INDEX

Sr.N o. 1. 2. 3. 4. Particulars

Page no. 1 2 9 12

Executive Summary HOC Profile Research Methodology Literature Study Project Work 1.1 Balance sheet

5.

1.2 Profit and loss statement 1.3 Highlights 1.4 Calculations and interpretation of ratios

VII

6. 7 8.

Findings & Analysis Conclusion Reference Section

XXII XXII XXVII

A PROJECT REPORT ON

RATIO ANALYSIS
2

OF HOC LTD

1.0EXECUTIVE SUMMARY:

Finance, like blood in the human body, gives vitality and strength to a business enterprise; and the Financial Management is a system, like the blood circulatory system, of the human being, which is concerned with procurement of funds at low cost and their effective utilization in the business. The steady and healthy circulation of finance throughout the business is the basis of solvency. Finance is described as science of money and involves the process of conversion of accumulated funds to productive use. The essence of the effective Financial Management is that the finance so converted should generate an income higher than the cost of procuring such finance by utilizing the same in the best possible way. Otherwise, the enterprise would become sick and gradually would proceed to the close or winding up. The finance manager, therefore, must keep in view the needs of funds both short and long term and ensure that they do not keep too many funds blocked in inventories, book debts, cash etc.
3

Ratio analysis plays vital role for taking appropriate business decisions particularly at a time when market is highly competitive.

The major consideration in taking a Ratio Analysis decision is to evaluate its returns as compared to its investment. Ratio Analysis helps in identifying the financial strengths and weakness of the company, in evaluating companys performance relating to Financial Statement Analysis, to know the liquidity position of the company,

Project also contains overall study and analysis of companys financial position.

2.0 HOC PROFILE Hindustan Organic Chemicals Limited (HOCL) was set up by the government in 1960 with the objective of attaining self-reliance in basic organic chemical needs .In fact this was first attempt for manufacture of basic chemicals and to reduce countrys dependence on import of vital organic chemicals.HOC started as a small chemical unit. But today has acquired the status of multi-unit company with two fast growing units and one subsidiary unit. At present more than 500 units based on HOCs products have been set up all over the country which have not only succeeded in meeting the goal of self sufficiency but also entered

the international markets earning precious foreign exchange by exporting chemicals, dyes, dye intermediate and drugs. Main manufacturing units of HOC comprises of:

The Nitro aromatic complex at Rasayani in Raigad district (Maharashtra.) The Phenol complex at Kochi (Kerala) Polytetraflouroethylene (PTFE) Complex (Subsidary) at Rudraram, Hyderabad (Andhra Pradesh).

HOC provides the basic organic chemicals essential for vital industries. The main products manufactured by HOC are Phenol, Acetone, Nitrobenzene, Acetanilide, Formaldehyde, Aniline, and Nitrotoluenes. The raw materials used by HOC are Benzene, Toluene, LPG, Methanol, Naphtha and Sulphur, majority of which come from petroleum refineries and petrochemicals complexes. HOC provides the basic organic chemicals essential for vital industries like resins and laminates, dyes and dye intermediates, drugs and pharmaceutical, rubber chemicals, paints, pesticides and others, touching virtually every facet of everyday life. It also provides the versatile engineering plastic polytetraflouroethylene (PTFE) through its subsidiary.

MISSION: To be a dynamic chemical market leader committed to quality and customer satisfaction. Our mission is also to be prime representative of India in global chemical business.

GROWTH STRATEGY: The fast changing working environment and the need for not only sustaining but also accelerating the growth process, dictated the long term perspective in planning coupled with flexibility to make strategic decisions. Organizations are expected to be resilient enough to respond to the emerging challenges. Hence, the company concentrates on the core business of Nitro aromatics and Phenol/ Acetone and certain Phenol based down stream products.

Major business and investment thrust to be in the areas of core competency. Value addition in the area of manufacture.

Continuous restructuring and reengineering in order to achieve:

i)

Reduction in cost of production Increase market share and margins Higher level of efficiencies and productivity Economy of scale Rationalization of manpower

ii) iii) iv) v)

PRODUCTS ACETANILIDE Dyes and

END USE intermediates, perfumery

Compounds, Sulpha drugs. ANILINE Rubber chemicals, drugs, dyes polymers, Photographic chemicals perfumes pest

Control chemicals. CONCENTRATED NITRIC ACID Nitration of organic compounds, explosives. Industrial detergents / sulfonation. Drugs, dyes/intermediates, aniline, crop protection and pest control. FORMALDEHYDE Synthetic resin, adhesives, Drugs

SULPHURIC ACID/ OLEUMS NITROBENZENE

,disinfectants, pesticides intermediates. CAUSTIC SODA Pulp and paper industry, fibre industry, soap detergent, etc.

AWARDS AND REWARDS: HOC has received a multitude of accolades and awards. They include YEAR
1980.81

DESCRIPTION Export award from CHEMEXCIL for five consecutive years.

1979

First prize for HOCS annual report (1978-79) in the 21st national award for excellence in printing and designing by dacp ministry of information and broadcasting government of India,

1981

Indian chemical manufacturers association award for process design and process engineering for developing know-how and installing a detoxification

1982 1983 1984 1985 1986 1987

1988

plant for solvent extraction Institute of chartered accountants shield forth best presented annual accounts and report. National society for equal opportunity of handicapped (naseoh) award for employing maximum number of physically handicapped Grocery markets and shops board for greater Bombay (mathadi) boards award for being an ideal employer Indira Gandhi memorial national award for excellence in public sector enterprises. First prize for HOC annual report 1986-87 from association of business communicators of India Second prize in suggestion scheme by the Indian national suggestion schemes association. Certificate of commendation for HOC annual report 1987-88 from the association of business communicators of India Productivity award from Kerala productivity council Industrial safety award Kerala chapters (1998-1991) and consequently thereafter from the year 1993 till 1998 First prize in the chemical sector for energy conservation for the year 1991-92 by government of India, ministry of energy, department of power Dyestuff manufacturers industries association industrial pollution control award 1995 Certificate of merit by the Kerala state pollution control board for Kochi unit. Second prize for safety from the Kerala chapter of the national safety council Wisitex foundation international award life 2000 91994) for national
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1989 1990 1991

1992

1993 1994

1995

excellence in industrial pollution abatement The dyestuff manufacturers association of Indias award (dmai) for successful development of indigenous technology for product by a large scale unit for

1996 1997 1998

the year 1995-96 First prize award Indira Gandhi official language puraskar for the year 199798 for best implementation of rajbhasha Hindi Kerala state productivity councils productivity award among large industries in kerala-1998 ICICI technology award by national chemical laboratory research foundation jointly with the process development and chemical engineering division team member of national chemical laboratory for the mono chloro benzene

1999 2000

expansion project National energy conservation award, 1999 first prize in chemical sector by government of India ministry of power, New Delhi. National Energy Conservation Award, 2000 First Prize in Chemical Sector by government of India ministry of power, New Delhi.

