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Project on short term financial lanalysis

  1. 1. Project OnShort term financial analysis of cement industry in India Submitted by Praneswar nayak Roll-no -11 MCO- 043 Under the guidance of DR. Kishore Kumar DasAs a partial fulfillment for award of master degree in commerce School of commerce & management studies Department of commerce Ravenshaw University
  2. 2. DECLARATIONI, Praneswar Nayak hereby declare that the project Work entitled “Short termfinancial analysis of cement industry in India “is the original work done by me forfulfillment of my master degree of commerce under the guidance of Prof. Kishorekumar Das ,Department of commerce. Signature of student Praneswar Nayak Roll no-11MCo-043
  3. 3. ACKNOWLEDGEMENTI owe a great many thanks to a great many people who helped and supported meduring the preparing of this project My deepest thanks to Prof.Dr. KIshore ku. Das Guide of the project for guidingand correcting various documents of mine with attention and care. He has takenpain to go through the project and make necessary correction as and whenneeded. I would also thank my Institution and my faculty members without whomthis work would have been a distant reality. I also extend my heartfelt thanks tomy family and well wishers. Praneswar Nayak Department of commerce Roll no: - 11MCO043
  4. 4. Chapter 1: Introductory  Introduction  Scope & purpose study  Objective of the study  Methodology  Literature reviewChapter 2: Industrial profileChapter 3: Short term financial analysis of cement industry in India  Theoretical overview & analysisChapter 4: Epilogue  Findings of the study  Suggestions and Recommendation  Conclusion Bibliography
  5. 5. Chapter-1Introductory
  6. 6. INTRODUCTIONThe cement industry presents one of the most energy-intensive sectors withinthe Indian economy and is therefore of particular interest in the context ofboth local and global environmental discussions. Increases in productivitythrough the adoption of more efficient and cleaner technologies in themanufacturing sector will be effective in merging economic, environmental,and social development objectives. A historical examination of productivitygrowth in India’s industries embedded into a broader analysis of structuralcomposition and policy changes will help identify potential futuredevelopment strategies that lead towards a more sustainable developmentpath. Issues of productivity growth and patterns of substitution in the cementsector as well as in other energy-intensive industries in India have beendiscussed from various perspectives. Historical estimates vary from indicateimprovement to a decline in the sector’s productivity. The variation dependsmainly on the time period considered, the source of data, the type of indicesand econometric specifications used for reporting productivity growth.Regarding patterns of substitution most analyses focus on inter fuelsubstitution possibilities in the context of rising energy demand. Not muchresearch has been conducted on patterns of substitution among the primaryand secondary input factors: Capital, labour, energy and materials. However,analyzing the use and substitution possibilities of these factors as well asidentifying the main drivers of productivity growth among these and otherfactors is of special importance for understanding technological and overalldevelopment of an industry.
  7. 7. Scope & purpose studyThe present study “Short term financial analysis of cement industry inIndia” analyses the profitability of the Indian cement industry and analyze thecurrent financial position of the industry. The study attempts to determine theefficiency and effectiveness of management in each segment of workingcapital. Since the various methods of will be critically reviewed The importance of the study is emphasized by the fact that the mannerof administration of current asset and current liabilities determined to a verylarge extent the success or failure of a business. The efficient and effectivemanagement of working capital is of crucial importance for the success of abusiness, which involves the management of the current assets and thecurrent liabilities. The business concern has therefore to optimize the use ofavailable resources through the efficient and effective management of thecurrent assets and current liabilities. This will enable to increase theprofitability of the concern and the firm could be able to meet its currentobligation will in time.Objective of study:- The main objective of study is to know the short term financial position ofIndian cement industryMethodologyShort term financial analysis is the evaluation of firms past, present andanticipated future financial performance and financial condition. The sectionillustrates how financial information are collected and analyzed. Data Period: the company wise information has been collected on a number of variables during the pried from 2007-2011 covering five years.
