Beruflich Dokumente
Kultur Dokumente
A PROJECT REPORT
Submitted by:
Enroll No. :
In the partial fulfillment for the award of the degree of
Submitted to:
ACKNOWLEDGEMENT
Thanks to the Almighty for showering his blessings. It gives me immense pleasure to express my sincere and wholehearted sense of gratitude to, ___________ for his kind permission to choose a project report that was really beneficial to gain practical experience and for his dexterous guidance. To derive benefits of his enormous experience, it is a matter of great privilege to me. I offer my heartfelt appreciation to ___________for their ever willing cooperation, moral support, rendering ungrudging assistance where ever need arose and best wish for successfully taking this study I wish them very best in their life. I find no words to acknowledge in so formal manner the sacrifice, love, help and inspiration rendered to my parents to take up this study. All cannot be mentioned but nothing is forgotten.
DECLARATION
I Sushil Dhamija, hereby declare that the project report, Study of Financial Analysis of HERO CYCLES LTD has been carried out and submitted to the Indira Gandhi National Open University, New Delhi by me.
Dated
Sushil Dhamija
TABLES OF CONTENTS
S.No. 1 2 3 4 5 6. 7. 8. Topic Introduction Financial Analysis Objective Research Methodology Analysis & Interpretation Findings Suggestions Limitations References annexure
ABSTRACT
The term Financial Analysis also known as analysis and interpretation of financial statements refers to the process of determining financial strength and weaknesses of the firm by establishing strategic relationship between the items the balance sheet, profit and loss account and other operative data. Myers- Financial statement analysis is largely a study of relationship among the various financial factors in a business is disclosed by a single set of statements, and a study of the trend of these factors as shown in a series of statement. The Hero Group has done business differently right from the inception and that is what has helped us to achieve break-through in whatever product category we have ventured. The Groups low key, but focused; style of management has earned the plaudits amidst investors, employees, vendors and dealers, as also worldwide recognition.
INTRODUCTION
Bicycle was seen in India in the year 1890. Import of cycles, however, started in 1905 and continued for more than 50 years. The Government in July 1953 announced complete ban on imports, but cycle kept on simmering in the country till 1961. In 1890, selling price of an imported bicycle was around Rs. 45/-; in 1917, during the First World War the price jumped to Rs. 500/- but dropped considerably, month by month and came down to Rs. 35/- or so (U.K. makes) and Rs. 15/- or so (Japanese models). It would be interesting to mention that in 1919, five persons in Punjab imported cycles and used them on The Mall, Simla. These included one Bishop, Two military men and two contractors including S. Pala Singh Bhogal (Grand Father of Mr. M.S. Bhogal of Ludhiana). Under special permission of the Governor, they were allowed to use cycles on The Mall only for one hour in a day. They imported B.S.A. Cross bar Cycle from U.K. and it used to be a kind of Mela at that particular hour on the Mall in Simla, the scene watched by hundreds of people everyday. Later, a firm was formed under the name of Singh & Co. with shops on Railway Road, Jalandhar and Bazaar Vakillan, Hoshiarpur, which imported bicycles in the year 1930 onwards.
A tiny acorn has now become a mighty Oak. From cycle to two-wheelers were natural steps, and the Hero Group came into being. The Hero Group, today, is a vast conglomerate of companies either in the form of collaborations, joint ventures or fully owned subsidiaries, with more than Rs. 10000 Crore turnovers annually. The Hero Group The Hero Group has done business differently right from the inception and that is what has helped us to achieve break-through in whatever product category we have ventured. The Groups low key, but focused, style of management has earned the plaudits amidst investors, employees, vendors and dealers, as also worldwide recognition. The growth of the Group through the years has been influenced by the number of factor: The Hero Group through the Hero Cycles Division was the first to introduce the concept of just-in-time inventory. The Group boasts of superb operational efficiencies. Every assembly line worker operates two machines simultaneously to save time and improve productivity. The fact that most of the machines are either developed or fabricated in-house, has resulted in low inventory levels. In Hero cycles Limited, the just-in-time inventory principle has been working since the beginning of production in the limit in the unit and is functional even till date. The vendors bring in the raw material and by the end of the day the finished product is rolled out of the factory. This is the Japanese style of production and in India; Hero is the first company to have mastered the art of the just-in-time inventory principle.
MILESTONES
Heros success saga contains the element of courage, great; determination, enterprises and perseverance coupled with vision and meticulous planning: 1956 Hero Cycles Ltd. is established. 1961 Rockman Cycle Industries Ltd. established which is today the largest manufacturer of bicycle chains & hubs in the world. 1963 Bicycle exports take off from India a faray into the international market. 1971 Highway Cycles was set up. It is today the largest manufacturer of single speed & multi-speed freewheels in the country. 1975 Hero Cycles Limited became the largest manufacturer of bicycles in India. 1978 Majestic Auto Limited was formed and Hero Majestic Moped was introduced. 1981 Munjal Casting established.
1984 Hero Honda Motors Limited established in joint venture with Honda Motors, Japan to manufacture Motorcycles. It is now the worlds largest producer of twowheelers. 1985 Munjal Showa Ltd. established to manufacture shock absorbers and struts and is today one of the topmost shock absorber manufacturers companies in this country. 100cc Hero Honda Motorcycle was launched, which, later on in 1988, became No.1 among all motorcycles in India. 1986 Hero Cycles Limited entered the Guinness Books of World Records as the Largest bicycle manufacturer in the world. 1987 Hero Motors, a division of Majestic Auto Limited set up on collaboration with Steyr Diamler Puch of Austria. 1987 Gujarat Cycles Limited, now known as Munjal Auto Centre Ltd. was established to manufacture and export state-of-the-art bicycles and light products in its full automated plant at Wagodia.
