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The objective of this project work is to focus on the Ratio Analysis of Narmada Gelatines and
exploring its potential in the company. The project contain the basic postulates of working
capital, procedure of analysis of working capital, ratio being used to define the working capital
and the impact of working capital in the company in case of excess or inadequacy. Also, the
project contains analysis of estimation of working capital requirement and the procedure to
estimate working capital requirement in manufacturing and trading concern. And from the data
available it can be concluded that it holds a very strong position in the market.
The overall performance of Narmada Gelatine Limited is getting on a good track. The total
turnover of the company has registered a growth of 7.15% where as the operating profits for the
year were higher by 82.5% mainly on the accounts of increase in the volume or sales, higher
realization and effective cost control measures taken by the company.
With the increase in capacity on account of expansion projects being undertaken by the
company, it is expected that the company would be in a position to maintain the growth in future
years.
Concept
An organization undertakes multiple projects with different capital requirements, rates of return,
and time duration.
For example, some projects may need investment over a longer period of time, whereas others
need investments only in the initial years.
Since every project requires investment; therefore, an organization should take project selection
decisions very prudently to ensure the optimum utilization of funds invested.
Any wrong selection of a project may incur heavy losses for the organization. In addition, the
reputation and goodwill of the organization may also get affected.
An organization needs to evaluate the capital requirements of a project and the returns generated
from it, before selecting a project. This can be done with the help of Ratio Analysis, which is a
process of determining the actual profitability of a project. In other words, Ratio Analysis is a
process that helps in planning the investment projects of an organization in the long run. The
long- term investments of an organization can be purchase and replacement of fixed assets, new
product launching or expansion of existing products, and research and development.
The Ratio Analysis process can be effective if an organization determines the total capital
expenditure for a project that is expected to generate returns over a particular period of time. An
organization uses various techniques to determine the total expenditure for a project and rate of
return yielded from it. Some of the popular techniques are net present value, internal rate of
return, payback period, sensitivity analysis, and decision tree analysis.
In other words, Ratio Analysis is a method of identifying, evaluating, and selecting long-term
investments. The concept of Ratio Analysis has a great importance in project selection as it helps
in planning capital required for completing long-term projects. Selection of a project is a major
investment decision for an organization.
Therefore, Ratio Analysis decisions are included in the selection of a project. In addition, Ratio
Analysis helps in estimating costs and benefits involved in a particular project. A project is not
worth investing, if it does not yield adequate return on invested capital.
Some of the management experts have defined Ratio Analysis in the following ways:
According to Charles T. Homgreen, Ratio Analysis is long-term planning for making and
financing proposed capital outlays.
COMPANY PROFILE
Narmada Gelatines Ltd. (Erstwhile Shaw Wallace Gelatines Ltd) was set up in 1961. The
company is strategically located in the Central Indian State of Madhya Pradesh and has
convenient access to its main and essential inputs of crushed bones, acid, lime and good quality
water.
Narmada Gelatines Ltd. has pioneered the manufacture of ossein and gelatin in India and is today
a frontrunner in India's Gelatine Industry meeting exacting standards of various users worldwide.
A professional marketing set up with stock points / warehouses in major Indian metros
Gelatine is one of the most versatile biological products with a wide range of physical and
chemical properties. It is a natural animal protein composed of various essential amino acids
required for human nutrition.
Gelatine is derived from the selective hydrolysis and extraction of protein collagen found mainly
in the connective tissues of animals.
Collagen is the principal organic component of animal bones. In India bovine bones, are the
conventional raw materials used in gelatine manufacture. The formation of water-soluble
gelatine may be regarded as hydration and hydrolysis of collagen. Gelatine molecules represent
various sized units, each a fragment of the collagenous chain.
Gelatine is not a single chemical entity. It is a mixture of fractions different principally in
molecular sizes. These fractions are composed entirely of amino acid radicals joined together by
peptide linkages.
Gelatine contains the essential elements of carbon, hydrogen, nitrogen and oxygen. It contains all
the amino acids, which are essential for mammalian nutrition with the exception of tryptophane.
It has a direct contribution to a wide range of products in the pharmaceutical, edible,
photographic and other technical industries.
Gelatine is the only natural gelling protein of commercial importance. It also has the following
two unique properties.
