Analysis of financial statement @ kirloskar project report mba finance


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Analysis of financial statement @ kirloskar project report mba finance

  1. 1. ANALYSIS OF FINANCIAL STATEMENT EXECUTIVE SUMMARYINDUSTRY PROFILEThe healthy growth in the industrial sector achieved during 2003-04 has continued duringthe current year as well with overall industrial growth (measured in terms of the index ofIndustrial Production) growing at a rate of 7.9 percent during the April- September2004-05 compared with 6.2 percent achieved during the same last year. The existing installed capacity in the industry is of the order of 4500 MWthermal, 1345 MW of Hydro and about 25 MW of gas based power generation equipmentper annum and manufacturing units depending upon the needs and their capacity areaugmenting the capacity.COMPANY PROFILETHE KIRLOSKAR GROUP A significant event in history of Indian industry was the rise of the KirloskarGroup of companies to a multibillion conglomerate. The founder Mr. LaxmanraoKirloskar strongly believed that a company’s progress was determined by the integrationof man and his intellect with technological growth and environment. The first kirloskar product, “iron plough”, was an innovation far ahead ofits time a product designed wholly with the customer in mind. it ultimately became aninstrument of wealth for an entire society. His words breathe the spirit with the Kirloskar industrial journey began. And thisspirit has continued through the passage of time. K.E.C Ltd. An ISO 9001 certifiedCompany was established in 1946 with its registered office at Rajajinagar in Bangalore.As a part of diversification activity, K.E.C Ltd. started another unit at Hubli in 1969, tomanufacture Electric motors ranging from fractional horsepower to motor up 20HP.Under the leadership of Shri Laxmanrao Kirloskar and Shri N.W.GUJAR, K.E.C unit-1 BABASAB PATIL 1
  2. 2. ANALYSIS OF FINANCIAL STATEMENTWas started in Bangalore, Kirloskar Electric Company is the pioneer in India in themanufacture of quality equipments like AC and DC electric motors, generators, weldingequipments, controls equipments transformers etc. OBJECTIVES OF THE STUDY • To study on the financial performance of the company for the past 4 years. • To bring out the results of financial statements through ratio analysis. • To study about the Kirloskar electric company limited. Hubli in general. • To study the financial position of the company.SCOPE OF THE STUDY The scope of the study is the covered area for the purpose of study. The study islimited to KAYTEE SWITCHERGEAR LIMITED (subsidiary of kirloskar electric Unit –II.METHODOLOGY Methodology is the systematic method or an activity, which is used to collectthe information required to complete this project work. The data is collected by 2 methods: 1. Primary data 2. Secondary data.Primary data is collected through collecting information from company officers, fromexternal guide.Secondary data, which is secondary in nature i.e. already, collected information thissecondary data is collected through Company’s Annual Report and discussion with them.Interpretation of:  Balance sheet  Profit and loss account  Annual reports BABASAB PATIL 2
  3. 3. ANALYSIS OF FINANCIAL STATEMENTINTRODUCTION OF THE STUDY The accounting process begins with the recording of transactions in the books ofprimary entry. The accounting information resulting from the transactions so recordedgets posted in to various accounting heads in the ledger. In the ledger each account isbalanced at the end of an accounting period and a summary of all balances in the variousaccounting heads from the ledger is prepared which is known as trial balance from suchtrial balances and after effecting certain adjustments considered necessary (which isdependent on the particular accounting system followed by the organizations) thefinancial statements relating to the accounting period are prepared. NEED FOR THE STUDY There are some questions, which arise from the study of financial statements.These could be “Is Company’s profitability adequate? Why is a profit low in spite ofincreased sales? Why is there liquidity problem though profitability is good? Why noreasons for changes in assets, liabilities and equity between two dates? Why no dividendsare paid though there are good profits? From where have come cash flows and how theyare applied? These and many other questions need answers, which can be possible whenthe financial statements are suitably analyzed Thus financial statement analysis deals with meaningful interpretation of financialdata available in financial statements to serve specific purpose of organizations of suchdata for their decision making .this involves identifying the purpose and selecting suitablemeans of analysis. Financial statement analysis is essentially purposive. ABOUT THE ORGANIZATION Kirloskar group of companies are a century old company which comprises of over20 companies with a total turnover of over Rs.1200crores and personnel strength of over25000 workers, engineers and managers.In the history of India industry, a significant event was the rise of kirloskar group ofcompany. BABASAB PATIL 3
  4. 4. ANALYSIS OF FINANCIAL STATEMENTThe kirloskar stands for excellence in engineering, quality and reliability. The businessareas of the group companies reflects its diversity, process control equipment andmachine tools, rotating electrical machines, internal combustion, engines, computers etc.The company started with manufacture of AC Motors 1984. Today KEC manufacturesdiversified product range consisting of AC Motors, AC Generators, Transformers, DCMotors and Electric equipments. The Unit-II in Hubli, Kirloskar Electric Companylimited is a subsidiary of Kirloskar electric company limited. It manufactures AC Motorsand AC Generators. BABASAB PATIL 4
  5. 5. ANALYSIS OF FINANCIAL STATEMENT INDUSTRY PROFILEThe healthy growth in the industrial sector achieved during 2003-04 has continued duringthe current year as well with overall industrial growth (measured in terms of the index ofIndustrial Production ) growing at a rate of 7.9 percent during the April- September2004-05 compared with 6.2 percent achieved during the same last year.The worldwide electric power industry provides vital services essential to modern life. Itprovides the nation with the most prevalent energy form known in history electricity. Itadvances the nation’s economic growth and productivity; promotes business developmentand expansion; and provide solid employment opportunities to workers globally ingeneral and India in particular. It is a robust industry that contributes to the progress andprosperity of our nation. Today the electric power industry operates in a hybrid model ofcompetition and regulation. The worldwide electrical and electronics industry is growingat a fast pace which consist of manufacturers, suppliers, dealers, electricians, electronicequipment manufacturers.Power industry restructuring, around the world, has a strong impact on Asian powerindustry as well. Indian power industry restructuring with a limited level of competition,since 1991, has already been introduced at generation level by allowing participation ofindependent power producers (IPPs). The new Electricity Act 2003 provides theprovision of competition in several sectors. It is felt that the prevailing condition in thecountry is good only for wholesale competition and not for the retail competition at thismoment.As per the recent survey, the global electric & electronic market is worth $1, 03.8 billion,which is forecasted to grow to $ 1,216.8 billion at the end of the year 2008. If we talk ofelectric & electronic production statistics, the industry accounted for $ 1,025.8 billion in2006, which is forecasted to reach $1,051.5 billion in future. BABASAB PATIL 5
  6. 6. ANALYSIS OF FINANCIAL STATEMENTSize of the Electric/ Electronic IndustryTop three electric and electronic goods manufacturing countries in the world are;United States of America, Japan and Korea respectively, The United States of Americabeing the largest producer of electronic products worldwide contributes the total share ofaround 21% furthermore; USA is at the forefront to have the largest market share witharound 29% in the global market.The world’s electrical market size was $ 1038.8 billion in 2006, since last year anincrease of 10.6% is forecasted to grow even more. The industrial electrical goodsindustry size was $ 651.3 billion, contributing around 62.7% of the total. With regard toelectronics parts and components sector, the total market share was around $ 282.7billion i.e.; 27.2% while home electronics was 104.7 billion. This figure is supposed toincrease in this decade.Major Production and Export CentersAs electronic manufacturing industry is growing with a fast pace, Western Europe isdeveloping gradually to contribute this industry. Western Europe comprising of 16countries is contributing around 22% of the global market. Simultaneously, EasternEurope is forecasted to grow about $ 24 billion in 2013 from $ 9 billion in 2006.If we talk of Asia Pacific region, China, Japan, North & South Korea, Singapore andIndia are the top manufacturer of electrical and electronic products. Among these Asiancountries, China is becoming the manufacturing region of electronic products on theglobe.In United States of America, cities like New York, Atlanta, Colorado, Detroit, Florida,and New England, San Diego, San Francisco, and Texas can be named as industrial hubsof electronics industry. BABASAB PATIL 6
