Pro chapter 1 2-3

Financial statement analysis
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CHAPTER 1
INTRODUCTION

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1.1 INTRODUCTION
The project named “FINANCIAL STATEMENT ANALYSIS OF SITARAM
TEXTILES LTD THRISSUR ” is aimed at analyzing the liquidity and financial position of the
company. The main objective of the study is to know the financial performance of the
organization for the last 5 years. The secondary objective include measuring the efficiency,
ascertaining the short term solvency and assessing the profitability. A well designed research
methodology is used to meet the above objectives of the study.
SITARAM TEXTILES LTD is a public limited company now owned by Kerala government.
SITARAM TEXTILES LTD a composite textile mill, fully owned by government of Kerala
situated at THRISSUR, in Kerala was incorporated on 14th February 1975 under the Indian
companies ACT 1956.
Financial statements are the principal source of financial information. They are the
statements showing the financial position and results of business operation at the end of the
accounting period. The two basic financial statements include balance sheet and profit and loss
account. The balance sheet shows the financial position at a particular point of time. That is why
it is some time described as ‘position statement’.
The profit and loss account shows the result of operations for a period of time. Profit and
loss account also known as income statements. The figures contained in the financial statements
cannot speak by themselves. Financial statement do not revel important conclusions such as
efficiency of the management, strength and weakness of the firm, future progress etc. But if we
analyze the financial statements, we can draw inference on the financial position. On the basis of
these informations, it is possible to understand more about the business. Thus it becomes
necessary to analysis financial statements in order to understand more about profitability,
liquidity, solvency and financial position of a business.

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1.2 OBJECTIVES OF THE STUDY
1. To attempt the financial statement analysis of the company
2. To analyze liquidity position of the firm
3. To find out the profitability position of the firm
4. To understand the long term solvency position of the firm
5. To make suggestions for improvement.
1.3 SCOPE OF THE STUDY
The scope of the study is to analyze the growth and profitability of the firm, over a period of
5 years from 2011-2015. It will be helpful to understand whether the firm is making profit for
promotion of growth of business. The main objective of the study is to analyze financial position
and liquidity position of SITARAM TEXTILES LTD for five years. It may help to understand
their financial strength and weakness and also the opportunities and threats.
1.4 Significance of the study
Financial statement analysis is an in-depth study on various aspects of financial health including
liquidity, solvency, and profitability. The information revealed by the study is of utmost in
assessing performance of the company for all the stakeholders of the company such as director,
customers, suppliers, investors and the general public as well.

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1.5 RESEARCH METHODOLOGY
Research Design
A research design is a systematic plan to study a scientific problem. The design of a study
defines the study type (descriptive, correlation, semi-experimental, experimental, review,
meta-analytic) and sub-type descriptive-longitudinal case study), research
question, hypotheses, independent and dependent variables, experimental design, and, if
applicable, data collection methods and a statistical analysis plan. Research design is the
framework that has been created to seek answers to research questions. The type of research
adopted in this study is descriptive or desk research bared in historical data collected from
research and accounting statements.
SOURCE OF DATA
The information collected is mainly of secondary in nature, the secondary data required for the
study had been collected from the published and unpublished records, annual reports and
financial statements of the Sitaram textiles ltd. In order to elicit more information a casual
conversation has been made with the officials and staffs.The secondary data are those which had
already been collected by someone else.

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The source of secondary data and tools used for analysis are given in the chart below:-
Secondary data
Business records, balance sheet, annual
reports, journals, websites, newspapers etc.
Analytical tools Tables, charts, diagrams, ratio analysis.

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1.6 Limitations of the study
 Inferences made on the basis of accounting records may not be realistic. Analysis and
interpretation was made from published data
 The time period allotted for completing the project was limited
 The data used for the study is secondary, and historical in nature
 Current year was excluded on account of non availability of data. So the current position
of the firm was not taken into consideration.
 The time value of money was not taken into consideration.
 Non monetary factors like human behavior and their relationship are not considering.
TIME LINE OF THE STUDY
Data collection – 1week
Analysis and report writing -2 weeks
Report submission – 10-10-2016

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CHAPTER 2
REVIEW OF LITERATURE

