CHAPTER 4 DATA ANALYSIS AND INTERPRETATION

4.1 MEANING OF FINANCIAL ANALYSIS

Financial Statements Analysis is an analysis which critically examines the relationship between various elements of the Financial Statements. It focuses on the evaluation of past operations as revealed by the analysis of basic statements. It is a process of scanning Financial Statements for evaluating the relationship between the items as disclosed in these. It is an important means of assessing past performance and forecasting and planning future performance. The analysis simplifies, summarizes and systematizes the monotonous figures.

4.2 MEANING OF RATIO ANALYSIS

Analysis of Financial Statements with the help of Ratio is termed as Ratio Analysis. Ratio Analysis is a widely used tool of Financial Analysis. It can be used to compare the risk and return relationships of firms of different sizes. It is defined as the systematic use of ratio to interpret the Financial Statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.

4.3 OBJECTIVES OF RATIO ANALYSIS

Following are the important objectives of Ratio Analysis 1) To provide the necessary basis for Inter-period and Inter-firm Comparison. 2) To help in providing a part of information needed in the process of decision-making.

3) To focus on facts on a comparative basis and facilitate drawing of conclusions relating to the performance of a firm. 4) To evaluate the performance of a firm in determining the important aspects of a business such as liquidity, solvency, operational efficiency, overall profitability capital gearing, etc. 5) To throw light on the degree of efficiency in the management and the effectiveness in the utilization of its assets. 6) To provide the way for effective control of the enterprise in the matter of achievingthe physical and monetary targets. 7) To help management in discharging its basic functions like forecasting, planning, coordination, communication, control, etc. 8) To promote co-ordination among the departments and the staff by the study of performance and efficiency of each department. 9) To point out the financial condition of business whether it is strong, questionable, or poor and enables the management to take necessary steps.10)To act as an index of the efficiency of an enterprise.

4.4 CLASSIFICATION OF RATIOS

Accounting Ratios may be classified as under:

1) Traditional Ratios 2) Functional Ratios

4.4.1 Traditional Ratios

Traditional Accounting Ratios are classified on the basis of the origin of the figures used in the accounting ratios, i.e. on the basis of the Financial Statements from which ratios are derived. The following ratios are usually included in this type of classification. 4.4.1.1 Balance Sheet Ratios or Financial Ratios Ratios calculated from the different items as appearing in the Balance Sheet of a concern are called Balance Sheet Ratios, e.g. Current Ratio, Liquid Ratio, Proprietary Ratio, Debtequity Ratio, and so on. 4.4.1.2 Profit & Loss Account Ratios or Operating Ratios Ratios calculated from the different items as appearing in the Profit & Loss Account of a concern are called Profit & Loss Account Ratios or operating Ratio, e.g. Gross Profit Ratio, Net Profit Ratio, Operating Ratio.

4.4.1.3 Mixed Ratios or Composite Ratios Ratios calculated, taking some items as appearing in the Balance Sheet and taking some items as appearing in Profit & Loss Account are called Mixed Ratios or Composite Ratios, e.g. Return on Net Worth, Return on Investment (ROI), Capital Turnover Ratio, etc.

4.4.2 FUNCTIONAL RATIOS

The other way of classifying the ratios in on the basis of functions they perform, what they indicate, symptoms or characteristics, namely, liquidity, profitability, financial stability and turnover relationship, etc. This classification assumes greater significance because it distinctly the different aspects of business performance and helps the various users of Financial Statements to take guard of their interest. For instance, short-term creditors are interested to evaluate the liquidity position by analyzing the liquidity ratios, while long-term creditors and investors are interested in the solvency and profitability position of the

organization and as such they study the solvency and profitability ratios. The following ratios are included in this classification.