Due to these unique features there is often no satisfactory alternative or substitue for gelatine.
The end product would not be available to the consumer without its gelatine content.
These and gelatine's other significant intrinsic properties allow it to be used in a variety of ways -
not only as a product for human consumption, in various edible and food products but also in the
demanding field of pharmaceuticals.
Without gelatine, the pharmaceutical and vitamin industries would be unable to produce the
modern day capsules, which allow for the measured dosage and controlled release of medicines,
drugs and vitamins.
Gelatine is manufactured in facilities, which maintain the highest standards for health and safety.
The raw material used for production of gelatine is the naturally occurring protein collagen,
which is commercially sourced from the meat industry from healthy animals designated for
human consumption. Each stage of the manufacturing process is rigorously controlled in modern
laboratories to ensure purity and quality. The process of converting collagen into gelatine
involves several cleansing and purification steps. The end result is an off white dry powder of the
utmostpurity.
Gelatine is a multifunctional ingredient with unique properties: it melts at body temperature and
it forms thermo reversible gels. There is no satisfactory alternative or substitute for gelatine
because of these two unique properties. These unique properties and other significant intrinsic
properties provide a highly versatile substance, which can be used for:
Gelatine gives a unique mouth feel in food application, already appreciated since ancient time.
Gelatine is a foodstuff not a food additive. Therefore, gelatine can be used freely without
limitation or qualification and does not require and E number. Moreover, gelatine is a natural
protein composed of the same amino acids as those found in the human body and contains 18
amino acids of which 9 out of 10 (of which 2 are only essential to children) are essential in the
human diet. It is also known that gelatine hydrolysate derived from gelatine has a preventive and
regenerative effect on the skeleton and locomotors system especially bones, cartilage, tendons
andligaments.
Gelatine Range:
Pharmaceutical
Edible
Industrial
Photographic
Topic Description
Ratio Analysis, or investment appraisal, is the planning process used to determine whether an
organization's long term investments such as new machinery, replacement of machinery, new
plants, new products, and research development projects are worth the funding of cash through
the firm's capitalization structure (debt, equity or retained earnings). It is the process of allocating
resources for major capital, or investment, expenditures.[1] One of the primary goals of Ratio
Analysis investments is to increase the value of the firm to the shareholders.
Many formal methods are used in Ratio Analysis, including the techniques such as
These methods use the incremental cash flows from each potential investment, or project.
Techniques based on accounting earnings and accounting rules are sometimes used - though
economists consider this to be improper - such as the accounting rate of return, and "return on
investment." Simplified and hybrid methods are used as well, such as payback
period anddiscounted payback period.
Project classifications
Ratio Analysis projects are classified as either Independent Projects or Mutually Exclusive
Projects. An Independent Project is a project whose cash flows are not affected by the
accept/reject decision for other projects. Thus, all Independent Projects which meet the Ratio
Analysis criterion should be accepted.
Mutually exclusive projects are a set of projects from which at most one will be accepted. For
example, a set of projects which are to accomplish the same task. Thus, when choosing between
"mutually exclusive projects", more than one project may satisfy the Ratio Analysis criterion.
However, only one, i.e., the best, project can be accepted.
Of these three, only the net present value and internal rate of return decision rules consider all of
the project's cash flows and the time value of money. As we shall see, only the net present value
decision rule will always lead to the correct decision when choosing among mutually exclusive
projects. This is because the net present value and internal rate of return decision rules differ
with respect to their reinvestment rate assumptions. The net present value decision rule implicitly
assumes that the project's cash flows can be reinvested at the firm's cost of capital, whereas the
internal rate of return decision rule implicitly assumes that the cash flows can be reinvested at the
project's IRR. Since each project is likely to have a different IRR, the assumption underlying the
net present value decision rule is more reasonable.
Internal rate of return
The internal rate of return (IRR) is defined as the discount rate that gives a net present
value (NPV) of zero. It is a commonly used measure of investment efficiency.
The IRR method will result in the same decision as the NPV method for (non-mutually
exclusive) projects in an unconstrained environment, in the usual cases where a negative cash
flow occurs at the start of the project, followed by all positive cash flows. In most realistic cases,
all independent projects that have an IRR higher than the hurdle rate should be accepted.
Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the
highest IRR - which is often used - may select a project with a lower NPV.
In some cases, several zero NPV discount rates may exist, so there is no unique IRR. The IRR
exists and is unique if one or more years of net investment (negative cash flow) are followed by
years of net revenues. But if the signs of the cash flows change more than once, there may be
several IRRs. The IRR equation generally cannot be solved analytically but only via iterations.
One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual
annual profitability of an investment. However, this is not the case because intermediate cash
flows are almost never reinvested at the project's IRR; and, therefore, the actual rate of return is
almost certainly going to be lower. Accordingly, a measure called Modified Internal Rate of
Return (MIRR) is often used.
Despite a strong academic preference for NPV, surveys indicate that executives prefer IRR over
NPV[citation needed], although they should be used in concert. In a budget-constrained environment,
efficiency measures should be used to maximize the overall NPV of the firm. Some managers
find it intuitively more appealing to evaluate investments in terms of percentage rates of return
than dollars of NPV.
Equivalent annuity method
The equivalent annuity method expresses the NPV as an annualized cash flow by dividing it by
the present value of the annuity factor. It is often used when assessing only the costs of specific
projects that have the same cash inflows. In this form it is known as the equivalent annual
cost (EAC) method and is the cost per year of owning and operating an asset over its entire
lifespan.
It is often used when comparing investment projects of unequal lifespans. For example, if project
A has an expected lifetime of 7 years, and project B has an expected lifetime of 11 years it would
be improper to simply compare the net present values (NPVs) of the two projects, unless the
projects could not be repeated.
The use of the EAC method implies that the project will be replaced by an identical project.
Alternatively the chain method can be used with the NPV method under the assumption that the
projects will be replaced with the same cash flows each time. To compare projects of unequal
length, say 3 years and 4 years, the projects are chained together, i.e. four repetitions of the 3-
year project are compare to three repetitions of the 4-year project. The chain method and the
EAC method give mathematically equivalent answers.
The assumption of the same cash flows for each link in the chain is essentially an assumption of
zero inflation, so a real interest rate rather than a nominal interest rate is commonly used in the
calculations.
Real options
Real options analysis has become important since the 1970s as option pricing models have gotten
more sophisticated. The discounted cash flow methods essentially value projects as if they were
risky bonds, with the promised cash flows known. But managers will have many choices of how
to increase future cash inflows, or to decrease future cash outflows. In other words, managers get
to manage the projects - not simply accept or reject them. Real options analysis tries to value the
choices - the option value - that the managers will have in the future and adds these values to
the NPV.
Ranked projects
The real value of Ratio Analysis is to rank projects. Most organizations have many projects that
could potentially be financially rewarding. Once it has been determined that a particular project
has exceeded its hurdle, then it should be ranked against peer projects (e.g. - highest Profitability
index to lowest Profitability index). The highest ranking projects should be implemented until
the budgeted capital has been expended.
Funding sources
Ratio Analysis investments and projects must be funded through excess cash provided through
the raising of debt capital, equity capital, or the use of retained earnings. Debt capital is
borrowed cash, usually in the form of bank loans, or bonds issued to creditors. Equity capital are
investments made by shareholders, who purchase shares in the company's stock. Retained
earnings are excess cash surplus from the company's present and past earnings.
Need for Ratio Analysis
1. As large sum of money is involved which influences the profitability of the firm
making capital budgeting an important task.
2. Long term investment once made cannot be reversed without significant loss of
invested capital. The investment becomes sunk, and mistakes, rather than being
readily rectified, must often be borne until the firm can be withdrawn through
depreciation charges or liquidation. It influences the whole conduct of the business
for the years to come.
3. Investment decisions are the based on which the profit will be earned and probably
measured through the return on the capital. A proper mix of capital investment is
quite important to ensure adequate rate of return on investment, calling for the
need of Ratio Analysis.
4. The implication of long term investment decisions are more extensive than those of
short run decisions because of time factor involved, Ratio Analysis decisions are
subject to the higher degree of risk and uncertainty than short run decision
BREAKING DOWN 'Ratio Analysis'
Ideally, businesses should pursue all projects and opportunities that enhance shareholder
value. However, because the amount of capital available at any given time for new projects is
limited, management needs to use Ratio Analysis techniques to determine which projects will
yield the most return over an applicable period of time. Various methods of Ratio Analysis can
include throughput analysis, net present value (NPV), internal rate of return
(IRR), discounted cash flow (DCF) and payback period.