2001

National Energy Conservation Award, 2001 Second Prize in chemical sector by government of India ministry of Power, New Delhi.

3.0 RESEARCH METHODOLOGY 3.1 Scope of the Study This research is done on financial position of the company which is based on financial statement.

This study is very helpful to find out the performance of the company which is helpful to take decisions in future and improve the company performance.

This study report helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm.

The study is also beneficial to employees and offers motivation by showing how actively they are contributing for companys growth.

This study is helpful to shareholders, creditors, lenders, government to know the company financial position.

3.2 Objective of study

To identify the financial strengths and weakness of the company.

Through the net profit ratio and other profitability ratio, understand the Profitability position of the company.

Evaluating companys performance relating to Financial Statement Analysis.

To know the liquidity position of the company, with the help of Current Ratio.
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To find out the utility of financial ratio in credit analysis and determining the financial capability of the firm.

3.3 Limitation of the Study

The Balance sheet and Profit and loss statement of the year 2010-2011 is not easily available. Because the limitations of the company some information can not use for study. Time duration is also one of the constraints for the study.

3.4 Sources of Data The focus of this chapter is on the methodology used for the collection of data for research. Data constitutes the subject matter of the analyst. The primary sources of the collection of data are observations, interviews and the questionnaire technique. The secondary sources are collections of data are from the printed and annually published material. Primary data:Data that is collected for the specific purpose at hand is called as primary data. Information relating to the project was collected during formal and informal discussions with the Chief Finance Manager and Staff of finance department. Secondary Data: Secondary data highlights the contextual familiarities for primary data collection. It provides rich insights into the research process. Secondary data is collected through following sources: Published Sources: Annual report of HOC Ltd from the year from 2008-09 to 2010-11 a. Profit and loss accounts statements.
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b. Balance sheet (assets and liabilities)

3.5 Sampling procedure Samples are not use in the project report because there is no need of samples for the ratio analysis.

3.6 Methods & Instruments of Data gathering Most of the data is gathered from internet and books. No questionnaire method is used for ratio analysis.

3.7 Statistical Treatment Ratio Analysis is used for Statistical treatment.

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4.0 LITERATURE STUDY

4.1 Introduction of Ratio MEANING OF RATIO: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship of two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio is an expression relating one number to another. It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as so many times. As accounting ratio is an expression relating two figures or accounts or two sets of account heads or group contain in the financial statements. MEANING OF RATIO ANALYSIS: Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk and return relationship of firms of different sizes. It is defined as the systematic use ratio to interpret the financial statement so that the strengths and weaknesses of a firm as well as historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items/variable. This relationship can be expressed as (i) percentages, say, net profits are 25percent of sales (assuming net profits of Rs 25,000 and sales of Rs. 1, 00,000) , (ii) fraction (net profit is one fourth of sales ) and (iii) proportion of numbers (the relationship between net profits and sales is 1:4).these alternative methods of expressing items which are related to each other are, for purposes of financial analysis, referred to as ratio analysis. It should be noted that computing the ratios does not add any information not already inherent in the above figures of profit and sales. What the ratio does is that they reveal the relationship in a more meaningful way so as to enable equity investors; management and lenders make better investment and credit decisions. The rationale of ratio analysis lies in the fact that it makes related information comparable. A single figure by itself has no meaning but when expressed in terms of a related figure, it yields
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significant inferences. For instance, the figure of net profits of a firm amount to, say, Rs10lakhs throws no light on its adequacy or otherwise. The figure of net profits has to be considered in relation to other variables. How does it stand in relation to sales? What does it represent by way of return on total assets used or total capital employed? If, therefore, net profits are shown in terms of their relationship with items such as sales, assets, capital employed, equity capital and so on, meaningful conclusions can be drawn regarding their adequacy. To carry the above example further assuming the capital employed to be Rs 50lakh and Rs 100lakh, the net profits are 20 percent and 10 percent respectively. Ratio analysis, thus, as a quantitative tool, enables analysts to draw quantitative answers to questions such as: are the net profits adequate? Are the assets being used efficiently? Is the firm solvent? Can the firm meet its current obligations and so on? FORMS OF RATIO: Since a ratio is a mathematical relationship between two or more variables / accounting figures, such relationship can be expressed in different ways as follows A] As a pure ratio: For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1. B] As a rate of times: In the above case the equity share capital may also be described as 4 times that of preference share capital. Similarly, the cash sales of a firm are Rs. 12, 00,000 & credit sales are Rs. 30, 00,000. So the ratio of credit sales to cash sales can be described as 2.5 [30, 00,000/12, 00,000] or simply by saying that the credit sales are 2.5 times that of cash sales. C] As a percentage:

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In such a case, one item may be expressed as a percentage of some other item. For example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs. 10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]

Steps in Ratio Analysis The ratio analysis requires two steps as follows: 1] Calculation of ratio 2] Comparing the ratio with some predetermined standards. The standard ratio may be the past ratio of the same firm or industrys average ratio or a projected ratio or the ratio of the most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself. Types of Comparison The ratio can be compared in three different ways 1] Cross section analysis: One of the way of comparing the ratio or ratios of the firm is to compare them with the ratio or ratios of some other selected firm in the same industry at the same point of time. So it involves the comparison of two or more firms financial ratio at the same point of time. The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. The firms performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies. The cross section analysis is easy to be undertaken as most of the data required for this may be available in financial statement of the firm. 2] Time series analysis:

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The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time. By comparing the present performance of a firm with the performance of the same firm over the last few years, an assessment can be made about the trend in progress of the firm, about the direction of progress of the firm. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. The Time series analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any from the other set of data\ 3] Combined analysis: If the cross section & time analysis, both are combined together to study the behavior & pattern of ratio, then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. A trend of ratio of a firm compared with the trend of the ratio of the standard firm can give good results. For example, the ratio of operating expenses to net sales for firm may be higher than the industry average however, over the years it has been declining for the firm, whereas the industry average has not shown any significant changes. Pre-requisites to Ratio Analysis In order to use the ratio analysis as device to make purposeful conclusions, there are certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are not conditions for calculations for meaningful conclusions. The accounting figures are inactive in them & can be used for any ratio but meaningful & correct interpretation & conclusion can be arrived at only if the following points are well considered. The dates of different financial statements from where data is taken must be same. If possible, only audited financial statements should be considered, otherwise there must be sufficient evidence that the data is correct. Accounting policies followed by different firms must be same in case of cross section analysis otherwise the results of the ratio analysis would be distorted. One ratio may not throw light on any performance of the firm. Therefore, a group of ratios must be preferred. This will be conductive to counter checks. Last but not least, the analyst must find out that the two figures being used to calculate a ratio must be related to each other, otherwise there is no purpose of calculating a ratios.
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4.2 Classification of ratio:Figure 4.2.1 CLASSIFICATION OF RATIO