  8. 8. Source of Data: The basic data for this current study has been collected fromthe secondary source. The data was collected from the following companies’website:  ACC limited  Ultratech cement limited  India cement limited  Ambuja cement limited  OCL limitedFrame Work of Analysis: To find out short term financial position andsolvency in cement industry of India, the ratio analysis is used.Tools of Analysis1.Current ratio: Current ratio is the ratio between current assets and currentliabilities. The firm is said to the comfortable in its liquidity position, if thecurrent ratio is 2:1 Current assetsCurrent ratio = ---------------------------- Current liabilities2. Cash ratio: It is the ratio between absolutes liquid assets and currentliabilities. It supplements the information given by current ratio. The standardof the cash ratio is 1:1. Cash + marketable securitiesCash Ratio = --------------------------------------- Current liabilities3. Debtor turnover ratio: Debt or turnover ratio indicates the number ofdebtor turnover each year. Higher the value of debtor turnover, the moreefficient is the management of credit. Credit SalesDebtors Turnover Ratio = ------------------------------- Average Debtors
  9. 9. 4. Net working capital ratio: Net working capital ratio is the differencebetween the current assets and current liabilities excluding short-term bankborrowing. It is sometimes used as measure of firm’s liquidity. Net working capitalNet working capital Ratio = ---------------------------------------- Net assetsIII) HYPOTHESIS:- There is no any significant difference between ProfitabilityTrends of Cement Industry of India.Literature reviewFactor Analysis was first applied to financial ratios by Pinches, Mingo andCaruthers (1973) in an attempt to develop an empirically-based classificationof financial ratios. Since then, researchers are using Factor Analysis as a meanof eliminating redundancy and reducing the number of financial ratios neededfor empirical research. Hamdi and Charbaji (1994) applied Factor Analysis to42 financial ratios of International Commercial Airlines for the year of 1986to reduce them to underlying factors. Tan, Koh and Low (1997) used the actorAnalysis on 29financial ratios of the companies listed on the Stock Exchangeof Singapore (SES) from 1980 to 1991 to derive 8 underlying factors. Öcal,Oral, Ercan Erdis and Vural (2007) applied Factor Analysis on 25 financialratios of Turkish construction industry during 1998 to 2001 to derive 5underlying factors. Dr, Bandyopadhyay and Chakraborty (2010) made anempirical study on the 44 financial ratios of selected companies from Indianiron & steel industry and derived 10 underlying factors. Application of ClusterAnalysis on financial ratios is also not a new one. Few researchers have doneit before. Wanga and Leeb (2008) applied a new clustering method based on afuzzy relation between financial ratio sequences. They also conducted anempirical study on 24 financial ratios of four Taiwan shipping companiesusing Cluster Analysis. De, Bandyopadhyay and Chakraborty (2010) alsovalidated the results derived from the Factor Analysis by the Cluster Analysis.Morris and Shin (2010) conceptually defines the liquidity ratio as “realizablecash on the balance sheet to short term liabilities.” In turn, “realizable cash” isdefined as liquid assets plus other assets to which a haircut has been applied.Ration analysis is one of the conventional way that use financial statements toevaluate the company and create standards that have simply interpreted
  10. 10. financial sense (George H.Pink, G. Mark Holmes 2005). A sudden stop in anorganization is generally defined as a sudden slowdown in emerging marketcapital (cash) inflows, with an associated shift from large current accountdeficits into smaller deficits or small surpluses. Sudden stops are “dangerousand they may result in bankruptcies, destruction of human capital and localcredit channels” Calvo, 1998.According to many university researchers (Basno & Dardac, 2004), therequired liquidity for each business depends on the balance sheet situation ofthe business. In order to evaluate the liquidity state, special importance is heldby the way in which there are classified organizational assets and liabilities(Basno & Dardac, 2004). Liquidity risk is seen as a major risk, but it is theobject of: extreme liquidity, "security cushion" or the specialty of mobilizingcapital at a "normal" cost (Dedu, 2003)The International Accounting Standards (IFRS, 2006) indicate the fact thatliquidity refers to the available cash for the near future, after taking intoaccount the financial obligations corresponding to that period. Liquidity