1) Liquidity Ratios 2) Leverage Ratios 3) Profitability Ratios 4) Activity/Efficiency Ratios

4.4.2.1 Liquidity Ratios Liquidity Ratios are those ratios which are computed to evaluate the capacity of the company to pay off its short-term liabilities. These ratios indicate the short-term financial position of the company by relating short-term resources with short-term obligations. These ratios are basically used by the short-term creditors, viz. suppliers, bankers, lenders, employees and all others who are interested in the recovery of money due to them. Shortterm creditors focus their attention on the liquidity of the company. The most common ratios which indicate the extent of liquidity or lack of it are as follows:

Current Ratio

This ratio is also called Working Capital Ratio. It is used to assess the short-term financial position of the business concern. In other words, it is a measure of the companys shortterm solvency, i.e. its ability to meet its short-term obligations. It matches the total current assets of the company against its current liabilities. As a measure of short-term solvency, it indicates the rupees of current assets available for each rupee of current liability.

Apparently, the higher the current ratio, the more protected are the short-term creditors and vice -versa. Conventionally, a current ratio of 2:1 (current assets twice of current liabilities) is satisfactory. The Formula for computation of current ratio is given below:

Current Assets = Current Assets Current Liabilities Where, Current Assets = Cash in Hand + Cash at Bank + Short-term Investments + Bills Receivable + Debtors + Short-term Loans & Advances + Inventory+ Prepaid Expenses. Current Liabilities = Creditors + Bills Payable + Bank Overdraft + Provision for Taxation + Proposed Dividend + Unclaimed Dividend + Payment Received in Advance + Outstanding Expenses + Other Liabilities Payable within One Year.

Current Ratio of KSFC

Table 4.1 Showing Current Ratio of KSFC: (Rs. in Lakhs)

YEAR 2005 - 06

CURRENT ASSETS 34,534.03

CURRENT LIABILITIES 12,434.02 7,816.77 18,900.97 9,292.14 9,453.41 10,345.30

CURRENT RATIO 2.78 2.51 1.48 2.55 1.98 2.82

2006 - 07 19,612.14 2007 08 27,933.61 2008 - 09 2009 - 10 2010 -11 23,712.52 18,690.25 29,196.75

Current Ratio
3 2.5 2 1.5 1 0.5 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11

Current Ratio

CHART 4.1 Showing Current Ratio of KSFC

Analysis and Interpretation

The Current Ratios for a period of six years of Karnataka State Financial Corporation are presented in Table 4.1. The current ratio of KSFC was 2.78:1 in 2005-06 which declined to 1.48:1 in 2007-08. Thereafter, it again rose to 2.82:1 in 2010-11.A close look at the table and the chart reveals that Current Ratios of Corporation have been above the ideal ratio, which is 2:1, during the study period except in the year 2007-08. It is an indication of a sound liquidity position of the Corporation. A Current Ratio of 2.78:1 in 2005-06 implies that for every one rupee of current liabilities, current assets of 2.7 rupees were available to meet them. The protection available to the short-term creditors declined in 2007-08 to 1.48. However, current assets were 2.55, 1.98 and 2.82 times of current liabilities in 2008-09, 2009-10 and 2010-11 respectively. An analysis of these figures reveals that the Corporation

is able to meet its short-term obligations in full. Although KSFC has better short-term solvency position, a higher current ratio of more than 2:1 may be regarded as an inefficient working capital management. Therefore, it should have a reasonable current ratio.

Super Quick Ratio:

This ratio is also called, Cash Position Ratio or Cash Ratio or Absolute Liquidity Ratio. This ratio establishes the relationship between super quick assets and current liabilities. It may be used by banks and financial institutions who are very much interested in lending short-term loans to companies for a period of not more than three months. Generally, an absolute liquid ratio of 0.5:1 is considered as an ideal ratio. This ratio is computed with the help of the following formula.