  7. 7. ANALYSIS OF FINANCIAL STATEMENTAt present, Asia is growing with more speed in comparison to America and Europe. In2002, Asia occupied 41% of total electronics market share, which grew up to 56% in2007. Those days are not far away when Asia will become the market leader globally.Future Outlook of Electric & Electronic IndustryTotally, the electrical and electronic industry is experiencing phenomenon andremarkable changes worldwide. The worldwide electronics industry is distinguished byfast technological advances and has grown rapidly than most other industries over thepast 30 years.Products are heading towards new destinations where cost is less than other place withhigher costs involved. These places offer the most long term potential for market growth.Companies indulged in manufacturing electrical products are investing a lot on researchand development for the best products to meet the demand of the market. They aremanufacturing the products with the best quality at reduced cost due to manycompetitors. BABASAB PATIL 7
  8. 8. ANALYSIS OF FINANCIAL STATEMENT COMPANY PROFILETHE KIRLOSKAR GROUP A significant event in history of Indian industry was the rise of the KirloskarGroup of companies to a multibillion conglomerate. The founder Mr. LaxmanraoKirloskar strongly believed that a company’s progress was determined by the integrationof man and his intellect with technological growth and environment. The first Kirloskar product “the iron plough”, was an innovation far ahead of itstime a product designed wholly with the customer in mind. It ultimately became aninstrument of wealth for an entire society. The group is committed to innovation, qualityand continuing technological advancement. This is evident in their and customs designedproducts, which have already gained a worldwide reputation for meeting criticalindustrial needs. The company’s growth within the country and their entry into globalmarket is based on their highly skilled Human resource and their vast distributionnetwork. We have some of the best engineering and technical brains in the country, whohave made their mission immensely productive and successful. .K.E.C at a glance A country’s progress has been closely linked to effective harnessing and use ofelectrical energy for the benefit of its people. Kirloskar Electric Company’s endeavor hasbeen to contribute cost effective solutions in all application of electricity. They areactively involved in supplying electrical industrial electronic equipment, systems toindustry, agriculture and utilities. In all these ventures, their focus has been to providestate of the art technology that can living standards and thereby make the environment abetter place to live in. In the words of Mr. Laxman Kirloskar: “My faith is in the human intellect. It gives us our means to create wealth bydirecting our talents towards procedure work. And therefore, freedom for individualability is the only way a society can prosper. After all, you cannot distribute wealthunless you first create it. And you cannot create it unless you know how” BABASAB PATIL 8
  9. 9. ANALYSIS OF FINANCIAL STATEMENT His words breathe the spirit with the Kirloskar industrial journey began. And thisspirit has continued through the passage of time. K.E.C Ltd. An ISO 9001 certifiedcompany was established in 1946 with its registered office at Rajajinagar in Bangalore.As a part of diversification activity, K.E.C Ltd. started another unit at Hubli in 1969, tomanufacture Electric motors ranging from fractional horsepower to motor up 20HP.Under the leadership of Shri Laxmanrao Kirloskar and Shri N.W.GUJAR, K.E.C unit-1Was started in Bangalore, Kirloskar Electric Company is the pioneer in India in themanufacture of quality equipments like AC and DC electric motors, generators, weldingequipments, controls equipments transformers etc.The company started with manufacture of AC Motors in 1984. Today KECmanufacturers diversified product range consisting of AC Motors, AC Generators,Transformers, DC Motors and Electronic Equipments. The Unit II in Hubli, KirloskarElectric Company Limited is a subsidiary of Kirloskar Electric Company Limited. Itmanufactures AC Motors and AC Generators. BABASAB PATIL 9
  10. 10. ANALYSIS OF FINANCIAL STATEMENT EMPLOYEES PROFILEKEC Ltd. has a strong employee base. It has maintained fully trained and experiencedworkers. It values its employees and the employees are considered the real Asset of thecompany.The employees are very hard working and dedicated towards the growth of the company.The employee base can be depicted based on the number of employees in each section.SECTION NO. OF EMPLOYEES • Canteen 9 • Central Planning Dept. 5 • Production Dept. 32 • Engineering Dept. 13 • Finance Dept. 14 • Forwarding Dept. 3 • General Stores 12 • MED 3 • Marketing Dept. 7 • Packing Dept. 32 • MMD and MSD 17 • Personnel Dept. 4 • Quality Assurance Dept. 73 • Reception 1 ---------- 229 BABASAB PATIL 10
  11. 11. ANALYSIS OF FINANCIAL STATEMENT MILESTONES IN THE HISTORY OF KEC1946 ---- KEC established at Bangalore.1948 -- A new era opens for Indian K.E.C produces the country’s very first ACmotors1954 ---- Impatient for progress, the company gets into product diversification producingits first transformers.1956 ---- First transformer manufactured.1958 --- A critical power situation inspires production of the country’s firsttransformers.1963 ---- The patient of breakdown continues. DC motors and DC generators roll off the assembly line.1965 ---- Market demand increases. India’s first motorized gear unit joins the K.E.Cproduct range.1966 ---- Intensive research and development sets the pace for production of the firstinduction heating equipment.1973 ---- First oversees office at Malaysia.1976 ---- Office at Nairobi established.1982 ---- New collaborations. Better products. Thyristor, Converters, made incollaboration with Thorn EMI, U.K. BABASAB PATIL 11
  12. 12. ANALYSIS OF FINANCIAL STATEMENT1987 ---- Introduction of CNC systems and factory automation.1989 ---- More collaboration. More products. With Fuji of Japan for investors and withToshiba of Japan for UPS1991 ----Toyo Denki collaboration for motors and generators up to 10MW/ MVA.Production of technologically advanced large DC motors and large AC machines incollaboration with AEG Daimler Benz of Germany up to 20MW1992 ---- The company starts production of Hi- Tech CRT based CNC systems.1993 ---- Kirloskar Electric becomes the first company in India to receive ISO 9001certification for its entire product range and for all its manufacturing units.1995 ---- Took over Voltas Transformer and started manufacturing plant at Tumkur for Manufacturing units1996 ---- Celebrated Golden jubilee and started manufacture of wind turbine.2001 ---- Company restructure.2002 ---- First test lab was started at Tumkur.2003 ---- Received NVLAP certificate test lab.2004 ---- Customer Excellence Certificate. BABASAB PATIL 12
  13. 13. ANALYSIS OF FINANCIAL STATEMENT COLLABORATIONKEC provides the latest technology products to customers. Towards this, it has enteredinto collaboration with foreign companies apart from indigenous research anddevelopment efforts. Some of the major collaboration is:AC induction motors ---- AEG, GermanyAC generators ---- AEG, GermanyCast resin transformer ----- OCREV, ItalyInverters ----- Fuji Electric, JapanVector control inverters ---- University of Wuppertal, GermanyUninterruptible power systems ---- Toshiba Corporation, JapanCNC Controls ---- ADOLPH numerical controls. Ltd, UKTransformers ---- Peebles Electric Ltd.Wind turbine generators ---- Wind energy group, UK. BABASAB PATIL 13
  14. 14. ANALYSIS OF FINANCIAL STATEMENT K.E.C. UNITS Units Place Products Unit - 1 Bangalore AC motors, AC generators, motorized gear units. Unit – 2 Hubli AC motors, AC generators, motorized gear units. Unit – 3 Peenya DC motors, generators, traction. Recently Closed Unit -4 My sore • Industrial electronic group- thyristor devices, static invertors, UPS systems. • Factory automation group- digital readouts, CNC systems, Servo drives and induction heaters. Unit – 5 Bangalore Transformers. Recently Closed Unit – 6 Pune Automation electric equipments, small range induction motors and alternators up to 5 HP. Unit – 7 Tumkur Stampings, Die cast rotors/ bodies and coils. Unit – 8 Pune Cast resin, transformers, and oil filled transformers. ORGANISATION SET UP OF KEC BABASAB PATIL 14
  15. 15. ANALYSIS OF FINANCIAL STATEMENTBoard of Directors manages KEC Unit II. Mr. Vijay Kirloskar is the Managing Directorand Chairman. Under the managing director, there is an Executive Vice- President. Achief executive manages each of this unit.BOARD OF DIRECTORSVijay Kirloskar : Chairman and Managing DirectorAgarwal. S.N : DirectorAnil Kumar Bhandari : DirectorSarosh. J. Ghandy : DirectorMythili Bal Subramanian : IDBI NomineeRamesh. D. Damle : LIC NomineeMalik. P.S : Dy. Managing DirectorVenkatesh Murthy. D.R : Director Sales & MarketingCompany Secretary : P. Y. MahajanAuditors : B.K.Ramdhyani & co. BangaloreBANKERS 1. Bank of Baroda 2. Bank of India 3. State bank of India 4. State bank of Mysore 5. State bank of Travancore 6. Standard Chartered Bank 7. The Hong Kong & Shanghai Banking Corp.REGISTERED OFFICEIndustrial Suburb, Rajajinagar BABASAB PATIL 15
