Comparative study of financial statements

1

A

PROJECT REPORT

ON

AN ANALYSIS & COMPARATIVE STUDY OF FINANCIAL STATEMENTS

FOR KALYANI STEELS LTD., PUNE

SUBMITTED TO UNIVERSITY OF PUNE

IN PARTIAL FULFILMENT OF TWO YEARS FULL TIME COURSE MASTERS IN BUSINESS ADMINISTRATION(MBA)

SUBMITTED BY KETAN P. SHETTI (BATCH 2005-07)

VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE-48

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To Whomsoever It May Concern

This is to certify that Mr. Shetti Ketan Prakash is a bonafide student of

Vishwakarma Institute of Management, Pune. He has successfully carried

out his summer project titled AN ANALYSIS AND COMPARATIVE

STUDY OF FINANCIAL STATEMENTS at Kalyani Steels Ltd,

Pune. in the partial fulfillment of Masters in Business Administration

course of University of Pune (2005-2007).

He has worked under our guidance and directions. His work is found to be

good and complete in all respects. During the period we found him hard

working, sincere and loyal. We wish him all the best for his future.

Prof Mahesh Halale. Dr Sharad L. Joshi. (Project Guide) (Director)

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ACKNOWLEDGEMENT

It gives me great pleasure to express my gratitude towards all the individuals

who have directly or indirectly helped me in completing this project. First of all I am

extremely grateful to Mr. Anant Bhave, Vice President (Accounts and Finance

Project), Kalyani Steels Ltd, for providing me integrating project in finance for sixty

days. I would like to express my sincere gratitude to my company guide Mr. Rajiv

Toye, Associate Vice President (Accounts and Finance), Kalyani Steels Ltd for his

invaluable guidance during the project period which helped me in completing the

project successfully. I also extent my special thanks to Mr. Anand Shirsat (Asst

Personnel Manager), Kalyani Steels Ltd.

I wish to express my sincere thanks to our Director Dr. Sharad Joshi and my

project guide Prof Mahesh Halale for providing me valuable guidance & inputs which

helped me to complete this project in true sense.

I also extend my thanks to all the staff of Finance department of Kalyani Steels

Ltd. for their support, which helped me a lot in completing the project.

Lastly my ingenious thanks to all my colleagues and friends for their kind co-

operation and help.

Ketan Shetti

(MBA-II)

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CONTENTS

Sr. No. Topic Page No.

1. EXECUTIVE SUMMARY 1

2. OBJECTIVE AND SCOPE OF PROJECT 2

3. COMPANY PROFILE 3

4. THEORETICAL BACKGROUND 14

5. RESEARCH METHODOLOGY 26

6. RATIO ANALYSIS AND PRESENTATION 27

7. CONCLUSION 46

8. BIBLIOGRAPHY 47

9. ANNEXURE 1 48

10. ANNEXURE 2 49

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EXECUTIVE SUMMARY

This project named An Analysis and Comparative Study of Financial Statements was

carried out at Kalyani Steels Ltd to analyze and understand financial feasibility of the

company in terms of liquidity, turnover, solvency, profitability etc. by using Ratio

Analysis technique.

I chose to do this project at Kalyani Steels Ltd because it is a leading manufacturer of

Carbon and Alloy steels and an important constituent of the over $ 1.2 billion Pune

based Kalyani group. The company was established way back in 1973 mainly to cater

to in-house requirements of forging quality steels. Over the years the Kalyani Steels

Ltd is upgrading its technology and infrastructure to justify its mission statement,

Better Steel Through Better Technology .

The Ratio Analysis technique is the process of identifying the financial strength and

weakness of the firm by properly establishing relationship between the items of the

balance-sheet and the profit and loss account because the figures recorded in the

financial statements are absolutely incapable of revealing the soundness or otherwise of

a Company s financial position or performance. Thus the technique of Ratio Analysis

has been used which is supposed to be powerful tool for financial statements.

In Ratio Analysis technique a ratio is used as a benchmark for evaluating the financial

position and the performance of the firm.

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OBJECTIVES

1. To obtain a true insight into financial position of the company.

2. To make comparative study of financial statements of different years.

3. To draw the correct picture of the financial operations of the company in

terms of liquidity, solvency, turnover, profitability etc.

4. To find out the reasons for unsatisfactory results.

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COMPANY PROFILE

The Kalyani Group is one of the leading Industrial Houses in India, having core

businesses in Steel and Steel based products, Forgings and Automotive Components.

The Group s Annual Turnover is over USD 1.5 billion and has joint ventures with some

of the world leaders such as Meritor, USA, Carpenter Technology Corporation, USA,

Hayes Lemmerz, Germany, Faw Corporation, China etc.

Bharat Forge Limited, the flagship company of the group is the 2nd largest forging

company in the world and the largest domestic player with a share of 80% in axle

components and engine components.

Bharat Forge Ltd., the flagship company of the US $ 1.5 billion Kalyani Group, is a

'Full Service Supplier' of engine & chassis components. It is the largest exporter of

auto components from India and leading chassis component manufacturer in the world.

With manufacturing facilities spread over 9 locations and 6 countries - two in India,

three in Germany, one in Sweden, one in Scotland, one in North America and one in

China, the company manufactures a wide range of safety and critical components for

passenger cars, commercial vehicles and diesel engines. The company also

manufactures specialized components for the railway, construction equipment, oil &

gas and other industries. It is capable of producing large volume parts in both steel and

aluminium.

Bharat Forge has built up a strong capability in design and engineering, including a full

fledged product testing and validation facility, which gives Bharat Forge a Full Service

Supply Capability - from product conceptualization to designing to manufacturing and

product testing & validation

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Apart from Bharat Forge Ltd., the other major companies in the group are Kalyani

Steels, Kalyani Carpenter Special Steels, Kalyani Lemmerz, Automotive Axles,

Kalyani Thermal Systems, BFL Utilities, Kalyani Net Ventures, Epicenter and Synise

Technologies.

The Kalyani Group's vertical integration, with upstream steel making and downstream

machining coupled with international competitiveness at every step, benefits our

customers in terms of :

World Class Technology

High Quality

Partnership

Apart from Kalyani Steels, the 2000 cr. Pune based Kalyani Group encompasses

Bharat Forge - The flagship company of the group was established in 1961.