Super-Quick Ratio =Super Quick Assets Current Liabilities

Where, Super Quick Assets = Cash in Hand + Cash at Bank + Marketable Securities

TABLE 4.2 Showing Super Quick Ratio of KSFC:

(Rs. in Lakhs)

Year
2005 - 06 2006 -07 2007 - 08 2008 - 09 2009 - 10

SUPER ASSETS
11,563.87 4,871.07 4,995.99 6,498.37 6,979.35

QUICK CURRENT LIABILITIES

12,434.02 7,816.77 18,900.97 9,292.14 9,453.41

SUPER RATIO
0.93 0.62 0.26 0.7 0.74

QUICK

2010 - 11

3,651.58

10,345.30

0.35

Super Quick Ratio

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 Super Quick Ratio

CHART 4.2 Showing Super Quick Ratio of KSFC:

Analysis and Interpretation:

The Super Quick Ratios of KSFC over a period of six years are presented in the Table4.2. The Super Quick Ratio of KSFC was 0.93 in 2005-06. It declined to 0.62 in 2006-07. These ratios are well above the ideal ratio which is 0.5:1. It suggests that the Corporation was having sufficient cash and bank balances at its disposal to meet its current liabilities. The ratio deteriorated in the year 2007-08. The decline in the ratio was due to more increase in the current liabilities than the super quick assets. The ratio showed an upward trend in the next two years. Again, it declined to 0.35:1.The analysis of these figures reveals that the corporation has maintained sufficiently high amount of cash and bank balances than what is

usually considered as ideal, over the years barring 2007-08 and 2010-11. The ratios in 200708 and 2010-11 were 0.26:1 and0.35:1 respectively which suggests that cash and bank balances were not sufficient to meet the short-term obligations.

4.4.2.2 Leverage/Solvency/Capital Structure Ratios

The second category of financial ratios is Leverage or Capital Structure Ratios. The long-term lenders/creditors would judge the soundness of a firm on the basis of the long-term financial strength measured in terms of its ability to assure the long-term lenders with regard to a) Periodic payment of interest during the period of the loan and b) Repayment of principal on maturity or in predetermined instalments at due dates. There are, thus, two aspects of the long-term solvency of a firm: a) Ability to repay the principal when due and b) Regular payment of the interest. Accordingly, there are two different, but mutually dependent and interrelated, types of leverage ratios. First, ratios are based on the relationship between borrowed funds and owners capital. These ratios are computed from the Balance Sheet and reflect the relative / stake of owners and creditors in financing the assets of the firm. In other words, such ratios reflect the safety margin to the long-term creditors. The second category of such ratios is based on the Income Statement and shows the number of times the fixed obligations are covered by earnings before interest and taxes. In other words, they indicate the extent to which a fall in operating profits is tolerable in that the ability to repay would not be adversely affected.

Debt to Equity Ratio:

The relationship between borrowed funds and owners capital is a popular measure of the long-term financial solvency of a firm. This relationship is shown by the Debt-Equity Ratio. This ratio indicates the relative proportions of debt and equity in financing the assets of a firm. It reveals the extent to which debt financing has been used in the business. It discloses to the creditors the extent of their in interest being covered by the net worth by the company. It can be computed by using the following formula.

Debt-Equity Ratio = Total Debt (Outsiders Fund) Shareholders Funds Where, Total Debt Debentures + Term Loans + Loans on Mortgage + Loans from Financial= Institutions + Other Long-Term Loans + Redeemable Preference Share Capital + All Current Liabilities. Shareholders Funds Equity Share Capital + Irredeemable Preference Share Capital += Capital Reserves + Retained Earnings + Any Earmarked Surplus Like Provision for Contingencies etc. Fictitious Assets (Goodwill, Preliminary Expenses).