riskconsist in the probability that the organization should not be able to make itspayments to creditors, as a result of the changes in the proportion of longterm credits and short term credits and the uncorrelation with the structureof organizations liabilities (Stoica, 2000).Liquid assets should have thefollowing attributes: diversified, residual maturities appropriate for theinstitution’s specific cash flow needs; readily marketable or convertible intocash; and minimal credit risk. (2005 The Bank of Jamaica Publish: February1996). Liquidity lines and funding facilities may also have a role within aninstitution’s liquidity programmed by helping an institution protect itselfagainst temporary difficulties that might occur when honoring cash outflowcommitments. (2005 The Bank of Jamaica Publish: February 1996). The efficient management of the broader measure of liquidity, workingcapital, and its narrower measure, cash, are both important for a companysprofitability and well being. In the words of Fraser (1998) "there may be nomore financial discipline that is more important, more misunderstood, andmore often overlooked than cash
  11. 11. Chapter-2Industrial profile
  12. 12. History of cement industryThe history of the cement industry in India dates back to the 1889 when aKolkata-based company started manufacturing cement from Argillaceous. Butthe industry started getting the organized shape in the early 1900s. In 1914,India Cement Company Ltd was established in Porbandar with a capacity of10,000 tons and production of 1000 installed. The World War I gave the firstinitial thrust to the cement industry in India and the industry started growingat a fast rate in terms of production, manufacturing units, and installedcapacity. This stage was referred to as the Nascent Stage of Indian CementCompany. In 1927, Concrete Association of India was set up to create publicawareness on the utility of cement as well as to propagate cementconsumption.The cement industry in India saw the price and distribution control system inthe year 1956, established to ensure fair price model for consumers as well asmanufacturers. Later in 1977, government authorized new manufacturingunits (as well as existing units going for capacity enhancement) to put ahigher price tag for their products. A couple of years later, governmentintroduced a three-tier pricing system with different pricing on cementproduced in high, medium and low cost plants.Cement Company, in any country, plays a major role in the growth of thenation. Cement industry in India was under full control and supervision of thegovernment. However, it got relief at a large extent after the economic reform.But government interference, especially in the pricing, is still evident in India.In spite of being the second largest cement producer in the world, India falls inthe list of lowest per capita consumption of cement with 125 kg. The reasonbehind this is the poor rural people who mostly live in mud huts and cannotafford to have the commodity. Despite the fact, the demand and supply ofcement in India has grown up. In a fast developing economy like India, there isalways large possibility of expansion of cement industry.
  13. 13. Growth in domestic cement demand is likely to remain strong, with theresumption in the housing markets, regular government spending on the ruralsector and infrastructure spend accomplished by rise in the number ofinfrastructure projects implemented by the private sector. Furthermore, it isexpected that the industry players will continue to increase their annualcement output in coming years and India’s cement production will grow at acompound annual growth rate (CAGR) of around 12 per cent during 2011-12 -2013-14 to reach 303 Million Metric Tons, according to Indian CementIndustry Forecast to 2012. Cement Manufacturing Association (CMA) istargeting to achieve 550 MT capacities by 2020. A large number of overseaplayers are also expected to enter the industry in the coming years as 100 percent FDI is permitted in the cement industry. Our country is the second majorcement producing country following the China having a total capacity ofaround 230 MT (including mini plants). However, on account of low per capitaconsumption of cement in the country (156 kgs/year as compared to worldaverage of 260 kgs) there is an enormous potential for growth of the industry. The demand for cement mainly depends on the level of development and therate of growth of the economy. There are no close substitutes for cement andhence the demand for cement is price inelastic. During the October – 201114.78 MT were produced and 14.38MT was consumed. For the FY 2011 – 12(Apr - Oct), MT 