firm. These ratios are based on therelationship between the level of activity and the level of various assets. Example:Fixed assets turnover, Stock turnover, Debtors turnover, Creditors turnover, Totalassets turnover ratio.These ratios would also indicate the profitability position of the business. 72
  74. 74. (4) PROFITABILITY RATIOS Profitability reflects the final result of business operations. There are twotypes of profitability ratio.Profit margin ratiosRate of return ratiosA profit margin ratio shows the relationships between profit and sales. Rates ofreturn reflect the relationship between profit and investment.(d) Classification According To Importance:Some ratios when related to the main objective of the business purpose of analysismay be more important than others. This basis classification has beenrecommended by the British Institute of Management for inter-firm computationsand the following types have been suggested by the institute:(i) Primary Ratios: The primary motive of any commercial under taking is profit and therefore,ratios like profit-to-sales, return on capital employed may be termed as primaryratios to such an undertaking. 73
  75. 75. (2) Secondary Ratios: These ratios are mainly used to explain the primary ratios. They are alsoknown as subsidiary or supporting ratios. Taking the ratio of return on capitalemployed as the primary ratio, the following ratios may be grouped as secondaryratios:(a) Profit and Earning ratios(b) Cost or expenses ratios(c) Turnover ratios(d) Capital and related ratios 74
  76. 76. SHORT-TERM SOLVENCY OR LIQUIDITY RATIOSLiquidity ratios play analysis key role in the analysis of the short-term financialposition of analysis business. Commercial banks and other short-term creditors aregenerally interested in such an analysis. However, managements can employ theseratios to ascertain how efficiently they utilize the working capital in the business.Shareholders and debenture-holder and long-term creditors can use these ratios toassets the prospects of dividend and interest payments. This type of ratiosnormally indicates the ability of the business to meet the maturing or current debts,the efficiency of the management inventory utilizing the working capital and theprogress attained inventory the current financial position.Description of Principal Ratios:-1. Current RatioCurrent ratio may be defined as the ratio of current assets to current liabilities. It isalso known as working capital ratio or 2 to 1 ratio. Current ratio shows therelationship between total current assets and total current liabilities. 75
  77. 77. ComponentsCurrent assets normally include cash in hand or at bank, marketable securitiesother short-term high quality investment bills receivable, prepaid expenses, work-in-progress, sundry debtors and inventories. While current liabilities are composedof sundry creditors, bills payable, outstanding and accrued expenses, income taxpayable.Expressed as a formula, the current ratio is as follows: Current Assets Current Ratio = ----------------------- Current Liabilities 2009-10 2976.43 Current Ratio = ------------ = 2.11:1 1413.49 2008-09 2968.30 Current Ratio = --------------- = 3.40:1 871.87 76
  78. 78. Explanation:Coming to KCL the current ratio is 2009 has decreasing in comparison year 2008.The ratio of 2009 shows that the assets are 2.11 times of current liabilities. CurrentAssets should be one and half of current liabilities. According to KCL report isimproving. A low current ratio indicates that the enterprise is short of funds forhonoring its commitment and this was lead to insolvency. On the other hand avery high current ratio indicates that the firm has a very large amount of currentassets Many times higher than that of current liabilities.This is a situation of high liquidity and is indicative the existence of excessivecurrent assets.2. Acid Test Ratio or Liquid RatioAcid test Ratio or Liquid ratio, as it is sometimes called is concerned with therelationship between liquid assets and liquid liabilities to supplement theinformation given by the current ratio. In many lines of business a concern whosecurrent assets consist largely of inventory can very early become technically, if notactually; insolvent within analysis very short period of time and this is the rationaleof the term „Acid-Test Ratio‟ 77
  79. 79. Components: Liquid Assets = Current Assets – Inventory.Generally, this ratio is considered to be good if it is 1:1. It shows the relationshipof quick cash-yielding assets to current liabilities. Expressed as a formula, the liquid ratio is as follows: Quick Assets Liquid Ratio = ----------------------- Current Liabilities 2009-10 1573.88 Liquid Ratio = --------------- = 1.11:1 1413.49The quick ratio is increasing over the period 2008 to 2009. With the help of quickratio we analysis the inventory level. The quick ratio analysis gives better picturethan the current ratio towards the payment of current liabilities. It is used to testthe short-term liquidity of the firm in its correct form and represent good position. 78
