A STUDY OF FINANCIAL DATA ANALYSIS OF NMDC LIMITED A PROJECT REPORT Submitted to the SRM School of Management In Partial fulfillment

of the requirement for the award of the degree of MASTER OF BUSINESS ADMINISTRATION By PRIYA RANJAN (Reg. no. - 35080417) Under the guidance of Miss. R. Raji ( Asst. Prof. MBA )

SRM SCHOOL OF MANAGEMENT STUDIES SRM UNIVERSITY KATTANKULATHUR 603203 MAY 2010

BONAFIDE CERTIFICATE

Certified that this project report titled FINANCIAL DATA ANALYSIS (NMDC Ltd.) under the guidelines of Miss. R. Raji. SRM School of Management is Bonafide work of Mr. PRIYA RANJAN who carried out the project work under my supervision. Certified further, that to the best of my knowledge the work reported herein does not form a part of any other project reports of dissertation on the basis of which a degree of award was conferred on an earlier occasion on this or any other candidate.

Internal Guide

(Miss. R. Raji.) MBA

DEAN

External Guide

DECLARATION

I, PRIYA RANJAN (35080417) hereby declare that the project work entitled FINANCIAL DATA ANALYSIS (NMDC Ltd.) submitted in partial fulfillment of the requirements for the award of the degree of Master of Business Administration is a record of work done by me during the academic year 20092010 under the guidance of Miss. R. Raji.(Asst. Prof. M.B.A.) Department of Business Administration, SRM Institute of Science & Technology Kattankalathur. And it has not formed the basis for the award of any Degree/Diploma/Associate ship or other similar title to any candidate in any University.

Signature of the Candidate

PRIYA RANJAN

PLACE:DATE:-

ACKNOWLEDGEMENT

If words are considered as symbols of approval and tokens of knowledge then the words play the heralding role to express my gratitude. I extend my deep gratitude to Mr. S.M. Gena (Dept. Manager Finance) and Mr. M. Chandrakant (Training Officer) for permitting me to undertake the providing the incessant guidance and support throughout the project. I am extremely grateful to Dr. Mrs. Jayashree Suresh, B.A., M.B.A., Ph.D, HOD for her invaluable help rendered throughout the project. I would like to express my grateful thanks to my guide Miss. R. Raji. M.B.A for his excellent guidance and suggestions to complete my project. Words are inadequate to express my gratitude to my Patents who have been pillars of strength and moral support to me. Above all, my heartfelt thanks to the Almighty God for his presence and guidance in every moment in completing this project successfully.

PREFACE

Financial statements provide us with the fundamental information that we use to analyze firms. It consists of the application of analytical tools and techniques to the data in financial statements in order to derive from them measurements and relationships that are significant and useful for decision making. The process of financial analysis can be described in various ways, depending on the objectives to be obtained. Financial analysis can be used as a preliminary screening tool in the selection of stocks in the secondary market. It can be used as a forecasting tool of future financial conditions and results. It may be used as a process of evaluation and diagnosis of managerial, operating or other problem areas. Above all, financial analysis reduces reliance on intuition, guesses and thus narrows the arrears of uncertainty that is present in all decision making processes. Financial analysis does not lessen the need for judgment but rather established a sound and systematic basis for its rational application. Financial statement analysis is also the interpretation of the date and measures assembled as a basis for decision and action, this is the most important and difficult of the steps, and requires application of a great deal of judgment, skill and effort. Though there are limitations for financial statements analysis but it is the only means by which the financial realities of an enterprise can be reduce to a common denominator that is quantified and that can be mathematically7 manipulated and projected in a rational and disciplined way.

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TABLE OF CONTENT

Chapters
CH I 1.1 1.2 1.3 1.4 1.5 CH II 2.1 2.2 2.3 2.4 CH III 3.1

Contents

Page No.

Introduction Rational of the Study Objectives of the Study Limitations Direction for Research

01 03 04 05 05

Company Profile Methodology Contribution Stock Adjustment

06 10 11 15

3.2 3.3 CH IV

Ratio Analysis - Liquidity Ratio - Profitability or efficiency Ratio - Ownership Ratio Comparative Analysis Du Point Analysis

17 18 30 38 55 67

Summary CH V Findings CH VI Suggestions CH VII Conclusions CH VIII Bibliography

74

76

77

78

79

INTRODUCTION Financial Statement provides fundamental information that can be utilized by the analysts to analyze the firm. There are three basic accounting statements that summaries the information about a firm. The first is the Balance Sheet, Which summarizes the assets owned by a firm, the value of these assets and the mix of financing, debt and equity, used to finance these assets at a point in time. The next is the income statement, which provides information on the revenue and expenses of the firm, and the resulting income made by the firm, during the year. Finally, there is the statement of cash flows, which specifies the sources and uses of cash of the firm from operating, investing and financing activities, during the year. The process of financial analysis can be described in various ways, depending on the objectives to be obtained. Financial analysis can be used as a preliminary screening tool in the selection of the stocks in the secondary market. It can be used as a forecasting tool of future financial conditions and results. It may be used as a process of evaluation and diagnosis of managerial, operating or other problem arrears. Above all, financial analysis reduces reliance on intuition, guesses and thus narrows the areas of uncertainty that is present in all decision making process. Financial analysis does not lessen the need for judgment but rather establishes a sound and systematic basis for its rational application. The financial data needed in the financial analysis come from many sources. The primary source is the provided by the firm itself in its annual report and required disclosures. The annual report comprises the income statement, the balance sheet, and the statement of cash flows, as well as footnotes to these statements. Besides this, information such as the market prices of securities of publicly traded

corporations can be found in the financial press and the electronic media daily. The financial press also provides information on stock price indices for industries and for the market as a whole. In the analysis of financial statements, the analyst has a variety of tools available from which he can choose those best suited to his specific purpose. The following are the important tools of analysis.

1. Ratio analysis, - Comparative analysis - Du-point analysis 2. Fund flow analysis

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FINANCIAL STATEMENT ANALYSYS (NMDC LIMITED) SYNOPSIS

Rational of the study:-

A financial statement is a compliance of data, which is logically & consistently organized according to accounting principle. It is proposed to convey an understanding of some financial aspects of a business firm. It may show a position at a moment in time, as in case of a balance sheet, or may reveal a series of activities over a given period of time, as in case of an income statement. Financial statements as the major means through which firms present their financial situations to stockholders, creditors, and the general public. The majority of firms include extensively financial statements in their annual report, which receive wide distribution.

Objectives of the Study:-

1. Appreciate the importance of financial statements analysis to identify strong and weak areas of business and to look for other possible solutions. 2. Differentiate between external and internal analysis 3. Understand various approaches like horizontal and vertical financial analysis and technique adopted thereof. 4. Identification of the strong and weak financial area of NMDC Limited. 5. Suggestion for taking corrective action to avoid financial loss in future.

Limitation:-

This study shall be limited to few organizations only. Also the analysis is related to the data that collected from the annual reports of the corporation.

Direction for future research:-

In future, data will be collected from concerned mining organizations to assess its status of the feasibility study.

Incorporated in 1958 as a Government of India fully owned public enterprise. NMDC is under the administrative control of the Ministry of Steel, Government of India. Since inception involved in the exploration of wide range of minerals including iron ore, copper, rock phosphate, lime stone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite, beach sands etc. India's single largest iron ore producer and exporter, presently producing about 30 million tons of iron ore from 3 fully mechanized mines viz., Bailadila Deposit14/11C, Bailadila Deposit-5, 10/11A (Chhattisgarh State) and Donimalai Iron Ore Mines (Karnataka State) which are awarded ISO 9001-2000 certification. NMDC has the only mechanized diamond mine in the country with a capacity of 1.00 lakh carats / annum at Panna (Madhya Pradesh State). The mine remained non-operational since 22.08.2006 as per the directives of MP Pollution Control Board. The issues have now been resolved and Sunsequently Panna Diamond Mine of NMDC, the only mechanized diamond mine in Asia, has been revived with the Honble Supreme Court of India granting permission. Honble Union Minister for Steel Sri Virbhadra Singh has rededicated the project in the service of the nation on 21st August 2009. Strong back up of an ISO 9001 certified R&D Centre, which has been declared as the "Centre of Excellence" in the field of mineral processing by the Expert Group of UNIDO. Consistent profit making and dividend paying company. Results Sales Income Profit before tax No. of Employees 2007-08 Rs 5,711 corer Rs 4,947 corer 5655 (31.3.08) 2008-09 Rs 7,564 corer Rs 6,648 corer 5652 (31.3.09)