It is the largest forging company in Asia and one of the three largest and most

technologically advanced commercial forge shops in the world. Bharat Forge

manufactures a wide range of forgings and machined components for automotives,

diesel engines, railways, earthmoving, cement, sugar, steel, coal, ship building and

oilfield industries.

Kalyani Brakes Ltd. - Established in 1982, when the automative revolution in India

was about to take-off, Kalyani Brakes Ltd.(KBX) is today, a leading manufacturer of

brakes in the country. Kalyani Brakes is a joint venture between Robert Bosch,

Germany- a Fortune 500 company, and world leader in brake systems, Nippon Air

Brake Co. Ltd. of Japan and the Kalyani Group.

Kalyani Lemmerz Ltd. - The Kalyani Group had promoted Kalyani Wheels as a part

of its diversification plan. At that time they had a collaboration with Lemmerz Werke,

Germany. Subsequently, Lemmerz Werke became a joint venture partner and the new

company was christened as Kalyani Lemmerz Ltd.(KLL). The company manufactures

wheel rims for utility vehicles, light and heavy commercial workers and tractors.

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Kalyani Sharp India Ltd. - Was established in 1986 as a joint venture between Sharp

Corporation, Japan and the Kalyani Group. It is a leading manufacturer and exporter of

consumer electronic items from India.

Kalyani Thermal Systems Ltd. - Established in 1979, this company specializes in

design, construction and installation of custom engineered Industrial Heat Processing

Systems. To stay apace with the latest technology, the company has a technical tie-up

with Flinn & Dreffein Engineering Co., USA

Mr. B. N. Kalyani

Chairman, Kalyani Group

The corporate philosophy of the Chairman of the Kalyani Group, Mr. B.N.

Kalyani is, "To use our specialized skills and innovative technology to contribute to

the welfare of the society. It is our intention to grow with our employees and to aid and

encourage them to participate in our goals in order that they realize their full potential.

Our prosperity is linked to the prosperity of our customers".

Kalyani Steels Ltd. was established in 1973, to fulfill the in-house requirements of

forging quality steel of the Kalyani Group. It's corporate office is in Pune. Over the

years, Kalyani Steels has been continuously upgrading its technology and

infrastructure. The first such technology update was implemented through a technology

tie-up with AICHI Steels of Japan.

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Although the forging industry in India is the primary market for the company's

products, manufacturers of various components for commercial vehicles, two-wheelers,

diesel engines, bearings, tractors, turbines, railways and seamless tubes (oil sector) also

form a substantial part of the company's clientele.

In 1997, the Kalyani Group entered into product sharing with Mukund Ltd. to set up a

new plant in the Hospet-Bellary region of Karnataka state.

At present the products for the KSL are manufactured at its Hospet plant which

employs a new facility using less power intensive mini-blast furnace route, provided by

Tata Korf-Korf Technology of Brazil. In 1999, the KSL plant in Pune was hived off to

KCSSL (Kalyani Carpenter Special Steels Ltd.).

Kalyani Steels commissions its first 7.5 MW Captive Power Plant

The plant to generate power equivalent to # 52 million units per annum

Kalyani Steels Limited, a leading manufacturer of Carbon and Alloy Steels and a part

of the over $ 1.2 billion Kalyani Group has commissioned its 7.5 MW capacity Power

Plant.

A company that uses blast furnaces for producing steel has set up the plant for captive

consumption by using blast furnace gas generated by its mini blast furnaces. The virtue

of heat content is utilized to generate electric power.

The projected power requirement of the integrated steel plant is more than 120 Million

units per annum. Setting up our own power plant gives us the advantage to be in a

position to control costs and generate power economically. It will reduce reliance on

the state electricity grid as well as bring down the input cost of steel production and

increase the competitiveness of the end products.

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The plant has been commissioned at Hospet and will generate power equivalent to

approximately 52 Million units per annum.

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PRODUCTS

The various products of Kalyani Steels Ltd. include :

PRODUCTS

GRADES (As per Indian & Various International Standards) :

CARBON AND ALLOY STEELS (Automobile sectors)

1. Carbon Steels

A. Forging

B. Boilers

C. Auto

2 wheeler

Cars

Tractors

D. Seamless tube

E. Exports

Transmission

2. Low Alloys

A. Forging

B. Auto

2 wheeler

4 wheeler

C. Seamless tube

3. High Alloys

A. Forging

B. Auto

Heavy engineering

SPRING STEELS

BALL BEARING STEELS

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ANY OTHER SPECIAL GRADES OF STEEL

AS PER CUSTOMER'S REQUIREMENTS

Primary Aluminium smelters cathode/Anode steel bars.

SIZE RANGE

AS CAST PRODUCTS

BILLETS : 120 x 120 mm, 160 x 160 mm & 180 x 180 mm Squares

BLOOMS : 240 x 280 mm, 280 x 320 mm Rectangle

ROUNDS : 160, 200, 220 mm Dia Rounds

AS ROLLED PRODUCTS

ROUNDS : 83, 85, 100, 105, 110, 125, 130 mm

RCS : 75, 95, 100, 115, 120, 125, 140, 160 mm

ANY OTHER SIZE MUTUALLY AGREED.