  16. 16. ANALYSIS OF FINANCIAL STATEMENTBangalore – 560010FACTORIES 1. Belvadi Industrial Area, Mysore 2. Gokul Road, Hubli 3. Hirehalli, Tumkur. K.E.C UNIT –II BABASAB PATIL 16
  17. 17. ANALYSIS OF FINANCIAL STATEMENTThe K.E.C Unit – II, Hubli was founded on 2nd march 1969 and is situated on Gokul road,Hubli- 580030. It covers 110 acres, which presents a gigantic picture. K.E.C Unit-II isalso known, as KAYTEE SWITCHGEAR LTD. is a subsidiary unit of K.E.C. It ismainly concerned with production whereas K.E.C looks carries out all other activities.The main branch is at Bangalore. The board of Directors at Bangalore formulates all thepolicies and plans.Kaytee switchgear Ltd. has been set up under the Arrangement Scheme U/S 391- 394 ofCompany’s Act 1956, which has been approved by the honorable High Court ofKarnataka. Certain specified assets and liabilities of K.E.C have been transferred to KSL.Thus KSL has come into existence from 4th August 2003.KSL has been brought into existence to over come financial problems which are theresults of accumulated losses of 30 crores because of heavy competition. Performance ofK.E.C has been disappointing as concerned to the financial year 1997-1998. This unit isthe only one unit that seems to be contributing to the profits in terms of turnover, which isthe highest among all over units of K.E.C group. The production activity is carried outthroughout the year in this unit.QUALITY POLICY BABASAB PATIL 17
  18. 18. ANALYSIS OF FINANCIAL STATEMENT The quality price of KEC shall be to design, manufacture and market atcompetitive prices, products of such quality, which results in customer satisfaction,quality reputation and market leadership.MISSION • To remain a leading produce of electrical technology products in India. • To continuously grow in our business and become a significant player in the world market. • To maximize return on investment. • To achieve international levels of excellence in technology and quality.VALUES • Products of highest technology and quality. • Customer orientation • Teamwork among our people. • Profits for growthGUIDING PRINCIPLES • Innovate continuously to excel in design and manufacturing. • Development products required by market. • Manufacture products of highest quality • Focus on customer in all actions. • Respond promptly to customer needs. • Deliver supplies on time every time. • Treat each other with trust and respect to build a team. • Develop people by training and delegation. BABASAB PATIL 18
  19. 19. ANALYSIS OF FINANCIAL STATEMENT • Adopt process-oriented thinking, continuous improvement, and management by facts priority. • Reduce costs constantly to remain competitive. • Earn enough profits to fund growth and diversification. • Offer goods and services at competitive prices. • Look upon dealers, suppliers and business associates as partners. • Maintain safe, clean and healthy environment. • Conduct business in a socially responsible manner. HOD’S OF KIRLOSKAR ELECTRIC CO.LIMITED, UNIT-IICEO - K.S.S.PANIKARPERSONNEL - U.PARAMESHWARAPRODUCTION - A.B.JOSHI (SHOP III), - D.S.WODEYAR (SHOP III),FINANCE - K.SHRIDHARMARKETING - V.RAMPRASADENGINEERING - D.A.DESAIMMD - ASHOK KADAKOLIMED & MSD - S.V.PUROHITCEN.PLANNING - A.B.JOSHI BABASAB PATIL 19
  20. 20. ANALYSIS OF FINANCIAL STATEMENT ORGANISATION STRUCTURE OF KEC UNIT II HUBLIPersonnelDepartment(Senior Chief ExecutiveManager) Deputy General Manager Quality Production Finance Engineering Assurance Central Department Department Department Marketing M.M.D Stores Department Planning (Senior (Senior (Senior (Deputy (Assistant (junior (Senior (Assistant Manager) Manager) Manager) Manager) Manager) Manager) Manager) Manager) BABASAB PATIL 20
  21. 21. ANALYSIS OF FINANCIAL STATEMENT MANPOWER IN KEC UNIT-II AS on 01-05-2007 Human Resource Total MembersDaily rated employees (DRE’s) From grade 4321 to 8Monthly rated employees (MRE’s) From 45grade 1 to 7Officers, Engineers and above From grade 858 to 16Total 562 Table: 1Besides these permanent employees, around 81 trainees are recruited and contract Labourare hired only for some specific purposes and in never employed in production or feedershops. Officer’s cadre is divided into 2 categories. 1. Junior officers from the grade from 5 to 7 • Junior officer 1: Grade 5 • Junior officer 2: Grade 6 • Junior officer 3: Grade 7 2. Senior officers from the grade from 8 to 9 Officer: Grade 8 Senior Officer: Grade 9 The manager cadre is classified as follows from grade 10 to 16 Assistant Manager - Grade 10 Deputy Manager - Grade 11 Manager - Grade 12 Deputy Senior Manager - Grade 13 BABASAB PATIL 21
  22. 22. ANALYSIS OF FINANCIAL STATEMENT Senior manager - Grade 14 Deputy General Manager - Grade 15 General Manager - Grade 16 PRODUCT PROFILE AC Generator AC motor ` DC Motor Traction EquipmentWe design and manufacture our products according to the standards of : • ISO (International Organization for Standardization) • IEC (International Electro technical Commission) • BIS (Bureau of Indian Standards) BABASAB PATIL 22
  23. 23. ANALYSIS OF FINANCIAL STATEMENT • BSI (British Standards Institution) • JEM(Japan Electrical Manufactures Association) PERSONNEL DEPARTMENTK.E.C, company recognizes its employees as its most important asset for its continuedgrowth. Human resources management in Kirloskar Electric Company shall striver toensure continuous organizational growth by nurturing the strengths of its employees andproviding the environment and opportunity for every individual to rise to his/her highestpotential, identity and achieve his/her personal goal within the framework oforganizational, social and natural objectives. To achieve this following sections areformed to perform the various functions including, Positive Motivation, Preparation andmaintenance of quality plans with aid of systems, procedures and work instructionspublished collectively in quality manuals.Scope: Personnel Department is applicable to personal welfare safety and security.Responsibility of Personnel Department:Implementation and maintenance of various functions is the responsibilities of the Headof Department (HOD) with appropriate duties assigned to section in charges (SIC) andstaff.Functions:The Main functions of Personnel Department are: HOD-PERSONAL AND INDUSTRIAL RELATIONS: • To ensure that harmonious relations exists between workers and management • To ensure safe working conditions and to provide safety equipments. • To Co-ordinate security and vigilance activities • Manpower planning accountability. BABASAB PATIL 23
  25. 25. ANALYSIS OF FINANCIAL STATEMENT MARKETING DEPARTMENT Success of any product totally depends on HO it is marked and positioned din themarket. Marketing department is on of the important functional divisions of KEC UNIT-II, which is basically, identifies and meets the needs of customers profitably. The peoplein the marketing department are responsible for the growth of a business concern becausethey come in direct contact with the customers who now are considered as King of themarket as it is a buyers market and no more a sellers market. As marketing departments basic principle is to take care of the customers toachieve way they have divided their department in to there sections such as :  Marketing  Customer Service  CommunicationMarketing is further having its subgroups i.e. technical group, which does the job oftendering or equally handling Execution, is planning group.The network of marketing department has all over India at 28 branches known as salesoffice/branches.The function of this division in K.E.C UNIT-II starts to determine the needs of thecustomers their documents concurrently then accurately to communicate then to variousdepartments.Marketing:-When a branch office in any part of its network receives an order in case of specialproduct (i.e. as per customer requirements) it sends an order acceptance copy i.e. dulyverified by the sales engineering of that branch to the tendering group where this OAcopy is examined and sent to planning department and further forwarded engineeringdepartment for design and development of special product who prepares its engineering BABASAB PATIL 25
  26. 26. ANALYSIS OF FINANCIAL STATEMENTspecification and sends it to the purchase department if any new or additionalcomponents are regard to the production department. The marketing department based onthe demand contacts the materials management department issues materials on theamount and the type of material, which required. Based on the amount required thedepartment based on the demand contacts the materials management department issuedmaterials on the amount required the production scheduling, routing and the like has to becarried out. K.E.C UNIT-II is planning turnover is 100 crores for last year achieved to the 84crore. This planning for turnover is 110 crores.AC-Generator Marketing:- In case of AC-Generator the final customer is directly purchase throughManufacture of Branch office or Dealer. The O.E.M. (Original Equipment Manufactures) who in turn places the purchaseorder to the branch office, The order acceptance form along with desired specifications isstudied. Carefully in the marketing department and if found possible for production isimmediately informed to the O.E.M the information is also forwarded to the productionunitsAC Motor Marketing:- The customer decided the rating of a motor required and approaches to the dealer,the dealer in turn acceptance and passes it on to the branch office which prepares an orderacceptance and passes to customers and another to the unit of the production otherwisecustomer is directly contact through the marketing department. BABASAB PATIL 26