NMDC has made valuable and substantial contribution to the National efforts in the mineral sector during the last five decades and has been accorded the status of schedule-A Public Sector Company. In recognition to the Company's growing status and consistent excellent performance, the Company has been categorized by the Department of Public Enterprises as "NAVRATNA" Public Sector Enterprise in 2008. The story of NMDC is woven around the dreamy hills and the deep jungle land of Bastar in Chhattisgarh, known as Dandakaranya from the epic periods. The Bailadila iron ore range - "The hump of an ox" - in the local dialect, was remote, inaccessible and replete with wild life. The range contains 1200 million tons of high grade iron ore distributed in 14 deposits. The entire area was brought to the mainstream of civilization by the spectacular effort of NMDC by opening-up of mines. Today, Bailadila is a name to reckon with in the world iron ore market because of its super high grade iron ore. Bailadila complex possesses the world's best grade of hard lumpy ore having +66% iron content, with negligible deleterious material and the best physical and metallurgical properties needed for steel making. In the past, NMDC had developed many mines like Kiriburu, Meghataburu iron ore mines in Bihar, Khetri Copper deposit in Rajasthan, Kudremukh Iron Ore Mine in Karnataka, Phosphate deposit in Mussorie, some of which were later handed over to other companies in public sector and others became independent companies. NMDC is presently producing about 22 million tons of iron ore from its Bailadila sector mines and 7 million tons from Donimalai sector mines. Because of its excellent chemical and metallurgical properties, the calibrated ore from Bailadila deposits has substituted the iron ore pellets in sponge iron making and hence became an important raw material for three major gas-based sponge iron steel producers like Essar Steel, Ispat industries and Vikram Ispat. In addition to these three, the entire requirement of the Visakhapatnam Steel Plant is also being met from Bailadila. The demand for steel will continue to grow in the years to come and this in turn would call for increased demand for iron ore. NMDC is gearing itself to meet the expected increase in demand by enhancing production capabilities of existing mines and opening up new mines - Deposit -11B in Bailadila sector and Kumaraswamy in Donimalai sector. The production capability would increase

toaround 50 million tons per year by 2014-15. Besides, NMDC is also in the process of securing mining leases of following iron ore mines (some as JV with State Governments): Sasangada Iron Ore Deposit, Jharkhand Ghatkuri Mine, Jharkhand Ramandurg, Karnataka Deposit 13, Bailadila, Chhattisgarh Deposit-4, Bailadila, Chhattisgarh Apart from iron ore NMDC is developing Magnesite mine in Jammu and Arki Lime Stone Project in Himachal Pradesh. For Value addition NMDC is in the process of developing a 3 mtpa steel plant at Jagdalpur and 2 pellet plants at Donimalai (1.2 mtpa) and at Bacheli (2 mtpa). Besides, NMDC is also in the process of merger of Sponge Iron India Limited with plan for expansion to produce billets. Besides iron ore, NMDC also plans to go for other minerals like Coal, Diamond, gold etc for which NMDC is looking forward for leases / buy properties from foreign countries directly / under Special Purpose Vehicle / Joint Ventures. For continuing the exploration activities NMDC has set a Global Exploration Centre at Raipur, Chhattisgarh. NMDC is taking up diversification activities through its intensive R&D efforts for production of High-Tech and High Value added products from Blue Dust like Carbon free sponge iron powder, Nano crystalline powder. Besides, study is also being conducted for setting up a demonstration plant to beneficiate BHJ/BHQ material for up gradation to +64% Fe iron ore concentrate. NMDC is also investing in development of renewable energy resources as an environment friendly investment. A Wind mill project (10.5MW capacity) has been completed & commissioned at Karnataka. NMDC has always shown great concern for environment protection. At all its projects care is taken in this regard by tree plantation, making tailing dams/check dams at different places.

Research Methodology:-

To undergo this project work primary data will be collected from the Deposit 5, 10 & 11A project of NMDC Limited & also the annual report of the NMDC Limited as whole. NMDC Limited is a public sector undertaking under the ministry of steel undergone the business of the exploration of iron ore, Diamond, silica sand in different part of the country in INDIA. a) For financial analysis data are collected from different units as Deposite-5, 10 & 11A project( Bacheli), in Chhatishgarh State , Deposite-14 ( Kirandul) project in Chhatishgarh state and Donimalai Project , in Karnataka State. Theses unit are treated as a separate profit centre units of the NMDC LTD. These units are related to only exploration of the iron ore. The activity in these projects related to the Mining, Screening and loading of iron ore. b) For analysis financial the primary sources is the data from 1) Firms annual report (Annual Reports of NMDC Limited) 2) The required Disclosure As the annual report comprises the income statement, the Balance sheet, statements of cash flows, as well as foot notes to these statements. Besides the above data, information such as the market price of the securities of publicly traded corporations collected from the financial press and electronic data media. Hence some data related to the above corporation are collected from corporations website & also some local as well as national news papers. Also the data collected above will be compared in terms of the industry norms.

Contribution:-

This study shall contribute in enabling the industry for adopting the best possible financial planning. It also provides the analysis on the following paint 1.Ratio analysis i) Comparative analysis ii) Du- Point analysis 2. Funds flow analysis A financial statement covers Balance Sheet and profits and Loss accounts. Balance sheet shows profits and liabilities while a profit & loss account presents expenses and revenues and also net profits and loss for the period. The financial statement contains information in monetary terms but do not provide answers to the followings 1. 2. 3. 4. How far there is growth in terms of sales or assets of the enterprise? Are sales Profitable? How fare is the profits attractive for investors? Will the enterprises be able to honor its commitments in terms of payment of interest, other expenses and debt obligations? 5. How far have collections from debtors on account of credit sales improvement over the period?

However, by expressing the various items from financial in relation to each other, one can get meaningful information relating to the above questions. Financial statement analysis involves the methodical compilation of data and comparison of the same to identify the strong and weak areas of business and to seek solution to such problems. The analysis is linked with the purpose and interest of the agency involved. The purpose may be to seek information relating to the profitability, solvency or the liquidity of the enterprises.

Balance Sheet of Color-Chemical Industries as on 31/03/2005 to 31/03/2009 is as follows:2009 SOURCES OF FUND A. Share Capital B. Reserves Total 11.65 71.36 11.65 59.50 9.63 37.05 7.94 20.14 7.94 16.89 2008 2007 2006 2005

C. Total Shareholders Fund (A+B) D. Secured Loan E. Unsecured Loans F. Total Debt (D+E) G. Total Liability (C+F)

83.01

71.15

46.68

28.08

24.83

48.62 25.70 74.32 157.33

41.25 19.34 60.59

60.45 10.51 70.96

53.43 11.50

30.58 14.50

64.93 45.08 93.01 69.91

131.74 117.64

APPLICATION OF FUND H. Gross Block I. Less Accum. Depre. J. Net Block (H-I) K. Capital WIP L. Investment M. Current Assets, Loans& Adv. N. Inventory O. Sundry Debtors P. Cash and Bank Balance Q. Loans & Advances 46.30 49.85 1.85 23.10 110.05 103.89 52.02 58.03 6.88 6.63 50.02 53.87 5.51 3.03 90.90 75.27 44.46 46.44 4.77 2.89 56.81

40.26 36.88 35.01 3.76 2.89 19.93 8.00 2.65

(N + O + P + Q) 40.48 37.30 1.62 14.88 34.87 37.75 1.10 11.16 35.53 30.53 1.10 10.23 41.20 31.86 1.26 6.90

R. Less : Current Liability & Prov. S. Current Liability T. Provision U. Net Current Assets V. Misc. Expenses not W/O X. Total Assets 32.36 4.24 84.50 1.29 157.33 23.53 3.42 69.33 0.00 19.17 2.17 63.54 0.00 24.63 1.93 51.35 0.00 93.01 39.99 1.90 39.33 0.00 69.91

131.74 117.64

Profit & Loss Accounts for the Years from 2005 to 2009 2009 Income A. Sales B. Other Inc. C. Stock Adj.* 261.00 9.81 4.10 214.41 11.21 2.99 228.61 181.29 8.71 0.97 190.97 155.58 9.50 -3.11 161.97 131.94 6.14 6.67 144.75 2008 2007 2006 2005