1987 Sunbeam Auto Limited, earlier a unit of Highway Cycle Ind. Ltd., established as an ancillary to Hero Honda. It has the largest die casting plant in India. 1988 Hero Puch was introduced by Hero Motors Ltd., which was a revolutionary machine to set new records of petrol. 1989 Ranger bicycles (a generic name for Mountain Bikes today) was introduced by Hero Cycles Limited. 1990 Hero Cold Rolling Division established which is one of the most modern steel cold rolling plants in India. 1991 Hero Honda received National Productivity Council Award and also the Economic Times Harvard Business School Association Award against 200 contenders. 1991 Hero Cycles introduced Kid the first branded bike in childrens segment. 1992 Hero Cycles introduces Impact, the first citibike in India.
1992
Munjal Showa Ltd. received national safety award. 1993 Hero Exports was established as International Trading Division for group & nongroup products. 1995 Hero Corporate Services Ltd. was established. The first exerbike from Hero Group was introduced with the name Allegro. 1996 Hero Winner, a large wheeled scooter with a choice of 50 cc & 75 cc engines was launched by Hero Motors Ltd. 1998 Hero Briggs & Stratton Auto (P) Ltd. was set up to produce 4-stroke two wheeler engines in various cubic capacities. 1998 Munjal Auto Components established to manufacture gear shaft & gear blanks for motorcycles. 2000 The first fully automated bicycles by the name POWERBIKE was introduced by Hero Cycles Limited. Hero Corporate diversified into I.T. and I.T. Enabled Services through its services segment Hero Corporate Services Limited.
2001 Hero Honda emerges as the market leader in motorcycles with the sales of over a million motorcycles and a market share of 47%. 2002 Hero Cycles Limited ties up with National Bicycle Industries, a part of Matsushita Group, Japan, to manufacture high-end bicycles. Fastener World established. 2002 Easy Bills Limited established to offer utility bill collection and retail services. 2003 Tie-up with Live Bridge Inc., U.S.A., Aprilia Scooters, Haly & Bombardier Rotax GmbH of Germany. 2003 Super Starter Series Launched by Hero Cycles Limited. 2003 Hero Honda continues to be the worlds largest manufacturer of two-wheelers with the market of more than 48%. 2004 Hero Retail Insurance Business established. Super Smart Series introduced by Hero Cycles Limited.
OWNERSHIP OF MANAGEMENT
BOARD OF DIRECTORS
SH. BRIJMOHAN LAL MUNJAL(CHAIRMAN) SH. SATYANAND MUNJAL SH. OM PARKASH MUNJAL SH. VIJAY KUMAR MUNJAL SH. SURESH CHANDRA MUNJAL ASHISH KUMAR MUNJAL SH. SUNIL KANT MUNJAL SH. PANKAJ MUNJAL SH. S.K. RAI DR. M.A. ZAHIR DR. D.R. SINGH (CO-M.D. OF WORKS) (CO-M.D. OF MKTG. & ADMN.) (M.D. OF INTNL MARKETING) (M.D. OF DOMESTIC MKTG.) (M.D. OF UNIT TO SAHIBABAD) (M.D. OF C.R.DIVISION) (M.D. OF NEW HERO AUTO DIV.) (M.D. OF WORKS) (DIRECTOR) (DIRECTOR)
MAJOR PRODUCTS
The Hero Cycles Ltd. Manufactures cycles, rims , free wheels ,hubs & chains and cold rolled strips as a main product. Company has long portfolio of different range of cycles. Company has 132models in the list, covers all the three section-gents, ladies and kids. It also manufactures cycles parts for its own requirements. After fulfilling the requirements of company, it can export its remaining quantity. The main products are:i) ii) iii) iv) v) Cycles Rims Free wheels Hubs and Chains Cold Rolled strips
The Achievements The Group and its management have acquired a number of accolades and achievements over the years: Hero Group Management style has been acclaimed internationally by World Bank and BBC, UK. Hero Group is discussed as a case study at London Business School, UK and INSEAD, France. World Bank has acclaimed Hero Cycles as a role model in vendor development based on a worldwide study. The London Business School, UK, has done a case study on the Group as model of entrepreneurship. Boston Consulting Group has ranked Hero Group as one of the top ten Business Houses on Economic value, in India.
The Hero Group is recognized as a long-term partner and an ideal employer: --Hero Groups Partnership with Honda Motors, Japan is over 20 years old. --Hero Groups Partnership with Showa Manufacturing Corporation, Japan is over 18 years old.
Group Chairman, Mr. Brijmohan Lall Munjal received the coveted Ernst
& Young Entrepreneur of the Year award for 2001.
Hero Cycles was ranked 3rd amongst top Indian Companies Review 2000 Asias leading companies award (2003) by Far Eastern Economic Review. Hero Cycles is the Worlds largest manufacture of Bicycles with annual sales volume of over 4.8 million cycles. Hero Cycles Limited is a Guinness Book Record holder since 1986 as the worlds largest manufacture of bicycles, with annual sales volume of 5.2 million bicycles in FY 2004. Engineering Exports Promotion Council has awarded Hero Cycles with the Best Exporter Award for the last 28 years in succession.