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2. 1 REVIEW OF LITRATURE
Financial statement analysis is the process of reviewing and analyzing a company's
financial statements to make better economic decisions. These statements include the income
statement, balance sheet, statement of cash flows, and a statement of retained earnings. Financial
statement analysis is a method or process involving specific techniques for evaluating risks,
performance, financial health, and future prospects of an organization.
It is used by a variety of stakeholders, such as credit and equity investors, the government, the
public, and decision-makers within the organization. These stakeholders have different interests
and apply a variety of different techniques to meet their needs. For example, equity investors are
interested in the long-term earnings power of the organization and perhaps the sustainability and
growth of dividend payments. Creditors want to ensure the interest and principal is paid on the
organizations debt securities (e.g., bonds) when due.
The basis of financial planning analysis and decision making is the financial information
(Statements). Financial statements are needed to predict, compare and evaluate a firm’s earning
ability. It is also required to aid in economic decision making investment and financing decision
making. The financial information of an enterprise is contained in the financial statements. The
use of financial statement analysis in investment decision has been addressed by a series of
authors.
According to Gautam, U. S. (2005) Accountancy (P#215) Financial Statement is generally
explained as financial information which is the information relating to financial position of any
firm in a capsule form.
Financial statement according to J. A Ohison (1999) was defined as a written report that
summarizes the financial status of an organization for a stated period of time. It includes an
income statement and balance sheet or statement of the financial position describing the flow of
resources, profit and loss and the distribution or retention of profit.
According to Pandey, I.M. (2005 Financial management) profitability is the ability of an entity to
earn income. It can be assessed by computing various relevant measures including the ratio of
net sales to assets, the rate earned on total assets etc.
According to Meigs (2001), Financial Statement simply means a declaration of what is believed
to be true and which, communicated
in terms of monetary unit. It describes certain attributes of a company that is considered to fairly
represent its financial activities.
Meigs and Meigs (2003) stated that the rate of return on investment (ROI) is a test of
management’s efficiency in using available resources.

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Common methods of financial statement analysis include fundamental analysis, DuPont
analysis, horizontal and vertical analysis and the use of financial ratios. Historical information
combined with a series of assumptions and adjustments to the financial information may be used
to project future performance. The Chartered Financial Analyst designation is available for
professional financial analysts.
What is Financial Statement?
According to Meigs and Meigs (2003), financial statement are a structured representation of the
financial position and financial performance of an entity. The objective of financial statements is
to provide information about the financial position, financial performance and cash flows of an
entity that is useful to a wide range of users in making economic decisions.
Financial statements also show the results of the management’s stewardship of the resources
entrusted to it. To meet these objectives, financial statements provide information about an
entity’s:
a) Assets
b) Liabilities
c) Equity
d) Income and expenses, including gains and losses
e) Contribution by and distribution to owners in their capacity as owners, and f) cash flows
A complete set of financial statement comprises:
1) A statement of financial position as at the end of the period:
2) A statement of comprehensive income for the period;
3) A statement of changes in equity for the period:
4) A statement of cash flow for the period.
5) Notes of Account comprising a summary of significant accounting policies and other
explanatory information; and
6) A statement of financial position as at the beginning of the earliest comparative period when
an entity applies an accounting policy retrospectively or makes a retrospective restatement of
items in its financial statements or when it reclassifies items in its financial statements.

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History
Benjamin Graham and David Dodd first published their influential book "Security
Analysis" in 1934. A central premise of their book is that the market's pricing mechanism for
financial securities such as stocks and bonds is based upon faulty and irrational analytical
processes performed by many market participants. This results in the market price of a security
only occasionally coinciding with the intrinsic value around which the price tends to fluctuate.[4]
Investor Warren Buffett is a well-known supporter of Graham and Dodd's philosophy.
The Graham and Dodd approach is referred to as Fundamental analysis and includes: 1)
Economic analysis; 2) Industry analysis; and 3) Company analysis. The latter is the primary
realm of financial statement analysis. On the basis of these three analyses the intrinsic value of
the security is determined.
Financial statements are a collection of reports about an organization's financial results, financial
condition, and cash flows. They are useful for the following reasons:
 To determine the ability of a business to generate cash, and the sources and uses of that cash.
 To determine whether a business has the capability to pay back its debts.
 To track financial results on a trend line to spot any looming profitability issues.
 To derive financial ratios from the statements that can indicate the condition of the business.
 To investigate the details of certain business transactions, as outlined in the disclosures that
accompany the statements.
The standard contents of a set of financial statements are:
Balance sheet: Shows the entity's assets, liabilities, and stockholders' equity as of the report date.
It does not show information that covers a span of time.
Income statement: Shows the results of the entity's operations and financial activities for the
reporting period. It includes revenues, expenses, gains, and losses.
Statement of cash flows: Shows changes in the entity's cash flows during the reporting period.
Supplementary notes: Includes explanations of various activities, additional detail on some
accounts, and other items as mandated by the applicable accounting framework, such as GAAP
or IFRS.

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If a business plans to issue financial statements to outside users (such as investors or lenders), the
financial statements should be formatted in accordance with one of the major accounting
frameworks. These frameworks allow for some leeway in how financial statements can be
structured, so statements issued by different firms even in the same industry are likely to have
somewhat different appearances.
If financial statements are issued strictly for internal use, there are no guidelines, other than
common usage, for how the statements are to be presented.
At the most minimal level, a business is expected to issue an income statement and balance sheet
to document its monthly results and ending financial condition. The full set of financial
statements is expected when a business is reporting the results for a full fiscal year, or when a
publicly-held business is reporting the results of its fiscal quarters
Purpose of Financial Statements
Business decisions are made on the basis of the best available estimates of the outcome of such
decisions. According to Meigs and Meigs (2003), the purpose of financial statement analysis is
to provide information about a business unit for decision making purpose and such information
need not to be limited to accounting data. White ratios and other relationships based on past
performance may be helpful in predicting the future earnings performance and financial health of
a company, we must be aware of the inherent limitations of such data.
According to Meigs and Meigs (2003), the key objectives of financial analysis are to determine
the company’s earnings performance and the soundness and liquidity of its financial position.
We are essentially interested in financial analysis as a predictive tool.
Accordingly, we want to examine both quantitative and qualitative data in order to ascertain the
quality of earnings and the quality and protection of assets. In periods of recession when business
failures are common, the balance sheet takes on increase importance because the question of
liquidity is uppermost in the minds of many in the business community. However, when business
conditions are good, the income statement receives more attention.
Nevertheless, a financial analyst has to grapple on the above complexities of using financial
statement analysis to achieve a specific purpose.
The objective of financial statements is to provide information about the financial position,
performance. Financial position of an enterprise that is useful to a wide range of users in making
economic decisions (IASB Framework).Financial Statements provide useful information to a wide range
of users. According to Akpan (2002), financial statement may be used by users for different purposes:
Managers require Financial Statements to manage the affairs of the company by assessing its
financial performance and position and taking important business decisions. Shareholders use

