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PREFACE
As a student of M.B.A., it is important to study practical things with theoretical knowledge of financial management. The main purpose of Project Report in the finance field is to know how the financial analysis is carried out. We all know that finance is the blood of any business and without it no business can run. In the field of finance you always learn something new, and if you like challenging work you should choose finance. As we like calculative subject and challenges, we have chosen an organization that is ITC where we get exposure of all type of work and can learn many things. Financial analysis of a company is very difficult and most important. We have chosen the subject of financial analysis and by doing this, we are able to know its financial position and financial structure of the company. This report includes analysis of balance sheet, profit & loss account and cash flow statement. Ratio has been calculated to present a clear picture of the financial profitability and liquidity of the company. Kadi, 14th December, 2011 Sunny Teelani Ishan Shah
The cash flow analysis containing the operating activities, investing activities & financing activities.
OBJECTIVES
To find out various critical aspects of the Financial Statements. To Analyzed & Interpret the Financial strength of the company. To know about Trends of profit, expenditure, net worth, fixed assets and various other trends of Profit & loss and Balance sheet statements. To show the contribution of various variables in the Profit & loss A/C & Balance sheet with respect to Sales & Total Assets. To recommend the company about the solution of the problem. And the first & foremost thing is to fulfill the requirement of the course.
ITC
1.2
History
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ITC
Subsidiaries:
ITC Bhadrachalam: ITC Limited increased its stake in the subsidiary by 5% during FY00 to 56%. The subsidiary is the leading producer of paperboard in India.
This subsidiary is into business of hospitality and has 18 properties under its banner. This subsidiary has focus both on top end as well as mid-market segment. The company has decided to attach ITC prefix to all Super Deluxe Hotels, Five star hotels would be under brand, Welcome Hotels, and Heritage Properties would be under brand, Welcome heritage and 3-4 star hotels would be under brand of Fortune Hotels. Russell Credit Ltd. And Summit Investments Ltd. And Saga investments Ltd.: These three subsidiaries involved in the business of managing financial investments have been merged together to form Russell Credit Ltd. during FY00. All India Tobacco and Elan Enterprises are wholly owned subsidiaries engaged in trading in tobacco. ITC InfoTech is an overseas subsidiary. ITC Global Holdings Pvt. Ltd. is a Singapore based subsidiary engaged in international commodities trading and is facing bankruptcy.
1.4 Location
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2.
GENERAL INFORMATION
2.1 Basic information of ITC 2.2 Organization Structure 2.3 Vision & Mission of ITC
2.1
Executive Directors
Nakul Anand P V Dhobale K N Grant
Non-Executive Directors
A Baijal S H Khan H G Powell Basudeb Sen S Banerjee S B Mathur P B Ramanujam K Vaidyanath AV Girija Kumar D K Mehrotra Anthony Ruys B Vijayaraghavan
Foods Division
Chitranjan Dar Divisional Chief Executive S Ganeshkumar Member Vikram Khosla Invitee M Ganesan Member Paritosh Wali Member V L Rajesh Member M S Gadhok Member
N Thakur Member
V S Thyagarajan Member
Hotels Division
N Anand Executive Director A Pathak Member A R Noronha Member Dipak Haksar Member M Bhatnagar Member G Anand Invitee B Hariharan Member S C Sekhar Member A Sharma Invitee
Kannadiputhur Sundararaman Suresh Transfer Agents Investors Service Centre 37 Chowringhee Calcutta 700071
2.3
Vision
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3.1 3.2
The position of finance in business can be matched with the position of blood in the human body. Finance is the lifeblood of the S.V.INSTITUTE OF MANAGEMENT, KADI (20011-12) 21
business. Finance, today is not only limited up to function that circulates business but also extended its boundaries. Today success or failure concern depends upon how effective financial management a firm has. It is the portfolio that gives maximum return at minimum cost. Further different parties, both inside and outside of firm are interested in financial position of firm and at fixed interval they often evaluate financial position of firm interval they often evaluate financial position by assessing financial statement of firm.