STEELS GRADES

CATEGORY AISI/SAE

DIN B.S. JIS

1010 CK10 EN2A S10C

1015 CK15 EN32B S15C

1025 CK25 EN3B S25C

PLAIN CARBON STEEL

1035 CK35 EN8,EN8A S35C

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1045 CK45 EN43B S45C

1055 CF53 EN9 S55C

1065 C60 EN43D S58C

1541 28Mn6 EN15 SMn420H

40Mn4

SMn433H

CARBON- Mn STEEL

SEMI FREE CUTTING

STEEL 1137,1141

EN15AM SMn443H,SUM41

1541 16MnCr5

SCR415,SUM420 CHROME+MANGENSE

STEEL

20MnCr5

CHROME+NICKEL STEEL

3120 15CrNi6 EN352

8620

En353,EN354

SNCM420H

4320 17CrNiMO6

EN36C,EN

LOW CARBON

CHROME+NICKEL MOLY

STEEL

361,362,363

5130 34Cr4 EN18A,EN18C

SCR435 CHROME STEEL

5140 41Cr4

SCR440

4130 25CrMO4 EN19C SCM440H

4135 34CrMO4

SCM435,SCM420

CHROME+ MOLY STEEL

4140 42CrMO4

MEDIUM CARBON

CHROME+NICKEL+MOLY

STEEL

4340 -- EN24 SNCM431,SNCM439

SNCM447

SAE52100

100Cr6 En31 SUJ1,SUJ2 etc BEARING STEEL

SAE5160

-- EN45A SUP6,SUP9,SUP11

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SIZES :

As Cast : 120 X 120, 160 X 160 , 240 X 280 mm

: 160 mm dia,200 mm dia. ,220 mm dia.

As Rolled Rounds : 80,83,90,100,105,110,125,130 dia.

As Rolled Rounded

Corner Squares (RCS) : 75 ,90,95,100,115,125,140,160& 180 mm RCS

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KALYANI STEELS LTD FACILITIES:

EQUIPMENT TECHNOLOGY QUALITY BENEFITS

1. MINI BLAST FURNACE KORF TECHNOLOGIA

- Lower Tramp Elements

(2 Nos. x 250 Cu.M) SIDERURGICA

LTDA., - Consistent input to EOF

Brazil

2. ENERGY OPTIMISING KORF TECHNOLOGIA

- Lower Gas Levels(N2)

FURNACE SIDERURGICA

LTDA., - Predictable Tapping

Brazil Chemistry

3. LADLE REFINING ASEA BROWN - Chemical Homogeneity

FURNACE WITH CORED

BOVERI, - Narrow Hardenability

WIRE INJECTION Sweden Band

(2 No. x 40/45 MT)

- Finer & more consistent

Grain size

4. VACUUM DESAGGING ALD VACUUM - Low O2, H2, N2 levels

(1 No. x 40/45 MT) TECHNOLOGY - Lower Inclusions

Vacuum of 1 m bar in Germany - Improved Chemical

3 minutes

Homogeneity

5. CONTINUOUS CASTING TECHINT,

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- 1 No. x 2 Strand (Pomini Group)

Bloom/Round Italy

- Bloom Caster capable of

Casting Blooms & Rounds

10/18 M radius

- 1 No. x 3 Strand Billet

Caster -9/16 M radius

- Fully Shrouded Casting

- Low pick up of N2, O2

- Combi Electro Magnetic

- Reduced level of

Stirrer (Mould & Strand)

segregation & more

equiaxed grains

- Automatic Mould Level

- Avoids entrapment of

Control

Mould Flux resulting in

lower macro inclusions

- T-Shape Tundish

- Reduction in inclusions

due to improved floatation

6. BLOOM / INGOT BENDOTTI - Top & Bottom fired

REHEATING FURNACE Italy More uniform

35 T/Hr Pusher Type,

temperature

Oil Fired

7. ROLLING MILL DANIELI - Strict dimensional

750mm 2-High Blooming Italy tolerances

Mill

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THEORITICAL BACKGROUND

MEANING OF RATIO: -

A ratio is a simple arithmetical expression of the relationship of one number to

another. According to Accountants Handbook by Wixon Kell and Bedford, a ratio is

an expression of the quantitative relationship between two numbers . In short it can be

defined as the indicated quotient of two mathematical expressions. The ratios can be

expressed in 1) Percentages 2) fraction and 3) Proportion of numbers.

MEANING OF RATIO ANALYSIS: -

Ratio Analysis is a technique of analysis and interpretation of financial statements.

it is defined as the systematic use of ratios to interpret the financial statements so that

the strengths and weaknesses of a firm as well as its historical performances and current

financial condition can be determined. There are a number of ratios which can be

calculated from the information given in the financial statements, but the analysts has to

select the appropriate date and calculate only a few appropriate ratios from the same

keeping in mind the objectives of analysis.

The following four steps involved in the ratio analysis: -

1. Selection of relevant data from financial statements depending upon financial

analysis.

2. Calculation of appropriate ratios.

3. Comparison of the calculated ratios of the same firm in the past or the ratios

developed from projected financial statements to the ratios of some other firms

or the comparison with ratios of the industry to which firm belonged.

4. Interpretation of ratios.

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INTERPRETATION OF RATIOS: -

The interpretation of ratios is an important factor. Though calculation of ratios is

also important but it is only a clerical task whereas interpretation needs skill,

intelligence and foresightedness. The impacts of factors such as price level changes,

change in accounting policies, window dressing etc should be kept in mind when

attempting to interpret ratios. The interpretation of ratios can be made in following

ways: -

1. Intra firm comparison: - Here the ratios of one organization may be compared

with the ratios of the same organization for the various years either the previous

years or the future years.

2. Inter firm comparison: - The ratios of one organization may be compared with

the ratios of the other organization in the same industry and such comparison

will be meaningful as the various organization, in the same industry may be

facing similar kinds of financial problems.

3. The ratios of an organization may be compared with some standards, which

may be supposed to be the thumb-rule for the evaluation of the performance.

CLASIFICATION OF RATIOS: -

The ratios may be classified under various ways, which may use various criterions

to do the same. However for the convenience purpose, the ratios are classified under

following groups.

1. Liquidity group

2. Turnover group

3. Profitability group

4. Solvency group and

5. Miscellaneous group

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LIQUIDITY GROUP:

The ratios computed under this group indicate the short-term position of the

organization and also indicate the efficiency with which the working capital is being

used. Commercial banks and short-term creditors may be basically interested in the

ratios falling under this group. Two most important ratios may be calculated under this

group.

1) Current Assets: -

It is calculate as, Current Assets Current Liabilities

Current ratio indicates the backing available to current liabilities in the form of

current assets. In other words, higher current ratio indicates that there are sufficient

assets available with the organization, which can be converted in the form of cash. A

current ratio of 2:1 is supposed to be standard and ideal.