97.84 was consumed form the 98.91 MT produced. During thefirst half of the year, there was marginally poor off take in cement demand dueto passive construction activity, which lead to excess supply, thus puttingdownward pressure on realizations. This has been coupled with rise in inputcosts, especially prices of coal and petroleum products. As a result, both thetop line and bottom line have been affected. This demand supply mismatchscenario is expected to prevail for some time. Good agricultural income willsupport demand.Present scenario of IndustryIndia is the second major cement producing country following the China;we have 137 large and 365 mini cement plants. Leading players in theindustry are Ultratech Cement, Ambuja Cement Limited , JK Cements, ACCCement, Madras Cements etc. Cement is an adhesive that holds the concretetogether and is therefore vital for meeting economy’s needs of Housing &
  14. 14. accommodation and necessary infrastructure such as roads & bridges,schools, hospitals etc. Hence, the cement is one of the fundamental elementsfor setting up strong and healthy infrastructure of the country and plays animportant role in economic development and welfare of the nation.Cement industry is being segmented regionally i.e. Northern, Central,Western, Southern and Eastern. Cement, being a bulk item transporting itover long distances can prove to be uneconomical as it attracts very highamount of freight. Thus, it has resulted in cement being largely a regional playwith the industry divided into five main regions. As it is a freight intensiveindustry, the segment is completely domestic driven and exports account forvery negligible percentage of the total cement off take.Southern region in the country is the biggest contributor in cementproduction and it has a largest pie in capacity with 92.11MT. India has totalcapacity of 226.90 MT as on March – 2010 comprised of Northern Region48.27 MT, Central Region 26.01 MT, Eastern Region 31.89 MT, WesternRegion 28.62 MT and as mentioned earlier Southern Region 92.11 MT.Rajasthan, Andhra Pradesh, Tamilnadu, Madhya Pradesh and Gujarat are theprominent cement industry contributor states. The southern region generallyhas an excess capacity trend in the past owing to profuse availability oflimestone, the western and northern regions are generally has more demandthan availability.Some specifics of Indian cement industry  India ranks second in world cement producing countries.  Capacity utilization: In view of the fact that the industry operates on fixed cost, higher the capacity sold, the wider the cost distributed on the same base. But there have been instances wherein despite a healthy capacity utilization, margins have fallen due to lower realizations.  Access and proximity to raw materials (limestone and coal) and consuming markets are very important as it is extremely bulky commodity
  15. 15.  Sector is highly capital-intensive, a green field project for 1 MT on an average requires capital expenditure of Rs 3 bn and 2 MT is considered an ideal size for a company to have some kind of economies of scale. The sector operates with a high level of fixed cost and therefore volume growth is decisive to have good growth margins.  Raw materials like limestone and gypsum costs are usually lower than freight and power costs in the cement industry. Excise duties imposed by the government and labor wages are among the other chief cost components involved in the manufacturing of cement.Cement production and growthDomestic demand plays a major role in the fast growth of cement industry inIndia. In fact the domestic demand of cement has surpassed the economicgrowth rate of India. The cement consumption is expected to rise more than22% by 2009-10 from 2007-08. In cement consumption, the state ofMaharashtra leads the table with 12.18% consumption, followed by UttarPradesh. In terms of cement production, Andhra Pradesh leads the list with14.72% of production, while Rajasthan remains at second position.The production of cement in India grew at a rate of 9.1% during 2006-07against the total production of 147.8 MT in the previous fiscal year. DuringApril to October 2008-09, the production of cement in India was 101.04 MTcomparing to 95.05 MT during the same period in the previous year. DuringOctober 2009, the total cement production in India was 12.37 MT comparedto a production of 11.61 MT in the same month in the previous year. Thecement companies are also increasing their productions due to the highmarket demand. The cement companies have seen a net profit growth rate of85%. With this huge success, the cement industry in India has contributedalmost 8% to Indias economic development.