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Financial Statements to assess the risk and return of their investment in the company and take
investment decisions based on their analysis. Prospective Investors need Financial Statements to
assess the viability of investing in a company. Investors may predict future dividends based on
the profits disclosed in the Financial Statements. Furthermore, risks associated with the
investment may be gauged from the Financial Statements. For instance, fluctuating profits
indicate higher risk. Therefore, Financial Statements provide a basis for the investment decisions
of potential investors.
Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a loan or
credit to a business. Financial institutions assess the financial health of a business to determine
the probability of a bad loan. Any decision to lend must be supported by a sufficient asset base
and liquidity.
Suppliers need Financial Statements to assess the credit worthiness of a business and ascertain
whether to supply goods on credit. Suppliers need to know if they will be repaid. Terms of credit
are set according to the assessment of their customers' financial health.
Customers use Financial Statements to assess whether a supplier has the resources to ensure the
steady supply of goods in the future. This is especially vital where a customer is dependent on a
supplier for a specialized component. Employees use Financial Statements for assessing the
company's profitability and its consequence on their future remuneration and job security.
Competitors compare their performance with rival companies to learn and develop strategies to
improve their competitiveness.
General Public may be interested in the effects of a company on the economy, environment and
the local community.
Governments require Financial Statements to determine the correctness of tax declared in the tax
returns. Government also keeps track of economic progress through analysis of Financial
Statements of businesses from different sectors of the economy.
The purpose of financial statement analysis is to examine past and current financial data so that a
company's performance and financial position can be evaluated and future risks and potential can
be estimated.
Financial statement analysis can yield valuable information about trends and relationships, the
quality of a company's earnings, and the strengths and weaknesses of its financial position.
Financial statement analysis begins with establishing the objective(s) of the analysis. For
example, is the analysis undertaken to provide a basis for granting credit or making an
investment? After the objective of the analysis is established, the data is accumulated from the

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financial statements and from other sources. The results of the analysis are summarized and
interpreted. Conclusions are reached and a report is made to the person(s) for whom the analysis
was undertaken.
To evaluate financial statements, a person must:
1. Be acquainted with business practices,
2. Understand the purpose, nature, and limitations of accounting,
3. be familiar with the terminology of business and accounting, and
4. Be acquainted with the tools of financial statement analysis.
Financial analysis of a company should include an examination of the financial
statements of the company, including notes to the financial statements, and the auditor's report.
The auditor's report will state whether the financial statements have been audited in accordance
with generally accepted auditing standards.
The report also indicates whether the statements fairly present the company's financial
position, results of operations, and changes in financial position in accordance with generally
accepted accounting principles.
Notes to the financial statements are often more meaningful than the data found within
the body of the statements. The notes explain the accounting policies of the company and usually
provide detailed explanations of how those policies were applied along with supporting details.
Analysts often compare the financial statements of one company with other companies in the
same industry and with the industry in which the company operates as well as with prior year
statements of the company being analyzed.
Comparative financial statements provide analysts with significant information about
trends and relationships over two or more years. Comparative statements are more significant for
evaluating a company than are single-year statements.
Financial statement RATIOS are additional tools for analyzing financial statements.
Financial ratios establish relationships between various items appearing on financial statements.
Ratios can be classified as follows:
1. Liquidity ratios. Measure the ability of the enterprise to pay its debts as they mature.
2. Activity (or turnover) ratios. Measure how effectively the enterprise is using its assets.

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3. Profitability ratios. Measure management's success in generating returns for those who
provide capital to the enterprise.
4. Coverage ratios. Measure the protection for long-term creditors and investors.
Horizontal analysis and vertical analysis
Importance of Financial Statement Analysis
The financial statement analysis is important for different reasons:
1. Holding Of Share
Shareholders are the owners of the company. Time and again, they may have to take decisions
whether they have to continue with the holdings of the company's share or sell them out. The
financial statement analysis is important as it provides meaningful information to the
shareholders in taking such decisions.
2. Decisions and Plans
The management of the company is responsible for taking decisions and formulating plans and
policies for the future. They, therefore, always need to evaluate its performance and effectiveness
of their action to realize the company's goal in the past.
For that purpose, financial statement analysis is important to the company's management.
3. Extension of Credit
The creditors are the providers of loan capital to the company. Therefore they may have to take
decisions as to whether they have to extend their loans to the company and demand for higher
interest rates. The financial statement analysis provides important information to them for their
purpose.
4. Investment Decision
The prospective investors are those who have surplus capital to invest in some profitable
opportunities. Therefore, they often have to decide whether to invest their capital in the
company's share. The financial statement analysis is important to them because they can obtain
useful information for their investment decision making purpose.