TABLE 4.3 Showing Debt-Equity Ratio of KSFC: Year 2005 - 06 2006 - 07 2007 - 08 2008 09 2009 - 10 2010 - 11 TOTALDEBT 1,90,155.54 1,73,719.56 1,75,960.85 1,72,155.17 1,76,040.01 1,96,015.74 SHAREHOLDERS'FUNDS 12,892.55 12,892.55 33,108.24 58,054.77 70,732.82 72,588.68

(Rs. in Lakhs) DEBT-EQUITYRATIO 14.75 13.47 5.31 2.97 2.49 2.7

Debt- Equity Ratio

16 14 12 10 8 6 4 2 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 Debt- Equity Ratio

CHART 4.3 Showing Debt-Equity Ratio of KSFC

Analysis and Interpretation

The Debt-Equity Ratios of KSFC have been presented in Table 4.3. It can be seen from the table that the increase in shareholders funds has been more than the increase in total debt. It is seen from the table that there has been continuous decline in the quantum of debt proportion from 14.75:1 in 2005-06 to 2.49:1 in 2009-10. However, a marginal rise in DebtEquity Ratio was seen at the end of the study period. The Debt-Equity Ratio indicates the margin of safety to the creditors. A ratio of 14.75:1implies that for every 14.75 rupees of outside liability, the firm has only one rupee of owners capital. It has serious implications from creditors point of view because owners are putting up relatively less money of their own. However, KSFC reduced the proportion of debt in its capital structure over a period of time by issuing more shares. At the end of the study period, the Debt-Equity Ratio of KSFC was 2.7:1 which is quite an improvement over 2005-06s ratio. Yet, it is not a satisfactory ratio.

Debt to Total Tangible Assets Ratio:

The Debt-Total Tangible Assets Ratio indicates the proportion of total tangible assets financed by total debt. Symbolically, it is equal to: Debt-Total Assets Ratio =Total Debt Total Tangible assets Where, Total Tangible Assets = Total Assets (Goodwill + Preliminary Expenses +Accumulated Losses) TABLE 4.4 Showing Debt-Total Tangible Assets Ratio of KSFC YEAR Total Debt Total Tangible Assets Debt Total Intangible Asset Ratio 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 1,90,155.54 1,73,719.56 1,75,960.85 1,72,155.17 1,76,040.01 1,96,015.74 1,42,720.56 1,26,520.87 1,55,194.58 1,72,351.35 1,89,210.39 2,13,229.12 1.33 1.37 1.13 0.99 0.93 0.92

Debt-Total Tangible Assets Ratio

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 Debt-Total Tangible Assets Ratio

CHART 4.4 Showing Debt-Total Tangible Assets Ratio of KSFC

Analysis and Interpretation

It is observed from the table and the chart that the Debt to Total Tangible Assets Ratios of KSFC revealed a declining trend during the study period except during 2006-07. The ratio was 1.33 in 2005-06 which signifies that 1.33 rupees of debt is covered by one rupee of tangible assets. This is undesirable from the point of creditors/lenders as there is no sufficient margin of safety available to them. There was a slight increase in the ratio in 200607. However, the mid and lower part of the study period revealed an altogether downward trend in the ratio values. This is a welcome change as the margin of safety available to the creditors/lenders has increased over the years. On the whole, there have been desirable changes in the ratio values from the perspective of creditors/lenders. However, the debt holders are still at high risk because of low margin of safety.

Proprietary Ratio
This ratio is called Equity Ratio or Owners Fund Ratio or Shareholders Equity Ratio. This ratio points out the relationship between the shareholders funds and total tangible assets. In other words, it indicates the proportion of total assets financed by owners. The formula for this ratio may be written as follows:

Proprietary Ratio = Share holders Funds Total Tangible Assets 100

TABLE 4.5 Showing Proprietary Ratio of KSFC:

Year
2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11

Share holders Funds

Total Assets

Tangible Proprietary Ratio

12,892.55 12,892.55 33,108.24 58,054.77 70,732.82 72,588.68

1,42,720.56 1,26,520.87 1,55,194.58 1,72,351.35 1,89,210.39 2,13,229.12

9.0 10.2 21.3 33.7 37.4 34.0

Proprietary Ratio
40 35 30 25 20 15 10 5 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 Proprietary Ratio

CHART 4.5 Showing Proprietary Ratio of KSFC:

Analysis and Interpretation

The Proprietary Ratios of KSFC over a period of six years are presented in tabular and graphical form. The Proprietary Ratio of KSFC was 9% in 2005-06 which indicates that shareholders funds form only 9% of total tangible assets employed in the business. From creditors point of view, it is alarming for them because it indicates more of creditors funds and less of shareholders funds in the total tangible assets of the company. A marginal increase in Proprietary Ratio was registered in the next year. A significant rise in Proprietary Ratio was seen from 9% in 2005-06 to 37.4 % in 2009-10. This rise was partly due to increase in the amount of reserves and surplus and the issue of additional share capital the rise in the ratio implies corresponding increase in the security to the creditors as more shareholders funds are available as safety of margin. Thereafter, the ratio declined to 34%.The analysis of these figures reveals that there has been appreciable improvement in the Proprietary Ratio of KSFC during the period of study. However, creditors are still exposed to more risk. Usually, a Proprietary Ratio of 50% is regarded as safe.

Fixed Assets to Proprietors Funds Ratio:

This is also known as Fixed Assets to Net worth Ratio. It establishes the relationship between fixed assets and shareholders funds. The main object of calculating this ratio is to ascertain the percentage of owners funds invested in fixed assets. This is an indicator of the efficiency of the management regarding formulation of financial planning. It can be calculated as follows:

Fixed Assets to Proprietors funds Ratio = Fixed AssetsShareholders'Funds100 Where, Fixed Assets = Total Fixed Assets Depreciation

TABLE 4.6 Showing Fixed Assets to Proprietors Funds Ratio of KSFC

Year

Fixed Assets

Shareholders Fund

Fixed

Assets

to

Proprietors funds Ratio

6.37 5.80 18.59 10.50 8.50 7.27

2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11

821.85 748.21 6155.17 6094.41 6011.58 5280.52

12,892.55 12,892.55 33,108.24 58,054.77 70,732.82 72,588.68

Fixed Assets to Proprietors Funds Ratio

20 18 16 14 12 10 8 6 4 2 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 Fixed Assets to Proprietors Funds Ratio

CHART 4.6 Showing Fixed Assets to Proprietors Funds Ratio of KSFC

Analysis and Interpretation It is observed from the table and the chart that the Fixed Assets to Proprietors Funds Ratio of KSFC revealed a fluctuating trend during the study period. A thorough scrutiny of the ratio values reveals that there was a downward trend in upper part of the study period, that is, 2005-06 and 2006-07. There was a rise in the ratio in 2007-08. There was again a declining trend during the latter part of the study period. A ratio of 6.37% implies that 6.37% of shareholders funds are sunk into the fixed assets which constitute the revenue earning capacity of a business. There was a dip in the ratio in the next year. This was mainly due to the decrease in the value of fixed assets. The Ratio increased to 18.59 in 2007-08 which was the highest during the study period. In the last three years, the value of fixed value decreased as a result of which there was also a decline in the ratio. On the whole, the Corporation has used very less amount of shareholders funds in making investment in the fixed assets especially in the latter part of the study period.

Capital Gearing Ratio This ratio is also known as Capital Structure Ratio or Leverage Ratio. It is used to analyze capital structure of the company. It establishes the relationship between fixed interest, dividend bearing securities and equity shareholders funds. It is an indicator of the degree of risk involved in the total capital employed in the business. It can be calculated as follows: Capital Gearing Ratio=Fixed Interest and Dividend bearing Funds Equity Shareholders' Funds Where, Fixed Interest and Dividend bearing Funds = Preference Share Capital + Debentures +LongTerm Loans. Equity Shareholders Funds = Equity Share Capital + Reserves and Surplus {Goodwill+ Preliminary Expenses + Profit and Loss A/c (Dr.)}

TABLE 4.7 Showing Capital Gearing Ratio of KSFC YEAR FIXED INTEREST AND EQUITYSHAREHOLDERS' DIVIDEND FUNDS 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 -10 2010 - 11 1,77,726.52 1,66,147.79 1,57,059.88 1,62,872.03 1,66,586.60 1,85,670.44 12,892.55 12,892.55 33,108.24 58,054.77 70,732.82 72,588.68 13.79 12.89 4.74 2.81 2.36 2.36 BEARING FUNDS CAPITAL RATIO GEARING