  16. 16. Chapter-3Short term financial analysisof cement industry in India Theoretical overview & analysis
  17. 17. Before making analysis of short financial position of various cement industries inIndia the following are be to discuss. So the followings are discuss about the ratiosby which the short term financial position are analyzedLiquidity Ratio:-It is extremely essential for a firm to be able to meet its obligation as they becomedue. Liquidity ratios measures the ability of the firm to meet its currentobligations .A firm should ensure that it does not suffer from lack of liquidity andalso that it does not have excess liquidity. The failure of the company to meet itsobligations due to lack of sufficient liquidity, will result in a poor creditworthiness, loss of creditor’s confidence etc. A very high degree of liquidity is alsobad; idle assets earn nothing. Therefore it is necessary to strike a proper balancebetween high liquidity and lack liquidity. The most common ratios which indicate the balance of liquidity are(a) current ratio (b) quick ratio (c) cash ratio (d) interval measure (e) net workingcapital ratio.Importance of Liquidity Ratios:Liquidity ratios are probably the most commonly used of all the businessratios. Creditors may often be particularly interested in these because theyshow the ability of a business to quickly generate the cash needed to payoutstanding debt. This information should also be highly interesting since theinability to meet short-term debts would be a problem that deserves yourimmediate attention.Liquidity ratios are sometimes called working capital ratios because that, inessence, is what they measure. The liquidity ratios are: the current ratio andthe quick ratio. Often liquidity ratios are commonly examined by banks whenthey are evaluating a loan application. Once you get the loan, your lender mayalso require that you continue to maintain a certain minimum ratio, as part ofthe loan agreement.
  18. 18. Current Ratio:-Current ratio is the relationship between current asset and current liability.This ratio is also known as working capital ratio which measures the othergeneral liquidity and is most widely used to make the analysis of short termfinancial position of a firm. It is calculated by dividing the total current assetby total current liability. Current Ratio=Current Assets/current LiabilitiesA relatively high current ratio is an indication that the firm is liquid and hasthe ability to pay its current obligation in time as and when they become due.The rule of thumb is 2:1 i.e. current asset as double the current liability isconsider being satisfactory.Significance of current ratio:This ratio is a general and quick measure of liquidity of a firm. It representsthe margin of safety or cushion available to the creditors. It is an index of thefirm’s financial stability. It is also an index of technical solvency and an indexof the strength of working capital.A relatively high current ratio is an indication that the firm is liquid and hasthe ability to pay its current obligations in time and when they become due.On the other hand, a relatively low current ratio represents that the liquidityposition of the firm is not good and the firm shall not be able to pay its currentliabilities in time without facing difficulties. An increase in the current ratiorepresents improvement in the liquidity position of the firm while a decreasein the current ratio represents that there has been a deterioration in theliquidity position of the firm. A ratio equal to or near 2 : 1 is considered as astandard or normal or satisfactory. The idea of having double the currentassets as compared to current liabilities is to provide for the delays and lossesin the realization of current assets. However, the rule of 2 :1 should not beblindly used while making interpretation of the ratio. Firms having less than 2: 1 ratio may be having a better liquidity than even firms having more than 2 :1 ratio. This is because of the reason that current ratio measures the quantityof the current assets and not the quality of the current assets. If a firms
  19. 19. current assets include debtors which are not recoverable or stocks which areslow-moving or obsolete, the current ratio may be high but it does notrepresent a good liquidity position.Limitations of Current Ratio:This ratio is measure of liquidity and should be used very carefully because itsuffers from many limitations. It is, therefore, suggested that it should not beused as the sole index of short term solvency. 1. It is crude ratio because it measures only the quantity and not the quality of the current assets. 2. Even if the ratio is favorable, the firm may be in financial trouble, because of more stock and work in process which is not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities.Valuation of current assets and window dressing is another problem. Thisratio can be very easily manipulated by overvaluing the current assets. Anequal increase in both current assets and current liabilities would decreasethe ratio and similarly equal decrease in current assets and current liabilitieswould increase current ratioQuick Ratio:It is an indicator of a companys short-term liquidity. The quickratio measures a companys ability to meet its short-term obligations with itsmost liquid assets. The higher the quick ratio, the better the position ofthe company.The quick ratio is calculated as:Also known as the "acid-test ratio" or the "quick assets ratio"