2) Liquid Ratio or Acid Test Ratio: -

It is calculated as, Liquid Assets

Liquid Liabilities

Here liquid assets include all assets except inventory and p/p exps and liquid

liabilities except overdraft or cash credit or o/s exps.

Liquid ratio indicates the backing available to liquid liabilities in the form of

liquid assets. The term liquid assets indicate the assets, which can be converted in the

form of cash without any reduction in the value. Almost immediately whereas the term

liquid liabilities which are required to be paid almost immediately. In other words, a

higher liquid ratio indicates that there are sufficient assets available with the

organization, which can be converted in the form of cash almost immediately to pay off

those liabilities, which are to be paid off almost immediately. As such higher the liquid

ratio better will be the situation. A liquid ratio of 1:1 is supposed to be standard and

ideal.

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TURNOVER GROUP:

Ratios computed under this group indicate the efficiency of the organization to

use the various kinds of assets by converting them in the form of sales. Under this

group the following classification of ratios are made.

1) Fixed Assets Turnover Ratio: -

It is calculated as, Net Sales

Fixed Assets

A high fixed assets turnover ratio indicates the capability of the organization to

achieve maximum sales with the minimum investment in fixed assets. It indicates that

the fixed assets are turned over in the form of sales more number of times.

2) Current Assets Turnover Ratio: -

It is calculated as, Net Sales

Current Assets

A high current assets turnover ratio indicates the capability of the organization

to achieve maximum sales with the maximum investment in current assets. It indicates

that the current assets are turned over in the form of sales more number of times.

3) Working Capital Turnover Ratio: -

It is calculated as, Net Sales

Working Capital

A high working capital turnover ratio indicates the capability of the

organization to achieve maximum sales with the minimum investment in the working

capital. It indicates that working capital is turned over in the form of sales more number

of times.

4) Inventory or Stock Turnover Ratio: -

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It is calculated as, Cost of Goods Sold

Avg. Inventory

A high inventory turnover ratio indicates that maximum sales turnover is

achieved with the minimum investment in inventory. As such as a general rule, high

inventory turnover ratio is desirable.

5) Debtors Turnover Ratio: -

It is calculated as, Net Credit Sales

Closing Sundry Debtors

This ratio indicates the speed at which the sundry debtors are converted in

the form of cash. However the intention is not correctly achieved by making the

calculation in this way. As such this ratio is normally supported by the calculation

period, which is calculated as below.

a) Calculation of Daily Sales: -

It is calculated as, Net Credit Sales

No of Working Days

b) Calculation of Collection Period: -

It is calculated as, Closing Sundry Debtors

Daily Sales

The average collection period as computed above should be compared with

the normal credit period extended to the customers. If the average collection period is

more than the normal credit period allowed to the customers, it may indicate over

investment in debtors which may be the result of over extension of credit period,

liberalization of credit term, ineffective collection procedure and so on.

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6) Capital Turnover Ratio: -

It is calculated as, Sales Capital Employed

This ratio indicates the efficiency of the organization with which the capital

employed is being utilized. A high capital turnover ratio indicates the capability of the

organization to achieve maximum sales with minimum amount of capital employed. As

such higher the capital turnover better will be the situation.

SOLVENCY GROUP

Ratios computed under this group indicate the long-term financial prospects

of the company. The shareholders debenture holders and other lenders of long-term

finance/ term loan may be basically under this group. Following ratios may be

computed under this group.

1) Debt-equity Ratio: -

It is calculated as, External Liabilities . Shareholders Fund

Debt-equity ratio indicates the state of shareholders or owners in the

organization vis-à-vis that of the creditors. It indicates the cushion available to the

creditors on liquidation of the organization. A high debt-equity ratio may indicate that

financial status of the creditors is more than that of the owners. A very high debt-equity

ratio may make the proportion of investment in the organization a risky one. On the

other hand a very low debt equity rate may mean that the borrowing capacity of the

organization is being underutilized.

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2) Proprietary Ratio: -

It is calculated as, Total Assets

Owners Fund

This ratio indicates the extent to which the owner s funds are sunk in

different kinds of assets. If the owner s fund exceeds fixed assets, it indicates that a part

owners fund invested in the current assets also and if owners fund are less than fixed

assets it indicates that the creditors finance a part of fixed assets either by long term or

short term.

3) Capital Employed Ratio: -

It is calculated as, Fixed Assets *100

Capital Employed

This ratio indicates the extent to which the long-term funds are sunk in

fixed assets.

4) Interest Coverage Ratio: -

It is calculated as, PBIT

Interest Charges

This ratio indicates protection available to the lenders of long-term

capital in the form of funds available to pay the interest charges i.e. profits. Normally a

high ratio will desirable but too high a ratio may indicate underutilization of the

borrowing capacity of the organization whereas too low a ratio may indicate excessive

long-term borrowings or inefficient operation.

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PROFITABILITY GROUP

1) Gross Profit Ratio: -

It is calculated as, Gross Profit *100

Net Sales

The gross profit ratio indicates the relation between production cost

and sales and efficiency with which the goods are produced or purchased. A high gross

profit ratio may indicate that the organization is able to produce or purchase at a

relatively lower cost.

2) Net Profit Ratio: -

It is calculated as, Net Profit after Taxes *100

Net Sales

The net profit ratio indicates that portion of sales available to the owners

after the consideration of all types of expenses and costs either operating or non-

operating or normal or abnormal. A high net profit ratio indicates higher profitability of

the business.

3) Operating Ratio: -

It is calculated as, Mfg COGS + operating exps*100

Net Sales

This ratio indicates the percentage of net sales, which is absorbed by the

operating cost. A high operating ratio indicates that only a small margin of sales is

available to meet the expenses in the form of interest, dividend and operating exps. As

such low operating ratio will always be desirable.

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OVERALL PROFITABILITY GROUP

1) Return on Assets: -

It is calculated as, Net Profit *100

Assets

Return on assets measures the profitability of the investment in a firm.

As such higher return on assets will always be preferred. However Return on assets

does not indicate the profitability of various sources of funds, which finance total

assets.