Mr. Nabankur Gupta, Mr. Piyush Pandey, Mr. Raghav Bahl, Mr. Sunil k Alagh, Mrs. Tara Sinha and Mr. Yogi C Deveshwar, besides others. Globally, a select few, exceptionally powerful brands, are recognized as Super Brands. Some of the Indian brands have made it into this unique hall of fame, and amongst that coveted group features Hero Cycles. Super Brands are actually the big ideas, which provoke us to explore the realms of our dreams and inspire us to live satisfying life styles. Anchored in omnipotent consumer insights, the super brands go beyond mere functional promises as they trigger deeply embedded emotional chords. Hero Cycles has been one of the most progressive and dynamic brands for the decades now. More than 3200 dealers, 4800 employees and more than 9.6 crore satisfied customers, have directly or indirectly, endeavored tirelessly to make Hero Cycles a phenomenal success and are the true guardians of this brand. Ambitions, belief, empathy and a strong culture of sensitivity are at the heart of Hero Cycles brand. Each of these values is reflected in the companys products, its communication and its dealings with suppliers, employees, dealers and customers. Be it companys environment friendly manufacturing processes or the brand initiatives for the lower income customers, leadership is all about capturing the hearts & minds of the people- the way a true Hero always does. The Vision We, at the Hero Group are continuously striving for synergy between technology, systems and human resources to provide products and services that meet the quality, performance, and price aspirations of the customers. While doing so, we maintain the highest standards of ethics and societal responsibilities,
constantly innovate products and processes, and develop teams that keep the momentum going to take the group to excellence in everything we do. The Mission Statement Its our mission to strive for synergy between technology, systems and human resources, to produce products and services that meet the quality, performance and price aspirations of our customers. While doing so, we maintain the highest standards of ethics and societal responsibilities. This mission is what drives us to new heights in excellence and helps us forge a unique and mutually beneficial relationship with all our stakeholders. We are committed to move ahead resolutely on this path, shown to us by visionaries like Mr. Satyanand Munjal, Mr. Om Prakash Munjal, the late Mr. Dayanand Munjal and late Mr. Raman Kant Munjal. Mr. Brijmohan Lall Munjal, Chairman & MD THE HERO GROUP. Promotions Until 1986, the company had no need for mass communication. But as competition started growing, Hero Cycles begun to feel the need for creating lasting impression on the customers mind. In the mid 1980s Hero was perceived to be the manufacturer of the basic black bicycles. The company required an image change. It needed to communicate to customers the vast portfolio of products that it had, particularly in the recreational segment. The launch of innovative products and their use as image builders happened simultaneously. Since 1986, the communication strategy has been to build each product separately and create a unique positioning for them. In this way the Ranger was positioned as the bike for outdoor fun, Impact was the preferred choice among city riders and Jet was projected as the lightest running roadster while Hawk was the racers edge. Each of these launches and their promotion gave the Hero brand a new meaning. The
brand has also used celebrities including film stars Sanjay Dutt, Rani Mukherjee, Hrithik Roshan and Ameesha Patel. The latest is Indias new bowling sensation, Irfan Pathan who has also been a real life Hero Cycle user. National Mainstream Hero Groups humane approach is manifested in all aspects of commercial production. The Group undertakes various projects and activities of socio-humanitarian nature to contribute to the National Mainstream. Group Companies, Hero Cycles Limited and Hero Honda Motors Limited has been pioneers within the Group, in undertaking socially productive work of myriad nature.
3. Future plan of action: - Though the domestic market for standard bicycles is
shrinking since last three years but the fancy segment has shown a significant upsurge in the demand. Moreover India has a very small share of Global Market. The up graduation of technology through in-house research will assist the company in design development to capture the vast untapped market potential. Technology Absorption, Adaptation and Innovation (i) The company is upgrading technology absorption and innovation to enhance its range of product both in domestic and export. Some of new designs developed through in house research and registered under Design Act with Controller General of Patents Design and Trade Marks are Anaconda, wizard, crusader, DTB, Miss India, Twinkle (Brat) and Tech Team. (ii) While in Indian market it is directed towards introducing products at lower cost e.g. Wonder Years and Brat series to the benefit of masses or high-end
technology products like Street Racer, Fusion, Yiking Hero and Miss India Series (for the ladies) which completes the total product range. (iii) The company has not imported any technology in the last 5 years. However, it has entered into a technical assistance agreement with national Bicycle Industrial Co. Ltd. Kashiwara City, Osaka, Japan in 2002 for upgrading its technology. Outlook During the year 2007-07 the economy has shown further improvements and the GDP has also increased. Your directors are pleased to inform you that despite the volatility in the prices of main inputs i.e. steel and nickel your company has increased its production by 5.47% vis a vis previous year by introducing new era light alloy bicycles and powered cycles as well as bikes with a sincere focus on students. Industry producing the rolling steel strips can be broadly classified into two categories i.e. narrow (400mm) and wide (1650mm). Your company comes under mid segment with a capacity to produce up to 800mm wide strips. The industry is further classified into Stand Alone manufacturer and Integrated manufacturer. Though the Stand Alone manufacturer are putting up a stiff competition , your directors are hopeful that companys C.R.Division will do well by putting emphasis on special grades, narrow and thinner strips with short delivery period and fast customization.