BASED ON FINANCIAL STATEMENT

BASED ON FUNCTION

BASED ON USER

1] BALANCE SHEET RATIO 2] REVENUE STATEMENT RATIO 3] COMPOSITE RATIO

1] LIQUIDITY RATIO 2] LEVERAGE RATIO 3] TURNOVER RATIO 4] PROFITABILITY 5] COVERAGE RATIO

1] RATIOS FOR SHORT TERM CREDITORS 2] RATIO FOR SHAREHOLDER 3] RATIOS FOR MANAGEMENT 4] RATIO FOR LONG TERM CREDITORS

BASED ON FINANCIAL STATEMENT Accounting ratios express the relationship between figures taken from financial statements. Figures may be taken from Balance Sheet , P& P A/C, or both. One-way of classification of ratios is based upon the sources from which are taken. 1] Balance sheet ratio:
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If the ratios are based on the figures of balance sheet, they are called Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio of debt to equity. While calculating these ratios, there is no need to refer to the Revenue statement. These ratios study the relationship between the assets & the liabilities, of the concern. These ratio help to judge the liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity ratio, and Stock working capital ratio. 2] Revenue ratio: Ratio based on the figures from the revenue statement is called revenue statement ratios. These ratio study the relationship between the profitability & the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio. 3] Composite ratio: These ratios indicate the relationship between two items, of which one is found in the balance sheet & other in revenue statement. There are two types of composite ratios Some composite ratios study the relationship between the profits & the investments of the concern. E.g. return on capital employed, return on proprietors fund, return on equity capital etc. Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend payout ratios, & debt service ratios

BASED ON FUNCTION: Accounting ratios can also be classified according to their functions in to liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios:

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It shows the relationship between the current assets & current liabilities of the concern e.g. liquid ratios & current ratios. 2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietory ratios. 3] Activity ratios: It shows relationship between the sales & the assets. It is also known as Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors turnover ratios. 4] Profitability ratios: It shows the relationship between profits & sales e.g. operating ratios, gross profit ratios, operating net profit ratios, expenses ratios It shows the relationship between profit & investment e.g. return on investment, return on equity capital. 5] Coverage ratios: It shows the relationship between the profit on the one hand & the claims of the outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios. BASED ON USER: 1] Ratios for short-term creditors: Current ratios, liquid ratios, stock working capital ratios 2] Ratios for the shareholders: Return on proprietors fund, return on equity capital 3] Ratios for management: Return on capital employed, turnover ratios, operating ratios, expenses ratios 4] Ratios for long-term creditors: Debt equity ratios, return on capital employed, proprietor ratios. Figure: 4.2.2

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LIQUIDITY RATIO: Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year) obligations. The ratios, which indicate the liquidity of a company, are Current ratio, Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below Figure: 4.2.3

CURRENT RATIO: Meaning: This ratio compares the current assests with the current liabilities. It is also known as working capital ratio or solvency ratio. It is expressed in the form of pure ratio. E.g. 2:1 Formula: Current Ratio =
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Current Assets

Current Liabilities

The current assets of a firm represents those assets which can be, in the ordinary course of business, converted into cash within a short period time, normally not exceeding one year. The current liabilities defined as liabilities which are short term maturing obligations to be met, as originally contemplated, with in a year. Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL). Current assets include cash and bank balances; inventory of raw materials, semi-finished and finished goods; marketable securities; debtors (net of provision for bad and doubtful debts); bills receivable; and prepaid expenses. Current liabilities consist of trade creditors, bills payable, bank credit, and provision for taxation, dividends payable and outstanding expenses. This ratio measures the liquidity of the current assets and the ability of a company to meet its short-term debt obligation. CR measures the ability of the company to meet its CL, i.e., CA gets converted into cash in the operating cycle of the firm and provides the funds needed to pay for CL. Higher the current ratio, greater the short-term solvency. This compares assets, which will become liquid within approximately twelve months with liabilities, which will be due for payment in the same period and is intended to indicate whether there are sufficient short-term assets to meet the short- term liabilities. Recommended current ratio is 2: 1. Any ratio below indicates that the entity may face liquidity problem but also Ratio over 2: 1 as above indicates over trading, that is the entity is under utilizing its current assets.

QUICK RATIO: Meaning: Quick ratio is also known as acid test ratio or liquid ratio. Quick ratio compares the quick assets with the quick liabilities. It is expressed in the form of pure ratio. E.g. 1:1.

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The term quick assets refer to current assets, which can be converted into, cash immediately or at a short notice without diminution of value.

Formula: Current Assets Inventory Quick Ratio = Current Liabilities Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to those current assets that can be converted into cash immediately without any value strength. QA includes cash and bank balances, short-term marketable securities, and sundry debtors. Inventory and prepaid expenses are excluded since these cannot be turned into cash as and when required. QR indicates the extent to which a company can pay its current liabilities without relying on the sale of inventory. This is a fairly stringent measure of liquidity because it is based on those current assets, which are highly liquid. Inventories are excluded from the numerator of this ratio because they are deemed the least liquid component of current assets. Generally, a quick ratio of 1:1 is considered good. One drawback of the quick ratio is that it ignores the timing of receipts and payments. INVESTMENT / SHAREHOLDERS:Figure: 4.2.4

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23

EARNING PER SHARE:Meaning: Earnings per Share are calculated to find out overall profitability of the organization. Earnings per Share represent earning of the company whether or not dividends are declared. If there is only one class of shares, the earning per share are determined by dividing net profit by the number of equity shares. EPS measures the profits available to the equity shareholders on each share held.