2) Return on Capital Employed: -

It is calculated as, Net Profit after taxes+Int on Long Term Loans*100 Capital Employed

Return on capital employed measure4s the profitability of the capital

employed in the business. A high return on capital employed indicates a better and

profitable use of long-term funds of owners and creditors. As such a high return on

capital employed is preferred.

3) Return on Shareholders Funds: -

It is calculated as, Net Profit after Taxes*100

Total Shareholders Funds

This ratio indicates the profitability of a firm in relation to the fund

supplied by the shareholders

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MISCELLANEOUS GROUP

1) Capital Gearing Ratio: -

It is calculated as, Fixed income-bearing securities

Equity Capital

A high capital-gearing ratio indicates that in the capital structure, fixed income bearing

securities are more in comparison to the equity capital in that case the Company is said

to be highly geared. On the other hand, if fixed income-bearing securities are less as

compared to equity capital the company is said to be lowly geared.

2) Earning Per Share: -

It is calculated as, Net Profit after tax and dividend

Number of equity shares o/s

It is widely used ratio to measure the profit available to the equity

shareholders on a per share basis. As such increasing Earning Per Share may

indicate the increasing trend of current profits per equity share.

3) Dividend Payout Ratio: -

It is calculated as, Dividend Per Share *100

Earning Per Share

It measures the relationship between the earnings belonging to the

equity shareholders and the amount finally paid to them by way of dividend. It

indicates the policy of management to pay cash dividend.

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ADVANTAGES OF RATIOS

1. Ratios simplify the comprehension of financial statements. They tell the whole

story as a heap of financial data is condensed in them. They indicate the

changes in the financial condition of the business.

2. They act as an index of the efficiency of enterprise. As such they serve as an

instrument of management control. It is an instrument for diagnosis of the

financial health of an enterprise. The efficiency of the various individual units

similarly situated can be judged through inter-firm comparisons.

3. The ratio analysis can be if invaluable aid to management in the discharge of its

basic functions of forecasting, planning, co-ordination, communication and

control. A study of the trend of strategic ratio may help the management in this

respect. Past ratios indicate trends in cost, sales, profit and other relevant facts.

4. The ratio analysis provides data for inter-firm comparison or intra-firm

comparison. Comparison cannot be made with absolute figures. Net profit of

one firm cannot be compared with the net profit of the other firm. But the

percentages of net profits can be compared to evaluate the performance.

Similarly performance and efficiency of different departments in the same firm

can be compared with the help of ratios.

5. Investment decisions can at times be based on the conditions revealed by certain

ratios.

6. They make it possible to estimate the other figure when one figure is known.

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LIMITITIONS OF RATIO ANALYSIS

Though ratio analysis technique has got number of advantages, it attracts equal

number of disadvantages too. Some of important advantages are as follows:

1) The ratios of the other organization May not be readily available.

2) Different accounting policies may be followed by the constituent organization

in the industry.

3) The constituent organization in the same industry may vary from each other in

terms of age, location, extent of automation, quality of management and so on

4) The technique of ratio analysis may prove to be inadequate in some situation if

there is difference of opinions regarding the interpretation of certain items while

computing certain ratios.

5) As the ratios are computed on the basis of financial statements, the basic

limitation, which is applicable to the financial statements, is equally applicable

in case of the technique of ratio analysis also.

Thus the ratio analysis points out the financial condition of business whether

it is very strong, good, questionable or poor and enables the management to take

necessary steps.

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RESEARCH METHODOLOGY

1) DATA COLLECTION

a) Primary Data: -

Primary data related to the project was collected from the discussion and

interaction with the senior employees and executives in the organization from

Accounts and Finance department.

b) Secondary Data: -

Secondary data was collected from the documents, which were in printed

forms like annual reports, pamphlets, reference books based on Financial

Management and through websites.

METHODOLOGY FOR ANALYSIS

The methodology opted for carrying out project was by way of collection of data

from the company s annual reports for the past three years i.e. from 2003-2004 to

2005-2006, for the calculation of ratios. The theory related to ratios was gathered

from various financial management books, which served the purpose of calculation

and analysis of ratios. Further based on the above statements ratios related to

liquidity, turnover, solvency, profitability and over profitability groups and

miscellaneous groups have been calculated and interpreted in an intra firm

comparison method. Similarly the ratios have been presented in graphical format to

have clear understanding of it during three financial years and changes in it.

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RATIO ANALYSIS

LIQUIDITY GROUP

1) Current Ratio: -

Current Ratio

1.451.56

1.82

0

0.5

1

1.5

2

2003-2004 2004-2005 2005-2006

Financial year

Significance: -

This ratio is calculated for knowing short term solvency of the organization.

This ratio indicates the solvency of the business i.e. ability to meet the liabilities of

the business as and when they fall due. The Current Assets are the sources from

which the current liabilities are to be met. Certain authorities have suggested that in

order to ensure solvency of a concern current assets should be twice the current

liabilities and therefore this ratio is known as 2:1 ratio . However it depends upon

Formula 2003-2004 2004-2005 2005-2006

Current

Assets/Current

Liabilities

1.45 1.56 1.82

32

the nature of industry. The standard Current Ratio applicable to the Indian

industries is 1.33:1.

Here the Current Ratio of Kalyani Steels Ltd indicates that it has got

sufficient assets to pay off short term liabilities as and when they fall due. The

company has maintained its short term solvency through out the years and it is

improving its short term solvency status which is appreciable.

2) Acid Test Ratio: -

Acid Test Ratio

1.17

1.24

1.35

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

2003-2004 2004-2005 2005-2006

Financial Years

Significance: -

This ratio serves as a realistic guide to the short term solvency of the

company. It is a measure of the extent to which liquid resources are immediately

available to meet current obligation. In so far as it eliminates inventories as part of

Formula 2003-2004 2004-2005 2005-2006

Liquid Assets/Liquid

Liabilities

1.17 1.24 1.35

33

current ratio, this is a more rigorous test of liquidity than the Current Asset Ratio

and when used in conjunction with it, gives a better picture of the firms ability to

meet its short term debts out of its short term assets. An Acid Test Ratio of 1:1 is

considered to be ideal and standard.

Here the Acid Ratios of Kalyani Steels Ltd through out the years considered

indicates that it has adequate assets which can be converted in the form of cash

almost immediately to pay off those liabilities which are to be paid off immediately.