There are three popular methods for deciding which projects should receive investment
funds over other projects. These methods are throughput analysis, DCF analysis and payback
period analysis.
Throughput Analysis
The analysis assumes that nearly all costs in the system are operating expenses,
that a company needs to maximize the throughput of the entire system to pay for
expenses, and that the way to maximize profits is to maximize the throughput
passing through a bottleneck operation. A bottleneck is the resource in the system
that requires the longest time in operations. This means that managers should
always place higher consideration on Ratio Analysis projects that impact and
increase throughput passing though the bottleneck.
DCF Analysis
DCF analysis is similar or the same to NPV analysis in that it looks at the initial
cash outflow needed to fund a project, the mix of cash inflows in the form of
revenue, and other future outflows in the form of maintenance and other costs.
These costs, save for the initial outflow, are discounted back to the present date.
The resulting number of the DCF analysis is the NPV. Projects with the highest
NPV should be ranked over others, unless one or more are mutually exclusive.
Payback Analysis
Payback analysis is the most simple form of Ratio Analysis analysis and is
therefore the least accurate. However, this method is still used because it's quick
and can give managers a "back of the napkin" understanding of the efficacy of a
project or group of projects. This analysis calculates how long it will take to
recoup the investment of a project. The payback period is identified by dividing
the initial investment by the average yearly cash inflow.
Benefits
Ratio Analysis revolves around capital expenditures which include large inflow
and outflow of money to finance investment projects. It is a process by which a
company decides whether it should invest in a project or not. We should
understand the advantages and disadvantages of Ratio Analysis as a technique to
have a correct interpretation of results thereof.
Ratio Analysis is largely used for long-term investment opportunities whose tenure
is more than a year and fetches returns over several subsequent years. These
investment opportunities could be for new plant & machinery, factory facility,
construction of a building etc. Ratio Analysis is a very important tool in finance
but it comes with its own merits and demerits.
of the company.
It helps the company to estimate which investment option would yield
wisely.
investing.
Drawbacks
Ratio Analysis decisions are for long term and are majorly
irreversible in nature.
Most of the times, these techniques are based on the estimations and
Ratio Analysis still remains introspective as the risk factor and the
A wrong Ratio Analysis decision taken can affect the long term
flows and outflows. The future is always uncertain and the data
collected for future may not be exact. Obviously, the results based
decisions.
Ratio Analysis.
Role In Business
Ratio Analysis decisions are of paramount importance in financial decision. The profitability of a
business concern depends upon the level of investment made for long period. Moreover, the
investments are made properly through evaluating the proposals by Ratio Analysis. So it needs
special care. In this context, the Ratio Analysis is getting importance.
1. Long-term Implications of Ratio Analysis: A Ratio Analysis decisionhas its effect over a
long time span and inevitably affects the companys future cost structure and growth. A wrong
decision can prove disastrous for the long-term survival of firm. On the other hand, lack of
investment in asset would influence the competitive position of the firm. So the Ratio Analysis
decisions determine the future destiny of the company.
2. Involvement of large amount of funds in Ratio Analysis: Ratio Analysis decisions need
substantial amount of capital outlay. This underlines the need for thoughtful, wise and correct
decisions as an incorrect decision would not only result in losses but also prevent the firm from
earning profit from other investments which could not be undertaken.
3. Irreversible decisions in Ratio Analysis: Ratio Analysis decisions in most of the cases are
irreversible because it is difficult to find a market for such assets. The only way out will be scrap
the capital assets so acquired and incur heavy losses.
4. Risk and uncertainty in Ratio Analysis: Ratio Analysis decision is surrounded by great
number of uncertainties. Investment is present and investment is future. The future is uncertain
and full of risks. Longer the period of project, greater may be the risk and uncertainty. The
estimates about cost, revenues and profits may not come true.