Capital Gearing Ratio

16 14 12 10 8 6 4 2 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 Capital Gearing Ratio

CHART 4.7 Showing Capital Gearing Ratio of KSFC

Analysis and Interpretation Table 4.7 shows the Capital Gearing Ratio of KSFC for the study period. The Capital Gearing Ratio of the KSFC reflected a downward trend during the study period except during 201011 which recorded a marginal increase in the ratio as compared to the previous year. The ratio was 13.79:1 in 2005-06. It signifies that for every 13.79 rupees of non-owners funds one rupee of owners funds is available in the capital structure of KSFC. It shows the KSFCs heavy dependence on outsiders funds which bear fixed charges. It also shows the amount of security available to non-owners funds which is very meager in this case (one rupee for every 13.79 rupees). However, the Corporation has been able to reduce the proportion of non-owners funds to owners funds either by repaying the debtor raising more funds through shares. It is a healthy sign because it allows KSFC to operate flexibly. The Capital Gearing Ratio of KSFC was 2.56 which are slightly higher than the previous years ratio. This is a significant improvement over 2005-06s figure. But, creditors/lenders are still exposed to risk because their funds are more than the owners funds. This is undesirable from their view point.

Interest Coverage Ratio This ratio establishes the relationship between the amount of net profits or earnings before the deduction of interest, taxes and fixed interest charges. This ratio is used as a yardstick for the lenders to know whether the business concern is able to pay its fixed interest charges on long-term loans periodically. Interest Coverage Ratio is calculated with the help of the following formula: Interest Coverage Ratio= EBIT or Operating Profits Fixed Interest Charges Where, EBIT or PBIT = Earnings or Profits before Interest and Taxes.

TABLE 4.8 Showing Interest Coverage Ratio of KSFC YEAR 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 EBIT 17,676.17 15,886.75 20,453.25 13,127.48 15,246.00 17,729.21 FIXED CHARGES 16,780.62 14110.66 13,634.01 16,667.20 13,706.49 14,391.03 INTEREST INTEREST RATIO 1.05 1.13 1.50 0.79 1.11 1.23 COVERAGE

INTEREST COVERAGE RATIO

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 INTEREST COVERAGE RATIO

CHART 4.8 Showing Interest Coverage Ratio of KSFC

Analysis and Interpretation Table 4.8 shows the Interest Coverage Ratio values of the Karnataka State Financial Corporation during the study period. In 2005-06 Re. 1.05 was available for every one rupee of fixed interest charges. It does not provide a sufficient margin of safety to the debt holders because even a slight decline in its earnings would hamper KSFCs ability to offer assured payment of interest to the lenders. The further analysis of the figures reveals that Interest Coverage Ratio remained at or below 1.50:1. The highest ratio was 1.50:1 which occurred in 2007-08 and the lowest was 0.79:1 which occurred in 2008-09. This was the year when KSFC incurred loss. On the whole, it can be said that earnings available to the lenders are not sufficient. Usually coverage of six to seven times is desirable from lenders point of view.

4.4.2.3 PROFITABILITY RATIOS Profit is the difference between revenue and expenditure over a period of time. It refers to the absolute quantum of profits, whereas profitability refers to the ability to earn profits. Profitability ratios are the ratios which are computed to evaluate the performance and efficiency of the business concern. Profitability Ratios are used by the management, owners, creditors and employees. Equity shareholders employ these ratios because they are very much interested in knowing capital appreciation of their investment and dividend per share. Management employs profitability ratios to assess the operational performance of the business concern. They are used by the creditors to ascertain the margin of safety available to them. Profitability ratios are the test of wages and fringe benefits to the employees. Following are the important profitability ratios: Return on Assets (ROA) Here, the profitability ratio is measured in terms of the relationship of between net profits and assets. The ROA may also be called profit to assets ratio. It is calculated to measure the productivity of total assets. It is calculated using the following formula: Return on Assets = Net Profit after Interest and Tax Total Assets-Fictitious Assets100

Note: The term fictitious assets include preliminary expenses, deferred revenue expenditure, discount on issue of shares and debentures, debit balance of Profit and Loss Account and other losses shown on the assets side of the Balance Sheet.