It must be remembered that the company is improving its Acid Test Ratio year by

year at a constant rate which is appreciable as such higher the liquid ratio better the

situation

TURNOVER GROUP

1) Fixed Assets Turnover Group:

Fixed Asset Turnover Ratio

2.65

4.31

3.12

0

1

2

3

4

5

2003-2004 2004-2005 2005-2006

Financial Years

Formula 2003-2004 2004-2005 2005-2006

Net Sales/Fixed

Assets

2.65 4.31 3.12

34

Significance:-

This ratio measures the efficiency in the utilization of fixed assets. This ratio

indicates whether the fixed assets are being fully utilized. It is an important measure

of the efficient and profit earning capacity of the business. Normally standard ratio

is taken as five times.

The financial year 2003-04 had not so good fixed asset turnover ratio. The

financial year 2004-05 had an appreciable fixed assets turnover ratio indicating

fixed assets are turned over more number of times. This was due to around 72%

growth in sales. This shows better asset management policy as compared to the past

year. The same ratio came down to 3.12 times in the financial year 2005-06 due to

fall in sales by around 31.48%.

2) Working Capital Turnover Ratio: -

Working Capital Turnover Ratio

8.63 8.48

3.33

0

2

4

6

8

10

2003-2004 2004-2005 2005-2006

Financial Years

Formula 2003-2004 2004-2005 2005-2006

Net Sales/Working

Capital

8.63 8.48 3.33

35

Significance: -

This ratio signifies achievement of maximum sales with less investment in

working capital. As such higher the ratio better will be the situation.

The financial year 2003-04 and 2004-05 saw excellent ratio as the company

was able to achieve maximum sales with less investment in working capital which

shows better working capital management policy. It must be remembered that

working capital ratio has been increasing through out the years but the financial

year 2005-06 failed to maintain the past records due to fall in sales by 31.48%. The

year 2005-06 had heavy investments in working capital which shows rise in

activity.

3) Current Asset Turnover Ratio: -

Capital Asset Turnover Ratio

2.693.08

1.5

0

0.5

1

1.5

2

2.5

3

3.5

2003-2004 2004-2005 2005-2006

Financial Years

Formula 2003-2004 2004-2005 2005-2006

Net Sales/Current

Assets

2.69 3.08 1.5

36

Significance: -

This ratio indicates capability of the organization in efficient use of current

assets. This ratio indicates whether current assets are fully utilized. It indicates the

sales generated per rupee of investment in current assets.

The financial year 2004-05 had good current asset turnover ratio because it had

excellent sales in that year. It must remembered that investments in current assets

are increasing year by year at constant rate but the company failed to register

growth in sales and its sales fell down by 31.48%.

4) Capital Turnover Ratio: -

Capital Turnover Ratio

1.52

2.25

1.29

0

0.5

1

1.5

2

2.5

2003-2004 2004-2005 2005-2006

Financial Years

Significance: -

Formula 2003-2004 2004-2005 2005-2006

Sales/Capital

Employed

1.52 2.25 1.29

37

This ratio indicates whether capital employed is turned over in the form of

sales more number of times. As such higher the capital turnover better will be

situation.

The financial year 2004-05 had acceptable ratio because it had better sales as

compared to other two years. Due to addition or purchase of fixed assets and heavy

investments in working capital due to rise in activity, the capital turnover ratio for

2005-06 came down as compared previous years.

5) Inventory Turnover Ratio: -

Inventory Turnover Ratio

13.99

1.82

7.45

0

2

4

6

8

10

12

14

16

2003-2004 2004-2005 2005-2006

Financial Years

Significance: -

It is an indication of the velocity with which merchandize moves through the

business. This is a test of inventory to discover possible trouble in the form of

overstocking or overvaluation.

Formula 2003-2004 2004-2005 2005-2006

Net Sales/Average

Inventory

13.99 1.82 7.45

38

A low inventory turnover may reflect dull business, overinvestment in

inventory or accumulation of absolute and unsaleable goods. A high inventory

turnover indicates relatively lower amount of working capital locked in inventories.

The financial year 2003-04 had excellent inventory turnover ratio locking up

smaller part of funds in inventory. The company had low inventory turnover ratio

for the year 2004-05 thus indicating over investment in inventory but it has

improved in the financial year 2006 indicating less investment in inventory.

SOLVENCY GROUP

1) Debt-Equity Ratio: -

Formula 2003-2004 2004-2005 2005-2006

External

Liabilities/Shareholders

Fund

1.24 1.39 1.07

Debt-Equity Ratio

1.241.39

1.07

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003-2004 2004-2005 2005-2006

Financial Years

39

Significance: -

It is a measure of financial strength of a concern. Lower the ratio greater the

security available to the creditors. A satisfactory current ratio and ample working

capital may not always be a guarantee against insolvency if the total liabilities are

inordinately large.

The purpose of this ratio is to derive an idea of the amount of capital supplied

be the owners and of assets cushion available to creditors on liquidation.

Generally 1:2 ratio is acceptable, but the ratio of at least 1:1 is desirable as banks

even do accept this. The greater the interest of the owners as compared with that of

the creditors, the more satisfactory is the financial structure of the business because

in such a situation the management is less handicapped by interest charges and debt

repayment requirements. A company having a stable profit can afford to operate on

a relatively high debt-equity ratio; whereas in the case of a company having an

unstable profit, a high debt-equity ratio reflects a speculative situation. Too much

reliance on external equities may indicate undercapitalization, whereas too much

reliance on internal equities may lead to over-capitalization.

All the financial years considered has debt-equity ratio more than 1:1, which is

appreciable and acceptable indicating equal amount of interest of the owners as

compared with that of creditors.

2) Proprietary Ratio: -

Formula 2003-2004 2004-2005 2005-2006

Total

Assets*100/Owners

Fund

61.38% 51% 56.93%

40

Propriotary Ratio

61.38

5156.93

0

10

20

30

40

50

60

70

2003-2004 2004-2005 2005-2006

Financial Years

Per

cen

tag

e

Significance: -

This ratio is normally a test of strength of credit-worthiness of the concern. To

the extent the percentage of liability increase or the percentage of capital dwindles,

the credit strength of the concern deteriorates. A high proprietary ratio is however a

frequently indicative of over-capitalization and an exercise investment in fixed

assets. A low proprietary ratio on the other hand is a symptom of

undercapitalization and an excessive use of creditors funds to finance the business.