so that firm can carry out its objective easily. For earning out the objectives management also have to be familiar with the financial position of firm time by time. So for knowing of financial position management has to go for financial analysis. Management can analyze firms financial position by evaluating and analyzing financial statement of the firm. There are mainly seven techniques of analyzing financial statements are follows: Comparative Statement. Trend Percentages. Common Size Statement. Statement showing change in net working capital. Fund flow analysis. Cash flow analysis. Ratio analysis. By using these techniques management or any person who knows these Techniques can analyze the financial position with adequate data and interpret it and also deriving conclusion from it. (A) Comparative Statement. Under this, the logic is if we put financial statements of different year together we can easily know the changes in the business that occur time by time and slowly gradually. This method is very useful for the owners of the business; by this they can better know their performance in business in last few years. Here, this method needs financial statement of a firm of more than two years. Because if we compare current years position with previous year position then it may give wrong information i.e.it may happen that previous year is affected by inflation or vice a versa then in this situation we cant get correct conclusion. Thus by putting last three or five years statement together we can know the increase or decrease in assets, liabilities, income and expense of the business. With this method we can interpret profit and loss account as well as balance sheet. (B) Trend percentage. In this method, for interpreting the situation, weight age should be given to one year and assume that particular year as base year and given it 100. From this we can get increase and decrease in percentage for furthers years of related matter. Suppose we have information S.V.INSTITUTE OF MANAGEMENT, KADI (20011-12) 23
about cash and bank balance of business as follow for one particular company. Year Cash & bank 2008-2009 10000 2009-2010 12000 2010-2011 14000
So, in trend analysis we put 100 for 100 for 2008-2009 and get 120 for 2009-2010 and also get 140 for the year 2010-2011. So by comparing data in percentage we can easily get conclusion about financial position. But some limitations are that if base year is not normal year than we cannot correct conclusion, further sometime in current year it may be possible that price of some goods is increased or decreased or due to some Govt. new policies, business have to be change accordingly so in this type of condition business in trend analysis cannot give correct conclusion.
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4 4.1
Composition of Balance sheet. Balance sheet of ITC. Trend Balance Sheet of ITC. Common size Balance sheet of ITC. Ratio analysis of ITC & Interpretation
4.1
A balance sheet is a list of assets and claims of business at some specific point of time and is prepared from an adjusted trail S.V.INSTITUTE OF MANAGEMENT, KADI (20011-12) 26
balance. It shows the financial position of business by detailing the sources of funds and the utilization of these funds. A Balance Sheet shows the assets and liabilities grouped, properly classified and arranged in a specific manner.
The British Companies Act 1856 prescribed a format for Balance Sheet exactly in the style laid down by Simon Stevin three centuries before. To fulfill required of the Companies Act, accountants established the British Practice of displaying the Balance Sheet in Stevins way. Later, this style was copied by Commonwealth and colonial countries. However, USA, Australia have abandoned this style long ago and always present their Balance Sheet by placing assets in the left hand side and liabilities of the right hand side.
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Different ratios can b calculated from the Balance Sheet and these ratios can be utilized for better management of the business.
4.2
Balance Sheet can be represented both vertical as well as horizontal form. Most of the companies represent their Balance Sheet in the vertical format. So, vertical Performa sheet is as follow.
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E F G H I J
(1)
FUNDS EMPLOYED:
(a) Share capital: It involves detail of share capital i.e. total sanctioned share capital, no. of share, and par value. Total issued share capital as well as paid share capital with share numbers, and at last but not least profited shares and its total amount. Reserves & Surplus: This involves different type of reserves e.g. General Reserve, Dividend reserve, Provident Fund, BDR, Workers salary fund and surplus.
(b)
(c) Loans: Loans involve secured and unsecured loans Secured loans: - Secured loans means this type of loans is taken by mortgaging some kind of asset, e.g., debenture. Unsecured loan: - Unsecured loan means loan taken from party without mortgaging any property or asset, e.g. Public Deposit, Public Loan. S.V.INSTITUTE OF MANAGEMENT, KADI (20011-12) 29
(d)
Current liabilities: It indicated the expenses that are outstanding remain to pay, interest due but not paid, and also involves creditors, bills payable etc. Most companies show current liabilities under current assets and deduct it from current assets to know new current assets. Provision: This involves different type of provisions for expected expenses so that business firm can face that type of expenses without any problem e.g. Provision for depreciation, Provision for Taxation, etc. Contingent liability: This type of liability not included in total liabilities. These are generally claims against companies, e.g. Dividend declared on shares but not paid.
(e)
(f)
(2)
APPLICATIONS OF FUNDS:
(a) Fixed Assets: Fixed assets involves Plant & Machinery, Land & Building, Furniture & Fixtures after deducting their depreciation, so their net balances is to be put in balance sheet. Investment: Investment indicated the investment of company into different projects, schemes as well as projects & plans. Current Assets: Current assets include income that is due already but not received e.g. Rent due but not received and also includes as well as Bills receivable. Miscellaneous Expense: This includes the details about preliminary expenses, brokerage, discount allowed on issue of share and debentures, these all capital nature expense. P & L Account: Debit balance of P & L account carried forward after deducting reserves.