Meaning of financial analysis The term financial analysis also known as analysis and interpretation of financial statements refers to the process of determining financial strength and weaknesses of the firm by establishing strategic relationship between the items the balance sheet, profit and loss account and other operative data. Acc. To Myers- Financial statement analysis is largely a study of relationship among the various financial factors in a business is disclosed by a single set of statements, and a study of the trend of these factors as shown in a series of statement. Purpose of financial statement analysis: The purpose of financial statement analysis depends upon the need of person who is analyzing these statements. These varying needs may be: To know the earning capacity or profitability of the firm. To know the solvency position of firm. To know the financial strength of the business. To make comparative study with other firms. To know the capability of payment of interest and dividend. To know the trend of the business. To know the efficiency of the management. To provide useful information to the management. Tools of financial Analysis: The analysis and interpretation of financial statement is used to determine the financial position and results of operations as well. A number of methods or
devices are used to study the relationship between different statements. A financial analyst may use following methods: Comparative statements Ratio analysis Fund Flow analysis Common size statement
OBJECTIVES
1. 2. 3. 4. 5. 6. 7. 8. To analyze the liquidity position of the firm. To analyze the solvency position of the firm. To study and analyze the overall profitability of the firm. To study and analyze the changes in working capital and fund flow position. To relate the various items of profit and loss account with sales. To compare the assets and liabilities of the current year and previous year. To study and analyze the capital structure of the firm. To determine the efficiency with which the current assets are managed.
RESEARCH METHODOLOGY
Basically project study is usually based on a research, which gives a concrete answer to a problem. This research may be Problem Solving or Problem Oriented. Both types of research are usually known as Applied Research. Marketing is a form of Applied research which proceeds with a certain problem, specifies alternative solutions and the possible outcomes of each alternative. It may be further named as Decisional Research. The Marketing Research methodology involves a number of interrelated activities, which overlap and do not rigidly follow a particular sequence. A marketing research involves the following major steps. FORMULATING RESEARCH PROBLEM The first step in research is formulating research problem. It is the most important stage in Applied Research as it rightly said A problem well defined is half solved. In this Project Report I have studied the concept of Working Capital and Ratio Analysis has carried the analysis of the same in HERO CYCLES LIMITED. STATISTICAL TOOLS & TECHNIQUES The statistical techniques like Percentages and Ratios have been in the study. These have been very useful in doing the interpretation and analysis of the data collected through secondary sources.
DATA REPRESENTATION The result have presented with the help of pie-charts and bar diagrams which clearly represents that the research conducted is a Formal Research and the Research Design is a sound one. DETERMINING THE SOURCE OF DATA The next step is to determine the source of data to be used. The marketing research may be based on primary or secondary data or on both. In this report I have used the information gathered through secondary data which include mainly the Annual Reports of HERO CYCLES LIMITED.
COMPARATIVE STATEMENTS
The comparative financial statements are statements of the financial position at different period; of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. From practical point of view, generally, two financial statements (balance sheet and income statement) are prepared in comparative form for financial analysis purpose. Not only the comparison of the figure of two periods but also be relationship between balance sheet and income statement may show: i. Absolute figures (rupee amounts) ii. Changes in absolute figures (increase or decrease in absolute figures) iii. Absolute data in term of percentages iv. Increase or decrease in terms of percentages 1. COMPARATIVE BALANCE SHEET The comparative balance sheet analysis is the study of the trend of the same items, groups of items and computed items in two or more balance sheets of the same business enterprise on different dates. The changes can be observed by comparison of the balance sheet at the beginning and at the end of a period and changes can help in forming an opinion about the progress of an enterprise. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show increase in figures. The fourth column may be added for giving percentages of increases or decreases. 2. COMPARATIVE INCOME STATEMENT The comparative income statement gives an idea of a business over a period of time. The changes in absolute data in money values and percentages can be determined to analyze the profitability of the business. It has also four columns.
First two columns give figures of various items for two years. Third and fourth columns are used to show increase or decrease in figures in absolute amounts and percentages respectively.
HERO CYCLE LTD. I) COMPARATIVE STATEMENT A) Comparative Balance Sheet Particulars 2007 2008 Increase/Decrease Assets Fixed Assets Investments Deferred Tax Assets (Net) Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance Loan and advances Total Assets Liabilities Shareholder Fund Loan Funds Current Liabilities - Liabilities - Provisions Total Liabilities 1968881237 2851504001 4892714 766521142 1860512457 69481654 337661837 7859455042 1893341411 3843437861 19845655 805661034 2228592486 22134657 457780835 9270793939 - 75539826 +991933860 +14952941 +39139892 +368080029 - 47346997 +120118998 +1411338897
%age
Interpretation 1. 2. Comparative Balance Sheet reveals that total Assets of Hero cycle increased during a year by 17.95%. There has been increase in shareholder funds by 21.16%.
1612956575 2054231296
1575635349 1262466410
-37321226 -791764886
-2.31 -38.54
Less : Tax provision for wealth -28757839 tax, taxation, fringe benefit tax & deferred tax Net profit After tax 664931302
1025585738
+360654436
+54.24
Interpretation There has been decrease in the gross profit by 2.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold. But the operating expenses decreases by 38.54% so operating profit increases.