  27. 27. ANALYSIS OF FINANCIAL STATEMENT The order acceptance is then separated into the one for standard products andother for special products. The special products requirements have to be discussed withthe engineering department and then accepted.CREDIT POLICY: Generally K.E.C-II does not follow the policy. But some times the credit is issuedto a particular customer depending on the volume of the purchase, the type of a customerK.E.C UNIT-II has a credit policy extending to a maximum of 30 days.Objectives: The objectives of marketing department are to achieve customer satisfaction withquality products, price, and delivery in time, and presale service after sale service,maintain brand image and earn profit for further diversification.COMPETITIORS 1. Organized sector • BHEL • ASEA • Crompton Graves Ltd. • Bharat Bijli ltd. • Asian Brawn Boweri Ltd (ABB Ltd.) • General Electrical Company Ltd. • Jyoti Ltd.Unorganized Sector: • Mainly cottage industries.Direct Customers. • OEM’s (Original Equipment Manufacturer’s) • OEA’s (Original Equipment Assembler’s) BABASAB PATIL 27
  29. 29. ANALYSIS OF FINANCIAL STATEMENT MATERIAL MANAGEMENT DEPARTMENTObjectives: To provide components can service for manufacturing as required by othersfunctional divisions.Scope:  To plan and procure materials confirming to specifications through adequate selection of sub contractor.  To feed the materials to the production division at required schedules at an economic cost.Functions:-  Work out material requirement based on sales requisite plan (SRP), Sales constancy plan (SCP) and Critical credit requirement (CCR)  To exercise purchase order as per procedure.  To plan for non-production item based on purchase requisitions to materials management division.  To finalize terms of purchase.Job Description and Responsibility  To maintain and direct the organization, which is adequate to perform material management functions.  To define the duties and responsibilities of MMD and to ensure that they carried out effectively.  To plan for realistic purchase budget.  To manage obsolete surplus and scrap material.SIC’S:  To plan the material requirement  To order material and on approved suppliers and supply in the quantity necessary to satisfy marketing requirement.  BABASAB PATIL 29
  30. 30. ANALYSIS OF FINANCIAL STATEMENT  To monitor the material recipient as per delivery schedule indicated in purchase order and co-coordinating with supplier.  To monitor the material release for production in accordance with SRP/SCP/CCP.FIC’S  To plan the materials requirement.  To order material and on approved supplied and supply in the quantity necessary to satisfy marketing requirement.  To monitor the material release for production in accordance with SRP/SCP/CCP  To follow with supplier for supplier for supplying, required material at required time of manufacturing.  To keep the manufacturing division and other functional divisions other than the manufacturing informed of related activities to facilitate overall coordination related activities include information regarding material availability supplier training programs reasoning for user training for supplier products etc.  To determine the need of stock replacement through use of daily material receipt perpetual inventory.  To monitor and reconcile materials issued to suppliers. BABASAB PATIL 30
  32. 32. ANALYSIS OF FINANCIAL STATEMENT FINANCE DEPARTMENT Finance department is the blood of any business organization to survive. Anyorganization handicapped by finance will never complete an ultimately results in failureand a burden to economy. Finance department is concerned with planning and controllingof company financial resources.The company policy is formulated and credit worthiness of the customer is evaluatedaudits such as cash audit, internal audit, cost audit is done per month. In the financedepartment of KEC UNIT-II, there are 26 staff members contributing towards theeffective functioning of the department. ORGANISATIONAL HIERARCHY OF FINANCE DEPARTMENT CORPORATE FINANCE CHIEF EXECUTIVE GRADE 8 AND ABOVE M.R.E’s up to GRADE 7 BABASAB PATIL 32
  33. 33. ANALYSIS OF FINANCIAL STATEMENTKEC UNIT-II, is characterized by the fact that all the collaboration are sent to corporateoffice at Bangalore and the expenditure of the particular day are sent to the unit as per therequirement of the units.FUNCTIONS:-FINANCING FUNCTIONSIt includes cash payments, receipts, bank receipts and payments.CREDIT MANAGEMENT:Due to the competition, now a day’s credit is a means to achieve the target without creditsale any organizational can fulfill their targets.COSTINGCosting relates to calculation of production cost per unit and it tries to minimize the costof production and helps in the function of pricing with marketing department.AUDITS:-Audit is a way to confirm about the accountancy of the functions and records of all overactivities. It has employed cost Audit and Internal Audit etc.RECORDING AND MAINTAINING OF ACCOUNTS:-These are the present and future reference of the company’s financial position. These areuseful for Shareholders, Creditors, Suppliers, and Bankers etc.BANKERS OF K.E.C UNIT-IIK.E.C UNIT-II has the following Bankers:1. Bank of Baroda2. Bank of India3. Canara Bank4. Hong Kong Bank5. State Bank of India6. State Bank of Mysore. BABASAB PATIL 33
  34. 34. ANALYSIS OF FINANCIAL STATEMENTFinancial Institutions:Following are the financial Institutions of K.E.C UNIT-II: 1. Industrial Credit & Investment Corporation of India (ICICI) 2. Industrial Development Bank of India (IDBI) 3. Unit Trust of India (UTI) K.E.C UNIT-II production per month is worth 10 crores. But now it attempting to rise to Rs 11 to 11.5 crores, the raw materials is steel and copper. These are procured from steel Authority of India Ltd., and Hindustan Copper Ltd. 1% of the total turnover is used for welfare expenses and 6% of total turnover is used for salary or expenditure. On an average the KEC Unit-II is paying Rs.150 lakhs as excise duty/month, 6% oftotal turnover is given as salary and 1% of the total turnover is spent on welfare activities.The method of depreciation followed is straight-line method. The company has adoptedFIFO method for costing.Listing on Stock exchanges: • Bangalore Stock Exchange Ltd., (KIRELECRRI) • Madras Stock Exchange Ltd.(KRL) BABASAB PATIL 34
  35. 35. ANALYSIS OF FINANCIAL STATEMENT ENGINEERING DEPARTMENTQuality Policy of Engineering: The quality policy of K.E.C UNIT-II shall be continuously improving the qualitymanagement system in design, manufacture, market and service at competitive prices.Product of such quality, resulting in customer satisfaction, quality, reputation and marketleadership, The role of engineering department is to design and develop products andcomponents taking into consideration the cost, product ability, usability, and maintenanceof the product.Scope: Applicable to quality objectives identified for improvement in design anddevelopment of products manufactured in KEC UNIT-II.Responsibility:The head of the engineering department is responsible for receiving the objectives.Procedure: Objectives shall be derived from the organizational quality policy and need tomeet customer and product requirement.Quality objectives by engineering department will lead to • Simplification in design • Standardization of components • Reduction in reworking of design • Reduction cost of production. • For achieving or reworking quality objectives appropriate statistical quality control technique shall be used.Functions: • Preparation revision and release of engineering and electrical specifications. • Preparation, revision and control of drawings and release of material risk. • Validation of design of products. • Effective implementation of the design changes. BABASAB PATIL 35
  36. 36. ANALYSIS OF FINANCIAL STATEMENT PRODUCTION DEPARTMENT In many manufacturing unit production department forms the most importantdepartment of all the whole running of the unit depends upon this department the properand timely functioning of this department helps in products reaching the customers end atright time. Slight difference in timing and quality upsets the cycle. Thus the productiondepartment we can say is the heart of the firm. K.E.C UNIT-II philosophy has always been to excel in what one knows best inthe process of development. KEC UNIT-II has laid great emphasis on adoptingtechnology to suit the environment in which it has to operate K.E.C UNIT-II’s productionprocess are continuously of upgraded from time to time by the latest technology.Objectives: • To follow up the production schedule as per the plan. • To maintain the close and coordinated relationship with other department. • To upgrade technical efficiency of production. K.E.C UNIT-II there is six shops in this department all of which have got different functions to perform. The product moves from first to sixth shop and then to the dispatch. H.O.D Production heads the production department with a total shop of 600. The whole shop is divided into among six shops. The department is divided into 2 groups. 1. Feeder shop (Shop I and Shop II) 2. Assembly Shop (Shop III and Shop V) 3. Shop IV is used as Research and Development Center is also called as “Invotech Center” and Shop VI is painting section. BABASAB PATIL 36