TABLE 4.9 Showing Return on Assets of KSFC YEAR 2005 06 2006 - 07 2007 - 08 2008 - 09 2009 10 2010 - 11 NET PROFIT AFTER TOTAL TANGIBLE ASSETS INTEREST AND TAX 526.17 1,42,720.56 1295.37 6216.74 -3984.09 296.15 2187.14 1,26,520.87 1,55,194.58 1,72,351.35 1,89,210.39 2,13,229.12 RETURN ON ASSETS RATIO 0.36 1.02 4.01 (-2.31) 0.15 1.03

RETURN ON ASSETS RATIO

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 RETURN ON ASSETS RATIO

CHART 4.9 Showing Return on Assets of KSFC

Analysis and Interpretation Table 4.9 visualizes the net profit after interest and tax as a percentage of total tangible assets. The Return on Assets over the years has shown fluctuating trend throughout the study period. In the initial three years, that is, 2005-06, 2006-07 and 2007-08 the ratio values showed a rising trend which were 0.36, 1.02 4.01 respectively. In2008-09, ROAs how a negative value of 2.31. This is due to the loss that KSFC sustained in that year. However, KSFC recovered from it very soon and registered net profit in the next two years. The analysis of the ratio values reveals that the income generated by the tangible assets has been very modest during the study period. In other words, the investment made intangible assets is not justified by the amount of income generated. Return on Investment Return on Investment is also known as Return on Capital Employed or Overall Profitability Ratio. It is calculated by establishing the relationship between the operating profit earned and capital employed. It is an indicator of the earning capacity of the capital invested in the business. It shows efficiency of the business as a whole. This ratio is calculated by using the following formula: Return on Investment =Operating Profits Capital Employed 100 Where,

Capital Employed = Equity Share Capital + Preference Share Capital + Reserves and Surplus + Debentures and Long-Term Loans (Fictitious Assets +Intangible Assets + Investments outside the Business). (Or) Capital Employed = Proprietors Funds + long-Term Loans.

TABLE 4.10 Showing Return on Investment of KSFC YEAR 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 EBIT 17,676.17 15,886.75 20,453.21 13,127.48 15,246.00 17,729.21 CAPITAL EMPLOYED 1,29,971.29 1,18,579.19 1,20,922.45 1,27,783.65 1,26,877.61 1,56,272.35 RETUN ON INVESTMENT 13.6 13.4 16.91 10.27 12.02 11.35

RETUN ON INVESTMENT
18 16 14 12 10 8 6 4 2 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 RETUN ON INVESTMENT

CHART 4.10 Showing Return on Investment of KSFC

Analysis and Interpretation The Return on Investment of KSFC is presented in Table 4.10. It is seen from the table and chart that the ratio values depicted a fluctuating trend throughout the study period. It ranged from 10.27, the lowest, in 2008-09 to 16.91, the highest, in 2007-08. The Return on Investment was 13.6 in 2005-06 which implies that the Corporation was able to earn Rs.13.6 on Rs.100 investment. It can be considered as reasonably satisfactory level of return. The return slightly declined in the next year. The Corporation earned Rs.16.91 on Rs.100 investment which was the highest during the study period as well. In the subsequent years, KSFC earned a reasonable rate of return on its investment. In the last year of the study period there was a decline in the rate of return which is not a good sign for KSFC.