Formula:NPAT Earnings per share = Number of equity share The higher EPS will attract more investors to acquire shares in the company as it indicates that the business is more profitable enough to pay the dividends in time. But remember not all profit earned is going to be distributed as dividends the company also retains some profits for the business

DIVIDEND PER SHARE:Meaning: DPS shows how much is paid as dividend to the shareholders on each share held. Formula: Dividend Paid to Ordinary Shareholders Dividend per Share = Number of Ordinary Shares

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DIVIDEND PAYOUT RATIO:Meaning: Dividend Pay-out Ratio shows the relationship between the dividend paid to equity shareholders out of the profit available to the equity shareholders. Formula: Dividend payout ratio = Earning per share D/P ratio shows the percentage share of net profits after taxes and after preference dividend has been paid to the preference equity holders. Dividend per share X 100

GEARING:Figure: 4.2.5

CAPITAL GEARING RATIO:Meaning: Gearing means the process of increasing the equity shareholders return through the use of debt. Equity shareholders earn more when the rate of the return on total capital is more than
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the rate of interest on debts. This is also known as leverage or trading on equity. The Capitalgearing ratio shows the relationship between two types of capital viz: - equity capital & preference capital & long term borrowings. It is expressed as a pure ratio. Formula: Preference capital+ secured loan Capital gearing ratio = Equity capital & reserve & surplus Capital gearing ratio indicates the proportion of debt & equity in the financing of assets of a concern. PROFITABILITY These ratios help measure the profitability of a firm. A firm, which generates a substantial amount of profits per rupee of sales, can comfortably meet its operating expenses and provide more returns to its shareholders. The relationship between profit and sales is measured by profitability ratios. There are two types of profitability ratios: Gross Profit Margin and Net Profit Margin Figure: 4.2.6 FF

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GROSS PROFIT RATIO:Meaning: This ratio measures the relationship between gross profit and sales. It is defined as the excess of the net sales over cost of goods sold or excess of revenue over cost. This ratio shows the profit that remains after the manufacturing costs have been met. It measures the efficiency of production as well as pricing. This ratio helps to judge how efficient the concern is I managing its production, purchase, selling & inventory, how good its control is over the direct cost, how productive the concern , how much amount is left to meet other expenses & earn net profit.

Formula: Gross profit Gross profit ratio = Net sales NET PROFIT RATIO:Meaning: Net Profit ratio indicates the relationship between the net profit & the sales it is usually expressed in the form of a percentage. Formula: NPAT Net profit ratio = Net sales This ratio shows the net earnings (to be distributed to both equity and preference shareholders) as a percentage of net sales. It measures the overall efficiency of production,
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x 100

x 100

administration, selling, financing, pricing and tax management. Jointly considered, the gross and net profit margin ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:Meaning: The profitability of the firm can also be analyzed from the point of view of the total funds employed in the firm. The term fund employed or the capital employed refers to the total long-term source of funds. It means that the capital employed comprises of shareholder funds plus long-term debts. Alternatively it can also be defined as fixed assets plus net working capital. Capital employed refers to the long-term funds invested by the creditors and the owners of a firm. It is the sum of long-term liabilities and owner's equity. ROCE indicates the efficiency with which the long-term funds of a firm are utilized. Formula: NPAT Return on capital employed = Capital employed x100

FINANCIAL These ratios determine how quickly certain current assets can be converted into cash. They are also called efficiency ratios or asset utilization ratios as they measure the efficiency of a firm in managing assets. These ratios are based on the relationship between the level of activity represented by sales or cost of goods sold and levels of investment in various assets. The important turnover ratios are debtors turnover ratio, average collection period, inventory/stock turnover ratio, fixed assets turnover ratio, and total assets turnover ratio. These are described below:

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Figure: 4.2.7

DEBTORS TURNOVER RATIO (DTO) Meaning: DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit sales minus returns, if any, from customers. Average debtors are the average of debtors at the beginning and at the end of the year. This ratio shows how rapidly debts are collected. The higher the DTO, the better it is for the organization.

Formula: Credit Sales Debtors Turnover Ratio = Average Debtors

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INVENTORY OR STOCK TURNOVER RATIO (ITR) Meaning: ITR refers to the number of times the inventory is sold and replaced during the accounting period.

Formula: COGS Stock Turnover Ratio = Average Stock

ITR reflects the efficiency of inventory management. The higher the ratio, the more efficient is the management of inventories, and vice versa. However, a high inventory turnover may also result from a low level of inventory, which may lead to frequent stock outs and loss of sales and customer goodwill. For calculating ITR, the average of inventories at the beginning and the end of the year is taken. In general, averages may be used when a flow figure (in this case, cost of goods sold) is related to a stock figure (inventories).

FIXED ASSETS TURNOVER (FAT) The FAT ratio measures the net sales per rupee of investment in fixed assets. Formula: Net Sales Fixed Assets Turnover = Net Fixed Assets

30

This ratio measures the efficiency with which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient use of assets. However, this ratio should be used with caution because when the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends to be high (because the denominator of the ratio is very low).

STOCK WORKING CAPITAL RATIO: Meaning: This ratio shows the relationship between the closing stock & the working capital. It helps to judge the quantum of inventories in relation to the working capital of the business. The purpose of this ratio is to show the extent to which working capital is blocked in inventories. The ratio highlights the predominance of stocks in the current financial position of the company. It is expressed as a percentage.

Formula: Closing Stock Stock Working Capital Ratio = Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition & quality of the working capital. This ratio also helps to study the solvency of a concern. It is a qualitative test of solvency. It shows the extent of funds blocked in stock. If investment in stock is higher it means that the amount of liquid assets is lower.

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DEBT EQUITY RATIO: MEANING: This ratio compares the long-term debts with shareholders fund. The relationship between borrowed funds & owners capital is a popular measure of the long term financial solvency of a firm. This relationship is shown by debt equity ratio. Alternatively, this ratio indicates the relative proportion of debt & equity in financing the assets of the firm. It is usually expressed as a pure ratio. E.g. 2:1

Formula: Total Long-term Debt Debt-Equity Ratio = Total Shareholders Fund

Debt equity ratio is also called as leverage ratio. Leverage means the process of the increasing the equity shareholders return through the use of debt. Leverage is also known as gearing or trading on equity. Debt equity ratio shows the margin of safety for long-term creditors & the balance between debt & equity.

CREDITORS TURNOVER RATIO: It is same as debtors turnover ratio. It shows the speed at which payments are made to the supplier for purchase made from them. It is a relation between net credit purchase and average creditors

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Net credit purchase Credit turnover ratio = Average creditors

365 days Average age of accounts payable = Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher creditors turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid promptly. It enhances credit worthiness of the company. A very low ratio indicates that the company is not taking full benefit of the credit period allowed by the creditors.