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Classification of Financial Statement
According to Diamond (2006), all watchful business owners have an innate sense of how well
their business is doing. Almost without thinking about it, these business owners can tell you any
time during the month how close they are to butting budgeted figures. Certainly, cash in bank
plays a part, but its more than that.
Helpful is the nowtine review of financial statements. They are three types of financial
statements. Each will give important information about how efficiency and effective the business
is operating.
Income statement, balance sheet and statement of cash flow are the basic and the most important
financial statements which interprets the quantitative data’s of a company’s performance.
Whereas foot notes have the qualitative explanation for the major transactions and the
accounting policy adopted while formulating the financial statements. The publicly traded
companies publish their financial statements quarterly.
a) Income Statement
Income statement measures the company’s profitability over a period of time. In the income
statement, the net income is calculated by subtracting all the expenses from income. According
to Patrick, Ralph, Barry & Susan (2002:63-92), income statement provides the information of the
transactions occurred in a certain period of time called accounting period. Expenses include
purchase, administrative expenses, selling expenses, depreciation, amortization expenses and
income tax paid. Initially gross profit is calculated by subtracting cost of goods sold from net
sales. Cost of goods sold is the expense occurred from the sales of the goods, Labour cost, raw
materials and overhead expenses occurred during the sales period falls under the cost of goods
sold category.
Operating income is calculated by subtracting the depreciation and the other selling and
administrative expenses. From the operating income, interest and/or amortization is paid which
will result in earning before tax income of the entity. Finally, income tax is paid from earning
before tax resulting in net profit. Management decides if they want to pay dividends or not. If
they do pay dividends then preferred dividends are paid first and afterwards common stock
holders’ dividends are paid. The residue income also known as the retained earnings are
reinvested in the firm.
b) Balance Sheet
A firm’s assets, liabilities and equity at a given time period are presented in the balance sheet. It
shows the financial position at a point in time. There are two sub accounts in balance sheet.
Assets account is the first one, which includes all the current and fixed assets of the company.
Current assets include cash, market securities, account receivable, inventories, prepaid expenses
etc. Current assets also named as working capital provide short-term benefit for the entity. The
other items which fall under assets are property, plant, equipment, goodwill, intangibles, long
term investments, note receivable and other long term assets. Additionally, the other sub account

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includes all the liabilities and equity. Accounts payable, accrued expenses, notes payable, short
term debt are the major components of current liabilities. While total long term debt, deferred
income tax and minority interest added to the current liabilities sums up the total liabilities. Total
liabilities summed up with total equity make total liabilities & shareholder´s equity, which is
always equal to the total assets. (Frank, 1989)
c) Statement of Cash Flow
Statement of cash flow shows how cash flows in and out of the company. Cash generated by the
operating, investing and financing activities are shown in the statement of cash flow.
Furthermore statement of cash flow shows the overall net increase or decrease in cash of the
firm. According to Patrick et al (2002:99), cash flow helps the investors and creditors to access
the ability of the firm to generate positive future cash flow, ability to meet the debt obligations
and to shed light on the cash and non-cash aspect of the investing and financial transactions.
Operating activities includes net income, depreciation, the increase or decrease in marketable
securities, accounts receivable, inventory, prepaid expenses, account payable, and accrued
expenses. The cash involved in purchase or sales of fixed assets falls under investing activities.
Finally sales and retirement of notes, preferred and common stock, other corporate securities and
bonds falls under financial activities in the statement of cash flow report
d) Footnotes
The footnote gives a detailed description of reporting policies and the practices companies have
adopted. It is impossible to present understandable financial statements without some
explanations as all the information cannot be shown on the face of the statement. Although the
quantitative information is shown in the major financial statements, the foot note provides the
vital qualitative understanding of the financial report. Footnotes have two kinds of information;
initially the accounting method company chooses to formulate its financial statements. The
second one explains the major financial results mentioned in the financial statements like income
statement, balance sheet and statement of cash flow. (Charles and Patricia, 1983:79)
e)The statement of retained earnings
The statement of retained earnings shows the breakdown of retained earnings. Net income for the
year is added to the beginning of year balance, and dividends are subtracted. This results in the
end of year balance for retained earnings.
Remember that expenses, revenues and dividends impact retained earnings. Since net income
equals revenue minus expenses, we need to include dividends when computing end of period
retaining earnings, plus net income and minus dividends.