  20. 20. Significance of quick Ratio:-The quick ratio/acid test ratio is very useful in measuring the liquidityposition of a firm. It measures the firms capacity to pay off current obligationsimmediately and is more rigorous test of liquidity than the current ratio. It isused as a complementary ratio to the current ratio. Liquid ratio is morerigorous test of liquidity than the current ratio because it eliminatesinventories and prepaid expenses as a part of current assets. Usually highliquid ratios an indication that the firm is liquid and has the ability to meet itscurrent or liquid liabilities in time and on the other hand a low liquidity ratiorepresents that the firms liquidity position is not good. As a convention,generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory.Although liquidity ratio is more rigorous test of liquidity than the current ratio, yet it should be used cautiously and 1:1 standard should not be used blindly.A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity positionof the firm if all the debtors cannot be realized and cash is neededimmediately to meet the current obligations. In the same manner, a low liquidratio does not necessarily mean a bad liquidity position as inventories are notabsolutely non-liquid. Hence, a firm having a high liquidity ratio may not havea satisfactory liquidity position if it has slow-paying debtors. On the otherhand, A firm having a low liquid ratio may have a good liquidity position if ithas a fast moving inventories.Working Capital Turnover Ratio:Working capital turnover ratio indicates the velocity of the utilization of networking capital.This ratio represents the number of times the working capital is turned overin the course of year and is calculated as follows:Formula of Working Capital Turnover Ratio:Following formula is used to calculate working capital turnover ratio Working Capital Turnover Ratio = Cost of Sales / Net Working Capital
  21. 21. The two components of the ratio are cost of sales and the net working capital.If the information about cost of sales is not available the figure of sales may betaken as the numerator. Net working capital is found by deduction from thetotal of the current assets the total of the current liabilities.Significance of working capital turnover ratio:The working capital turnover ratio measures the efficiency with which theworking capital is being used by a firm. A high ratio indicates efficientutilization of working capital and a low ratio indicates otherwise. But a veryhigh working capital turnover ratio may also mean lack of sufficient workingcapital which is not a good situationInventory Turnover Ratio or Stock Turnover Ratio (ITR):Every firm has to maintain a certain level of inventory of finished goods so as to be able tomeet the requirements of the business. But the level of inventory shouldneither be too high nor too low.A too high inventory means higher carrying costs and higher risk of stocksbecoming obsolete whereas too low inventory may mean the loss of businessopportunities. It is very essential to keep sufficient stock in businessDefinition:Stock turnover ratio and inventory turnover ratio are the same. This ratio is arelationship between the cost of goods sold during a particular period of timeand the cost of average inventory during a particular period. It is expressed innumber of times. Stock turnover ratio/Inventory turnover ratio indicates thenumber of time the stock has been turned over during the period andevaluates the efficiency with which a firm is able to manage its inventory. Thisratio indicates whether investment in stock is within proper limit or not.Components of the Ratio:Average inventory and cost of goods sold are the two elements of this ratio.Average inventory is calculated by adding the stock in the beginning and at