Particulars Assets Fixed Assets Investments Deferred Tax Assets (Net) Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance Loan and advances Total Assets Liabilities Shareholder Fund Loan Funds Current Liabilities - Liabilities - Provisions Total Liabilities
2007 Amount (Rs.) 1968881237 2851504001 4892714 766521142 1860512457 69481654 337661837 7859455042 4427446105 1567876432 1640425867 223706638 7859455042
%age 25.05 36.28 0.06 9.76 23.67 0.88 4.30 100.00 56.33 19.95 20.87 2.85 100.00
2008 Amount (Rs.) 1893341411 3843437861 19845655 805661034 2228592486 22134657 457780835 9270793939 5364231022 1732223697 1978589143 19575007 9270793939
%age 20.42 41.46 0.22 8.69 24.04 0.24 4.93 100.00 57.86 18.69 21.34 2.11 100.00
Interpretation The investment in fixed assets, current assets and investment are same in both the years. The ratio of shareholders funds and the loan funds are do not change much.
1612956575 2054231296
14.19 18.07
1575635349 1262466410
11.84 9.49
Operating profit/loss Add: Other income Net profit Before Tax Less : Tax provision for wealth tax, taxation, fringe benefit tax & deferred tax Net profit After tax
Interpretation In 2007 the cost of goods sold is 85.81% of sales which increase to 88.16% in year 2008 resulting the decrease in gross profit from 14.19% to 11.84% but the company is successful in controlling operating expenses like administrative expenses from 18.07 % to 9.47% with the result the operating profit in 2008, 2.35% of sales. So the companys operating profitability improves in 2008.
HERO CYCLES LTD. Cash Flow Statement Particulars Profit Before Tax Net Cash Flow Operating Activity Net Cash used in Investing Activity Net Cash used in Financing Activity Net Inc/Dec in Cash & Equivalent Cash and Equivalent at the Begin of the Year Cash and Equivalent at the End of the Year 2007 6361.73 8382.83 -4988.22 -3471.47 -76.86 771.68 2008 12113.28 2996.85 -3143.35 -326.97 -473.47 694.82 Increase/ Decrease +5751.55 -5385.98 -1844.87 -3144.50 +396.61 -76.86 %age 90.41 -64.25 -36.98 -90.58 +516.02 -9.96
694.82
221.35
-473.47
-68.14
A question arises as to the definition of FUND. It means: Funds may mean change in cash only; Funds may mean change in working capital (the difference between current assets and current liabilities) only. A more comprehensive definition of funds may be given as follows: Funds may mean change in financial resources, arising from changes in working capital items and from financing and investing activities of the enterprise, which may involve only non-current items. The funds flow statement analyses only the causes of changes in the firms working capital position. The cash flow statement is prepared to analyze changes in the flow of cash only. These statements fail to consider the changes in the firms total financial resources. They do not reveal some significant items that do not affect the firms cash or working capital position, but considerably influence the financing position and asset mix of the firm. The statement of changes in financial position is an extension of the funds flow statement or the cash flow statement. Therefore, to get better insights, a firm may prepare a comprehensive, all inclusive, statement of changes in financial position incorporating changes in the firms cash and working capital positions involving: Changes in the firms working capital position, Changes in the firms cash position, and Changes in the firms total financial resources.
Statement of Changes in Working Capital Particulars Current Assets - Inventories - Sundry Debtors - Cash & Bank Balance Current Liabilities - Liabilities - Provisions 2007 2008 Effect on Working Capital Increase Decrease 47346997 338163276 -
1640425867 1978589143 223706638 195750077 (B) 186413250 2174339220 5 832382748 4966209 882048957 882048957 882048957
43517648 2
49666209 435176482
WORKING NOTES
Adjusted Profit and Loss Account
Particulars By Balance b/d By Deferred Tax By Fund from Operation (Bal. Figure)
FIXED ASSETS
Particulars To Balance b/d To purchase on Fixed Assets (Bal. figure) Amount (Rs.) 1968881237 137805397 2106686634 Particulars By Adjusted P & L A/c (Dep.) By Balance c/d Amount (Rs.) 213345223 1893341411 2106686634
Interpretation : As seen from the above analysis that there is increase in working capital which, indicate that company is having sufficient current assets to pay back the current liabilities in time. There is increase in amount of loans by 10.48% and it is being utilized in financing the fixed assets & investments.
MEANING OF RATIO A ratio is a simple arithmetical expression of the relationship of one number to another. According to Accountants Handbook by Wixon, Kell and Bedford, a ratio is an expression of quantitative relationship between two numbers. According to Kohler, a ratio is the relation, of the amount a, to another, b, expressed as the ration of a to b, a:b (a is to b); or as a simple fraction, integer, decimal, fraction or percentage.
A financial ratio is the relationship between two accounting figures expressed mathematically. A ratio can also be expressed as percentage by simply multiplying the ratio by 100. Ratios provide clues to the financial strength, soundness position or weakness of an enterprise. One can draw conclusions about the exact financial position of a concern with the help of ratios. MEANING AND CONCEPT OF RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end itself. It is only a means of better understanding of financial strength and weakness of a firm. Calculation of ratios does not serve any purpose, unless several appropriate ratios are analyzed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the objective of analysis. The following are four steps involved in the ratio analysis : Selection of relevant data from financial statement depending upon objective of analysis. Calculation of the appropriate ratios from the above data. Comparison of the calculated ratios with the ratio of same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparisons with ratios of the industry to which the firm belongs. Interpretation of the Ratios Ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analyze and interpret the financial health of enterprise. It is with
help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis. The use of ratios is not confined to financial managers only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. The supplier of goods on credit, banks, financial institutions, investors, shareholders and management all make use of ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investments in the firm. With the use of ratio analysis, one can measure the performance of the firm is improving or deteriorating. Thus, Ratios have wide applications and are of immense use today. Guidelines or precautions for use of ratio:
1.