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Techniques of Financial Statement Analysis
Financial statement users and analysts have developed a number of techniques to help them
analyze and interpret financial statements. According to Diamond (2006) the most common of
these includes, horizontal, vertical and ratio analysis. All of these techniques focus on
relationships among items in the financial statement themselves.
In trying to understand the current financial position of firm and its future outlook, it is
important, to consider changes from year to year as well as trends over several years. One way to
accomplish this is to use comparative financial statements and the five-or-ten year summary of
data found in the firm’s annual report to spot important or emerging trends.
TOOLS USED
1.RATIOS
Ratio analysis is the process of determining and interpreting numerical relationships based on
financial statements. A ratio is a statistical yardstick that provides a measure of the relationship
between two variables or figures.
This relationship can be expressed as a percent or as a quotient. Ratios are simple to calculate
and easy to understand. The persons interested in the analysis of financial statements can be
grouped under three heads,
i) Owners or investors
ii) Creditors and
iii) Financial executives.
Although all these three groups are interested in the financial conditions and operating results, of
an enterprise, the primary information that each seeks to obtain from these statements differs
materially, reflecting the purpose that the statement is to serve.
Investors desire primarily a basis for estimating earning capacity. Creditors are concerned
primarily with liquidity and ability to pay interest and redeem loan within a specified period.
Management is interested in evolving analytical tools that will measure costs, efficiency,
liquidity and profitability with a view to make intelligent decisions.
A study of the relationships between financial variables. Ratios of one firm are often compared
with the same ratios of similar firms or of all firms in a single industry. This comparison
indicates if a particular firm's financial statistics are suspect.

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Likewise, a particular ratio for a firm may be evaluated over a period of time to determine if any
special trend exists.
Advantages
1. It simplifies the financial statements.
2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a period.
4. It highlights important information in simple form quickly. A user can judge a company by
just looking at few numbers instead of reading the whole financial statements.
Limitations
Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of
financial ratio analysis are:
1. Different companies operate in different industries each having different environmental
conditions such as regulation, market structure, etc. Such factors are so significant that a
comparison of two companies from different industries might be misleading.
2. Financial accounting information is affected by estimates and assumptions. Accounting
standards allow different accounting policies, which impairs comparability and hence ratio
analysis is less useful in such situations.
3. Ratio analysis explains relationships between past information while users are more concerned
about current and future information
Liquidity ratio
Liquidity Ratio may refer to:
Quick Ratio (also known as an Acid Test or Liquidity Ratio ), a ratio used to determine the
liquidity of a business entity
Liquidity ratio expresses a company's ability to repay short-term creditors out of its total
cash. It is the result of dividing the total cash by short-term borrowings. It shows the number of
times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully
covered.
The formula is the following:
LR = liquid assets / short-term liabilities.

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Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as
its current or working capital position) by deriving the proportion of current assets available to
cover current liabilities.The concept behind this ratio is to ascertain whether a company's short-
term assets (cash, cash equivalents,
marketable securities, receivables and inventory) are readily available to pay off its short-term
liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In
theory, the higher the current ratio, the better.
Formula:
Current ratio= current assets / current liabilities
Quick Ratio
In finance, the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its
near cash or quick assets to extinguish or retire its
current liabilities immediately. Quick assets include those current assets that presumably can be
quickly converted to cash at close to their Book values. A company with a quick ratio of less
than 1 cannot currently fully pay back its current
Formula
Quick ratio= cash and cash equivalent + marketable securities + accounts
Receivables / Current liabilities
Net working capital ratio
Net working capital is used for the cash conversion cycle (aka earnings cycle ) of a business,
which uses cash for raw materials, converts into the finished product, sells the product, then
receives payment for it. This conversion cycle may vary depending on the type of business, but
net working capital is essentially the cash needed to run the business.Net working capital is what
remains after subtracting current liabilities from current assets; hence, it is money to run the
business.
Net Working Capital Formula
Net Working Capital = Current Assets – Current Liabilities
Profitability analysis ratio

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A profitability ratio is a measure of profitability, which is a way to measure a company's
performance. Profitability is simply the capacity to make a profit, and a profit is what is left over
from income earned after you have deducted all costs and expenses related to earning the
income. The formulas you are about to learn can be used to judge a company's performance and
to compare its performance against other similarly-situated companies.
Return on assets
Return on assets is the ratio of annual net income to average total assets of a business during a
financial year. It measures efficiency of the business in using its assets to generate net income. It
is a profitability ratio.
Formula
The formula to calculate return on assets is:
ROA = Annual Net Income / Average Total Asset
Average total assets = [beginning total assets + ending total asset ]/ 2
Profit margin
Often referred to simply as a company's profit margin, the so-called bottom line is the most often
mentioned when discussing a company's profitability. While undeniably an important number,
investors can easily see from a complete profit margin analysis that there are several income and
expense operating elements in an income statement that determine a net profit margin. It keeps
investors to take a comprehensive look at a company's profit margins on a systematic basis.
Profit margin = net income / sales
Earnings per share
The earnings per share ratio (EPS ratio) measure the amount of a company's net income that is
theoretically available for payment to the holders of its common stock. A company with high
earnings per share ratio is capable of generating a significant dividend for investors, or it may
plow the funds back into its business for more growth; in either case, a high ratio indicates a
potentially worthwhile investment, depending on the market price of the stock
Earnings per share = net income / no. of common shares outstanding