The financial year 2003-04 had good proprietary ratio as it indicates assets are

financed to the extent of 69% by the owners funds and the balance is financed by

the outsiders. The year 2004-05 had fall in proprietary ratio but in the year 2005-06

the company has improved due to rise in reserve and surplus due to appreciable

profits in the last financial year.

41

3) Capital Employed Ratio:-

Capital Employed Ratio

57.5452.27

41.39

0

10

20

30

40

50

60

70

2003-2004 2004-2005 2005-2006

Financial Ratio

Per

cen

tag

e

Significance: -

Normally a proprietor should provide all the funds required to purchase fixed

assets. If the capital employed ratio exceeds 100%, it indicates that the company

has used short-term funds for acquiring fixed assets, which policy is not desirable.

When the amount of proprietor funds exceeds the value of fixed assets i.e when the

percentage is less that 100, a part of the net working capital is supplied by the

shareholders, provided that there are no other non-current assets. Though it is not

possible to lay down a rigid standard as regards the percentage of capital which

should be invested in fixed assets in each industry there always is a maxim which

should not be exceeded so that the harmony among the fixed assets, debtors and

stock is not disturbed. The ratio should generally be 65%.

Formula 2003-2004 2004-2005 2005-2006

Fixed

Assets*100/Capital

Employed

57.54% 52.27% 41.39%

42

It should be remembered that all of the financial years studied had cap

employed ratio below 65% which also suggest that the company had equally funded

for working capital for current assets through long term funds which has been

accepted principle of financial management.

PROFITABILITY RATIOS

1) Gross Profit Ratio: -

Gross Profit Ratio

24.4127

36.06

0

5

10

15

20

25

30

35

40

2003-2004 2004-2005 2005-2006

Financial Years

Per

cen

tag

e

Significance: -

This ratio indicates the degree to which selling prices of goods per unit may

decline without resulting in losses on operations for the firm.

Formula 2003-2004 2004-2005 2005-2006

Gross

Profit*100/Sales

24.41% 27% 36.06%

43

A high gross profit ratio as compared with that of the other firm in the same

industry implied that the firm in question produces its products at lower cost. It is a

sign of good management.

A low gross profit ratio may indicate unfavorable purchasing and make-up

policies, the inability of management to develop sales volume, theft, damage, bad

maintenance, market reduction in selling prices not accompanied by proportionate

decrease in the cost of goods etc.

The company is growing at a constant rate as far as gross profit is concerned

which is appreciable indicating efficiency in production of goods at relatively lower

costs.

2) Net Profit Ratio: -

Net Profit Ratio

2.38

4.98

17.07

02468

1012141618

2003-2004 2004-2005 2005-2006

Financial Years

Per

cen

tag

e

Formula 2003-2004 2004-2005 2005-2006

Net Profit(after

taxes)*100/Sales

2.38% 4.98% 17.07%

44

Significance: -

This ratio differs from the ratio of operating profits to net sales in as much as it

is calculated after adding non-operating incomes, like interest, dividends on

investments etc to operating profits and deducting non-operating expenses such as

loss on sale of old assets, provisions for legal damage etc. from such profits.

The ratio is widely used as a measure of over-all profitability and is very

useful to the proprietors. Reading along with the operating ratio it gives an idea of

the efficiency as well as profitability of the business to a limited extent.

The company has improved its net profits by 6.17 times in the year 2005-06

from the 2003-04 which is appreciable which shows considerable proportion of net

sales to the owners and shareholders after all costs, charges and expenses including

income tax, have been deducted.

OVER PROFITABILITY GROUP

1) Return on Assets: -

Formula 2003-2004 2004-2005 2005-2006

Net

Profit*100/Assets

3.19% 8.95% 17.33%

45

Return on Asset Ratio

3.19

8.95

17.33

0

5

10

15

20

2003-2004 2004-2005 2005-2006

Financial Years

Per

cen

tag

e

Significance:-

The ratio is a measure of the return on the total resources of the business

enterprise. It shows how efficiently management has used the funds provided be the

creditors and the owners.

It can be referred that the financial year 2003-04 had not so good ratio because

of high operating expenses. However the company is improving year by year at a

constant rate. The financial year 2005-06 had 17.33% as returns on its various

resources which is appreciable.

2) Return on Capital Employed: -

Formula 2003-2004 2004-2005 2005-2006

PAT+Int*100/Capital

Employed

3.65% 13.70% 23.86%

46

Return on Capital Employed

3.65

13.7

23.86

0

5

10

15

20

25

30

2003-2004 2004-2005 2005-2006

Financial years

Per

cen

tag

e

Significance: -

Return on capital employed measures the profitability of the capital employed

in the business. A high business return on capital employed indicates better and

profitable use of long term funds of owners and creditors. As such a high return

capital employed will always be preferred.

The company has rising trend of return on capital employed indicating

efficient use of funds of the creditors and owners by the management which is

appreciable.

3) Return on Shareholders Fund: -

Formula 2003-2004 2004-2005 2005-2006

PAT*100/Total

Shareholders Funds

5.20% 17.54% 14.22%

47

Return on shareholders Fund

5.2

17.54

14.22

0

5

10

15

20

2003-2004 2004-2005 2005-2006

Financial Years

Per

cen

tag

e

Significance:-

The ratio shows how well the firm used the resources of the owner. This ratio

is a measure of the profitableness of an enterprise. The realization of a satisfactory

net income is the major objective is being achieved.

The financial year 2003-04 had low returns on shareholders fund as compared

to next financial years. However the management of the company is improving in

utilizing the resources of the owner in efficient way.