D. Total Income274.91 (A+B+C) Expenditure E. Raw Material 122.42 F. Power & Fuel 16.72 G. Employee Cost 26.12 H. Other Manuf. Exp. I. Excise Duty J. Selling & Adm. Exp. K. Misc. Exp. L. Less Preoperative Exp. Capt 0.00 M. Operating 37.31 15.98 8.78 16.84 30.74

97.04 14.26 21.21

75.05 13.41 19.49

66.67 9.96 16.02

66.46 8.98 13.50

14.64 26.47

13.52 24.36

11.60 22.22

10.94 18.10

10.15 7.83

9.23 5.33

7.09 5.11

5.85 4.00

0.00 37.01

0.00 30.58

0.00 23.30

0.00 16.92

Profit (D-E-F-G-H-I-K+L)

N. Interest O. PBDT (M-N) P. Depreciation Q. PBT (O-P) R. Tax

9.58 27.73 6.49 21.24 5.30

10.71 26.30 6.37 19.93 5.00 14.93 0.71

13.57 17.01 4.76 12.25 3.60 8.65 0.23

11.42 11.88 3.56 8.32 3.00 5.32 -0.15

7.65 9.27 2.41 6.86 2.70 4.16 0.32

S. Net Profit (Q-R) 15.94 T. Adj. below Net Profit ** U. P&L Balance Brought Forward 6.65 00.00

2.50

1.65

1.50

1.01

V. Appropriation *** 14.48 11.59 W. P & L Balance 8.01 6.55

8.03 2.50

5.02 1.65

3.99 1.50

Carried down (S+T+U-V) *. Stock Adjustment Increase or decrease in stock: If the there is a decrease in stock, it means that either finished goods of the previous closing stock are sold and decrease in workin-progress and will added to the income. If there is an increase in the stock, it implies that some more finished goods are added to the previous closing stock or an increase in work-in progress. In the above case, the amount of stock adjustment can be obtained in the following way: = Opening Stock of Work-in-progress + Operating Stock of Finished Good + Opening Stock of Other Materials Closing Stock of Finished Goods Closing

Stock of Work-in-Progress Closing Stock of other materials

= 14.88+13.33+00.00-17.89-14.42-0.00 = -4.10 There is decrease, hence added to the income.

**. Adjustment below Net Profit, In this category, extraordinary incomes like sales of assets, income accrued because of changes in accounting policies, etc. Are adjusted from net profit. ***. Appropriations Appropriated to general ledger To Provision for Equity Dividend To Debenture Redemption Reserve = = = 9.87 4.08 0.53 ------Total 14.48 ====

RATIO ANALYSIS Ratios are well known and most widely used tools of financial analysis. A ratio gives the mathematical relationship between one variable and another. Though the computation of a ratio involves only a simple arithmetic operation, its interpretation is a difficult exercise. The analysis of a ratio can disclose relationships as well as bases of comparison that reveal conditions and trends that cannot be detected by going through the individual components of the ratio. The usefulness of ratios is ultimately dependent on their intelligent and skillful interpretation. Ratios are used by different peoples for various purposes. As ratio analysis mainly helps in valuing the firm in quantitative terms, two groups of people are interested in the valuation of the firm and they are creditors and shareholders. Creditors are again divided into short- term creditors and long-term creditors. Short term creditors hold obligations that will soon mature and they are concerned with the firms ability to pay its bills promptly. In the short run, the amount of liquid assets determines the ability to clear off current liabilities. These persons are interested in liquidity. Long-term creditors are interested in current payments of interest and eventual repayment of principal. The firm must be sufficiently liquid in the short-term and have adequate profits for long-term. These persons examine liquidity and profitability. In addition to the liquidity and profitability, the owners of the firm (shareholders) are concerned about the policies of the firm that affect the market price of the

firms stock. Without liquidity, the firm cannot pay cash dividends. Without profits, the firm would not be able to declare dividends. With poor policies, the common stock would trade at low price in the market. Considering the above category of user financial ratios fall into three groups: Liquidity Ratios Profitability or efficiency ratios Ownership ratios 1. Earnings ratios 2. Dividend Ratios 3. Leverage Ratios a) Capital Structure Ratios b) Coverage Ratios. LIQUIDITY RATIOS Liquidity implies a firms ability to pay its debts in the short run. This ability can be measured by the use of liquidity ratios. Short-term liquidity involves the relationship between current assets and current liabilities. If the firm has sufficient net working capital (excess of current assets over current liabilities) it is assumed to have enough liquidity. The current ratio and quick ratio are the two ratios, which are commonly used to measure liquidity directly. The ratios like Receivable Turnover Ratios and Inventory Turnover Ratios measure the liquidity indirectly. Current Assets

Current Ratio: -

------------------------Current Liabilities

46.30+49.85+1.85+23.10 Current Ratio :--------------------------------------------- = 121.1/36.6 = 3.31 32.36.+4.24

Quick Assets Quick Ratio: ------------------------Current liability (or)

Current assets - Inventories -----------------------------------Current Liabilities

121.1 - 46.3 Quick Ratio : -------------34.60 = 2.04

Current assets include cash, marketable securities, debtors, inventories, loans and advances, and prepaid expenses. Current liabilities include loans and advances taken, trade creditors, accrued expenses and provisions. Current ratio measures the ability of the enterprises to meet its current obligation. In the operating cycle of the firm current assets are converted into cash to provide funds for the payment of current liability. So higher the current ratio, higher the short term liquidity. But in interpreting the current ratio care should be taken in looking into the composition of current assets. A firm which has a large amount of cash and accounts receivable is more liquid than a firm with a high amount of inventories in its current assets, though both the firms may have the same current ratio. To overcome this more stringent form of liquidity ratio referred to as quick ratio can be calculated. Therefore quick ratio is a more stringent measure of liquidity because inventories, which are least liquid of current assets, are excluded from the ratio. Inventories have to go through a two-step process of first being sold and converted into receivables and secondly collected. The quick test is so named because it gives the abilities of the firm to pay its liabilities without relying on the sale and recovery of its inventories. Limitations of the Current and Quick Ratios: The current ratios are a static or stock concept of what resources are available at a given moment in time to meet the obligations at that moment. The ration has limitations in the following aspects: 1. Measuring and predicting the future fund flows. 2. Measuring the adequacy of future fund inflows in relation to outflows.

The existing pool of net funds does not have a logical or causative relationship to the future flows that are the subject of our greatest interest in the assessment of liquidity. These flows depend importantly on elements not included in the ratio, such as sales, cash costs and expenses, profits and changes in business conditions.

Bank Finance to Working Capital Gap Ratio Short-term bank borrowings = -----------------------------Working Capital gap

Where working capital gap is equal to current assets less liabilities other than bank borrowings. This ratio shows us the degree of the firms reliance on short term bank finance for financing the working capital gap. Turnover Ratios: Receivables turnover ratios and inventory turnover ratios measure the liquidity of a firm in an indirect way. Here the measure of liquidity is concerned with the speed with which inventory is converted into sales and accounts receivables converted into cash. The turnover ratios give the speed of conversion of current assets (liquidity) into cash in the above way.

Two ratios are used to measure the liquidity of a firms account receivables. They are; a. Accounts receivable turnover ratio b. Average collection period

Accounts receivable turnover ratio

Net Credit sales = ---------------------------------Average accounts receivable

The average accounts receivable is obtained by adding the beginning receivables of the period and the ending receivable, and divided the sum by two. The sales figure in the numerator is only credit sales, because from cash sales we dont get any receivable. As the publicly available information on the firm, may not disclose the credit sales details, the analyst in the external environment has to assume that cash sales are insignificant. Normally the receivables ratios are useful for internal analysis. Hire the receivables turnover ratio, greater the liquidity of the firm. However, care should be taken to see that to project higher receivables turnover ratio, the firm is not following a stricter credit policy.

For Color-Chemicals Industries, accounts receivables position for two years is follows. 2009 Sundry debtors more than 6 months Other debtors Prov. For doubtful Debts Total Debtors: 4.19 45.66 00.00 49.85 2008 1.31 35.99 00.00 37.3

Average accounts receivables =

(49.85 + 37.3)/2 = 43.58

Average Receivable turnover

261/43.88

= 5.95 (6 Approx.)