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Assets turnover ratio
Asset turnover is a financial ratio that measures the efficiency of a company's use of its assets in
generating sales revenue or sales income to the company. Companies with low profit margins
tend to have high asset turnover, while those with high profit margins have low asset turnover.
Companies in the retail industry tend to have a very high turnover ratio due mainly to cutthroat
and competitive pricing
Assets turnover ratio = sales / average total assets
Inventory turnover ratio
In accounting, the Inventory turnover is a measure of the number of times inventory is sold or
used in a time period such as a year. The equation for inventory turnover equals the Cost of
goods sold divided by the average inventory . Inventory turnover is also known as inventory
turns , merchandise turnover , stock turn , stock turns , turns , and stock turnover .
Inventory turnover ratio = cost of goods sold / average inventory
Average inventory = [beginning + ending] / 2
Debt to equity ratio
The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of
Shareholders' equity and debt used to finance a company's assets. Closely related to leveraging ,
the ratio is also known as Risk ,Gearing or Leverage . The two components are often taken from
the firm's balance sheet or statement of financial position (so-called book value ), but the ratio
may also be calculated using market values for both, if the company's debt and equity are
publicly traded , or using a combination of book value for debt and market value for equity
financially.
Debt to equity ratio = total liability / total stock holders’ equity.
Limitations of Financial Statement Analysis
In this survey, it will be pertinent to discuss the limitations of financial statement analysis and
recommend ways of minimizing or overcoming them. Categorically, according to Diamond
(2006), three problems involved in such analysis are
1. That firms use different accounting principles and methods.
2. That it is often difficult to define what industry and firm is really a part of and
3. That accounting principles varies among countries

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CHAPTER 3
PROFILE

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3.1 INDUSTRIAL PROFILE
Textile industry in India is the second largest employment after agriculture.
It holds significant status In India as it provides one of the most fundamental necessities of the
people. Textile industry was one of the earliest industries to come in to existence in India and it
accounts for more than 30% of the total exports. In fact Indian textile industry is the second
largest industry in the world. The textile industry in India has been the premier industry utilizing
the largest employment of man power. But during the last 4 years the industry has been suffering
from a lot of adverse factors. The major problem is the technology lag. Most of the major mills
suffer from this problem. Recently the Union Government has come out with ambitious
technology up-gradation fund of a possible magnitude or Rs. 25000cr to helps the industry to
catch up with the global markets
Textile and garment manufacturers and exporters in India were expecting a bright future in the
days to come as more international buyers were turning their attention to Indian markets
following hike in prices of textile and garments in china, which had the largest share in the
export market. Buyers from various countries, including US and European countries, were now
started placing fresh orders with the textile garments exporters here. The activities in textile
range the production of natural raw materials such as cotton, jute and silk to the manufacture of
quality product such cellulose fibber, synthetic filament and spun yarn.
The Government announced the new textile policy on 2nd November 2000. The
highlights of the policy are:
 Readymade garments fully deserved for small scrap.
 Venture capital fund to be set up for tapping technology knowledge based entrepreneurs.
 50% mandatory export obligation for garments removed.
 Handloom reservation act and hunk yarn obligation to stay.
 Textile export to be stepped up.
 Garments export to couch & 25 million annually.

24
 Launch of technology mission on jute.
 Private sector integrated textile companies to be encouraged.
 Shuttle less loom to be increased to 50000.
 Restructuring of AEPC & other promotion council.
The textile industry s a whole is undergoing rapid restructuring in India. Being a highly
intensive labour textile manufacturing is showing a steady shift from developed industrial
countries to developing countries
INDIAN TEXTILE INDUSTRY
India is a traditional textile-producing country with textile in general, and cotton
in particular, being major industries for the country. India is among the world’s top producers of
yarn and fabrics, and the export of its products is ever increasing. Textile industry is one of the
largest and oldest industries in India. Textile industry in India is self-reliant and independent
industry and has great diversification and versatility.
The textile industry can be broadly classified into two categories;
 Organized mill sector.
 Unorganized decentralized sector.
The organized sector of the textile industry represents the mills. It could be a composite mill or a
spinning mill. Composite mill is one where the spinning, weaving and processing facilities are
carried out less one roof. The decentralized sector is engaged mainly in weaving in activity,
which makes it heavily dependent on the organized sector for their yarn requirements. This
decentralized sector comprised of the three major segments ViZ., power loom, handloom, and
hosiery. In addition to the above, there are readymade garments, khadi as well as carpet
manufacturing units in the decentralized sector.
The Indian textile has an overwhelming presence in the economic life of the country. It is the
textile industry in the world after China. Apart from providing one of the basic necessities of
textile industry contributes about 14% of the country’s industrial output and about 17% export