4.3 Importance of ratio analysis As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1] LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratios are particularly useful in credit analysis by bank & other suppliers of short term loans.
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2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the long-term creditors, security analyst & the present & potential owners of a business. The long-term solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on earning power & operating efficiency. Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. 3] OPERATING EFFICIENCY: Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in management & utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets- total as well as its components. 4] OVERALL PROFITABILITY: Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the management is constantly concerned about overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken & all the ratios are considered together. 5] INTER FIRM COMPARISON: Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. This is made possible due to inter firm comparison & comparison with the industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the
34

ratios of a firm with the industry average. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs. An inter firm comparison would demonstrate the firms position vice-versa its competitors. If the results are at variance either with the industry average or with those of the competitors, the firm can seek to identify the probable reasons & in light, take remedial measures. 6] TREND ANALYSIS: Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement, that is, whether the movement is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the present level may be satisfactory but the trend may be a declining one. ADVANTAGES OF RATIO ANALYSIS Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. The advantages of ratio analysis can be summarized as follows: Ratios facilitate conducting trend analysis, which is important for decision making and forecasting. Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm. Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm.

LIMITATIONS OF RATIO ANALYSIS Ratio analysis has its limitations. These limitations are described below:

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1] Information problems
Ratios require quantitative information for analysis but it is not decisive about

analytical output. The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the companys current financial position. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decisionmaking.

2] Comparison of performance over time When comparing performance over time, there is need to consider the changes in price. The movement in performance should be in line with the changes in price. When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology. Changes in accounting policy may affect the comparison of results between different accounting years as misleading. 3] Inter-firm comparison Companies may have different capital structures and to make comparison of performance when one is all equity financed and another is a geared company it may not be a good analysis.
Selective application of government incentives to various companies may also distort

intercompany comparison. comparing the performance of two enterprises may be misleading. Inter-firm comparison may not be useful unless the firms compared are of the same size and age, and employ similar production methods and accounting practices. Even within a company, comparisons can be distorted by changes in the price level. Ratios provide only quantitative information, not qualitative information.

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 Ratios are calculated on the basis of past financial statements. They do not indicate future trends and they do not consider economic conditions.

ROLE OF RATIO ANALYSIS: It is true that the technique of ratio analysis is not a creative technique in the sense that it uses the same figure & information, which is already appearing in the financial statement. At the same time, it is true that what can be achieved by the technique of ratio analysis cannot be achieved by the mere preparation of financial statement. Ratio analysis helps to appraise the firm in terms of their profitability & efficiency of performance, either individually or in relation to those of other firms in the same industry. The process of this appraisal is not complete until the ratio so computed can be compared with something, as the ratio all by them do not mean anything. This comparison may be in the form of intra firm comparison, inter firm comparison or comparison with standard ratios. Thus proper comparison of ratios may reveal where a firm is placed as compared with earlier period or in comparison with the other firms in the same industry. Ratio analysis is one of the best possible techniques available to the management to impart the basic functions like planning & control. As the future is closely related to the immediate past, ratio calculated on the basis of historical financial statements may be of good assistance to predict the future. Ratio analysis also helps to locate & point out the various areas, which need the management attention in order to improve the situation. As the ratio analysis is concerned with all the aspect of a firms financial analysis i.e. liquidity, solvency, activity, profitability & overall performance, it enables the interested persons to know the financial & operational characteristics of an organisation & take the suitable decision. USERS OF RATIO ANALYSIS Financial statements are used and analyzed by a different group of parties, these groups consists of people both inside and outside a business. Generally, these users are:

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A. Internal Users: are owners, managers, employees and other parties who are directly connected with a company: 1. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with more detailed information. These statements are also used as part of management's report to its stockholders, and it form part of the Annual Report of the company. 2. Employees also need these reports in making collective bargaining agreements with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. B. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for numbers of reasons. 1. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions. 2. Financial institutions (banks and other lending companies) use them to decide whether to give a company with fresh loans or extend debt securities (such as a long-term bank loan ). 3. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and duties paid by a company. 4. Media and the general public are also interested in financial statements of some companies for a variety of reasons. Which Ratio for whom: As before mentioned there are varieties of people interested to know and read these information and analyses, however different people for different needs. And it is because each of these groups has different type of questions that could be answered by a specific number

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and ratio. Therefore we can say there are different ratios for different groups, these groups with the ratio that suits them is listed below : 1. Investors: These are people who already have shares in the business or they are willing to be part of it. So they need to determine whether they should buy shares in the business, hold on to the shares they already have or sell the shares they already own. They also want to assess the ability of the business to pay dividends. As a result the Return on Capital Employed Ratio is the one for this group. 2. Lenders: This group consists of people who have given loans to the company so they want to be sure that their loans and also the interests will be paid and on the due time. Gearing Ratios will suit this group. 3. Managers: Managers might need segmental and total information to see how they fit into the overall picture of the company which they are ruling. And Profitability Ratios can show them what they need to know. 4. Employees: The employees are always concerned about the ability of the business to provide remuneration, retirement benefits and employment opportunities for them, therefore these information must be find out from the stability and profitability of their employers who are responsible to provide the employees their need. Return on Capital Employed Ratio is the measurement that can help them. 5. Suppliers and other trade creditors: Businesses supplying goods and materials to other businesses will definitely read their accounts to see that they don't have problems, after all, any supplier wants to know if his customers are going to pay them back and they will study the Liquidity Ratio of the companies. 6. Customers: Customers are interested to know the Profitability Ratio of the business with which they are going to have a long term involvement and are dependent on the continuance of presence of that. 7. Governments and their agencies: They are concerned with the allocation of resources and, the activities of businesses. To regulate the activities of them, determine taxation policies and as the basis for national income and similar statistics, they calculate the Profitability Ratio of businesses.
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8. Local community: Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area so they are interested in lots of ratios. 9. Financial analysts: They need to know various matters, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on .therefore they are interested in possibly all the ratios. 10. Researchers: Researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements depending on their nature of research.