Accuracy of financial statements: The ratios are calculated from the data available in financial statements. Before calculating ratios one should see whether proper concepts and conventions have been used for preparing financial statements or not. These statements should also be properly audited by competent auditors. The precautions will establish the reliability of data given in financial statements.
2.
Objective or purpose of analysis: The type of ratios to be calculated will depend upon the purpose for which these are required. The purpose or object for which rations are required to be studied should always be kept in mind for studying various ratios. Different objects may require the study of different ratios.
3.
Selection of ratios: Another precaution in ratios analysis is the proper selection of appropriate ratios. The ratios should match the purpose for which these are required. Only these ratios should be selected which can throw proper light on the matter to be discussed.
4.
Use of standards: The ratios will give on indications of financial position only when discussed with reference to certain standard. These standard may be rule of thumb as in case of current ratio {2:1}and acid test ratio{1:1}, may be industry standards, may budgeted or projected ratios etc.
5.
Caliber of the analyst: The ratios are the only tools of analysis and their interpretation will depend upon the caliber and competence of the analyst. He should be familiar with various financial statements and the significance of changes etc.
6.
Ratios provide only a base: The ratios are only guidelines for the analyst he should not base his decision entirely on them. He should study any other relevant information, situation in the concern, general economic environment etc. before reaching final conclusions.
Functional classification or classification according to tests In view of financial management or according to tests satisfied, various ratios have been classified as below: 1. Liquidity ratios: These are the ratios, which measure the short term solvency or financial position of the firm and are calculated to comment upon the short term paying capacity of concern or firms ability to meet its current obligations. The various liquidity ratios are: current ratio, liquid ratio and absolute ratio. 2. Long term solvency and leverage ratios: Long term solvency ratios convey firms ability to meet the interest cost and repayment schedule of its long term obligations, example debt equity ratio and interest coverage ratio. Leverage ration show the proportions of debt and equity in financing of the firm. 3. Activity ratios: Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also
called turnover ratios because it indicates the speed with which assets are being turned over in to sales example debtor turnover ratio. Classification according to significance or importance The Ratios have also been classified according to their significance or importance. Some ratios are more important than others and the firm may classify them as primary and secondary ratios. The British Institute of management has recommended the classification of ratios according to importance for inter firm comparisons. For inter firm comparisons, the ratios may be classified as primary and secondary ratios. The primary ratio is one which is of prime importance to a concern, thus return on capital employed is named as primary ratio. The other ratios which support or explain the primary ratio are called secondary ratio, e.g. the relationship of operating profit to sales or the relationship of sales to total assets of the firm. Analysis Of Short-Term Financial Position The short-term obligation of a firm can be met only when there are sufficient liquid assets. If a firm fails to meet such current obligations, its goodwill in the market is likely to be affected beyond repair. Moreover a very high degree of liquidity will tie funds in current assets. Therefore it is necessary to have a proper balance in regard to liquidity of the firm. Two types of ratio are calculated to measure short-term solvency of a firm. I) LIQUIDITY RATIOS II) EFFICIENCY RATIOS III)SOLVENCY RATIOS IV)PROFITABILITY RATIOS I) LIQUIDITY RATIO
It refers to the ability of a concern to meet its current obligation as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assets. These should be convertible into cash for paying obligations of short term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay-off current liabilities, the liquidity position is satisfactory. On the other hand, if current liabilities may not easily met out of current assets then the liquidity position will be bad. To measure liquidity of a firm, the following ratios can be calculated: (i) (ii) (iii) (i) Current ratio Quick ratio Absolute quick ratio Current Ratio
It is also known as Working capital ratio. It is a measure of liquidity and used in making analysis of short term financial position. Current Ratio Year Current assets Current liabilities Current Ratio = Current Assets / Current Liabilities. 2007 2696515253 1640425867 1.64 2008 3056388177 1978589143 1.54
Current assets
Current liabilities
3500000000 3000000000 2500000000 2000000000 1500000000 1000000000 500000000 0 Am ou nt (Rs .) 2007 Years 2008
Interpretation : It is decreasing in the year 2008 because current liabilities are increased this year as compare to 2007. Overall this ratio is satisfactory as it is nearest to the thumb rule i.e. 2:1
(ii)
Liquid Ratio Liquid Ratio is more rigors test of liquidity than the current ratio. It is the
ratio between quick ratio & current liabilities. Quick ratio refers to all current assets except Inventory & prepaid expenses. Liquid Ratio = Liquid assets / Current Liabilities Liquid assets = Current Assets- Prepaid Exp Inventories Year Liquid assets Current liabilities Liquid Ratio 2007 1929994111 1640425867 1.18 2008 2250727143 1978589143 1.14
Liquid assets
Current liabilities
2500000000 2000000000 1500000000 1000000000 500000000 Amount (Rs.) 0 2007 Years 2008
0.5
Interpretation : As seen from the analysis this ratio is almost same in both the years quite satisfactory with a thumb rule i.e. 1.5 : 1. Companys current assets involved large amount of debtors in it. (iii) Absolute Liquid Ratio Cash is the most liquid ratio asset. Absolute liquid assets include Cash in hand, Cash at bank, marketable securities or temporary investments. Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities Absolute Liquid Assets = Cash + Bank + Marketable Securities Year Absolute Liquid assets Current liabilities Absolute Liquid Ratio 2007 69481654 1640425867 0.04 2008 22134657 1978589143 0.01
Current liabilities
2008
Absolute Liquid Ratio 0.06 0.05 0.04 0.03 0.02 0.01 0 2007 Years 2008
Interpretation : Viewing the trend of the cash ratio of both the years it can be said that this ratio is not satisfactory because cash and bank balance has been decreased very much in the year 2008 approx. 68%.