Turnover ratio gives, how many times on an average the receivables are generated and collected during the year. In our case, the average receivables turnover ratios of 6 indicates that on an average receivables are revolved 6 times during the year. When we compare this with the industries of 5.16 times, we can say that the firms liquidity is accounts receivable is on average 16.17% more than the industry. Average collection period One can get a sense of the speed of collections from receivables turnover ratio and it is valuable for comparison purposes, but we cannot directly compare to the terms of trade that the firm usually gives. For example the firm may be having a policy of giving certain percentage of discount if the debtor pays made by converting the turnover into days of sales tied up in receivables.

The ratio which gives the above comparison is average collection period, which is defined as the number of days it takes to collect accounts receivable. This can be obtained by dividing 360 by the average receivables turnover ratio calculated above. That is,

360 Average Collection period = ---------------------------------------Average accounts receivable turnover Average accounts receivable = --------------------------------------Average daily sales For NMDC Limited, assuming that there is only one sundry debtor the average collection period is equal to 60 days (360/6). If the firm is having a credit policy of having substantial discounts if the receivables are collected within 30 day, the debtor will not able to avail the discounts. If we compare the above with the industry figure (i.e. 360/5.16 = 69.76 days), the firm is having above average collection period.

Evaluation: Accounts receivable turnover rates or collection periods can be compared to industry averages or to the credit terms granted by the firm to find out whether customers are paying on time. If the terms, for example say the average collection period is 30 days and the realized average collection period is 60 days, it could

reflect the following: 1. Collection job is poor. 2. In spite of careful collection efforts difficulty in obtaining prompt payments. 3. Customers facing financial problems. The first conclusion requires remedial managerial action, while the second and third conclusions convey the quality and liquidity of the accounts receivables. In conclusion, measures of accounts receivables turnover are important in the evaluation of liquidity of receivables. Inventory Turnover: The liquidity of a firms inventory may be calculated by dividing the cost of goods sold by the firms inventory. The inventory turnover, or stock turnover, measures how first the inventory is moving through the firm and generating sales. Inventory turnover can be defines as:

Cost of Goods Sold Inventory Turnover = -----------------------------Average inventory

Higher the ratio, greater the efficiency of inventory management. The important of inventory turnover can also be looked from different point of view i.e. it helps the analyst measure the adequacy of goods available to sell in comparison to the actual sales orders. In this regard, having inventory involves two risks;

1. Running out the stock due to low inventory (high turnover) which may indicate future shortages. 2. Excessive caring charges because of high inventory ( Low turnover ) One has to mange carefully between running out of good to sales and investing in excessive inventory otherwise it result in either a high or low ratio, which may be an indication of poor management. The analyst should keep in mind that high and low turnovers are relative in nature. The current turnover must be compared to previous periods or to some industry norms before it is designated as high, low or normal. The nature of the business should also be considered in analyzing the appropriateness of the size and turnover of the inventory. For example a manufacturing firm which has to import its key raw materials is justified in keeping high inventory of raw materials if it finds out that its base currency has been depreciating against the exporting countrys currency consistently. In this case, high inventory is kept if the cost of imported raw materials because of depreciation is more that the cost storage. In the case of NMDC Ltd. Industries the inventory turnover could be calculated as follows. First for getting the cost of goods sold, we have to add all the expenses in the profit and loss account including depreciation charges and excluding interest expenses. Average inventory can be obtained by adding the closing inventory and the opening inventory and divided them by two, 244.09 Inventory Turnover = -------------------(46.3+40.48)/2 = 5.63

The average industry inventory turnover is 4.3. A meaningful conclusion about the inventory turnover cab be arrived after studying its composition, its change over the years and comparing the turnover trends with the industry. Trend Analysis of inventory composition

Inventory Composition Raw Materials

2009

2008

2007

2006

8.33(18)

7.83(19.34)

7.80(21.95)

10.80(26.21)

Work-in-progress.

14.42(31.14) 14.87(36.73)

12.22(34.39) 12.79(31.04)

Finished Goods

17.89(38.64) 13.33(32.93)

12.03(33.86) 14.58(35.39)

Stores & Spares

4.22(9.11)

3.82(9.44)

2.99(8.42)

2.65(6.43)

Other Inventory Total

1.44(3.11) 46.30(100)

0.63(1.56) 40.48(100)

0.49(1.38) 34.87(100)

0.38(0.93) 35.53(100)

Inventory Turnover Ratio

2009

2008

2007

2006

Color-chemicals Ltd

5.64

5.30

5.20

4.38

Dyes & Pgm. Ind.

4.31

4.40

4.28

3.87

GROWTH RATE

2009

2008

2007

Sales (Color-Chem.)

21.72

18.26

16.52

Inventory ( Color- Chem.)

14.37

16.08

-9.80

Sales ( Industry)

21.42

12.63

17.42

Inventory ( Industry)

23.65

7.67

6.14

Turnover ( Color Chem.)

6.41

1.92

18.72

Turnover ( Industry)

-2.04

2.80

10.59

OVERALL LIQUIDITY POSITION

RATIO

DEFICITION

COLOR- CHEM

Current assets Current Ratio ------------------Current Liability 3.31 3.53

360 Average Collection Period ----------------------60 70

Accounts Receivable Turnover

Net Sales Inventory Turnover -------------------Average Inventory 5.62 4.31

From the above table, it can be noticed that the Color- Chem.s current ratio are just below the average industry figure. Inventory turnover is in better position as compared to the industry which is concluded in the overall analysis of inventory turnover in the respective section.

In conclusion, the liquidity position of Color Chem. Industries Ltd. can be said to be above average.

Profitability or Efficiency Ratios:

Theses measure the efficiency if the firms activities and its ability to generate profits. There are two types of profitability ratios. 1. Profits in Relation to Sales: It is important from the profit standpoint that the firm be able to generate adequate profit on each unit of sales. If sales lack a sufficient margin of profit, it is difficult for the firm to cover its fixed charges on debt and to earn a profit for shareholders. Two popular ratios in this category are gross profit margin ratio, net profit margin ratio.

2. Profit in relation to Assets: It is also important that profit be compared to the capital investment by owners and creditors. If the firm cannot produce a satisfactory profit on its assets base, it might be misusing its assets. They are also referred to as rate of return ratios and some of them are asset turnover ratio, earning power and return in equity.

Gross Profit Margin Ratio:

The gross profit margin ratio (GPM) is defined as:

Gross Profit ---------------Net Sales

Where net sales = Sales Excise Duty.

This ratio shows the profits relative to sales after the direct production costs are deducted. It may be used as an indicator of the efficiency of the production operation and the relation between production operation and the relation between production cost and selling price.

GPM for Color Chem. Ltd. Is calculated as follow 52.23 = -------230.26 GPM for industry is 10.6% which is less than GPM of Color Chem. Industries. = 22.68%

Net Profit Margin Ratio:

The net profit margin ratio is defined as

Net Profit ------------Net Sales

The ratio shows the earnings left for shareholders (both equity and preference) as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management. Jointly considering, the gross and net profit margin ratios provide the analyst available tool to identify the sources of business efficiency / inefficiency. NPM for Color-Chem. Ind. = 15.94/ 230.26 = 6.92%

NPM for industry

= 6.39%

In comparison with the industry net profit margin ratio is just above the average percentage figure. Had this been below the industry average, it would have indicated some mismanagement in the area excluding production (as GPM is on line with the Industry). Specific area could have been investigated by taking all the aspects and analyzing respectively.

Asset Turnover: It highlights the amount of assets that the firm used to produce its total sales. The ability to produce a large volume of sales on a small asset base is an important part of the firms profit picture. Idle or improperly used assets increase the firms need for costly financing and the expenses for maintenance and upkeep by achieving a high asset turnover, a firm reduces costs and increases the eventual profit to its owners.

Assets turnover ratio is defined as: Sales -------------------Average Assets

Average assets is calculated by adding the opening stock of assets (Previous years closing stock of assets) and closing stock of present year.

261.00 Asset Turnover for = ---------------------------- = Color Chem. (157.33 + 131.74)/2 1.80

Industry assets turnover is 1.15. An asset turnover ratio of 1.67 indicates the firm with as asset base of 1 unit could produce 1.67 units of sales. This is a healthy both in absolute terms and also in comparison with the industry as the turnover of the industry is only 1.15.

Earning Power:

Earning power is a measure of operating profitability and it is defined as:

Earnings before interest and taxes = -------------------------------------------Average total assets

The earning power is a measure of the operating business performance which is not affected by interest charges and tax payments. As it does not consider the effects of financial structure and tax rate it is well suited for inter-firm comparisons.