  37. 37. ANALYSIS OF FINANCIAL STATEMENTBrief description of shops:SHOP I: The matching functions are carried out in this shop which has 5 lines engaged inproduction namely welding section, sub assembly, labor section, tools and jigs crib andtool room. There are totally 80 machines and 100 workers in shop I. The raw materialsarrived in this shop where the metal drilling, milling and shaft fixing is done and sent tothe next process. The winding are also done in the shop I.Here the process of Bodies – KH 100 to LD 225 frames. Covers – KH 63 to LD 225 frame. Shaft – KH 63 to LD 180 frame. Gear cases – MGH 100 to MGH 225 frame.Gears/pinions for Geared motors are done and also undertake manufacturing JIGS andFIXTURES and DIE-CASTING dies.ROTOR SUB ASSEMBLY: Rotor is the static part in the ACM’s and dynamic that is moving in the ACG’s.The rotor goes through the following process.1) Sinking: The roots are treated in the solution for convenience of inserting the shaft so thatthey expand and make it easy for insertion of the shaft.2) Turning: The correct turning and made according to the specification.3) Fan Shop Drilling: This is the process where in the fan is to be fixed and for this purpose drilling isdone and then locks are fixed for safety.4) Balancing: This step involves balancing the rotor properly. BABASAB PATIL 37
  38. 38. ANALYSIS OF FINANCIAL STATEMENTWINDING: Winding is the most important functional part of the machine. It has to be donemanually and precisely. This is the only process, which is totally manual. The motor iswound with correct rating wires.SHOP II Shop II is die cast shop. Here in this shop only die-casting is done. That is theshapes of body and nameplates final shape. The shop II has two machines, one fornameplate pressing and another for body. It houses the router section, here stampings are received and die casting of themetal stamping is carried in a furnace heated at 675 degrees Celsius 755 degree CelsiusROTOR SECTION: Here processing of rotor sub assembling for KH 63 to 180 frames, SD 71 flangemachine is undertaken.DIE-CASTING SECTION: Here die-casting for motor for 63 to 225 frame motors and die-casting of bodies,flanges, covers, and terminal boxes from KH 63 to 10 frames.SHOP-III This shop can be called as assembly shop because the products here will get upto90% only, final finishing will be at this stage. The assembling of motors of the frame size motors are assembled in this shop inthree different assembly lines namely: • The non-standard line for custom mode and is operated manually. • The standard line for this standard motor is also called verticals assembly line where the motors are assembled mechanically by various stations in the machines acquired for the specific purposes. • The export line is where the motors have to be exported assembled with due care and is done manually. After assembling the motors they are sent to the painting section, which is housed in the same shop. BABASAB PATIL 38
  39. 39. ANALYSIS OF FINANCIAL STATEMENT SHOP IV: It works as research and development center for the company. It keeps its eye on the changes that are taking place in the electrical world and tries to adopt those changes in their manufacturing process. So it acts as research and development in the company. SHOP V: Here assembling of medium and large motors generators and MGU’s under separate bays like ACM bay, ACG bay and MGUU bay. Product RatingA.C Motors Frame 200 to 225 15 KW to 75 K WA.C Generator Frame and DS-DL-CMA 2.5KVA to 90KVA180 & 250Motorized gear units 90 to 225 0.75 KW to 22 KWPainting and testing is also done here.SHOP VI : In this section, components used in the motors are pre treated and painted. K.E.C UNIT-II has to its credit the pioneering of the latest technology called“Unibake” system. Earlier this system was applied to all the products but recently it hasbeen restricted only for export orders. The domestic products are painted in conventionalmanner. BABASAB PATIL 39
  40. 40. ANALYSIS OF FINANCIAL STATEMENT ORGANISATION CHART OF FEEDER SHOPS CEO HOD Production SIC – FEEDER SHOPS FIC, T FIC, Shaft FIC DIE FIC ROOM Body CASTING SHOP6 AND T CRIBK.E.C has its corporate and marketing office at Bangalore. National Offices are dividedinto 4 zones.1. North Zone : Delhi, Ludhiana, and Jaipur2. East Zone : Kolkatta, Jamshedpur, Guwahati, Bhubaneshwar and Ranchi.3. West Zone : Mumbai, Nagpur, Pune, Ahmedabad, Surat and Indore.4. South Zone : Chennai, Coimbatore, Cochin, Hyderabad, Bangalore, Belgaum, Pondichery BABASAB PATIL 40
  41. 41. ANALYSIS OF FINANCIAL STATEMENTQUALITY ASSURANCE Quality is the fitness to end-use, it is all persuasive. In this modern andcompetitive world each and every company is trying hard to introduce to quality andevery defect free product K.E.C has a full fledge quality assurance department headed byhighly qualified professionals committed to developing products that keep phase with thechanging desires and needs of the consumers. Quality plays important role in K.E.CUNIT-II because its products are used for industrial customer applications. Hence it mustsatisfy and come upto the customer expectations.Objective: The role of QA division is to assist all functional division in achieving andmaintaining level of specified quality requirement economically. This unit being ISO-9001, certified unit, has to follow the stringent qualityspecification. This department facilitates the total quality management (TQM) in all thedepartments, by adopting process controls at all stages. The quality assurance department follows a definite set of systems andprocedures, which are incorporated in the manuals. The manuals are drafted to the linesof the standards as specified by the ISO-9000 series of clause for quality documentation. Functions:The functional responsibilities of different sections of QA divisions are as follows: • Releasing of accepted products for further process. • Evaluating quality rating of suppliers. • Generation of NC reports for analysis/ review and initiating corrective action and preventive action. • Quality information and reporting. • Maintaining documents and records as per procedures.FEEDER SHOPS QA:Feeder shops QA is responsible for: BABASAB PATIL 41
  42. 42. ANALYSIS OF FINANCIAL STATEMENT • Inspection/ Testing of parts, sub assembly as per appropriate quality plan/ documents procedures/ inspection plans other documents. • Ensuring proper identification and inspection status. • Updating, revising inspection plans procedure as and when found necessary. • Generation of Non-conformance reports for analysis, revive and collective action, preventive action. • Ensuring that calibrated instruments are used for measurements and coordinating with calibration section for periodic calibration.FINAL INSPECTION AND TESTINGConduction routing/ type/ engineering tests on products to specified requirements as perdocumented procedures: • Maintaining test records and providing test certificates. • Ensuring tested products and conforming to specified requirements and complete in all respects. • Providing inspection/ tests stating for confirming products. • Providing engineering test results for design modification where necessary. • Assisting in customer inspection.QUALITY LABORATORY: • Periodic calibration of instruments as per documented process. • Arranging for repair/ rectification/ disposal of measuring instruments. • Planning for new instruments/ organizing calibration function from external agencies. • Maintaining documents/ records as per procedures. QUALITY SYSTEMS: • Maintaining quality systems as per ISO 9001-2000 • Assisting HOD QA for conduction quality related training programs. • BABASAB PATIL 42
  43. 43. ANALYSIS OF FINANCIAL STATEMENT • Analysis and reporting of customer complaints internal non-conformance reports. • Conducting systems audits, monitoring corrective actions, preventive actions. • Implementing of corrective actions and preventive actions.ORGANIZATION CHART OF QUALITY ASSURANCE CEO HOD Q.A FIC-QS SIC-Final SIC Final SIC-QA IMI 7 Inspection Shop 3 Inspection & Feeder Shop ` Testing Shop5 7 QA (Shop 1&2) QA Lab FIC –Final FIC-Final FIC inspection & Inspection Customer Testing & & Testing Inspection Customer Shop 3 Inspection Shop5 FIC-QA Lab FIC Winding FIC-Winding Inspection Inspection FIC-QA IMI FIC Shop 1 FIC-Shop 6 & 2 QA QA BABASAB PATIL 43
  44. 44. ANALYSIS OF FINANCIAL STATEMENT PROCESS FLOW CHART Customer cuuu -Requirements Marketing -EnquryHandling -Order execution -Customer Feedback Engineering -Release of specification MMD Planning & Procurement of material Stores -Receipt & Issueof materials Personnel & Computer - Supporting Services QA -Supporting Central Planning Services -Scheduling MSD Production MED -Supporting -Feeder Shop 1,2,&6 -Supporting Services -Product shop 3&5 services Packing & Forwarding After Sales & services BABASAB PATIL 44