II)
EFFICIENCY RATIOS OR ACTIVITY RATIOS Activity ratio measures the efficiency and the effectiveness with which a
firm can manage its resources. These are known as the Turnover ratios , because they indicate the speed with which assets are converted into cash. Major ratio given as under : 1. 2. 3 4. 1. Working capital ratio Inventory turnover ratio Debtor turnover ratio Creditor turnover ratio Working Capital Turnover Ratio It indicates the velocity of utilization of net working capital. It indicates the efficiency with which working capital is being used by the company. Working Capital Turnover Ratio = Net Sales /Average working capital Year Net sales Average working capital Working Capital Turnover Ratio 2007 11369337410 1170612956.5 9.71 2008 13308705116 1066944210 12.47
10
Interpretation : Working capital turnover ratio is increasing as we can see from the above table becomes 12.47 in 2008 from 9.71 in 2007 due to increase in sales 2. Inventory Turnover Ratio It indicates whether the inventory has been efficiently used or not. It indicated the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. Inventory Turnover Ratio : Net Sales / Avg. Inventory at Cost Year Net sales Average inventory at cost Inventory Turnover Ratio 2007 11369337410 708281512.5 16.05 2008 13308705116 786091088 16.93
Interpretation : As seen from the analysis there has been slight increase in the ratio. Being a manufacturing concern company has to maintain large amount of inventories in different forms but on the other side sales are increasing so it is good sign for the company. 3. Inventory Conversion Period It is calculated to see the average time taken for clearing the stocks. Inventory conversion period = No. of days in a year /Inventory Turnover Ratio Year No. of days in a year Inventory Turnover Ratio Inventory conversion period 2007 365 16.05 23 (days) 2008 365 16.93 22 (days)
Interpretation : The companys inventory conversion period is approximate 25 days which indicates there is no fear of obsolesce of material. 4. Debtor Turnover Ratio This ratio indicates the velocity of debt collection generally higher the ratio means the more efficient management of debtors or more liquid are debtors and vice verse. Debtor Turnover Ratio = Total sales / Average Trade Debtors Year Total Sales Average trade debtors Debtor Turnover Ratio 2007 11369337410 1844321481 6.17 2008 13308705116 2044552471.5 6.51
Interpretation : This ratio has been increased by 34% due to increase in sales but at the same time debtors are also increasing which is not feasible in long run.
5.
Average Collection Period It represents the average number of days for which a firm has to wait before
its receivables are converted into cash. Aver. Collection period = Year Aver. Collection period Number of days in a year Average Collection Period Number of days in a year / Debtor Turnover Ratio 2007 365 9.17 59 days 2008 365 6.51 56 days
Average Collection Period 60 50 Days 40 30 20 10 0 2007 Years Interpretation : Companys average collection period is approximate 60 days or two months. It means companys is allowing sufficient time to debtors. It should not be very much increase in the long run. 2008
6.
Creditor Turnover Ratio This ratio indicates the velocity with which the creditors are turned over in
relation to purchases. Generally higher the ratio better it is or otherwise lower the creditor velocity, less favorable are the results. Creditor Turnover Ratio = Annual Purchases / Average Creditors. Year Annual purchases Average creditors Creditor Turnover Ratio 2007 8450144997 1219309612 6.93 2008 10318618457 1499180490.5 6.88
7.
Average Payment Period = No. of days in a year / Creditor Turnover Ratio Year No. of days in a year Creditor Turnover Ratio Average Payment Period 2008 365 6.88 53 (days)
Interpretation : The payment track record of the company is properly designed such that timely payment is made to the suppliers. By analyzing the trend it can be said that creditors are paid with in two months this shows as and when payment is received from
Times
the debtors then it is being paid and more over company is enjoying credit policy by the creditors.