Color Chem. Industrys earning power: - =

30.82/144.54

= =

0.213 21.3%

Inter Firm comparison earning power percentage

Company

Year

2008-2009

Color- Chem. Industry

21.30%

Atul Products

13.76%

Indian Dyestuff

16.18%

Industry ( Dyes & pifg. )

16.29%

From the table, we can conclude that Color- Chem. industry with a percentage of 21.30%, where as the average is only 16.9%. Color- Chem. is operational very efficient in comparison to all the players in the industry.

Return On equity

The return on equity (ROE) is an important profit indicator to shareholders of the firm. It is calculated by the formula:

Net Income ---------------------Average Equity

Net income denotes profit after tax (PAT) and average equity is obtained by taking the average equities of 2009 and 2008.The return on equity measures the profitability of equity funds invested in the firm. It is influenced by several factors: earning power, debt-equity ratio, average cost of debt fund, and tax rate.

ROC for NMDC Ltd.

15.94/77.08 =

19.20%

Return on equity for the industry is 13.18% . The firms healthiness is this respect also can be easily seen from their difference in returns on equity. NMDC Ltd. Is giving 19.2% return to equity holders, where the industry is only 13.18%. Finally, we can conclude that NMDC ltd. Has employed it resources productively.

Overall Profitability (efficiency) Analysis: NMDC Ltds profitability ratio is summarized in the following table against the industry.

Ratios Gross profit Margin Net Profit Margin Asset Turnover Return on Equity Earning Power

Color- Chem. Mining Ltd. Industries 10.62% 6.11% 1.67% 19.20% 19.60% 10.6% 6.39% 1.25% 13.80% 14.12%

As mentioned in the beginning profitability is analyzed from two respects. That is in relation to sales and in relation to assets. The above table conveys that, NMDC Ltd. Is able to generate profits in relation to sales on average scale, but in the respect of efficient application of assets it performed well above the average. This indicates some remedial measures have to be taken from sales point of view.

****

Ownership Ratios:

Ownership ratios will help the stockholder in analyzing his present and future investment in the firm. Stockholders (Owner) are interested in how the values of their holdings are affected by certain variables. Ownership ratios compare the investment value with factors such as debt, earnings, dividends and the socks market price. By understanding the liquidity and profitability ratios, one can get the insights into the soundness of the firms business activities, whereas by analyzing the ownership ratios, the analyst is able to assess the likely future value of the market.

Ownership ratios are divided into three main groups. They are:1. 2. Earnings Ratios Leverage Ratios Capital Structure Ratios Coverage Ratios 3. Dividend Ratios.

1. Earnings Ratios:

The earnings ratios are earnings per share (EPS), price-earnings ratio (P/E ratio), and capitalization ratio. From earnings ratios we can get information on earnings of the firm and their effect on price of common stock.

Earnings Per Share (EPS)

Shareholders are concerned about the earnings of the firm in two ways. One is availability of funds with the firm to pay their dividends and the other to expand their interest in the firm with the retained earnings. These earnings are expressed on a per share basis which is in short called EPS. EPS is calculated by dividing the net income by the number of shares outstanding. Mathematically, it is calculated as follows:

Earnings Per Share (EPS) = Net Income (PAT) -------------------------------------Number of outstanding share

A cross sectional and year-to-year analysis can be very informative to the analyst.

Company Atul Product(EPS) Color-Chem. (EPS)

2009 5.97 13.68

2008 8.18 12.81

2007 5.15 8.98

2006 7.96 6.70

2005 12.16 5.24

When we observe the EPS trend of the above two firms, it can be easily understood that the Color-Chem. Ind. Began at a low EPS of Rs.5.24 per share and has steadily progressed and has nearly tripled its EPS in five years. Whereas Atul Products started at a high EPS of Rs.12.16 per share but in 5 Years declined up to Rs. 5.97 per share. The trend of the two earnings streams appears to forecast a brighter future for Color- Chem. Industries than for Atul Products.

Price Earning Ratio:

The price-earnings ratio (also P/E multiple) is calculated by taking the market price of the stock and dividing it by earning per share. Market price of the share Price earnings multiple = ----------------------------------Earning per share

This ratio gives the relationship between the market price of the stock and its earnings by revealing how earnings affect the market price of the firms stock. If the stock has a low P/E multiple, for example 3/1, it may be considered as an

undervalued stock. If the ratio is 80/1, it may be viewed as overvalued. It is the most popular financial ratio in the stock market for secondary market investors. The P/E ratio method is useful as long as the firm is a viable business entity, and its real value is reflected in its profits.

The P/E multiples of NMDC Ltd. Is calculated as follow

2009 Share Price EPS P/E 1250 13.68 310.07

2008 4500 12.81 351.30

2007 1300 8.89 144.70

2006 2400 6.70 358.2

The main use of the P/E ratio is it helps to determine the expected market value of a stock. For example, one firm A may having a P/E of 5/1 and another firm B of 9/1. If we assume the average industry P/E and EPS as 7/1, Rs3 and earning per share of both the firm as Rs.3 we will get the following results,

Market Value of Industry

7 * 3 = 21

Market Value of Firm A Market Value of Firm B

= =

5 * 3 = 15 9 * 3 = 27

The Capitalization Rate

Earning per Share Capitalization Rate = ------------------------------Market price of the share

The P/E ratio is also may be used to calculate the rate of return investor expect before they purchase a stock. The reciprocal of the P/E ratio, i.e. (market price / EPS) gives the return. For example, if a stock has Rs.12 ESP and sells for Rs.100, the market place expects a return of 12/100, i.e. 12%. This is called the stocks capitalization rate. A 12 percent capitalization implies that the firm is required to earn 12% on common stock value. If the investors require less than 12% return they will pay more the stock and capitalization rate would drop.

2009

2008

2007

2006

Capitalization Rate:

0.32

0.28

0.69

0.279

For Color- Chem. Ind., rate is very low because of high price in comparison to earning per share.

2. Leverage Ratio

When we extend the analysis to long term solvency of a firm we have two types of leverage ratios. They are structural ratios and coverage ratios. Structural ratios are based on the proportions of debt to equity in the capital structure of the firm, where as coverage ratios are derived from the relationships between debt servicing commitments and sources of funds for meeting these obligations.

Capital Structure Ratios: - Debt- Equity Ratio - Debt- Assets Ratio

Debt- Equity Ratio

The debt-equity ratio indicates the relative contributions of creditors and owners can be defined as Debt --------Equity

Depending on the type of the business and the patterns of cash flows the components in debt to equity ratio will vary. Normally the debt component

includes all liabilities including current and the equity component consists of net worth and preference capital (Includes only the preference shares not redeemable in one year). The ratio of long-term debt (total debt current liability) to equity could also be used, but what is important is that consistency is followed when comparisons are made.

For Color Chem. Lt. the Debt Equity ratio is

= 110.93/83.01

= 1.33

But in case of NMDC Ltd. Debt Equity ratio is Zero, but the Debt- equity ratio for GMDC Ltd. is 1.06 For 2008

In the above case we got the debt- equity ratio is 1.06, which implies the debt portion is more than equity. The Debtequity ratio of the mining industry on average is 0.48.

By normal standards and also the industry the debt equity ratio is within the limit. In the heavy engineering industries, petroleum industries, infrastructure industries like railways, airways the ratio even go more than 3:1 as the capital outlays required are in very huge sums.

In general, the lower the debt-equity ratio, the higher the degree of protection felt by the lenders. One of the limitations of the above ratio is that the computation of the ratios is based on book value, as it is sometimes useful to calculate these ratios using market values. At the time of mergers and acquisitions or rehabilitation operations the valuation of the equity and debt will be affected by the basis of computation. For example, a sick company whose equity is initially valued at book values may be a healthy one if its assets are valued at market price if it has large land property in its books.

The debt equity ratio indicates the relative proportions of capital contribution by creditors and share holders. It is used as screening devise in the financial analysis. When we are analyzing the financial condition of a firm, when the debt- equity ratio is less than 0.50, analyst can go to other critical areas of analysis. But an analysis revels that debt is a significant amount in the total capitalization further investigation is undertaken which will throw light on firms financial condition, results of operations and future prospectus. This way, analysis of debt-equity ratio has a very important position in the financial analysis of any firm. Debt-Asset Ratio The above ratio measures the extent to which borrowed funds support the firms assets. It is defined as: Debt ------Assets The composition of debt portion is same as in the debt equity ratio.