  22. 22. the and of the period and dividing it by two. In case of monthly balances ofstock, all the monthly balances are added and the total is divided by thenumber of months for which the average is calculated.Formula of Stock Turnover/Inventory Turnover Ratio:The ratio is calculated by dividing the cost of goods sold by the amount ofaverage stock at cost.(a) [Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost]Generally, the cost of goods sold may not be known from the publishedfinancial statements. In such circumstances, the inventory turnover ratio maybe calculated by dividing net sales by average inventory at cost. If averageinventory at cost is not known then inventory at selling price may be taken asthe denominator and where the opening inventory is also not known theclosing inventory figure may be taken as the average inventory.(b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost](c) [Inventory Turnover Ratio = Net Sales / Average inventory at SellingPrice](d) [Inventory Turnover Ratio = Net Sales / Inventory]Significance of ITR:Inventory turnover ratio measures the velocity of conversion of stock intosales. Usually a high inventory turnover/stock velocity indicates efficientmanagement of inventory because more frequently the stocks are sold, thelesser amount of money is required to finance the inventory. A low inventoryturnover ratio indicates an inefficient management of inventory. A lowinventory turnover implies over-investment in inventories, dull business,poor quality of goods, stock accumulation, accumulation of obsolete and slowmoving goods and low profits as compared to total investment. The inventoryturnover ratio is also an index of profitability, where a high ratio signifiesmore profit, a low ratio signifies low profit. Sometimes, a high inventory
  23. 23. turnover ratio may not be accompanied by relatively high profits. Similarly ahigh turnover ratio may be due to under-investment in inventories.It may also be mentioned here that there are no rule of thumb or standard forinterpreting the inventory turnover ratio. The norms may be different fordifferent firms depending upon the nature of industry and businessconditions. However the study of the comparative or trend analysis ofinventory turnover is still useful for financial analysis.Debtors Turnover Ratio | Accounts Receivable Turnover Ratio:A concern may sell goods on cash as well as on credit. Credit is one of theimportant elements of sales promotion. The volume of sales can be increasedby following a liberal credit policy.The effect of a liberal credit policy may result in tying up substantial funds of afirm in the form of trade debtors (or receivables). Trade debtors are expectedto be converted into cash within a short period of time and are included incurrent assets. Hence, the liquidity position of concern to pay its short termobligations in time depends upon the quality of its trade debtors.Definition:Debtors turnover ratio or accounts receivable turnover ratio indicates thevelocity of debt collection of a firm. In simple words it indicates the number oftimes average debtors (receivable) are turned over during a year.Formula of Debtors Turnover Ratio:Debtors Turnover Ratio = Net Credit Sales / Average Trade DebtorsThe two basic components of accounts receivable turnover ratio are net creditannual sales and average trade debtors. The trade debtors for the purpose ofthis ratio include the amount of Trade Debtors & Bills Receivables. Theaverage receivables are found by adding the opening receivables and closingbalance of receivables and dividing the total by two. It should be noted thatprovision for bad and doubtful debts should not be deducted since this maygive an impression that some amount of receivables has been collected. But
  24. 24. when the information about opening and closing balances of trade debtorsand credit sales is not available, then the debtors turnover ratio can becalculated by dividing the total sales by the balance of debtors (inclusive ofbills receivables) given. and formula can be written as follows.Debtors Turnover Ratio = Total Sales / Debtors Accounts receivable turnover ratio or debtors turnover ratio indicates thenumber of times the debtors are turned over a year. The higher the value ofdebtors turnover the more efficient is the management of debtors or moreliquid the debtors are. Similarly, low debtors turnover ratio implies inefficientmanagement of debtors or less liquid debtors. It is the reliable measure of thetime of cash flow from credit sales. There is no rule of thumb which may beused as a norm to interpret the ratio as it may be different from firm to firm.Creditors / Accounts Payable Turnover Ratio:Definition and Explanation:This ratio is similar to the debtor’s turnover ratio. It compares creditors withthe total credit purchases.It signifies the credit period enjoyed by the firm in paying creditors. Accountspayable include both sundry creditors and bills payable. Same as debtor’sturnover ratio, creditors turnover ratio can be calculated in two forms,creditors turnover ratio and average payment period.Formula:Following formula is used to calculate creditor’s turnover ratio:Creditors Turnover Ratio = Credit Purchase / Average Trade CreditorsAverage Payment Period:Average payment period ratio gives the average credit period enjoyed fromthe creditors. It can be calculated using the following formula:
  25. 25. Average Payment Period = Trade Creditors / Average Daily Credit PurchaseAverage Daily Credit Purchase= Credit Purchase / No. of working days in ayearOrAverage Payment Period = (Trade Creditors × No. of Working Days) / NetCredit Purchase(In case information about credit purchase is not available total purchases maybe assumed to be credit purchase.)ANALYSIS:CURRENT RATIOS ACC ULTRATECH AMBUJA OCL INDIAYEAR LIMITED LIMITED CEMENT LIMITED CEMENT LTD LTD2011 0. 87 0.67 1.14 5.84 0.952010 0. 68 0.67 1. 0 7 0.66 1.282009 0. 67 0.67 0. 8 9 0.75 1.462008 0. 89 0.59 1. 2 6 0.95 1.132007 0. 86 0.58 1. 0 3 0.45 1.43 18 16 14 12 INDIA CEMENT LTD 10 OCL 8 AMBUJA CEMENT 6 ULTRATECH 4 ACC LIMITED 2 0 Year 2011 2010 2009 2008 2007
  26. 26. QUICK RATIOS ACC ULTRATECH AMBUJA OCL INDIAYEAR LIMITED LIMITED CEMENT LIMITED CEMENT LTD LTD2011 0.58 0.36 0.85 13.63 1.352010 0.43 0. 34 0.75 1.08 1.692009 0.42 0.30 0.57 1.02 1.542008 0.61 0.34 0.74 1.15 1.232007 0.55 0.38 0.64 0.10 1.49 18 16 14 12 INDIA CEMENT LTD 10 OCL 8 AMBUJA CEMENT 6 ULTRATECH 4 ACC LIMITED 2 0 Year 2011 2010 2009 2008 2007Inventory Turnover RatioYEAR ACC ULTRATECH AMBUJA OCL INDIA LIMITED LIMITED CEMENT LIMITED CEMENT LTD LTD2011 18.59 15. 73 10.38 10. 66 8.982010 19.04 17. 69 9.19 11. 65 23.242009 25.22 22. 65 11.36 7. 15 25.932008 27.51 22. 89 7.54 9. 82 26.362007 24.85 31. 16 9. 9 6 1. 37 27.47
  27. 27. 100 90 INDIA CEMENT LTD 80 70 OCL 60 50 40 AMBUJA CEMENT 30 20 ULTRATECH 10 0 2011 2010 2009 2008 2007 ACC LIMITED (CHART OF INVENTORY TURNOVER RATIO)DEBTORS TURNOVER RATIOYEAR AC C ULTRATECH AMBUJA OCL INDIA LIMITED LIMITED CEMENT LIMITED CEMENT LTD LTD2011 42.62 26.71 45.92 16.39 18.112010 40.04 32.28 52.58 13.64 9.232009 31.22 35.04 37.60 11.16 8.792008 24.12 31.71 33.39 7.27 10.102007 27.40 27.55 48.14 2.87 10.66
  28. 28. 60 50 40 30 20 10 0 year 2011 2010 2009 2008 2007 AMBUJA CEMENT O CL ACC LIMITED ULTRATECH INDIA CEMENTANALYSIS AND FINDINGS: In ACC limited the current ratio is in increasing trend from2007-2008 i, e 0.86 to 0.89 that means the improvement in illiquidity position of firm & after that, in 2009 there has been detoriation of firm in some extent as it falls to 0.67 . In 2010 it also increases. For ultratech cement current ratio increase from2007-2008 as 0.58 -0.59 and after that it is in a constant position i,e 0.67 from 2009-2011 that means the current assets increases following the current liability. The all companies have not good current ratio because it is below the rule of thumb except the OCL limited in2011 as its current ratio is 5.84. India cements have its very satisfactory quick ratio & liquidity position of India cements is also very good in all year. OCl also have good ratios from 2011 OCL have huge quick ratio as 13.63 & it is
  29. 29. very good liquidity position and all other companies have low quick ratio in all year except and inventories are not absolutely non-liquid and its satisfactory because the inventory is fast moving. Inventory turnover ratio of all companies has satisfactory and it indicates efficient management inventory because more frequently stocks are sold. Debtor turnover ratio of all companies in all year are satisfactory except the OCL limited in 2007 I,e 2.87 is very low as comparison to other.in2007 of OCL limited has sales to the less liquidator debtor. Overally short term financial position of all companies are satisfactory. The management system of cement industries is very efficient. Indian cement industries in a healthy position & it produce qualitative cement.SUGGESTIONS AND RECOMMENDATIONS All companies should increase its productions as india develops its infrastructural sites. Management of companies is suggested to improve its current ratio. The Government should frame policy for the benefits of cement industries. The Government should develop the R & D in cement industries.
  30. 30. ConclusionThe amount of profit earned measures the efficiency of a business. The greaterthe volume of profit, the higher is the efficiency of the concern. The profit of abusiness may be measured and analyzed by studying the profitability ofinvestments attained by the business. The study investigates the profitabilityof the selected cement companies in India. The study uses various liquidityand profitability ratios for assessment of impact of liquidity ratios onprofitability performance of selected cement companies. It is inferred fromthe results profitability performance of selected cement companies issatisfactory. Bibliography  J. C. Van Home. J. M Wachowicz (JR). “Fundamental of Management Accounting”. Prentice Hall of India (PHI).  Pandey, I.M.“Financial Management” New Delhi: Vikash publication 