(b)
(c)
(d)
(e)
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100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
125.59% 116.80% 130.01% 99.70% 95.66% 120.77% 115.74% 148.10% 120.68% 140.22% 52.33% 116.33% 116.28% 111.71% 114.81% 120.45% 115.36% 237.79% 115.44%
148.00% 137.55% 153.26% 107.42% 92.50% 137.14% 105.02% 66.38% 130.36% 154.67% 120.97% 134.55% 132.40% 118.17% 127.83% 152.72% 130.78% 201.73% 131.35%
167.75% 160.09% 171.61% 89.28% 186.68% 135.63% 134.89% 116.05% 135.02% 138.77% 126.30% 134.74% 148.39% 308.92% 199.95% -41.66% 133.22% 199.70% 132.98%
178.94% 185.00% 175.88% 117.98% 181.07% 157.05% 142.55% 95.39% 153.24% 156.37% 269.20% 168.64% 182.08% 278.70% 213.11% 48.33% 150.90% 194.33% 74.48%
INTERPRETATION:
By looking at the trend analysis of Secured and Unsecured Loan of the company we can interpret as below: S.V.INSTITUTE OF MANAGEMENT, KADI (20011-12) 32
By the trend analysis we can interpret Liabilities and Assets: The growth rate of Fixed Assets is increases year by year which is good for company. The growth rate of Liabilities is also increases every year
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Sources of Funds: For the sources of funds we have taken the total liabilities as 100. 34
Application of Funds: For the analysis of application of funds we have taken the total Assets as 100 From the table we can interpret that the investment in the company increases in the last two years The Sundry Debtors of the company reported minor changes throughout whole the three years As we see in the table The Loans and Advances of the company increases year to year The liabilities of the company shows average changes through the time period of the first five years whereas it is decreased in the last year
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The ratios of balance sheet are as follows:1. 2. 3. 4. Current ratio. Quick or Acid ratio. Debt Equity ratio. Debtors turnover ratio.
1.
Current Ratio:-
The level of current assets against current liabilities called current ratio. It is obtained by dividing current assets by current liabilities; it is useful for knowing the short term creditors. The higher the ratio the better the liquidity of the company. Generally it is believed that ratio of 2:1 is good enough but this ratio is differed company-by-company & situation-by-situation. Some companies satisfied with 1:1 but according to chore committee 1.33:1 ratio indicates good liquidity position. Current Ratio= Current Assets/Current Liabilities Year 2006-07 1.23 2007-08 1.2 2008-09 2009-10 1.16 1.34 2010-11 1.8
2.
All current assets are not equally liquid. While cash is readily available to make payments to suppliers and debtors can be quickly converted into cash, inventories are two steps away from conversion into cash. The quick ratio, or acid test ratio, is computed as a supplement to the current ratio the ratio relates highly liquid current assets, usually current assets less inventories, to current liabilities. Acid Test Ratio= Quick Ratio/ Quick liabilities. Year 2006-07 0.58 2007-08 0.56 2008-09 0.61 2009-10 0.39 2010-11 0.5
3. Debt-Equity Ratio:This can be called other form of proprietary ratio. Difference is that this ratio is calculated to know that what percent of long-term debt. Is to owners capital. This ratio is obtained by dividing Long-Term by Owners Fund. Here long-term debt includes debenture and loan from different parties for long period of time. Debt-Equity Ratio = Long-term Debt/ Owners Fund. Year 2006-07 0.02 2007-08 0.02 2008-09 2009-10 0.01 0.01 2010-11 0.01
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INTERPRETATION: It is slowly and gradually in decreasing stage. Good for the company as the interest burden is low. Instead of debt funds company y is going for equity funds. In 2006-07 & 2007-08 the company was having the borrowing as well as debentures too. But later on the company had repaid its debentures and loans.
4. Debtors Turnover Ratio:Debtors turnover is a measure of the company to promote sales with minimum investment in uncollected debtors. It indicates timely quick collection or premature collection through cash discount incentives, bill discounting or factoring the bad-debts. It is formulated as under: Debtors Turnover Ratio = Credit sales/ Average Debtors Year 2006-07 2007-08 2008-09 2009-10 2010-11
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INTERPRETATION: It is increasing regularly but in the last year there is a decrease by 1%. The conversion of debtors into cash shows a good collection policy of the company.