III)
SOLVENCY RATIOS The term solvency refers to ability of a concern to meet its long-term
obligations. The long-term indebtness of a firm includes debenture-holders, financial institutions providing medium and long-term loans and other creditors selling goods on installments basis .Long-term solvency ratio indicate a firms ability to meet the fixed interest and costs and repayment schedules associated with its long-term borrowings. Following solvency ratios have been used for this purpose:(1) Debt-equity ratio (2) Equity ratio (3) Solvency ratio (4) Fixed assets to net worth (1) Debt Equity Ratio It shows the relationship between external and internal equities & it is calculated to measure the claim of outsiders and owners against companys assets The outsider's funds include all debts/ liabilities to outsiders, whether in form of debentures, bonds, mortgage or bills. The shareholders funds include equity + preference share capital included capital reserve, revenue reserve and reserves representing accumulated profits and surpluses. Debt Equity Ratio = Long term Debts / Shareholders Funds*100 Year Long term Debts Shareholders Funds 2007 1640425867 4427446105 2008 1978589143 5364231022
35.41
32.29
Interpretation : There has been a slight decrease in this ratio due to the fact that now the company is relying more on own funds then on outsiders funds. As such ratio has been improved and that amount is blocked in inventories. (2) Equity Ratio Establish the relationship between shareholders funds and total assets of the company, the components of this ratio are Equity Ratio = Shareholders Funds / Total Assets *100 Year Shareholders Funds Total Assets Equity Ratio 2007 4427446105 7516900491 59 2008 5367231022 8793167449 61
Percentage
Equity Ratio 70 60 50 40 30 20 10 0 2007 Years Interpretation : Company is relying more shareholder funds than on loan funds. This is favourable point for the creditors as companys equity ratio in 2007 is 59% and 41% in 2008 and in 2007 solvency ratio is 61% and 39% in 2008. 2008
Percentage
3.
Solvency Ratio This ratio indicates the relationship between total liabilities to outsiders &
total assets of the company. Solvency ratio = Year 2007 2008 100- Equity ratio Solvency Ratio 41 39
Solvency Ratio 50 40 30 20 10 0 2007 Years Interpretation : Company is relying more shareholder funds than on loan funds. This is favourable point for the creditors as companys equity ratio in 2007 is 59% and 41% in 2008 and in 2007 solvency ratio is 61% and 39% in 2008. 2008
4.
Fixed Assets to Net Worth Ratio The ratio established the relationship between fixed assets and shareholders funds
i.e. share capital plus, reserves and surplus and retained earning. The ratio can be calculated as follows : Fixed Assets to Net Worth Ratio = Fixed Assets (after Dep.) / Shareholder funds * 100
Percentage
Year
Fixed Assets (after Dep.) Shareholder funds Fixed Assets to Net Worth Ratio
Fixed Assets to Net Worth Ratio 50 40 30 20 10 0 2007 Years Interpretation : the companys fixed assets to net worth is 44.47% and 35.30% in years 2007 and 2008. It implies that 56% of fixed assets are purchased through debt in 2007 and 65% in 2008. The company should increase the shareholders funds in fixed assets. IV 2008
PROFITABILITY RATIOS
The following ratio are known as general profitability ratio 1) 2) 3) G.P. Ratio N.P. Ratio Return on Investment
Percentage
1.
Gross Profit Ratio Gross profit ratio measures the relationship of gross profit to net sales and is
usually represented as a percentage. Thus it is calculated by dividing the gross profit by sales. Gross Profit Ratio = Gross Profit / Sales * 100
15 10 5 0
Percentage
2007 Years
2008
Interpretation : There has been decrease in the Gross Profit by 2.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold
2.
Net Profit Ratio Net profit ratio established a relationship between net profit and sales. This ratio is
the overall measure of firms profitability and is calculated as : Net Profit Ratio = Net profit after tax / Net Sales *100
Year Net profit after tax Net sales Net Profit Ratio
Net Profit Ratio 10 8 6 4 2 0 2007 Years Interpretation : There has been decrease in the Gross Profit by 2.31% because the rate of increase in sales is less than the rate of increase in cost of goods sold. But the operating expenses decrease by 38.54% so net profit increases. 2008
Percentage
3.
Return on Investment
Return on Investment = Profit Before interest and taxes / Total investment *100
Year
Profit Before interest and taxes Total investment Return on Investment
Return on Investment 35 30 25 20
Interpretation : The companys overall profitability is improving as return on investment increases from 22.31% to 31.52%.
Percentage
FINDINGS
Companys is utilizing long term loans to finance fixed assets and investments but it has started relying on own funds. There is decrease in gross profit of the company due to increase in cost of goods sold but there is increase in net profits due to increase in sales. Debtors are also increasing which is not good sign for the company in long run. Current liabilities are increasing by 20.61%. Where as cash decreases very much by 68.14% There is stability in equity share capital.
SUGGESTIONS
The Company is enjoying a good current position. It should take steps to further improve its position by repositioning the composition of current assets as large amount has been block in debtors and inventories. Large amounts of funds are blocked in debtors. Company should reduce its debtors so that the blocked amount is properly utilized. Inventory control is not proper. The Company has not defined the minimum and the maximum stock level scientifically. Therefore there is blockage of funds. Moreover, the safety stock level is also not defined. So the company should apply the proper Inventory Control System so that there is no wastage of funds. Companys should increase its share capital instead of raising loans to finance fixed assets.
LIMITATION
Financial analysis is a powerful mechanism of determining financial strength and weakness of a firm. But the analysis is based on the information available in the financial statements. Thus the financial analysis suffers from some serious inherent limitation of financial statements, which are as follows :1. 2. 3. 4. 5. 6. It is only a study of interim reports. Financial analysis is based only upon monetary information & nonmonetary factors are ignored. It does not consider changes in price level. As financial statement are prepared on the basis of a going concern; it does not give exact position. Changes in accounting procedure by a firm may often make financial analysis misleading. Analysis is only a mean not an end in itself. The analyst has to make interpretation and draw his own conclusion.
REFERENCS
Annual Reports of HERO CYCLES LIMITED at ending year 2007 and 2008.