Return on Ordinary Shareholders Equity While there is no doubt that the preference shareholders are also owners of a firm, the real owners are the ordinary shareholders who bear all the risk, participate in management and are entitled to all the profits remaining after all outside claims including preference dividends are met in full. The profitability of a firm from the owners point of view should, therefore, be assessed in fitness of things, in terms of the return to the ordinary shareholders. The ratio under reference serves this purpose. It relates net profit, finally available to equity shareholders, to the capital employed by them. It is calculated as follows:

Return on Ordinary Shareholders Equity = Net Profit after Interest, Tax and Preference Dividend Ordinary Shareholders Equity 100 Ordinary Shareholders Equity = Equity Share Capital + Reserves and Surplus (Miscellaneous Expenses + Debit Balance of Profit and Loss Account).

TABLE 4.11 Showing Return on Shareholders Equity of KSFC YEAR NET PROFIT AFTER ORDINARY INTEREST AND TAX SHAREHOLDERS EQUITY 526.17 1295.37 6216.74 -3984.09 296.15 2187.14 12,892.55 12,892.55 33,108.24 58,054.77 70,732.82 72,588.68 RETURN SHAREHOLDERS EQUITY 0.041 0.100 0.188 -0.069 0.004 0.030 ON

2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11

RETURN ON SHAREHOLDERS EQUITY

0.25 0.2 0.15 0.1 0.05 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 -0.05 -0.1

RETURN ON SHAREHOLDERS EQUITY

CHART 4.11 Showing Return on Shareholders Equity of KSFC

Analysis and Interpretation The Return on Ordinary Shareholders Equity Ratio of the KSFC for the last six years is presented in Table and Chart 4.11. The ratio values showed a fluctuating trend during the study period. A close look at the figures reveals that the ratio values depicted an increasing trend in the first three years. The fourth year of the study period recorded a negative return which is because of the loss incurred in that year. Thereafter, there was a marginal increase in the ratio values. In 2005-06, the ratio was 0.041 which indicates that the Corporation earned Re.0.041 onRs.100 investment by the ordinary shareholders. This is very unsatisfactory level of return to the equity shareholders who are the owners of the Corporation. In the next two years there was a little increase in the level of return, which was very insignificant. In2008-09 there was negative return. In 2009-10, the Corporation made little progress. Again, in the last year of the study period, the return declined. This is not a healthy sign. On the whole, the return to equity shareholders is not at all considered to be satisfactory.

Earnings per Share (EPS)

Earnings per Share (EPS) measure the profit available to the equity shareholders on a per share basis, that is, the amount they can get on every share held. It is calculated by dividing the profits available to the equity shareholders by number of outstanding shares. The profits available to the ordinary shareholders are represented by net profits after tax and preference dividend. Thus,

EPS = Net Profit after Interest, Tax, and Preference Dividend Number of Ordinary Shares Outstanding. TABLE 4.12 Showing Earnings per Share of KSFC YEAR 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 10 2010 - 11 EAIT 526.17 1,295.37 6,216.74 -3917.39 296.15 2187.14 NO. OF ORDINARY SHARES EARNINGS PER SHARE OTSTANDING 97,84,550 0.000053 97,84,550 97,84,550 1,23,05,060 5,09,05,750 6,19,05,750 0.0001324 0.0006354 -0.0003184 0.0000058 0.0000353

EARNINGS PER SHARE

0.0008 0.0006 0.0004 0.0002 0 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 -0.0002 -0.0004 EARNINGS PER SHARE

CHART 4.12 Showing Earnings per Share of KSFC

Analysis and Interpretation:

The Earnings per Share values of the KSFC for the study period are depicted in the above table and chart. It can be observed from the above table and chart that the Corporation is not maintaining the EPS uniformly and at a higher level during the study period. This is mainly due to negative or low income generated in certain years. The Corporation is not able to generate even one rupee per share. The income generated is not justifying the contribution made by the shareholders. On the whole, the EPS of the Corporation is not considered to be satisfactory.

4.4.2.4 Activity/Efficiency Ratios:

Activity ratios make use of purchases and sales while calculating various ratios. But KSFC is neither a trading company nor a manufacturing company. Hence, the question of purchases and sales does not arise in the case of KSFC. Therefore, the activity/efficiency ratios cannot be calculated for KSFC.