  80. 80. LONG-TERM SOLVENCY ANALYSISBankers and other short-term creditors are most interested in the current debt-paying ability of business, so the share holders and debenture holders are mainlyconcerned with the long-term financial prospects. However, neither group maylogically ignore the financial aspects of primary interest to the other so that boththese groups concern themselves with current and prospective earnings. Someselected solvency ratios are discussed below:(a) Debt-Equity-RatioDebt-to-equity ratio relates all external liabilities to owners recorded claims. It isalso known as „External-Internal Equity Ratio‟. It is determined to measure thefirm‟s obligations to creditors in relation to the funds invested by the owners.Components: The term external equities refers to total outside liabilities andinternal equities includes all claims of preference share holders and equity shareholders such as share capital and reserves and surplus. Outside liabilities includeall debts, whether long-term or short-term or in the form of mortgages, bills ordebentures. But when used as analysis long-term financial ratio, only term debtslike debentures etc are to be considered. 79
  81. 81. In generally, Debt-to-equity ratio 2:1 is acceptable.2009-10 Debt 2628.28 Debt-Equity-Ratio = --------- = --------------- = 1.39:1 Equity 1893.40The ratio indicates the degree of protection provided to the lenders. The lower theratio the higher will be the degree of protection. As a general rule, this should notexceed 2:1. If the debt equity ratio is more than that is shows a rather riskyfinancial position from the long-term point of view. This ratio shows favorablecondition of KCL.(b) Proprietary RatioThis is a variant of the debt-equity ratio. This ratio relates the share holders‟ fundsto total assets. It is calculated by dividing the share holder‟s funds by the totaltangible assets. This ratio indicates the long-term or future solvency position ofthe business. It is also known as Equity to total assets ratio or Net Worth to totalAssets ratio. 80
  82. 82. This ratio throws light on the general financial strength of the company.Higher the ratio, the better it is for all concerned.2009-10 Proprietary or Shareholder‟ Funds Proprietary Ratio = ------------------------------------------------ Total Assets or Total Equities 1893.40 Proprietary ratio = ------------------------- = 0.37 5070.20This ratio indicates the long term or future solvency position of the business.Analysis high ratio shows that there is safety for creditors of all types. A ratiobelow 50% may be alarming for the creditors since they may have to lose heavilyin the event of company‟s liquidation on account of heavy losses.(c) Ratio of Fixed Assets to Proprietors‟ funds:This ratio establishes the relationship between fixed assets and shareholders‟ funds.The purpose of this ratio is to indicate the percentage of the owners‟ funds investedin fixed assets. 81
  83. 83. Fixed Assets (after depreciation) Fixed Assets to Proprietors‟ Fund = ------------------------------------------ Proprietors‟ funds 3447.89 Fixed Assets to proprietor‟s fund = -------------- = 1.82 or 182% 1893.40D. Ratio of Current Assets to Proprietors‟ FundsThis ratio establishes the relationship between current assets and share holders‟funds. The purpose of this ratio is to indicate the percentage of share holders‟funds invested in current assets. Current Assets Current Assets to Proprietors‟ funds Ratio = ---------------------- Proprietors Funds2009-10 2976.43 Current Assets to Proprietors‟ funds Ratio = ------------- = 1.57 or 157% 1893.40 82
  84. 84. Solvency RatioThe difference between proprietary ratio as % and 100 percents the ratio issolvency ratio. This ratio indicates the relationship between total liabilities & totalassets of the business. So it is also known as „Ratio of total liabilities to totalassets.‟2009-10 Total Liabilities Solvency Ratio = ----------------------- Total Assets 4041.77 Solvency Ratio = ----------------------- = 0.63 or 63% 6449.75(f) Fixed Assets Ratio or Ratio of Capital and Long-Term Funds to FixedAssets: The ratio of long-term loans to fixed assets is important and anotheraspect of long-term financial policy. 83
  85. 85. Components: Fixed assets will mean cost less depreciation or net fixed assets. Itwill also include trade investments. Long-term funds will mean equity sharecapital, preference share capital, reserves, debentures and long term loans.2009-10 Fixed Assets Ratio = Share holders‟ Funds + Long term loans / Net Fixed Assets 5070.20 Fixed Assets Ratio = --------------- = 1.45 3507.26It is also known as „Capital Employed to Fixed Assets Ratio.‟2009-10 Net Fixed Assets Fixed Assets Ratio = ----------------------- Capital Employed 3447.89 Fixed Assets Ratio = ------------------ = 0.76 4521.68 84