25
earnings. After agriculture this industry provides employment to maximum number of people in
India employing 35 million people. Besides, another 50 million people are engaged in allied
activities. India is the largest of jute, the second largest producer of silk, and the third largest
producer of cotton and cellulose fibber/yarn and the fifth largest of synthetic.
3.2COMPANY PROFILE
ABOUT THE COMPANY
NAME OF THE FIRM: SITARAM TEXTILE LTD,
THRISSUR, KERALA
GOVERNMENT UNDERTAKING
BUSINESS OF THE FIRM:
1, manufacturing yarns
2, wrapping and sizing
SITARAM TEXTILES LTD is a public limited company now owned by Kerala government.
SITARAM TEXTILES LTD a composite textile mill, fully owned by government of Kerala
situated at THRISSUR, in Kerala was incorporated on 14th February 1975 under the Indian
companies ACT 1956.
The SITARAM spinning and weaving mills managed as family concern was started as a power
loom unit in the year 1963 slowly and steadily with passage of the time the unit was expanded
diversified and became a public limited company.
SITARAM TEXTILES is a public limited company incorporated under the Indian companies
ACT 1956. It is a composite textile mill, fully owned by government of Kerala situated in
PUNKUNNAM (xxx1306 PUNKUNNAM THISSUR 680002, KERALA). The cotton yarn and

26
fabrics were the products of the company till 2000. Now the company produced only the cotton
yarn and polyester yarn. The main objective of the company is to provide employment
opportunities.
OBJECTIVE OF THE COMPANY
 To carry on manufacture of yarn at low cost
 To produce high quality products
 To provide more employment opportunities
 To maintain higher ethical standard with suppliers and customers
 To carry on other allied business
 To establish training institution
 To purchase and maintain cotton plantation
 To obtain patent right, licenses, concessions
 To enter in to foreign collaboration
 To establish technical institution
 To lend money to employs to take share of the company
VISION
SITARAM believes in continuous up gradation of its product quality by investment in the latest
technology and its successful implementation. It also focuses on providing employment
opportunities

27
Mission
To achieve market leadership through excellence in the quality of products and services, by
adopting new technology and innovative management approaches and aiming towards customer
satisfaction. And to be the most significant supplier of cotton yarn and polyester yarn to the
world market.
BOARD OF DIRECTORS
Board of directors has ultimate authority of the company. The share
holder of the company is government of KERALA. Board of directors of SITARAM TEXTILE
LIMTED is
CHAIRMAN : JACOB THOMAS ARIKUPURAM
MANAGING DIRECTOR : V. KURIAKOSE
DIRECTOR : T.S.SHEEJA
DIRECTOR : SAM.C.ITTICHERIA
DIRECTOR : SIDHARDHAN. S
DIRECTOR : PADMAJA VENUGOPAL
DIRECTOR : K.T.ABDU RAHMAN
DIRECTOR : P.V.PATHROS
DIRECTOR : R.GOPALAKRISHNAN
DIRECTOR : NARAYANKUTTI ALIASMANI
DIRECTOR : V.K.MUHAMMED

28
CAPITAL OF THE COMPANY
Capital refers to the money or money’s worth introduced or invested by the owner in the
business. The authorized capital of the company is 600000 equity shares of RS 100 each. The
starting capital investment of SITARAM TEXTILES was 205 CRORES.
The present capital investment is 594000 shares of RS 100 each. All these share are owned by
the government of Kerala.The sale turnover of the company in the year 2008-2009 was RS
878095 LAKHS as compared to RS 850.93 LAKH in the previous year. The company incurred a
net loss of RS 155.440lakhs
PRODUCTION UNIT
The SITARAM TEXTILES has only one production unit which is situated PUNKUNNAM,
THRISSUR. In an area of 10 acres of land engaged in the production of cotton yarn and
polyester yarn.
BUSINESS OPERATION
The company is situated in 10 acres of land engaged in the manufacturing of yarn. Two type of
yarn are manufactured here.
Around 200 employees are working in the organization. Now the company is in its growth stage.
The company has shown profit after going red for some years. The main objective of the
company is providing employment opportunities and carrying on manufacture of quality yarn
with minimum cost.

29
NATURE OF BUSINESS
The products of the company were cotton yarn and cotton fabrics till
2000. Now the company produces only cotton yarn and the polyester yarn. The finished product
is directly marketed to the depots in Bombay. The company gets advance order for producing
yarn. So they undertake just in time manufacturing system. The company is undertaking its
production on a large scale. The company consists of more than 200 employees. The company
they were qualified and skilled labors
TRADE UNIONS
It is the association of employees designed primarily to maintain or improve the condition of
employment of its members. Unions are primarily concerned with the term and condition of
employment.
The trade unions in this company are:
INTUC (INDIAN NATIONAL TRADE UNION CONGRESS)
AITUC (ALL INDIA TRADE UNION CONGRESS)
CITU (CENTRAL OF INDIAN TRADE UNION)
(BMS +CMP) COORDINATION

30
STRENGTH OF THE COMPANY
Workers – 161
Officers – 8
Supervisors – 5
Office assistant – 15
Drivers – 5
Security – 5
Peons _ 3
SHIFTS OF WORKERS
There are three shifts in the company
FROM TO
07.00 AM 03.30 PM
03.30 PM 12.00AM
12.00 AM 07.00PM