5. Difficult to make decision in Ratio Analysis: Ratio Analysis decision making is a difficult
and complicated exercise for the management. These decisions require an over all assessment of
future events which are uncertain. It is really a marathon job to estimate the future benefits and
cost correctly in quantitative terms subject to the uncertainties caused by economic-political
social and technological factors.
6. Large and Heavy Investment: The proper planning of investments is necessary since all the
proposals are requiring large and heavy investment. Most of the companies are taking decisions
with great care because of finance as key factor.
7. Permanent Commitments of Funds: The investment made in the project results in the
permanent commitment of funds. The greater risk is also involved because of permanent
commitment of funds.
8. Long term Effect on Profitability: Capital expenditures have great impact on business
profitability in the long run. If the expenditures are incurred only after preparing capital budget
properly, there is a possibility of increasing profitability of the firm.
9. Complicacies of Investment Decisions: Generally, the long term investment proposals have
more complicated in nature. Moreover, purchase of fixed assets is a continuous process. Hence,
the management should understand the complexities connected with each projects.
10. Maximize the worth of Equity Shareholders: The value of equity shareholders is increased
by the acquisition of fixed assets through Ratio Analysis. A proper capital budget results in the
optimum investment instead of over investment and under investment in fixed assets. The
management chooses only most profitable capital project which can have much value. In this
way, the Ratio Analysis maximize the worth of equity shareholders.
11. Difficulties of Investment Decisions: The long term investments are difficult to be taken
because decision extends several years beyond the current account period, uncertainties of future
and higher degree of risk.
12. Irreversible Nature: Whenever a project is selected and made investments as in the form of
fixed assets, such investments is irreversible in nature. If the management wants to dispose of
these assets, there is a heavy monetary loss.
13. National Importance: The selection of any project results in the employment opportunity,
economic growth and increase per capita income. These are the ordinary positive impact of any
project selection made by any company.
Current Scenario
In Current scenario Ratio Analysis is used to analyze the economic viability of a business project
lasting multiple years and involving capital assets. It is divided into three parts. The rst part is
the initial phase in which capital assets such as machinery and equipment are purchased and a
production facility is constructed. The second phase involves estimating a series of operating
cash ows that generate annual returns from the project. These operating cash ows extend over
the life of the business project. The third phase occurs at the end of the project and involves
liquidating the remaining assets and closing the business project.
Operating cash ows are usually estimated for monthly, quarterly, or annual time periods. First,
cash revenues are estimated. This usually involves estimating the number of units sold during
each time period and multiplying the number by the selling price of the units.
To estimate the cash expenses associated with making the product. Cash expenses are
categorized as variable and xed cash expenses. Variable cash expenses are tied directly to the
amount of output produced. For example, if it takes 10 pounds of raw materials to make one unit
of output, then the cost of raw materials varies in direct proportion to the amount of output
produced. Fixed cash expenses are those that dont vary according to the amount of output
produced.
Future Prospects
Generally, the Ratio Analysis decisions are related to long term investments. The general
scope of Ratio Analysis decisions are discussed briefly below.
3. Replacement Decision: A company can replace an old machine with a new machine by
considering latest technology. It brings down the operating expenses and increase the
productivity. Such replacement decision will be evaluated in terms of savings in operating costs
or the cash profits from additional volume of production by new machine or both.
4. Buy or Lease Decision: The fixed assets can be purchased or arranged on lease arrangements.
The purchase of fixed assets requires huge amount initially. If the same asset is used on lease
basis, the company requires less amount initially and heavy amount in total. Hence, a
comparative study can be made with reference to future benefits from these two mutually
exclusive alternatives.
5. Choice of Equipment: Two types of machines are available to perform a same work. The cost
of each machine differ from one another. Moreover, pros and cons of buying each machine are
evaluated and screened for selection of best one. Ratio Analysis process helps a lot in such
selections.
6. Product or Process Innovation: A new product may be find out or innovated. Sometimes, a
new production process may be innovated. The research and development department of a
company is finding a new product or innovation in a product or process. These require huge
amount for implementation. In this case also, a comparative study of net cash outflow (costs of
the project) and net cash inflow (i.e. future earnings) is highly useful for taking a decision. The
decision is based on the profitability of the product or process.
Conclusion
Books
Financial Management I.M.Pandey
Internet
www.karvy.com
www.narmadagelatines.com