MISCELLANEOUS GROUP

1) Capital Gearing Ratio: -

Formula 2003-2004 2004-2005 2005-2006

Eq

Cap+Res&Sur/Pref

Share&Loan Cap

3.52 3.29 2.04

48

Capital Gearing Ratio

3.523.29

2.04

0

0.5

1

1.5

2

2.5

3

3.5

4

2003-2004 2004-2005 2005-2006

Financial Years

Significance: -

The ratio is a means of analysis of the capital structure. If the proportion of

preference shares and loan capital is high, or where the proportion of ordinary share

capital is low, capital is said to be highly geared and reverse is the position in low

gearing. Low gearing indicates that the equity share capital is not paid an adequate

return because the profits are swallowed up by the high charges in the form of

interest and dividends. Capital gearing signifies the process of maintaining a desired

and appropriate gear ratio in an enterprise. When inflationary conditions are

expected, high gearing is to be employed and in the period marked by trade

depression, low gearing should be employed.

Here the company is geared which indicates that it attempts to employ fixed

income bearing securities in the capital structure with an intention to increase the

earnings of the shareholders.

49

NOTES FORMING PART OF THE PROJECT REPORT

1. Debtors for sale of assets has not been considered which has been duly

mentioned in the schedules.

2. While considering long term loans for capital gearing ratio interest accrued on

loans has not been considered.

3. While considering net sales, returns from sales has been deducted from gross

sales.

4. Gross profit is calculated by deducting manufacturing expenses from Net Sales.

50

CONCLUSION

The company has strong short term liquidity position as both the liquidity ratios

are favorable and appreciable which concludes that company has got sufficient

assets to pay off short term debts as and when they fall due.

The company had excellent turnover of various assets in the year 2004-2005 as

the sales rose by 72% indicating better assets management policy. The assets

were efficiently employed to generate maximum sales. However for the year

2005-2006 the turnover ratios suffered because of fall in sales by 31.48% and

also there was rise in activity as compared to past years. For inventory turnover

the year 2004-2005 was crucial as it had minimum investment in different

inventories avoiding thus blockage of funds.

The company has strong solvency position as all the solvency ratios are

favorable. Debt-equity ratio is favorable indicating equal share of owners and

creditors. The working capital ratio indicates the company has funded for

working capital through long term funds which represents accepted finance

policy. The proprietary ratio indicates around 60% of assets are financed by

owners fund which indicates reasonable creditworthiness to the company.

The company has got excellent gross profit ratio and the trend is rising which is

appreciable indicating efficiency in production cost. The net profit for the year

2005-2006 is excellent and it is 6.17 times past year indicating reduction in

operating expenses and large proportion of net sales available to the

shareholders of company.

The company has excellent overall profitability ratios indicating effective use of

funds provided be shareholders and creditors.

According to the capital gearing ratio the company is geared by including fixed

income bearing securities with an intention to increase the income of

shareholders.

51

BIBLIOGRAPHY

Following books were referred for carrying out the project: -

Financial Management M Y Khan/ P K Jain

Financial Management I M Pandey

Financial Management S M Inamdar

Management Accounting M G Patkar

Annual Reports from 2003-2004 to 2004-2005 of Kalyani Steels Ltd

Following websites were referred: -

www.kalyanisteels.com

www.bharatforge.com

www.google.com

52

PROFIT & LOSS ACCOUNT FOR THE LAST 3 YEARS

2005-2006 2004-2005 2003-2004

INCOME

Sales, Gross 7546482590 9230188514 5325946924

Less: Excise Duty 2107705856 1602250358 738809546

Net Sales 5438776734 7627938156 4587137378 Power Generated, Captively Consumed 200262113 21778011

Operating income 89089729 5728128576 56243793 7705959960 57733225 4644870603

Divestment of interest:

Profit on sale of long term inv 315272877

Other Income 29169325 9934647 70991291

6072570778 7715894607 4715861894

EXPENDITURE

Materials consumed & Mfg Exps 3782570647 6302132759 3787655900

Employees emoluments 170870364 110773625 92360079

Other exps 537406659 382713027 320722030

Interest 46227488 76587048 126198161 Int. differentials on restructuring

of loans 57464408

Depn & Write Offs 181608637 4718683795 194931431 7067137890 152545583 4536946161

Profit for the Year 1353886983 648756717 178915733 Less: Trial Rum income net of exp 380128 3571647

PBT 1353506855 645185070 178915733

Prov for Taxation

Current Tax 118300000 48725000 11250000

Deferred Tax 223432003 266372520 48004325

FBT 1600000 343332003 215097520 59254325

PAT 1010174852 430087550 119661408

53

CONSOLIDATED BALANCE SHEET FOR THE LAST 3 YEARS

2005-2006 2004-2005 2003-2004 1] Sources of Funds 1) Shareholders Funds

a) Capital 420909667 420909667 420909667 b) Reserve and Surplus 2896814903 3317724570 2031416703 2452326370 1876415780 22973254447

2) Loan Funds

a) Secured Loans 849696020 1317598093 1395860045 b) Unsecured Loans 105969319 955665339 85981060 1403579153 105116584 1500976629 3) Deferred Tax Adjustments a) Deferred Tax Liabilities 463700909 471447205 541940259 b) Deferred Tax Assets 2342749 461358160 233521048 237926157 470386622 71553637

Total 4734748069 4093831680 3869855713 2] Application of Funds

1) Fixed Assets

a) Gross Block 2893972992 2816968999 2508709521 b) less: Depreciation 997974575 817594121 623522746

c) Net Block 1895998417 1999374878 1885186775

d) Capital WIP

Exp to date 95838867 1991837284 104672254 2104047132 404231664 2289418439

2) Investments 911931257 807969286 810719920 3) Current Assets, Loans & advances

a) Inventories 999684728 587317212 358171941

b) Sundry Debtors 1103840173 1328572775 906932119 c) Cash and bank Balance 85432259 81082914 161689106 d) Other Current Assets 62037142 55771123 39659941 e) Loans and Advances 1737634738 914667776 579889270

3988629040 2967411800 2046342377

Less: Current Liabilities & Provisions

a) Liabilities 1833921502 1627367457 1244441874

b) Provisions 323728010 158229081 32183149

2157649512 1785596538 1276625023

Net Current Assets 1830979528 1181815262 769717345

Total

4734748069

4093831680

3869855713

54

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