  45. 45. ANALYSIS OF FINANCIAL STATEMENT COMPUTER DIVISION We are into technology revolution where process and manual jobs have beenatomized or computerized. So getting along with revolution K.E.C UNIT-II has alsosteeped into the field of computers and has computerized its various departments of theunit.Objective: The computer division is responsible for software developments, maintenance ofcomputer hardware accessories, using appropriate methods.Scope: This is applicable to all the functions performed by the computer divisions ofK.E.C UNIT-II, Hubli. The head of computer division has overall responsibility and delegate works toother staff as appropriate.FUNCTIONS: • Maintenance of computer hardware accessories: User department raises requisition for hardware breakdown. The call isattended enclosed after acknowledge for the user. • Preventive maintenance of computers and accessories: Preventive maintenance is carried out for computer hardware every half yearly and every quarterly and updated in the history card. This activity is acknowledged with the preventive maintenance sticker and stuck on the computer accessories. • Software Revalidation: Software revalidation is done annually as per the procedure defined in software revalidation and records are maintained. • Back – Ups: Regular backup is ensured department wise as per the procedure defined. BABASAB PATIL 45
  46. 46. ANALYSIS OF FINANCIAL STATEMENT • Document Control: Records files are updated and maintained in the document control register. GENERAL FUNCTIONS: Computer department works as a supporting device for all department and all the functional activities like payroll preparation and accounts receivables management is done with the help of computer department. In production field, it will help in planning, investment management etc. The company also has CMAN and ERP procedure to strengthen their production activities. ORGANIZATION OF COMPUTER DEPARTMENT CEO HOD CD SIC-Software Devlopment/ SIC-Software modification/Heardware/Ba Development/Revalidation ckup MaintenanceFIC- FIC-Hardware/Electrical SoftwareMaintenance Development/Maintenanc e BABASAB PATIL 46
  47. 47. ANALYSIS OF FINANCIAL STATEMENT CENTRAL PLANNINGObjective: To describe the quality management system process & procedures followed inproduction department.Scope: • Applicable to Central Planning Department. • To demonstrate product manufactured meets requirements by following applicable process. • For effective application, implementation, continued improvement in the different areas of work.Approach: Activities in the department are carried out with required resources. Resourcesinclude Building, Personnel, Manufacturing equipments, Test equipment etc. theavailable resources are managed to make quality products. The department, Organization,Process & Other activities followed for QMS requirements is given.Functions: • Release of material against SR/SCP to all departments. • Plan on basis of material availability. • Sub-contract is given. • Re-planning of material against the non-conformance. • Maintain of product identification and tractability. • Corrective action. • Maintain quality records. BABASAB PATIL 47
  48. 48. ANALYSIS OF FINANCIAL STATEMENT ORGANISATION CHART OF CENTRAL PLANNING CEO HOD CP SIC-Planning SIC-component manufacturing/sub contract FIC FIC- FIC-Die- FUC-Sub FIC- Assembly casting& Rotor contract Records planning sub- assembly BABASAB PATIL 48
  49. 49. ANALYSIS OF FINANCIAL STATEMENT MANUFACTURING ENGINEERING DEPARTMENT (MED)Functions: • Preparation general assembly drawings of jigs, fixtures, dies, tooling, storage devices & gauges. • Recession of drawing with design changes. • Coordinating with production for finalizing the manufacturing process. • Preparation of process sheets.Job Responsibilities: HOD • Overall administration of MED. • Development around organization to achieve the required objectives of the department. • Coordinate with other department to carry out the department activities. • Monitor the activities of the department through proper documentation. • Planning & procurement of Capital equipment. • Establish quality objective for the department function. • Design of jigs/ fixtures/ tooling. • Determining and defining of process for manufacturing activities process sheets. • Assisting process determination at supplier for component machining activities & release of process sheets wherever required. • Organizing for procurement of capital required for manufacturing activities. BABASAB PATIL 49
  50. 50. ANALYSIS OF FINANCIAL STATEMENT ORGANISATIONAL CHART OF MED CEO HOD MED SIC MED FIC Jigs/Fixtures/Dies & Tooling & Preparation & Release of Process Sheets BABASAB PATIL 50
  51. 51. ANALYSIS OF FINANCIAL STATEMENT GENERAL STORES To describe the process and procedure followed in stores department. A guide foreffective, ORGANIZATION CHART OF STORES CEO HOD Stores SIC StoresObjective: The role of stores is to maintain accountability of the materials received, storedand issued as per the specified requirements.Scope: Applicable to stores activities.Responsibility: The head of stores division is responsible for overall function of the stores withduties delegated to SIC/FIC as applicable.Functions: • Receive material as per delivery Chilean/ Invoice/ Credit Reports. • Ensure identification, inspection status, and supplier identification on the components vendor code/ material code in the delivery challan/ invoice.DUTIES AND RESPONSIBILITIES OF HOD: • Overall administration of stores. • Establishment of inventory norms & controls. • Establishing & maintaining quality systems in stores division.DUTIES & RESPONSIBILITIES OF SIC STORES: • Overall administration of stores. • Ensuring that all components / products received in stores are inspected and tested as per the applicable specification/procedures. • Ensure receipt, storage & issue of materials. BABASAB PATIL 51
  52. 52. ANALYSIS OF FINANCIAL STATEMENTDUTIES AND RESPONSIBILITIES OF FIC STORES • Receive and stores materials as per delivery Challan/ Invoice/ Audit reports. • Ensure identification & inspection status for the components/ products. • Preparation of receipt memos. • Storing of outstanding in specified areas like mobile racks/ pallets etc., • Issue of materials to shops/ suppliers as per indents. BABASAB PATIL 52
  53. 53. ANALYSIS OF FINANCIAL STATEMENT INTRODUCTION Financial Ratios are used in the evaluation of the financial conditionand profitability of a company. The ratios are calculated from the financial informationprovided in the balance sheet and income statements. While analyzing the financialstatements you should keep in mind the principles/practices that accountants use inpreparing statements to examine at the financial condition and preference of a company.RATIO ANALYSIS Ratio Analysis is one of the techniques of financial analysis where ratiosare used as a yardstick for evaluating the financial condition and performance of a firm.Analysis and interpretation of various accounting ratios gives a skilled and experiencedanalyst a better understanding of the financial condition and performance of the firm.MEANING AND DEFINITION:- A ratio is a simple arithmetic expression of the relationship of one numberto another. Ratio is relationships expressed in mathematical terms between figures whichare connected with each other in some manner.DEFINITION:-Ratio analysis is defined as, “The systematic use of ratios to interpret the financialstatements so that the strengths and weaknesses of the firm as well as its historicalperformance and current financial condition can be determined. This relationship can be expressed as: 1) Percentages:- For example,Assuming that net profits of Rs 25,000 and Sales of Rs 1,00,000. Then the net profits are25% of sales. 2) Fraction:- net profit is ¼ of sales. 3) Proportion:- the relationshipbetween net profits and sales is 1:4. To take managerial decision the ratio of such items reveals the soundness offinancial position. Such information will be useful for creditors, shareholdersmanagement and all other people who deal with company. BABASAB PATIL 53
  54. 54. ANALYSIS OF FINANCIAL STATEMENT IMPORTANCE OR SIGNIFICANCE OF RATIO ANALYSIS: The ratio analysis is one of the most powerful tools of financial analysis.It is used as a device to analyze and interprets the financial health of enterprise. Just like adoctor examines his patient by recording his body temperature, blood pressure etc. beforemaking his conclusion regarding the illness and before giving his treatment, a financialanalyst analyses the financial statements with various tools of analysis beforecommenting upon the financial health or weaknesses of an enterprise. Following are theuses of ratio analysis: • Liquidity position • Long term solvency • Operating efficiency • Overall profitability • Inter firm comparison • Trend analysis.Liquidity Position With the help of ratio analysis conclusions can be drawn regarding theliquidity position of a firm. It would be satisfactory if it is able to meet its currentobligations when they become due. A firm can be said to have the ability to meet its shortterm liabilities if it has sufficient liquid funds to pay the interest on its short maturingdebt usually within a year as well as to repay the principal. This ability is reflected in theliquidity ratios of a firm. The liquidity ratios are particularly useful in credit analysis bybanks and other suppliers of short term loans.Long term solvency: Ratio analysis is equally useful for assessing the long term financialviability of a firm. This aspect of the financial position of a borrower is of concern to thelong term creditors, security analysts and the present and potential owners of a business.The long term solvency is measured by the leverage/capital structure and profitability BABASAB PATIL 54