  86. 86. This ratio gives an idea as to what part of the capital employed has been used inpurchasing the fixed assets for the concern. If the ratio is less than 1 it is good forthe concern.G. Debt Service RatioThis ratio relates the fixed interest charges to the income earned by the business. Itis also known as „Interest Coverage Ratio‟. It indicates whether the business hasearned sufficient profits to pay periodically the interest charges.2009-10 Net Profit before Interest and TaxDebt Service Ratio = ------------------------------------------------ Fixed Interest Charges 889.66Debt Service Ratio = -------------------------- = 2.37 375.24In 2009, debt service ratio is higher than 2008 & 2007. 85
  87. 87. B. TEST OF PROFITABILITYThe main object of analysis business concern is to earn profit. In general terms,efficiency in business is measured by profitability. Profit as compared to thecapital employed indicates profitability of the concern. If analysis concern goes onlosing, its financial condition will definitely be bad sooner or later. Profits enableanalysis firm to improve its financial strength; there, ratios based on profitabilityare termed “casual” ratios, indicating the causes of the present or expectedfinancial position. These ratios are designed to highlight overall efficiency ofanalysis business concern. Thus, analysis measures of profitability are the overallmeasure of efficiency.(1) Gross Profit RatioThis ratio shows the relationship of sales with the direct costs such as purchases,manufacturing cost etc and thus is important.2009-10 Gross Profit Gross Profit Ratio = ------------------- * 100 Net Sales 2555.18 Gross Profit Ratio = ---------------- * 100 = 34.74% 7355.36 86
  88. 88. Any fluctuation in this gross profit is the result of a change either in „sales‟ or the„cost of goods sold‟ or both. Thus, this ratio shows the average margin on goodssold.The gross profit is what is revealed by the trading account. It results from thedifference between not sales and cost of goods sold without taking into accountexpenses generally charged to the profit and loss account.Operating Ratio: - This ratio establishes the relationship between operating profitand sales and is calculated as follows:2009-10 Operating Profit Operating Profit Ratio = ----------------------- * 100 Net Sales 1156.72 Operating Profit ratio = -------------- * 100 = 15.73% 7355.36WhereOperating Profit = Net Profit + Non-Operating Expenses – Non Operating IncomeOR Gross Profit – Operating expenses 87
  89. 89. Operating ratio as follows:Operating profit Ratio = 100 – Operating RatioOperating Profit margin is greater than 2008 and 2007. This ratio indicates theportion remaining out of every rupee worth of sales after all operating costs andexpenses, have been met. Higher the ratio better it is.(3) Expenses Ratio: Expenses ratios are calculated to ascertain the relationshipthat exists between operating expenses and volume of sales. These ratios arecalculated by dividing the sales into each individual operating expense. It indicatesthe portion of sales which is consumed by the various operating expenses. Thus,such an analysis will throw good light on the levels of efficiency prevailing indifferent aspects of the work. It is useful to work out the following ratios whichwill total up to the operating ratios:Ratio of Materials used to sales:Direct Material cost / Net Sales x 100Ratio of Labor to sales:Direct Labor cost / Net Sales x 100Ratio of Factory expenses to sales:Factory expenses / Net sales x 100 88
  90. 90. Ratio of Office and Administration exp to sales: Administrative Exp. Ratio = Office & Admin. Expenses / Net sales x 100 Selling Expenses Ratio = selling & distribution exp / Net sales x 100 Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales x 100Generally all these ratios are expressed in terms of percentage2009-10 Operating Exp. Operating Expenses Ratio = ----------------------- * 100 Net Sales 1665.52 Operating Expenses Ratio = ---------------- * 100 = 22.64% 7355.36(4) Net Profit Ratio:We all know that gross profit is not the final profit- it is the net profit which isreally significant. Therefore, a ratio of net profit to sales (also called net margin) isworked out; but in this case the profit considered is profit before interest. This isthe ratio of net income or profit after takes to net sales. Net Profit, as used here, isthe balance of profit and loss account which is arrived at after considered all non-operating income such as interest an investment, dividend received etc… and non-operating expenses like loss on sale of investments, provision for contingentliabilities, etc 89