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5.0 DATA ANALYSIS 5.1 BALANCE SHEET AS AT 31ST MARCH, 2011 (Rs. In lacs)

41

PARTICULARS I.SOURCES OF FUNDS 1. SHAREHOLDERS FUNDS : a) Share Capital b) Reserves and Surplus

Year ended March 2011

Year ended March 2010

33726.96 6577.50 40304.46

33727.36 6478.23 40205.59

2. LOAN FUNDS : a) Secured Loans b) Unsecured Loans 3095.05 19020.37 22079.42 TOTAL II. APPLICATION OF FUNDS 1. FIXED ASSETS : a) Gross Block b) Less : Depreciation / Amortisation c) Net Block d) Capital work-in-progress (CWIP) 71501.38 53830.64 17670.74 3298.88 20969.62 70579.12 51378.48 19200.64 3068.97 22269.61 62383.88 7028.15 18333.84 25361.99 65567.58

2. INVESTMENTS

1106.00

1106.00

3. CURRENT ASSETS, LOANS AND ADVANCES : a) Inventories b) Sundry Debtors c) Cash and Bank Balances d)Other current assets e) Loans and Advances 11031.75 5141.03 3105.99 548.35 7440.46 27252.58
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7626.19 4723.71 2894.84 622.42 7279.93 23147.09

4.

CURRENT

LIABILITIES

AND

PROVISIONS :

5.2 PROFIT AND LOSS A/C FOR YEAR ENDED 31ST MARCH 2010-2011 (Rs. In lacs) Particulars INCOME: Sales(gross) Less. Excise on sales Net sales Other income Profit on sale of asset Increase/(decrease)in stock-in-trade TOTAL EXPENDITURE: Materials consumed Excise duty Employees Remuneration and Benefits Manufacturing, Administrative and Selling Expenses Interest Depreciation
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Year ended March 2011 73803.91 7067.88 66736.03 1006.79 3.45 3041.77 70788.04

Year ended March 2010 52071.24 4207.83 47863.41 1745.59 0.98 (212.72) 49397.26

39213.21 167.97 12002.85 11856.12 2088.35

31489.89 165.13 9037.86 12020.43 2323.10

Provisions Loss on sale/disposal of Asset

2517.74 2411.46 68.03 68158.73

2652.28 139.89 0.63 57829.21 (8431.95) -

Profit/(Loss)for the year before Tax Less: Provision for taxation Less: Provision for Fringe Benefit Tax Less: Fringe Benefit Tax-previous year Profit /(loss) after Tax Less: Reserve/provision no longer required,Prior period & extra ordinary items Profit /(loss) after Tax & Adjustment 2571.59 Add: Opening balance of profit and loss account Add: Transferred from General Reserve Add: Transferred from Bond Redemption reserve no longer required Balance carried to Balance Sheet (31277.62) Earnings per share 3.83 (33849.21) (12.35) 1050.00 (33849.2) (26591.42) (8307.79) 2629.31 57.72 (8431.95) (124.16) 2629.31 -

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5.3 Highlights for the year 2010-2011 PRODUCTION During the year under review the company was able to generate the Net profit of Rs. 25.72 crores during the year, while the net loss during the previous year was Rs 83.08 crores.As regards the unit wise performance, the net profit of Kochi unit was Rs.130.08 crores which was much higher as compared to the previous years profit of Rs.14.74 crores. The Rasayani unit recorded a net loss of Rs. 104.37 crores as compared with the previous years loss of Rs. 97.82 crores. OPERATIONS : During the year under report, companys Kochi unit, achieved a sales turnover of 84082 MTs valuing Rs.58120.81 lacs as against 72172 MTs valuing Rs. 38032.63 lacs of the previous year. With the production of 234684 MTs (main products) during the year 201011 as against the production of 221249 MTs (main products) in 2009-10, company could achieve an overall capacity utilization of 58% during the year company has recorded the sale of 129021.09 MTs during the year (last year 125512.48 MTs) valuing Rs.64142.59 lacs (last year Rs.45940.24 lacs). The high labour cost and high incidence of cost on closed plants at Rasayani unit are the major concerns. Company has continued its cost cutting measures to counter these problems and in order to be competitive and improve performance and profitability. During the year, Rasayani unit could achieve only 67798 MTs (main products) of production as against 83520 MTs production (main products) of the previous year. The capacity utilization for the year 2010-11 was 27%. HOC continued to enjoy support from all its valuable customers during the year 2010-11 due to excellent quality of its products manufactured at Kochi and Rasayani. It has achieved sales turnover of Rs.667.36 Crores (net of excise duty) as against Rs. 478.63 crores (net of excise duty) of the previous year. The sales volume during year 2010-11 was 1,45,173.65 MTs against 1,43,747.48 MTs for the year 2009-10, registering an increase in sales realization for the year amounting to Rs. 188.73 crores as compared to previous years sales of Rs. 478.63 crores

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5.4 Calculation and Interpretation of Ratios PROFITABILITY RATIOS:5.4.1 RETURN ON CAPITAL EMPLOYED:NPBT Return on Investment: Capital Employed Year NPBT Capital Employed Return on Investment 2010-11 2,629.31 48,222.20 5.45% 2009-10 -8,431.51 30,612.37 -27.54% 2008-09 -2,573.51 36,714.73 -7.01% 2007-08 1,566.93 35,385.68 4.43% X 100

It indicates that company used its assets economically and made aprofit for the financial year 2010-11 over the previous years loss.It also indicate that management has utilised its resources in proper manner. The return on capital employed of 5.45% indicates that net return of Rs.5.45 is earned on a capital employed of Rs. 100.

5.4.2 GROSS PROFIT MARGIN RATIO:Gross Profit Margin Ratio= Gross Profit Margin Net Sales
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X 100

Year Sales Cost of Goods Sold Gross Grofit Margin

2010-11 2009-10 2008-09 2007-2008 66,736.03 47,864.41 54,653.7 57,142.84 42,254.98 24,481.05 31,702.61 16,161.8 37,683.5 16,970.2 40,626.2 16,516.64

Gross profit margin=sales - cost of goods sold

Year Gross Profit Margin Ratio Net Sales Gross Profit Margin Ratio

2010-11
24,481.05 66,736.03

2009-10
16,161.8

2008-09
16,970.2

2007-08
16,516.64

36.68%

47,864.41 33.77%

54,653.7 31.05%

57,142.84 28.90%

The gross profit ratio in 2010-11 is 36.68% which was 33.77% in 2009-10. In 2010-11 Gross profit ratio has increased by 8.62% than its previous year its because of cost of sales is less in this year. This indicates that the companys profitability position is good. 5.4.3 NET PROFIT RATIO:Net Profit Ratio: Net Profit Net Sales X 100

Year Net Profit Net Sales Net Profit Ratio

2010-11 2,629.31 66,736.03 3.939865767

2009-10 -8,431.95 47,864.41 -17.61632495

2008-09 -2,613 54,653.7 -4.781012082

2007-08 1,529 57,142.84 2.675750803

Net profit ratio for the year 2010-11 is +3.93% which is more than net profit ratio of 2009-10 which was -17.61%. Net profit ratio increased in 2010-11 by 122% as compared to previous year because of reduction in cost of production and increase in sales.