31
PRODUCTS
The products of the company are cotton yarn and cotton fabrics till 2000.now the
company only produces cotton yarn. For producing cotton yarn the period of time is one week.
The waste of cotton sales as interstate purchase.
ORGANIZATION STRUCTURE
In static sense the term organization refers to the structure made by a group of individuals
who are working together toward common goal. Organization structure is primarily concerned
with the allocation of task and delegation of authority and responsibility among the members of
the enterprises. An organizational chart gives a bird’s eye view of the whole structure of the
organization at a glance.
MANAGEMENT
Board of directors has ultimate authority of the company. The shareholders of the
company are government of KERALA. The board or board of directors means meeting of
directors duly called and constituted when the requisite member of directors assemble at a board
or the requisite member of directors entitled to pass a circular resolution in accordance with these
accordance.
Managing
Directors
Finance/
Accounts
Human
Resources
Purchases Production Marketing

32
FINANCE AND ACCOUNTING DEPARTMENT
Focus of Finance function is one of the most important business functions. It remains the all
activities. It is not possible to substitute and eliminate the function because all the functioning
will be disrupted in the absence of finance.
The accounts of SITARAM TEXTILES LTD are maintained according to the `day to
day` transactions of the company. All payment by receipt is properly scrutinized by the
concerned staff in the department. Finance department is responsible for waiting statutory
records. Preparing profit and loss account, balance sheet and all other schedules. They
coordinates with banks, auditors and financial institution responsible for preparation of bond
meeting paper, reports and they contribute most of the annual meeting.
HUMAN RESOURCE DEPARTMENT
The human resource management function includes a variety of activities, and key among
them is deciding what staffing you need and whether to use independent contractors or hire
employers to fill these needs.
Ensuring your personnel and management practices conform to various regulations.
Activities also include managing your approach to employee benefit and compensation,
employee records and personnel policies
PURCHASE AND STORE DEPARTMENT
SITARAM has an efficient purchasing which ensures the procurement of materials of the right
quality, in the right quantity at the right time from the right source and at a right price.
The main item produced in the mill at present is yarn. The raw materials in the mill are the cotton
bales which weight 185 KG.

33
Different varieties of cotton purchased from outside state that is TAMIL NADU, ANDRA
PRADESH, and MAHARASHTRA are namely LRA, MCU-5, SANKAR 4, FHIH, LK etc.
Inventories are the stock of the product. Stores department is responsible for storing the
raw materials, finished goods and spare parts required for the smooth functioning of the
organization. The store keeper in the SITARAM keeps an inventory of finished product to be
sold to customers whenever they demand.
The inventories of SITARAM have three type:
1. Raw materials inventory
2. Work in progress inventory
3. Finished goods inventory
PRODUCTION AND QUALITY CONTROL DEPARTMENT
The production department functions under the production manager. In this organization, raw
material like cotton and polyester, are used in conversion process. Company manufactures
different count of yarns. The following are the different steps involved in the conversion of the
raw materials in to finished goods
MARKETING DEPARTMENT
This department is responsible for introducing the products in the market at the right time in a
profitable way. SITARAM has got an efficient marketing and sales department. It seeks the help
of an external agency through marketing and sales department. It seeks the help of an external
agency through which product reach the market..

34
MANUFACTURING PROCESS
1. MIXING:
There is mainly 1 type of mixing. That is polyester and cotton mixing. Mixing is done both
manually and mechanically
2. BLOW ROOM
In this section, mainly opening and cleaning of bale take place. Firstly the bale passes through
bale breaker for the opening of the compressed bales. Secondly it passes through a machine and
called hopper.
Lastly the raw materials pass through another machine and the lap from these raw materials is
obtained with impurities removed to a certain extent.
3. CARDING:
The lab from of raw materials is faster processed cleaned to remove all the impurities and they
are converted to silvers. This silver is of non-uniform thickness. The machine used for carding is
called card machine and the product is known as card silver
4.DRAWING:
Here the card silver is processed to get silver of uniform thickness. This process is done twice.
So that thickness of the silver is reduced and made uniform. The product obtained by drawing
silver
5. SIMPLEX:
The thin uniform silver is passed in to the spindle machine for the purpose of rating it. A number
of spindles are used for it. The raw is further thinned and the silver is converted in to actual yarn
and it is will in the bobbins. When they break in one spindle, the machine automatically switched
off. The bobbins can carry 2 KG of yarn. The rowing bobbins are then passed to the next
department known as spinning department

35
6. SPINNING:
The cop winding is started in this department. There are number of machines used for it. 5
machines are controlled by one worker. But it is not a very risky work. The cops are about 80
KG .
7. CORE WINDING:
The cope form of yarn is will on the paper cone by using power loom. The can carry 1 KG of
yarn. This is used marketing. In the cone winding. Yarn from a single cop is wound one by one
to make 1 KG of cone. Like cone winding there is also doubters winding. In these types of
winding, instead of winding yarn from a single cop at the time, yarn from 2 cops is wound at the
same time. After this type of double winding, the final product becomes stronger
8. PACKING:
The cone of 1 KG is packed first in plastic. So it does not get wet and damaged while in transit.
The product is sold on bulk quality. It is a bag of 50 KG. so 50 cones are packed together and
slip specifying the type of yarn packed is also kept with pack

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