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PROFIT & LOSS ACCOUNT ANALYSIS. Introduction to Profit & Loss Account. Composition of Profit & Loss Account. Profit & Loss account of ITC. Trend Analysis of P & L Account of ITC Common Analysis of P & L Account of ITC Ratio analysis of P & L Account of ITC
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Balance carried to balance sheet Basic and Diluted earnings per share
INTERPRETATION:
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INTERPRETATION:
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As per the analysis of Profit & Loss account is concern there are total five ratios for analyzing and deriving conclusion of profit and losses can count are as follow: 1. 2. 3. 4. Gross Profit Ratio Operating Ratio Expense Ratio Net Profit Ratio
1. Gross Profit Ratio:This ratio is important for knowing the result of the business during the year. We can come to know by this ratio that what is the ratio of gross profit is to sales. This shows interrelationship between sales price and cost of goods sold. This ratio can be finding out by dividing gross profit with sales. By this ratio can be found the percentage of profit on cost goods sold. Gross Profit Ratio = Gross Profit / Sales Year 2006-07 34.05 2007-08 28.44 2008-09 29.17 2009-10 29.74 2010-11 30.97
INTERPRETATION:
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2. Operating Ratio:This ratio is obtained by dividing cost of goods sold plus opreting expenses with net sales. With help of ratio we can identify how much amount an owner has remain as net profit. The higher the ratio the worst situation. This ratio also indicates that out of total sales revenue how much amount is remain with owners and how much amount is expend as expences. Operating Ratio = cost of good sold + operating expenses / sales * 100 Year 2006-07 32.51 2007-08 31.57 2008-09 2009-10 2010-11 32.84 33.02 34.08
INTERPRETATION:
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3. Expense Ratio:This ratio is also found out as subsidiary for oprating ratio. This ratio is found out for knowing the ratio between sales and particular expenses. i.e. oprating expenses, financial expenses.,etc. but here we have total expenditure in formula. Expense Ratio = Expensis / sales Year 2006-07 18.54 2007-08 15.45 2008-09 14.85 2009-10 12.68 2010-11 13.32
INTERPRETATION:
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4. Net Profit Ratio:This ratio can be finding out by dividing net profit with total sales. Out of total sales revenue if we deduct all of the expenses then how much amount a company has remain is to be determine by this ratio. This ratio is exactly opposite of operating ratio. The higher the ratio good for the company. Income year gross profit is increases while net profit is decreased which indicates that operating expenses are increased. Net Profit Ratio = PAT (Profit After Sales) / sales Year 2006-07 21.4 2007-08 2008-09 21.5 21.18 2009-10 2010-11 21.3 22.91
INTERPRETATION:
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As there is have variation of net profit compant should try to maintain net profit.
6 COMPOSITE RATIOS
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2. Total Assets Turnover Ratio:What is the ratio of total asset against total sale is to be determining here. Higher the ratio higher the ability of getting more sale with less assets and also high profitability. This ratio can be finding out by following formula: Total Assets Turnover Ratio = Total Sale / Total Assets Year 200607 1.17 2007-08 2008-09 1.16 1.09 2009-10 1.33 2010-11 1.34
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3.
This is also called part of privious ratio here the only change is that the fixed assets are put in place of total assets in the formula. Fixed Turnover Ratio = Sales / Net Fixed Assets Year 200607 2.42 2007-08 2008-09 1.59 1.44 2009-10 1.58 2010-11 1.69
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4. Interest Covering Ratio:This ratio indicates the use of interest becoming debt funds in generating higher operating profits or EBIT. Higher is the Ratio better is the utilization of the debt funds. Higher interest covering ratio, enhsnces the equity earning is passed over to the equity financed of the capitalization. It can be concluded as follow: Interest Covering Ratio = PBIT / Interest Year 200607 456.67 2007-08 2008-09 258.92 168.97 2009-10 82.46 2010-11 123.3
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have earned book profit but surely not equivalent net profit. Its cash profit will be less than book profit, other things remain same. The stakeholder of a business entity are now mare intrested in knowing about the cash profit earned by the firm and not book profit.
Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents
INTERPRETATION: From the cash flow statement we know that the Net Profit before Tax is increasing every year. which shows the company is making good profit and rapid progress during last five years. Opening cash in 2008 is increased and by 2009 it is again decreased. It shows company do not have sufficient amount of cash and again increased next three years.
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Bibliography: Books Financial Accounting -A Managerial Perspective, 4th Edition R. Narayanaswamy Ch-11 Financial statement analysis. Websites http://www.moneycontrol.com
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