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LIQUIDITY RATIO:5.4.4 CURRENT RATIO:Current Ratio:Current Assets Current Liabilities Year Current Assets Current Liabilities Current Ratio 2011-10 27252.58 18221.94 1.495591578 2009-10 23147.09 14804.33 1.563535128 2008-09 23947.53 11909.71 2.010756769 2007-08 23100.31 13847.47 1.668197151

The standard current ratio is 2:1. The short term position of company is not satisfactory and it indicates good short term financial condition is required. Current ratio of company for 201011 is 1.49% and it was 1.56% in 2009-10 that indicate a company has a low percentage of its current assets in the form of working capital, cash that would be more liquid in the sense of being able to meet obligations as & when they become due. It is seen from year 2008-09 companys current ratio is declining which is not a good sign for company. The current ratio throws light on the companys ability to pay its current liabilities out of its current assets.

5.4.5 QUICK RATIO:Quick Ratio: Quick Assets Quick Liabilities Year Quick Assets Quick Liabilities Quick Ratio 2010-11 16235.83 18221.94 0.89100447 2009-10 15520.9 14804.33 1.048402731 2008-09 17252.18 11909.71 1.448581032 2007-08 17226.47 13878.47 1.241236966

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The quick ratio indicates the liquid financial position of an enterprise. Standard quick ratio is 1:1. Companys quick ratio is lessfor the year 2010-11 that is 0.89:1 which indicate that company liquidity position is not so good, so company can not easily meet its short term liabilities. Quick assets are less because there is lots of inventory is blocked in the form of current asset which is not good for company .

INVESMENT RATIOS:-(In a view of accumulated losses ,company has not declared any dividend on equity shares; therefore calculation of following ratios does not mean anything with respected to project; hence not calculated.) 5.4.6 EARNING PER SHARE:Earning per share: Net profit available to equity shareholders Number of equity shares 5.4.7 DIVIDEND PER SHARE RATIO:-

Dividend Paid to Ordinary Shareholders Dividend per Share = Number of Ordinary Shares

5.4.8 DIVIDEND PAYOUT RATIO:Dividend per share Dividend Payout ratio = Earning per share x100

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GEARING RATIO:5.4.9 CAPITAL GEARING RATIO:Capital Gearing Ratio:Preference Capital+ Secured Loan Equity Fund Year Preference Capital Secured Loan Equity Fund Capital Gearing Ratio 2010-11 27000 3059.05 10000 3.005905 2009-10 27000 7028.15 10000 3.402815 2008-09 27000 6064.79 10000 3.306479 2007-08 27000 11848.13 10000 3.884813

Gearing means the process of increasing the equity shareholders return through the use of debt. Capital gearing ratio is a leverage ratio, which indicates the proportion of debt and equity in the financing of assets of a company. Capital gearing ratio is decreased in the year2010-11 by 11.76% which shows that company has reduced its external loans. indicates companys external funds are less so company can rely more on external funds. It

FINANCIAL RATIO:5.4.10 STOCK TURNOVER RATIO:Stock Turnover Ratio:Cost of Goods Sold Average Inventory

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Average Inventory:-

Opening Stock + Closing Stock 2

Year Cost of Goods Sold Average Stock Stock Turnover Ratio(times)

2010-11 66736.03 3354.48

2009-10 47864.41 3871.28

2008-09 54653.7 6695.35 8.16293397 7

2007-08 57142.84 5873.84 9.72836168 5

19.894597 12.36397522 67

Stock turnover ratio shows the relationship between the sales and stock it means how stock is being turn over into sales. Stock turnover ratio is more in 2010-11 as compared to previous years because there is increase in cost of goods sold and decrease in average stock.

5.4.11 FIXED ASSETS TURNOVER RATIO:-

Fixed Assets Turnover Ratio: -

Net Sales Total Fixed Assets

Year Net Sales Total Fixed Assets

2010-11 66736.03 17670.74

2009-10 47863.41 19200.64

2008-09 54653.7 24676.91

2007-08 57142.84 21394.84

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Fixed Assets Turnover Ratio(times)

3.7766403 2.492802844 67

2.21477081 2

2.67087017 2

Fixed assets turnover ratio is more in 2010-11 as compared to previous years there is decrease in fixed assets but net sales of the company is increased in this year but instead of this it shows a good condition of sales against total assets. There is increase in total asset because of new projects undertaken by company.

5.4.12 DEBT EQUITY RATIO:Debt Equity Ratio: Long-term Debt Equity

Year Long-term Debt Equity Debt Ratio Equity

2010-11 22079.42 40205.59 0.54916294

2009-10 25361.99 40205.59 0.630807557

2008-09 23143.48 41451.74 0.558323487

2007-08 18210.03 41700.63 0.43668477

The debt equity ratio for the year 2010-11 is 0.55 which is less as compared to debt equity ratio of previous two years.Its due to decrease in long term debt and also companys reserves in this year is also decreased. Standard debt equity ratio is 2:1 so company can raise its external borrowings. 5.4.13 DEBTORS TURNOVER RATIO:Net Sales Debtor Turnover Ratio: Debtors

Year

2010-11

2009-10
52

2008-09

2007-08

Net sales Debtors Debtor turnover ratio(times)

66736.03 5141.03 12.98106216

47863.41 4723.71 10.13258858

54653 3886.46 14.06241155

57142.84 6590.5 8.670486306

5.4.15 Collection Period: -

No. of days in a year Debtors Turnover

Year No. of days Debtors Turnover Debtor Collection Ratio(days)

2010-11 365 12.98106216 28.117884

2009-10 365 10.13258858 36.02238432

2008-09 365 14.06241155 25.95571881

2007-08 365 8.670486306 42.09683138

Debtors turnover ratio is alternative known as Accounts Receivable Turnover Ratio. This ratio measures the collectibility of debtors and other Accounts receivable it means the rate at which the trade debts are being collected. Debtor turn over ratio in year 2010-11 is 28 times which less as compared to previous year. Therefore company efficiency of collecting debt has been increased compared to earlier year.

5.4.16 STOCK-WORKING CAPITAL RATIO:-

Closing Stock STOCK-WORKING CAPITAL RATIO= Working Capital Year Closing Stock Working Capital 2010-11 6708.96 9030.64 2009-10 3764.92 8364.76
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2008-09 3977.64 12037

2007-08 1767.1 9221.84

Stock-Working Capital Ratio

0.74291080 1

0.450093009

0.330451109

0.191621195

Stock-working capital ratio for the year 2010-11 is 0 .74 which is less as compared to previous .This ratio shows that extend of funds blocked in stock. Closing stock is more in 2010-11 so it indicates that fund blocked in stock is more. Also there is increase in working capital because of increase in cash.