The denominator in the ratio is total of all assets as indicated in the balance sheet. The type of assets an organization employs in its operations should determine to some extent the sources of funds used to finance them. It is usually held that fixed and other long-term assets should not be financed by means of short-term loans. In fact, the most appropriate source of funds for investment in such kind of assets is equity capital, though financially very sound organization may go for debt finance.

Color- Chem. Ind. Debt assets ratio for 2009 year end is

= 110.92/193.93

= 0.57

NMDC Ltd. debt assets ratio is 0 , But in case of GMDC Ltd. is = 664.29/1725.99 = 0.39

A debt assets ratio of 0.57 implies that 57% of the total assets are finance from debt sources. When we compare this with the industry average debt assets ratio of (.69), we find that the firm is having a lower leverage compared to the industry. There are two major uses of capital structure ratios. 1. To Measure Financial Risk One measure of the degree of risk resulting from debt financing is provided by those ratios. If the firm has been increasing the percentage of debt in its capital structure over a period of time, this may indicate as increase in risk for its longterm finance providers. As the debt content increases most of firm income will go

for servicing the debt and income will be reduced. This will affect the long term earnings prospectus of the company as less funds are reemployed because of increased debt servicing burden.

2. To Identify Sources of Funds The firm finances all its requirements either from debt or equity sources. Depending on the risk of different types the amount of requirements from each source is shown by these ratios. 3. To Forecast Borrowing Prospectus. If the firm is considering expansion and needs to raise additional money, the capital structure ratios offer an indication of whether debt funds could be used. If the ratios are too high, the firm may not be able to borrow. Coverage Ratio:

Coverage ratios give the relationship between the financial charges of a firm and its ability to service them. Important coverage ratios are interest coverage ratio, fixed charges coverage ratio and debt coverage ratio

Funds available to meet an obligation -------------------------------------------------Amount of that obligation

Interest Coverage Ratio

One measure of a firms ability to handle financial burdens in the interest coverage ratio, also referred to as the times interest coverage ratio. This ratio tells us how many times the firm can cover or meet the interest payments associated with debt. EBIT Interest Coverage Ratio = ---------------------------Interest Expenses

For Color- Chem Ind. It is equal to

= 30.82/9.58 = 3.22

For NMDC Ltd. It is 0

If we take the source of interest payment as cash flow before interest and taxation, the ratio could be modified as:

EBDIT = -----------------Interest Expenses

37.31/9.58 = 3.89

The greater the interest coverage ratio, the higher the ability of the firm to pay its interest expenses. An interest coverage ratio of 4 means that the firms earnings before interest and taxes are four times greater than its interest payments.

Fixed Charges Coverage Ratio:

Interest coverage ratio considers the coverage of interest of pure debt only. Fixed charges coverage ratio measures debt servicing ability comprehensively because it considers all the interest, Principal repayment obligations, lease payments and preference dividends. This ratio shows how many times the pre-tax operating income covers all fixed financing charges. It is defined as Earnings before Depreciation, debt interest and lease rentals and taxes -----------------------------------------------------------------------------------------------------Debt Interest + Lease Rental + Loan repayment installment + dividend Preference

------------------------------------ ------------------------(1- tax rate) (1- tax rate)

Fixed charges that are not tax deduct able must be tax adjusted. This is done by increasing them by an amount equivalent to the sum that would be required to obtain an after-tax income sufficient to cover such fixed charges. In the above ratio, preference stock dividend requirement is one example of such non-tax deductible fixed charges. To get the gross amount of preference dividends, it has to be divided by factor (1 tax rate)

For Color Chem. Ind. The fixed coverage ratio is calculated for the year 2008-09 as follow,

37.31 = -----------------------------------7.37 9.58 + 0 + -------0.75 = 1.92

For color- Chem. Ind. There are no lease rent payments and preference dividend payments. The loan repayment has been assumed to be Rs.7.37 crore. The fixed charges coverage ratio of 1.92 indicates that its pre-tax operating income is 1.92 times all fixed financial obligation.

Debt Service Coverage Ratio:

Normally used by term- lending financial institutions in India. The debt service coverage ratio, which is a post- tax coverage is defined as :

PAT + Depreciation + Other non-cash charges + interest on term loan -------------------------------------------------------------------------------------------Interest on term loan + Repayment of the term loan

For color-Chem Ind. The debt services coverage ratio for the year 2007-08 is ,

(15.94+6.49+0+9.58) = ---------------------------(9.58+7.37) = 1.89

A DSCR of 1.89 indicates the firm has post-tax earnings which are 1.89 times the total obligations (interest and loan repayment) in the particular year to the financial institutions.

3. Dividend Ratios: The common stockholder is very much concerned about the firms policy regarding the payment of cash dividends. If the firm is not paying enough dividends the sock may not be attractive to those who are interest in current income from their investment in the company. If the firm is paying excessive dividends, it may not be retaining adequate funds to finance future growth. So depending on the share holders aspirations a firm must formulate its dividend policy in a balanced way. The firm must be liquid and profitable to pay consistent and adequate dividends. Without profits, the firm will not have sufficient resources to give dividends, without liquidity the firm cannot get cash to pay the dividends. In the above respects, two dividend ratios are important; they are dividend payout ratio and dividend yield ratio. Dividend Payout Ratio: This is the ratio of the dividend per-share (DPS) to earnings per share (EPS) . It indicates what percentages of total earnings are paid to shareholders. The percentage of the earnings that is not paid out ( 1- dividend pay out) is retained for the firms future needs. There is no guideline as to what percentage of earnings should be declared as dividends and it varies according to firms fund requirements to support its operations. If the firm is in need of funds, then it may cut the dividends in relation to earnings and on the other hand if the firm finds that it lacks opportunities to use the firms generated, it might increase the dividends. But in both the cases, consistency of dividend payment is important to the shareholders.

Dividend Yield:

This is the ratio of dividends per share (DPS) to market price of the share. Dividend per share Dividend Yield = ---------------------------Market price of the share This ratio gives current return on his investment. This is mainly of interest to the investors who are desirous of getting income from dividends. No dividend yield exists for firms which do not declare dividends.

Dividend pay out and yield for Color- Chem. Ind. are summarized in the following table,

Ratios

2009

2008

2007

2006

DPS EPS Mkt. Price Div. Pay Out Div. Yield P/E

3.50 13.68 4250 0.27 0.08 373.90

2.84 12.81 4500 0.22 0.06 413.10

2.18 8.98 1300 0.24 0.17 144.70

2.40 6.70 2400 0.36 0.10 358.20

Overall Ownership Analysis

Ratios

Color- Chem.

Dyes & Pig Ind.

EPS Price Earning Mul. Capitalization rate Debt Equity Debt Asset Ratio Interest Cov. Ratio Dividend Payout Dividend Yield

13.08 373.90 0.32 1.33 0.57 3.22 0.27 0.08

1.424 0.69 2.00 -

The above analysis was made on the basis of the information taken from Color Chem Industries Ltd. as given at the stating of the ratio analysis. Now all the comparative analysis will make as per the information collected for Mining Industries. Here we are taking Thee Mining and exploration industry.

One is NMDC Ltd., second one is GMDC Ltd. & third one is Sesa Goa Ltd. The first & second companies as public sector undertaking and the third company is a private limited company.

All the three companies are pioneer in their mining activities in India. There fore all the comparative analysis will be made on the data received from the different sites of the internet & they are provided at end.

COMPARATIVE ANALYSIS

To get more meaningful picture of the position of firm sometimes it is useful to compare its financial information across many players in the industry (cross sectional analysis) or to compare over a period of time (time series analysis)

The comparison of financial statements is accomplished by taking the individual items of different financial statements and reviewing the changes that have occurred from year to year and over the years. The most important factor revealed by comparison of financial statements over a number of years will also reveal the direction, velocity, and the amplitude of trend. Further analysis can be undertaken to compare the trends in related items. Different types of comparative analysis are,

1. Cross-sectional analysis Time-series analysis a. Year - to - Year change b. Index analysis 2. Common size analysis

1. Cross-Sectional Analysis

To assess whether the financial ratios are within the limit, they are compared with the industry averages or with a good player in normal business conditions if an organized industry is not there. This is called cross-sectional analysis in which industry averages or standard players averages are used as benchmark.

The following table gives cross sectional analysis of NMDC Ltd. against the industry and GMDC Ltd. and a good competitor in mining industry.