  55. 55. ANALYSIS OF FINANCIAL STATEMENTratios which focus on earning power and operating efficiency. Ratio analysis reveals thestrengths and weakness of a firm in this respect.Operating efficiency Yet another dimension of the usefulness of the ratio analysis, relevantfrom the viewpoint of management, is that it throws light on the degree of efficiency inthe management and utilization of its assets. The various activity ratios measure this kindof operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis,dependent upon the sales revenues generated by the use of its assets total as well as itscomponents.Overall profitability: Unlike the outside parties which are interested in one aspect of thefinancial position of a firm, the management is constantly concerned about the overallprofitability of the enterprise. That is, they are concerned about the ability of the firm tomeet its short term as well as long term obligations to its creditors, to ensure a reasonablereturn to its owners and secure optimum utilization of the assets of the firm. This ispossible if an integrated view is taken and all the ratios are considered together.Inter- firm comparison Ratio analysis not only throws light on the financial position of a firm butalso serves as a stepping stone to remedial measures. This is made possible due to inter-firm comparison and comparison with industry averages. A single figure of a particularratio is meaningless unless it is related to some standard or norm. One of the populartechniques is to compare the ratios of a firm with the industry average. It should bereasonably expected that the performance of a firm should be in broad conformity withthat of the industry to which it belongs. An inter-firm comparison would demonstrate thefirm’s position vis-à-vis its competitors.Trend Analysis BABASAB PATIL 55
  56. 56. ANALYSIS OF FINANCIAL STATEMENT Finally, ratio analysis enables a firm to take the time dimension intoaccount. In other words, whether the financial position of a firm is improving ordeteriorating over the years. This is made possible by the use of trend analysis. Thesignificance of a trend analysis of ratios lies in the fact that the analysts can know thedirection of movement, that is, whether the movement is favorable or unfavorable. Forexample, the ratio may be low as compared to the norm but the trend may be upward. Onthe other hand, though the present level may be satisfactory but the trend may be adeclining one.LIMITATION OF RATIO ANALYSIS:-Ratio analysis is a widely used tool of financial analysis. Though ratios are simple tocalculate and easy to understand, they suffer from some serious limitations: Limited use of Single Ratio:- A single ratio usually does not convey much of a sense. To make abetter interpretation a number of ratios have to be calculated which is likely to confusethe analyst than help him in making any meaningful conclusion. Lack of Adequate Standards:- There are no well accepted standards or rules of thumb for all ratioswhich can be accepted as norms. It renders interpretation of the ratio difficult. Change Of Accounting Procedure:- Change in accounting procedure by a firm often makes ratio analysismisleading e.g. a change in the valuation of methods of inventories, from FIFO to LIFOincreases the cost of sales and reduces considerably the value of closing stocks whichmakes stock turnover ratio to be lucrative and an unfavorable gross profit ratio.  Window Dressing:- Financial statements can easily can be window dressed to present a better picture of its financial and profitability position to outsiders. Hence one has to be very careful in making a decision from ratios calculated from such financial statements. But it may be very difficult for an outsider to know about the window dressing made by a firm. BABASAB PATIL 56
  57. 57. ANALYSIS OF FINANCIAL STATEMENT  Personal Bias:- Ratio is only means of financial analysis and not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different ways.Incomparable:- Not only industries differ in their nature but also the firms of the similar business widely differ in their size and accounting procedure etc.. It makes comparison of ratios difficult and misleading. Moreover, comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis.  Absolute Figures Distortive:- Ratios devoid of absolute figures may prove distortive as ratio analysis is primarily a quantitative analysis and not a qualitative analysis.  Price Level Changes:- While making ratio analysis, no consideration is made to the changes in price levels and this makes the interpretation of ratios invalid.  Ratios No Substitutes:- Ratio analysis is merely a tool of financial statements. Hence, ratios becomeuseless if separated from the statements from which they are computed.CLASSIFICATION OF RATIOS:1) LIQUIDITY RATIO ♦ Current Ratio ♦ Quick Acid Ratio2) CAPITAL STRUCTURE RATIO ♦ Debt-equity Ratio ♦ Proprietary Ratio. ♦ Interest Coverage Ratio BABASAB PATIL 57
  58. 58. ANALYSIS OF FINANCIAL STATEMENT3) ACTIVITY RATIO: ♦ Inventory Turnover Ratio ♦ Debtors Turnover Ratio ♦ Creditors Turnover Ratio ♦ Capital Turnover Ratio ♦ Working Capital Turnover Ratio ♦ Fixed Assets Turnover4) PROFITABILITY RATIO: ♦ Gross Profit Ratio ♦ Net Profit Ratio ♦ Operating Profit Ratio ♦ Operating Expenses Ratio Or Operating Ratio ♦ Return on Investment RatioLiquidity Ratios: These ratios are also termed as ‘working capital’ or ‘short term solvency ratio’.The importance of adequate liquidity in the sense of the ability of a firm to meetcurrent/short term obligations when they become due for payment can hardly beoverstressed. In fact, liquidity is a prerequisite for the very survival of a firm. The shortterm creditors of the firm are interested in the short term solvency or liquidity of a firm.But liquidity implies, from the viewpoint of utilization of the funds of the firm that fundsare idle or they earn very littleLeverage/capital structure ratios: The second category of financial ratios is leverage or capital structure ratios.These ratios explain how the capital structure of a firm is made up or the debt-equity mixadopted by the firm. The long term solvency ratio of a firm can be examined by using BABASAB PATIL 58
  59. 59. ANALYSIS OF FINANCIAL STATEMENTleverage or capital structure ratios. The leverage or capital structure ratios may be definedas financial ratios which throw light on the long term solvency of a firm as reflected in itsability to assure the long term creditors with regard to: (1) Periodic payment of interestduring the period of the loan and (2) Repayment of principal on maturity or in predetermined instalments at due dates.Activity Ratios: Activity ratios are concerned with measuring the efficiency in asset management.These ratios are also called efficiency ratios or assets utilization ratios. The efficiencywith which the assets are used would be reflected in the speed and rapidity with whichassets are converted into sales. The greater is the rate of turnover or conversion, the moreefficient is the utilization/management, other things being equal. For this reason, suchratios are also designated as turnover ratios.Profitability Ratios: Profitability is indication of the efficiency with which the operations of thebusiness are carried on. Poor operational performance may indicate poor sales and hencepoor profits. A lower profitability may arise due to the lack of control over the expenses.Bankers, financial institutions and other creditors look at the profitability ratios as anindicator whether or not the firm earns substantially more than it pays interest for the useof borrowed funds and whether ultimate repayment of their debt appears reasonablycertain. The Management of the firm is naturally eager to measure its operating efficiencyof a firm and its ability to ensure adequate return to its shareholders depends ultimatelyon the profits earned by it. The profitability of a firm can be measured by its profitabilityratios. In other words, the profitability ratios are designed to provide answers toquestions such as: (1) Is the profit earned by the firm adequate? (2) What rate of returndoes it represent? (3) What is the rate of profit for various divisions and segments of thefirm? (4) What is the rate of return to equity holder. BABASAB PATIL 59
  60. 60. ANALYSIS OF FINANCIAL STATEMENT1) CURRENT RATIO: This ratio is an indicator of firm’s commitment to meet its short- termliabilities. Higher ratio, better the coverage. 2:1 ratio is treated as standard ratio. Thisratio is also called as solvency / working capital ratio. The current ratio is the ratio of the current assets and current liabilities. It iscalculated by dividing current assets by current liabilities.Formula:Current Ratio= Current assets Current liabilitiesTable-1 (Amount in Lakhs) Year 2004-05 2005-06 2006-07 2007-08 Current Assets 14,11,798 17,37,753 24,09,647 31,59,775 Current 12,86,103 15,76,507 18,05,200 22,14,785 Liabilities Current Ratio 1.09 1.10 1.33 1.43SOURCE: ANNUAL REPORTS OF COMPANY BABASAB PATIL 60