5.5 Graphs: Sales turnover Chart No. 5.5.1

(sources: Profit and loss statement of HOC LTD) Sales turnover chart shows that the company sales turnover has increased in year 2010-11.It has achieved sales turnover of Rs.667.36 Crores as against Rs. 478.63 crores the previous year. The sales volume during year 2010-11 was 1,45,173.65 MTs against 1,43,747.48 MTs for the year 2009-10, registering an increase in sales realization for the year amounting to Rs. 188.73 crores as compared to previous years sales of Rs. 478.63 crores.

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Production chart No.5.5.2

(sources: Annual report of HOC LTD) The chart shows that the company production is more in 2010-11 as compared to previous year2009-10. Company could achieve overall capacity utilization of 58% during the year.

Financial performance chart No.5.5.3

(sources: Profit and loss statement of HOC LTD)

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Net profit after tax has increased in year 2010-11. In 2010-11 net profit is much more as compared to previous year. Its becauseof companys cochi unit has permormed very well and has brought in profit of Rs130 crores. It shows that companys profitability position is good.

Distribution of each rupee earned chart No.5.5.4

(sources: Profit and loss statement of HOC LTD) Company has huge investment in employees remuneration and benefits; manufacturing,administrating and selling expenses;depriciation etc.

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6.0 FINDINGS AND CONCLUSION

6.1 Findings

Tall organization structure: The organization structure being tall and the culture being bureaucratic, the communication has become slow. Multitired responsibility and authority has made the decision making process slow. This has put serious limitation on the organization response time to the changes in external environment, in particular competition.

High cost of production: The machinery & plants of the organization are old and requires repair and maintenance expenditure. Due to this overhead cost increases and production cost also increases. The other companies are able to maintain their overhead costs such as maintenance, water, fuel, electricity etc and are able to produce at low cost. Due to high cost of production the demand of the product has declined considerably as compared to previous years.

Old depreciated plant: Most of the plants are old and depreciated, it require high maintenance cost. Some of the plants are idle due to various reasons. Some plants are idle due to lack of raw materials. Company has to prepared proper budgets for heavy investment for modernization of plants.

High manpower cost: Although companies manpower is skilled but they are over employed, it results in increase in the operating cost of the company.

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External factors: External factors like government policies, fluctuation in external environment reflects the companys financial performance, changing demand pattern, technologies, increasing competition due to globalization etc. affect the companys performance adversely. The companies technology is one which affects the performance of the company drastically.

Strategic considerations like increasing companys competitiveness, reducing companys dependence on external agencies etc.

Engineering and Technical viability.

Financial viability.

Seeking the support and involvement of all levels of management.

Fundamentally, the format serves as nothing more than a convenient way to record budget figures. It does not encourage or require that the managers developing these figures consider and analyze the various factors that are relevant to the development of truly meaningful budget figures.

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6.2 Conclusion

In the finance department each section should have its separate latest PCs with laser printers, so they can complete their work faster.

New software programs like ERP, Tally, SAP, etc should be implemented which can make finance work easier and faster.

Tall organization structure: The company should also give due consideration to
organization structure. Organization structure plays very essential role in the communication of employees. HR manager must form proper policies for the organization. Proper budgeting must be done in the tall organization to overcome the future hurdles. The responsibility should be properly disseminated to person in tall organization structure.

Reduced cost of production: Production cost must be reduced so that company can
gain due advantage. This can be done only by using proper tools, equipments and technology required for production of products. High cost of production is mainly due to overhead costs (power, maintenance, fuel and water) which the management must think and plan properly to reduce the costs.

Manpower cost: HR manager must plan properly and form proper policies so that the
competent employees can be retained in the organization. The HR manager must form personnel budget so that future cost can be estimated.

Other external and internal factors: The companies management needs to give due
consideration to external and internal factors and chalk out appropriate solution to the problems.

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 There should be proper mechanism to recognize and assess the impact on financial
and operational performance of changes in the level of activity.

Clear and Realistic goals: Budgeting is a means to achieve goals and objectives.
Budgeting will not succeed if the goals to be achieved are not clear; budget implementation will not be systematic. The financial manager or the budget director, therefore, must ensure that objectives and goals have been properly laid down. The enterprise objectives and budget goals to be accomplished through budgeting should be reasonable and realistic; they should be capable of attainment. Budgets goals should not set at too high or low a level. Goals set at a very high level are impossible to attain and as a result, have depressing effect on the employees morale. Once the employees know that they are unrealistic and unattainable they do not put any serious efforts to achieve them.

Creation of Responsibility centres: A small firm can be managed by an individual

or a small group of individual. But the activities of a large firm cannot be supervised by an individual. For effective control of all activities a large firm is divided into meaningful segments, departments or divisions. Responsibility centre is a sub unit of an organization under the control of a manager who has the responsibility for the activities of that responsibility centre. For planning and control purposes responsibility centres must generally classified into cost centre, profit centre, and investment centre.

Full Participation: Full participation of managers and their subordinates at all level
should be sought in developing the budgeting system. The participation should be meaningful and real. If employees have effectively participated in developing the

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budget goals and targets, they will make special efforts to see that the budgeting process succeeds.

Flexibility: The budgeting system should be flexible enough to take advantage of all
opportunities that arise from time to time. Inflexibility impairs the initiative and freedom of managers and subordinates in making decision. HOCL must administered flexible budgeting system due to which managers will feel free and relaxed in implementing the budget.

Top management support: A budgeting system will be an utter failure if it is not

initiated and supported by top management. Top management must: (i) understand the nature and characteristic of budgeting; (ii) Support the programs in its entire ramification; (iii) Be willing to devote the effort required to make it operative. The support of top management for the budgeting system implies that it is confident about its capability to plan the future course of action and run the enterprise successfully. HOCL has to do this for effective budgeting as effective budgeting results in good management.

Reduction of Scrap: To reduce the cost HOCL must reduce the scrap. As the control
of scrap or defective work is a matter of great importance in a manufacturing organization. That is why many manufacturing organizations have a high powered committee that periodically makes a careful examination of the cause of each item of scrap produced by an organization.

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7.0 REFERENCE SECTION A] Bibliography

Annual Report 2008-2009, 2009-2010,2010-11 of HOC Ltd.. Finance Sense-Dr. Prasanna Chandra.

Websites: www.hocl.gov.in

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