Ratios LIQUIDITY

NMDC Ltd.

GMDC Ltd.

Sesa Goa

Current Ratio

2.31

1.29

1.95

Quick Ratio

1.44

1.24

1.27

Inventory Turnover

5.98

66.02

15.38

LEVERAGE

Debt-equity Ratio

0.75

0.62

00.00

Fin. Charges Cov. Ratio

3.04

8.56

8.08

Fixed assets Turnover Ratio

1.35

0.53

5.56

Financial Charges Coverage Ratio

00.00

6.45

5.83

PROFITABILITY

Gross Profit Margin

11.09

47.32

68.73

Operating profit Margin

14.68

57.06

69.92

Net profit Margin

6.12

25.48

40.98

Return on Equity

60.68

61.64

907.42

From the comparison it was found that the NMDC Ltd. has the better liquidity position than the other two industries. As NMDC Ltd has better Current and Quick ratio than the other two companies. In case of profitability ratio Sesa Goa Ltd. is in

very good position , also return to equity is very large than other two companies.

3. Time- Series Analysis a. Year to year change. A comparison of financial statements over two to three years can be undertaken by comparing the year- to -year change in absolute mounts and it terms of percentage changes. Longer term comparisons are best illustrated by means of index number trend series. When a two or three years comparison is attempted, the presentations are manageable and can be understood by the reader. Comparative financial statements can also be presented in such a way that the cumulative totals for the period for each item under study and the average for that period are shown. Trend for liquidity and average ratios of NMDC LTD. and GMDC LTD can be illustrated as follows: NMDC Ltd. Year 2009 2008 2007 2006

Current Ratio

3.91

4.06

3.32

3.11

Quick Ratios

3.83

3.97

3.23

2.95

Debt to Equity Ratio

0.00

0.00

0.00

0.00

Interest Cov. Ratio

0.00

0.00

0.00

0.00

GMDC Ltd.

Year

2009

2008

2007

2006

Current Ratio

1.29

1.33

1.97

2.48

Quick Ratios

1.24

1.25

1.68

2.29

Debt to Equity Ratio

0.62

1.14

1.39

1.45

Financial Cov. Ratio

8.56

4.44

4.97

16.09

In the above table we have given two Liquidity Ratios, and two leverage ratios. There are no variations in case Current ratios and quick ratios for NMDC Ltd. for last four years. But in case of GMDC Ltd. Current ratio has decreased from 2.48 to 1.29 over a periods of four years, also the quick ratio decrease from 2.29 to 1.24. This is because of the increase in the current liability and provisions from Rs.

241.06 in year 2005 to Rs. 1053.49 in year 2009. If we come to leverage ratios debt equity ratios has declined over a period of time and financial cov. Ratio decreased from 2006 to 2008 and increase in 2009 which is good sing in the year 2009 as it increases.

This way we can come to the conclusions by observing the trends of certain important variables in the financial analysis.

b. Index numbering trend Series. When we comparison of financial statements covering more than three years is undertaken, the year to year method of comparison may become too cumbersome. The best way to understand such long term trend comparisons is by means of index numbers. The computations of as series if index numbers requires the choice of a base year that will, for all items, have an index amount of 100. Since such a base year represents a frame of reference for all comparisons, it is advisable to choose a year that is as typical or normal as possible in a business conditions sense.

Year Sources Funds: A. Share Capital

2005

2006

2007

2008

2009

100

100

121.28

146.72

146.72

B. Reserves Total 100

119.24

219.36

352.28

422.49

C. Total share

100

113.08

188.00

286.54

344.31

Holders Funds(A+B)

D. Secured Loan 100

174.72

197.67

134.89

158.99

E. Unsecured Loan100

79.31

72.48

133.37

177.24

F. Total Debt(D+E)100

142.03

157.40

134.40

164.24

G. Total liability 100 (C+F)

133.04

168.27

188.44

225.05

APPLICATION OF FUNDS:

H. Gross Block

100

132.49

160.00

182.87

193.71

I. Less: Accum. Dep.

100

109.16

120.55

135.62

141.05

J. Net Block (H-I) 100

175.66

233.01

270.29

291.16

K. Capital W-In-Prg.

100

47.00

59.63

68.80

86.00

L. Investment

100

109.05

109.05

114.33

250.18

M. Current Assets Loans & Advances (N +O + P + Q)

N. Inventories

100

85.75

84.64

98.25

112.37

O. Sundry Debtors

100

95.82

118.48

117.0

156.47

Q. Loans and Banks

100

128.57

87.30

128.5

146.82

TOTAL CURRENT ASSETS R. Less Current Liab. & Prov.

(N + O + P + Q)

S. Current Liabilities

100

61.59

47.93

53.83

80.92

T. Provisions

100

101.57

114.21

180.00

223.15

U. Net current Assets

100

130.56

161.55

176.27

214.85

V. Total Assets (J+K+L+U)

100

188.44

168.27

133.04

223.20

An important use of this method is when we want to see how all the variables of a particulars statement are changing over a longer period of time. For example, the index-number trend series for Color- Chem. industries over last five years is given in the above table makes over-all picture of change at a glance than the actual balance sheet. In summary, an important value of trend analysis is that it can

convey to the analyst a better understanding of managements philosophies, policies, and motivations, conscious or otherwise, that have brought about the changes revealed over the years. The more diverse the economic environments covering the periods comparison are, the better a picture can be obtained by the analyst of the ways in which the enterprise has came out of its adversities and taken advantage of its opportunities. 3. Common- size Analysis In the analysis of financial statements, it is often instructive to find out the proportion that a single item represents of a total group or subgroup. In a balance sheet, the assets as well as the liabilities and capital are each expressed as 100 percent, and each item in these categories is expressed as a percentage of the respective totals. Similarly, in the income statement, net sales are set at 100 percent and every other item in the statement is expressed as a percentage of net sales. Common size statements are very well suited to inter-company comparison because the financial statements of a variety of companies can be recast into the uniform common size format regardless of the size of individual accounts. Comparison of common size statements of companies within an industry or with common size composite statistics of that industry can alert the analysts attention to variations in account structure or distribution.

Year

as on 31/03/2009 Color-Chem. Ind. Atul Product.

Liabilities:

Equity Capital

7.40

9.69

Pref. Capital

0.00

0.00

Reserve (Excl. Revaluation Reserve)

45.36

49.90

Reval. Reserves

0.00

0.00

Shareholders Funds

52.76

59.59

Secured Loans

30.90

35.18

Unsecured Loans

16.34

5.23

Loan Funds

47.24

40.41

Total Funds Employed

100.00

100.00

Assets

Gross Block

69.95

83.03

Acc. Depn.

33.06

34.53

Net Block

36.88

48.50

CWIP

4.37

3.27

Investments

4.21

3.89

Inventory (Total) Sundry Debtors

29.43 31.68

23.85 17.96

Cash & bank balances

1.18

0.77

Loans, advances & deposits

14.68

17.44

Total current assets

76.97

52.92

Sundry Creditors

20.57

13.68

Other Curr. Liab. & Provisions

2.69

2.87

Total Current Liabilities

23.26

16.55

Net Current Assets ( Cu. Asset-Liab) 53.71

43.37

Misc. Exp. Not W/O

0.82

0.88

Total Assets

100.00

100.00

When we analyze the above table we can find that Color-Chem. Industries has employed more loan funds than the Atul Products which implies higher debt-equity ratio. Keeping all the other factors constant, in a tight credit market, Atul Products will be able to get more loans than Color-Chem. Ind.s because of lower debtequity ratio. If we make profit and loss statement also into consideration, we will find that because of Color-Chem.s High efficiency in generating profit it may be other way around. Color-Chem. also has higher proportion of working capital compared to Atul Products. In busy periods this may be useful but in slack period it works against the company. Like this, each and every variable is compared depending on analysts motives.

The common size analysis can be carried out further and extended to an examination of what proportion of a subgroup, rather than the total, an item is. Thus, in assessing the liquidity of current assets, it may be of interest to know not only what proportion of total assets is invested in inventories but also what proportion of current assets is represented by this.