  61. 61. ANALYSIS OF FINANCIAL STATEMENTInterpretation: - The current ratio of last four years is less than ideal ratio 2:1, i.e.fluctuating. This indicates that firm’s commitment to meet its short liabilities was not sogood. In 2007-08 and 2006-07 the current ratios are good compare to 2004-05, 2005-06.2) QUICK / ACID TEST / LIQUID RATIO: Liquid ratio is indication of availability of quick assets to honor itsimmediate claims. Higher the ratio betters the coverage. And the standard ratio is 1:1.Anasset is liquid if is can be converted into cash immediately without loss of value. Hencecash is most liquid assets after assets which are considered to be relatively liquid are;Debtor’s balance, marketable securities etc. inventories considered to be less liquidtherefore they require some time form relishing into cash and their value also hastendency to fluctuate.Formula:Quick ratio = Current Assets- Inventories / Current LiabilitiesTable-2 (Amount in Lakhs) Year 2004-05 2005-06 2006-07 2007-08 Quick Assets 12,84,269 15,19,792 21,79,920 27,03,911 Current 12,86,103 15,76,507 18,05,200 22,14,785 Liabilities Quick Ratio .99 .96 1.20 1.22SOURCE: ANNUAL REPORTS OF COMPANYInterpretation: The ideal ratio is 1:1. The quick ratio is also fluctuating. In 2007-08 theratio is satisfactory because it is higher than 1. And it is also good in 2006-07 and BABASAB PATIL 61
  62. 62. ANALYSIS OF FINANCIAL STATEMENT 2007-08.Because it is more than 1.But it has decreased in 2005-06 and 2004-05 i.e. 0.96 and 0.99 respectively. Overall the quick ratio is satisfactory, means liquidity position of the company is good. CASH RATIO: An asset which converts suddenly without doubtful is called as cash ratios. Here cash balance included trade investment or marketable securities that are equivalent to cash. Formula: Cash Ratio=Cash +Marketable Securities /Current Liabilities. Table- 3: ( Amount in lakhs)Year 2004-05 2005-06 2006-07 2007-08Cash+ 2,17,773 1,39,434 4,13,668 5,24,749marketablesecuritiesCurrent 12,86,103 17,37,753 18,05,200 22,14,785LiabilitiesCash Ratio .17 .08 .22 .23 SOURCE: ANNUAL REPORTS OF COMPANY Interpretation: In Cash ratio there is no standard ratios for maintained the cash balance because now a days nothing to be worried about the lack of cash if the company has BABASAB PATIL 62
  63. 63. ANALYSIS OF FINANCIAL STATEMENTreserve borrowing power for its day to days activities. Holding of Cash in the year2007-08 was 23% of current liabilities in the 2005-06 it came down to 8%, in the2006-07 it again increased to 23%.INTERVAL MEASURES RATIO: The ratio which assesses a firm’s ability to meet itsregular cash expenses is the interval measures. An interval measure relates to liquid assetand average daily operating cash flows.Formula:Interval Measure ratio = current assets-inventories/average daily operating expenses /360Table-4 (Amount in lakhs)Year 2004-05 2005-06 2006-07 2007-08Current asset – 12,84,269 15,19,792 21,79,920 27,03,911inventoriesAverage daily 585 644 762 919operating expInterval 2,195 2,360 2,860 2,942MeasuresSOURCE: ANNUAL REPORTS OF COMPANYInterpretation: Interval measure is said to be good if No of days are sufficient liquidasset to finance its operations. This chart Indicates that KEC have sufficient Liquid assets BABASAB PATIL 63
  64. 64. ANALYSIS OF FINANCIAL STATEMENTto finance its operations for 2942 days even though it does not receive any cash for 2942days.LEVERAGE RATIO LEVERAGE RATIO is also called as capital structure ratio. It relates to the studyof various types of capital structure of firm. The long- term solvency of a company canbe examined by using leverages or capital structure ratios. These ratios are for long-termcreditors to judge the long-term financial strength of the company.THE DIFFERENT LEVERAGE RATIOS ARE: 1. Debt Equity Ratio 2. Proprietary Ratio 3. Interest Coverage Ratio BABASAB PATIL 64
  65. 65. ANALYSIS OF FINANCIAL STATEMENT1) DEBT RATIO Debt ratios are use to analyze the long term solvency of firm. It is the proportion ofthe interest bearing debt in the capital structure. Debt ratio is Calculated by total debt bytotal debt by capital employed or net asset of the firm. Formula: Total debt /Total debt +Net worth Table-5 (Amount in lakhs)Year 2004-05 2005-06 2006-07 2007-08Long term debt 2,03,121 1,93,574 3,16,343 4,41,152Shareholders 13,11,350 13,01,803 11,08,229 12,52,506FundsDebt-equity .15 .14 .28 .35ratioSOURCE: ANNUAL REPORTS OF COMPANYInterpretation: The debt ratio for the 2007-08 was .35 or 35% of the capital employed.It indicates owners have provide the remaining finance that is 1-35=65% of capitalemployed. From above analysis the firm has lower risk in the year 2004-05 &2005-06.But afterwards it has increased its risk in the year 2006-07 &2007-08. BABASAB PATIL 65
  66. 66. ANALYSIS OF FINANCIAL STATEMENT2) DEBT-EQUITY RATIO It measures the relation between debt and equity in the capital structure of the firm.In other words, this ratio shows the relationship between the borrowed capital andowner’s capital. Formula: Debt equity ratio= Long term debt/Net worth Table-6 (Amount in lakhs)Year 2004-05 2005-06 2006-07 2007-08 Long term 2,03,121 1,93,574 3,16,343 4,41,152debt Net 11,08,229 11,08,229 11,08,229 12,52,506worthDebt-Equity .18 .17 .28 .35RatioSOURCE: ANNUAL REPORTS OF COMPANYInterpretation:- The ratio is high in 2007-08. It shows that a large share of financing bythe creditors of the firm and it is more risky to the creditors. In 2004-05 and 2005-06 ithas declined to .18 and 0.17 respectively. In 2005-06 and 2006-07 the ratio is low i.e.,0.18 and 0.17. It indicates that the firm finance point of view, the company has low risk. BABASAB PATIL 66
  67. 67. ANALYSIS OF FINANCIAL STATEMENTIt means that the company is in safer side of finance and a margin of safety to thecreditors.3) PROPRIETORY RATIO: It establishes relationship between the propitiator orshareholders funds & total tangible assets. The ratio indicates properties stake in totalassets. Higher the ratio lowers the risk and lower the ratio higher the risk. Debt –equityratio & current ratio affects the proprietary ratio.Formula: Proprietary Ratio=Shareholder’s Funds Total AssetsTable-7 (Amount in lakhs)Year 2004-05 2005-06 2006-07 2007-08Shareholder’s 4,32,688 4,32,688 4,32,688 4,52,688FundTotal Assets 15,39,264 18,56,702 25,25,498 32,92,946Proprietary .28 .23 .17 .13Ratio(%)SOURCE: ANNUAL REPORTS OF COMPANYInterpretation: The equity ratio is high in 2004-05 i.e. 28%. It indicates that a highproprietary ratio relatively little danger to the creditors and it is better for long-term BABASAB PATIL 67
  68. 68. ANALYSIS OF FINANCIAL STATEMENTsolvency position of the company. But it has been decreased to 13% and 17% in the year2006-07 and 2007-08 respectively. A ratio below 50% is dangerous to the creditors at thetime of winding up of a company.4) EQUITY RATIO: Equity Ratio is calculated by dividing capital employed (CE) by Net worth(NW)Formula: Equity Ratio= Capital employed (CE)/Net worthTable-8 (Amount in lakhs)Year 2004-05 2005-06 2006-07 2007-08Capital 4,32,688 4,32,688 4,32,688 4,52,688employedNet worth 11,08,229 11,08,299 11,68,229 12,52,506Equity Ratio .39 .39 .37 .36SOURCE: ANNUAL REPORTS OF COMPANYInterpretation: There are no standard rules for maintaining equity ratio. It differsaccording to the nature of the business. The lower performance in maintain Net worth in2004-05 & 2005-06 but in 2006-07 &2007-08 good performance maintaining of capitalemployed to net worth. BABASAB PATIL 68
  69. 69. ANALYSIS OF FINANCIAL STATEMENTTURNOVER / ACTIVITY RATIOS OF THE COMPANYIntroduction: Activity ratios are employed to evaluate the efficiently with which thefirm manages and utilizes its assets. These ratios are also called as turnover ratio.Therefore they indicate the speed with which assets are being converted / turned over into sales.Thus an activity ratio involves relationship between sales and assets. A proper balancebetween sales and assets generally reflects that assets are managed well.In other words, turnover ratio indicates the efficiency with which the capital employed isrotated in the business.Higher the ratio of rotation, the greater will be the profitabilityDIFFERENT TURNOVER RATIOS: 1) Inventory stock turnover Ratio 2) Debtors (Accounts Receivable) Turnover Ratios. 3) Creditors (Account Payable) Turnover Ratios 4) Fixed Assets turnover Ratio 5) Current Assets turnover Ratio 6) Working capital turnover Ratio 7) Total Assets turnover Ratio 8) Net Assets turnover Ratio BABASAB PATIL 69
  70. 70. ANALYSIS OF FINANCIAL STATEMENT1) INVENTORY / STOCK TURNOVER RATIO (ITR/STR).It indicates the efficiency of firm in producing and selling its products. High Ratio isgood from the view point of liquidity and vice versa. A low ratio would signify thatinventory does not sell fast and stably in the warehouse for a longtime.Formula: Cost of Goods Sold OR Sales ________________ __________ Avg. Inventory InventoryTable-9 (Amount in lakhs)Year 2004-05 2005-06 2006-07 2007-08Sales 31,20,434 41,40,246 59,13,957 72,77,768Inventory 1,27,529 2,17,961 2,29,727 4,55,864Inventory 24.4 18.9 25.74 15.96turnover ratioSOURCE: ANNUAL REPORTS OF COMPANYInterpretation:- In the above chart, the inventory turnover ratio is high in 2006-07,2004-05, i.e. 25.7, 24.4 respectively. But it is low in 2007-08 and 2005-06 i.e. 15.9 and BABASAB PATIL 70