DU PONT ANALYSIS

The Du Pont Company of the US developed a system of financial analysis which has got good recognition and acceptance. Analyzing return ratios in term of profit margin and turnover ratios, referred to as the Du Pont System. The usefulness of the above system can be better understood with the help of an illustration. Lets consider the return in assets ratio, the definition of the return on assets is Return on assets = Net profit / Average assets Suppose the return on assets changes from 30 percent to 15 percent we may conclude either this decreased return in due to a less efficient application of the firms assets, that is , lower activity or to lower profit margins. As we are interested in assessing the operating performance of the firm to judge about management abilities and future performance, knowing the sources of return is a valuable information. When both the numerator and the denominator of the return on assets is divided by sales:

Net Profit/Sales Return on Assets = ----------------------------Average Assets/ Sales

= Net profit Margin X Average asset turnover

When analyzing a change in return on assets, the analyst cloud look in to the above equation to see change in its components: net profit margin and total assets turnover. For Color- Chem Ind. For the year 2009 and 2008 the ratios of return on assets and margins are follows: Year Return on assets Net profit Margin Average assets Turnover

2008

11.00%

6.11%

1.8

2007

11.97%

6.96%

1.72

Net profit margin decline from 2008 to 2009, yet asset turnover improved slightly:

from 1.72 to 1.8. Therefore, the decrease in return on assets is attributable to the decrease in net profit margin.

If we go further each component of right hand side equation could be broken into parts to study what is the cause for change in individual components. With this approach of breaking down into components we can get an overall picture of the changes taking place in the system which will be great help to the analyst. The following figure shows the

Du Pont Chart as applied to Color- Chem. Ind. For the year 2008-09 The left hand side of the Du Pont chart gives the details of the net profit margin ratio. This side is examined to find out whether cost reduction may improve the net profit margin. In supplement to this, comparative common-size analysis is used to understand where cost control effort should be directed. From the right hand side of the Du Pont chart, we get the details of total assets turnover ratio. In addition to this, if make a study turnover ratios (Inventory turnover, Fixed assets turnover etc.) an insight can be get into assets utilization efficiencies. We can extend the basic Du Pont analysis to analyze the determinates of return on equity (ROE). But the return-on-equity ratios are in terms of the use of all assets, not just the proportion financed by equity, we need to adjust the activity ratio (Total assets turnover) by the proportion of assets that financed by equity (the ratio of the book value of share holders equity to total assets):

Adjusted average assets turnover

Sales = ---------------------------------Average book value of shareholders equity Sales X -------------------------------------Average assets

We can get the basic Du Pont equation for return on equity as:

Return On Equity ( ROE)

Net Profit = -----------Sales X

Sales -------------Average assets

Average Assets X -----------------Average equity

The third component of the equation is called equity multiplier. Looking back at the debt-to asset ratio, the equity multiplier can restate in term of the total debt-to-

assets ratio as follows.

Average assets Equity multiplier = ----------------Average equity

Average assets = -------------------------------Average assets average debt

1 = ----------------------------1 (Average debt/Average assets)

1 = --------------------------------1(Debt Assets ratio)

This way, we can breakdown each return ratio into its margin and turnover components.

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Problems Encountered in Financial Statement Analysis:

Analysis of financial statements using ratios can be very helpful in understanding a companys financial performance and condition. Yet there are certain problems which in the way of such an analysis. Development of benchmarks: Many companies have operations spread across a number of industries. As there may not be any other company having a presence in the same industries, that too in the same proportion, development of a benchmark becomes a problem. Even when the company is not a diversified one, figures for the various firms are needed in addition to the industry average, in order to draw a meaningful conclusion. Window-dressing: Firms may window dresses the financial statements in order to show a rosy picture. In such a case, the whole exercise of analyzing the statement becomes useless. In order to draw some meaningful results out of the analysis, the average figures over a period of time should be looked into. Price level change: Financial statements do not take into account changes in price levels. Analysis of such statements may not give a true picture of the state of affairs.

Difference in accounting policies: Different companies may follow different accounting policies in respect of depreciation, stock valuation etc. Comparison between the ratios of two firms following different policies may not give the true result. Interpretation of results: A problem may arise on two accounts interpretation of ratio on its own, and interpretation of all the ratios taken together. It is difficult to decide the optimum level of a ratio, in spite of the presence of industry average. For e.g. it is difficult to say whether a high current ratio shows a good liquidity position or an unnecessarily high level of inventories. Secondly, some ratios may be in favor of a company, while some other may be against it. In such a case, it may be difficult to form an overall opinion about the company. Correlation among ratios: There may be a high degree of correlation among the various ratios calculated, due to the presence of some common factor. This may make interpretation of all the ratios confusing. Hence it becomes essential to choose a few ratios which can convey the required information.

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Summary: Financial statement analysis involves the application of analytical tools and techniques to the financial data to get information that is useful in decision making. As we have observed, the foundation of any good analysis is a thorough understanding of the objectives to be achieved and the uses to which it is going to be put. Such understanding leads to economy of effort as well as to a useful and most relevant focus on the points that need to be clarified and the estimates and projections that are required. So to begin with, financial statement analysis is oriented toward the achievement of definite objectives. Importantly there are three types of users to whom the financial statement analysis could be very useful. They are short-term lenders, long-term lenders and finally stockholders. Having defined the objectives the next step is to decide the tools of analysis. In the chapter an important tool ratio analysis is covered extensively. Other tolls covered are comparative analysis and Du Pont analysis. The analysis of a ratio gives the relationship between two variables at a point of time, there are three kinds of ratios and they are liquidity ratios, profitability ratios, ownership ratios. Liquidity ratios measure the short term liquidity of the firm with the help of ratios like current ratio, quick ratio and turnover ratios. Profitability ratios measure the operational efficiency of the firm. They give the details of how efficient the firm is in applying its resources to get the maximum returns. Ownership ratios helps the present or future stockholders in assessing the value his investment. Earnings ratios, leverage ratios (Capital structure and coverage ratio) and dividend ratios fall into the category of ownership ratios.

Leverage ratios measure the long-term solvency of the firm. They are further divided into capital structure ratios and coverage ratios. Du Pont analysis divides a particular ratio into components and studies the effect of each and every component on the ratio. Comparative analysis gives an idea where a firm stands across the industry and studies its financial trends over a period of time. The final step in analysis is the interpretation of the data and measures assembles as a basis for decision and action. This is the most important and difficult of the steps, and requires application of a great deal of judgment, skill and effort. Though there are limitations for financial statement analysis but it is the only means which the financial realities of an enterprise can be reduced to a common denominator that is quantified and that can be mathematically manipulated and projected in a rational and disciplined way.

FINDINGS Comparison between the ratios of two firms following different policies may not give the true result. From Comparison it was found that NMDC Ltd. Has the better liquidity position than other two companies in this project. ROC for NMDC Ltd. Is 19.2% which shows healthiness and NMDC Ltd. Has employed its resources. Collection job is poor. Net Profit is increasing year by year of NMDC Ltd. Firms Liquidity Ratio is 3.31 so it can pay its debt in short run.

SUGESTIONS The Credit term or average collection period is 30 days but the realized average collection period is 60 days. So Company should draw their attention towards the credit term. Since efficient application of assts performed well so it indicates some remedial measures have to be taken from sales point of view. Different companies may follow different accounting policies in respect of depreciation, stock valuation, stock valuation etc. When the company is not a diversified one, figures for the various firms are needed in addition to the industry average, in order to draw a meaningful conclusion. Since current ratios for the firm have 3.31 is more than enough so it can be used elsewhere. Since NMDC Bacheli is very closer to Dantawan (Maoist Place) so it should have proper security and safety.

CONCLUSION The foundation of any good analysis is a thorough understanding of the objectives to be achieved and the uses to which it is going to be put. Such understanding leads to economy of effort as well as to a useful and most relevant focus on the points that need to be clarified and the estimates and projections that are required. The analysis of a ratio gives the relationship between two variables at a point of time, there are three kinds of ratios and they are liquidity ratios, profitability ratios, ownership ratios. Importantly there are three types of users to whom the financial statement analysis could be very useful. They are short-term lenders, long-term lenders and finally stockholders. The comparison it was found that the NMDC Ltd. has the better liquidity position than the other two industries. As NMDC Ltd has better Current and Quick ratio than the other two companies.

BIBLIOGRAPHY 1. Financial Management book issued The Institute of Chartered Financial Analysts of India.

2. Journals issued from ICAI Delhi, Topic on the financial analysis and its implication in the current scenario.

3. Seminar conducted by the ICWAI institute on Financial Statement Analysis.

4. Web site of SBICAP, information of different companies.

5. Seminar for Financial Statement Analysis conducted by Administrative Staff College of India (ASCI) Hyderabad.