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Index
Page No.
1. Executive Summary 1 2. Introduction To Topic
2
3. Objectives Of Project 4 4. Research Methodology 5 5. Company
Profile
7
Corporate Milestones 8
Product and Services 9
Industrial Application 11
Organization Chart 12
Finance & Legal Organization 13
Financial Highlights 14
Operational & Financial Result 15
Graphical presentation of operational and financial
Results
17
6. Information Of Ratio Analysis
Financial Statement Analysis 18
History Of Financial Analysis 22
Conceptual Framework Of Ratio Analysis 23
Users of Accounting Information 24
What Did The Users Of Accounts Need To Know? 25
Which ratios will each of these groups be interested
in?
27
Information and Analysis 28
Ratio Analysis 29
Classification of Ratios 32
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Executive Summary
Project Title: Financial Statement Analysis and
Interpretations.
Company Name: Alfa Laval (India) Limited.
Introduction:
Company changing name from Vulcan Laval Ltd, to Alfa Laval Ltd,
in 1987, comes a long way since it started as a fabrication
factory. Now a day, executing projects in all over the world in
countries like South Africa, Middle East, China and so on, the
company has diversified its core product lines with changing
technological environment. Core product lines of the company are
thermal, separation, chemical technologies.
Critical Analysis of Financial Statement and Interpretations on
basis of Ratio Analysis is an important tool in the hands of
management for analyzing the financial performance of the company.
This involves calculation of various ratios based on the
information presented in the financial statements of the company.
Based on the requirement of the management financial ratios are
calculated.
For this study five year s comparisons taken for calculating
ratio analysis. Main objective in undertaking this project is to
supplement academic knowledge with absolute practical exposure to
day to day functions of the organization.
The training at Alfa Laval (India) Limited involved the day to
day working at corporate accounts departments with the senior
managers in the company. This project helped us to get the deeper
understanding of the process of portfolio management in Alfa Laval
(India) Limited and how decisions are taken to strengthen the
financial position.
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Introduction to Topic
Every financial manager is involved in financial decision making
and financial planning in order to take right decision at right
time, he should be equipped with sufficient past and present
information about the firm and its operations and how it is
changing overtime. Much of this information that is used by
financial manager to take various decisions and to plan for the
future is derived from the financial statements.
The project, Financial Statement Analysis and Interpretations of
Alfa Laval (India) Limited focuses to analyze the financial
statements and to study different ratios over the period of 5 years
to determine the financial position of Alfa Laval (India) Limited,
Pune.
Financial analysis involves the use of various financial
statements. These statements do several things. First, the balance
sheet summarizes the assets, liabilities and owners equity of a
business at moment in time, usually the end of a year or a quarter.
Next the income statement summarizes the revenues and expenses of
the firm over a period of time while balance sheet represents a
snapshot of the firm s financial position at a moment in time.
Financial management is planning and controlling of financial
resources of a firm with a specific objective. Since, financial
management as a separate discipline is of recent origin, it is
still in a developing stage. It is very crucial for an organization
to manage its funds effectively and efficiently.
Financial management has assumed greater importance today as the
financial strategies required to survive in the competitive
environment have become very important. In the financial markets
also new instruments and concepts are coming and one must say that
a finance manager of today is operating in a more complex
environment. A study of theories and concepts of financial
management has therefore become a part of paramount importance for
academics as well as for practitioners but there are many concepts
and theories about which controversies exist as no unanimous
opinion is reached as yet.
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The project, Financial Statement Analysis and Interpretations of
Alfa Laval (India) Limited, Pune further aims at discussing and
understanding the concepts of financial management of Alfa Laval
(India) Limited; the functions expect to be performed by the
financial management as well as the objectives of financial
managements.
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Objectives of the Project
1. The main objective is to study Financial Statements like
income and expenses and balance sheet of Alfa Laval (India)
Limited.
2. To study various ratios to determine the relationship of
different factors which have impact on the financial position of
the company.
3. Analyze financial position of Alfa Laval (India) Limited over
5 years and relationship between deposits accepted and loans
disbursed over the period of 10 years.
4. To assess the present the present profitability, operating
efficiency and liquidity position of the company.
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Research Methodology
The focus of this chapter is on the methodology used for the
collection of data for research. Data constitutes the subject
matter of the analyst. The primary sources of the collection of
sources of the collection of data are observations, Interviews and
the questionnaire technique. The secondary sources are collections
of data are from the printed and annually published materials. A
questionnaire form is prepared to secure responses to certain
questions. It is device for securing answers to questions by using
a form.
The questionnaire technique is economical and time saving and is
an important tool of collecting information.
Primary Data:
Data that is collected for the specific purpose at hand is
called as primary Data.
Following methods are used to do this project: 1. Questionnaire
Method:
To study the project, Critical Analysis of Financial Statements
of Alfa Laval (India) Limited questionnaire was used as I asked few
questions to the Head of Department, Mr. S. L. Shewalkar and
project guide Mr. Sachin Zinjarde Finance Executive and other staff
for the relevant information.
a. The history of the Alfa Laval (India) Limited.
b. Numbers of staff working for the company. c. Other company
related information. d. Areas of operations.
Secondary Data:
Secondary data highlights the contextual familiarities for
primary data collection. It provides rich insights into the
research process.
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Secondary data is collected through following sources:
1. Published Sources:
Annual report of Alfa Laval (India) limited from the year from
2001 to 2005.
a. Profit and Loss accounts statements.
b. Balance sheet (assets and liabilities).
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COMPANY PROFILE
Alfa Laval India Limited is a leading global provider of
specialized products and engineering solutions. Alfa Laval has
business links with leading engineering multinational, Alfa Laval
AB Sweden. The company offers its core technologies in the areas of
Separation, Heat Transfer and Fluid Handling. The company also
posses expertise in project engineering and chemical equipment of
fabrication. With strong manufacturing base at Pune and Satara, It
is engaged in the production of equipment for industries such as
breweries, beverages, vegetable oils, food processing, power
generation, chemical, marines, oil and gas production, water
treatment plants, sugar, mining etc.
Alfa Laval s strength lies not only in the supply of individual
equipment to these industries but also in the execution of projects
from pre project engineering, to manufacture, to supply, to
installation, commissioning and after sales services. The company s
project management capability has proven in the field of dairies,
breweries, food processing and refrigeration.
Today Alfa Laval India Ltd is multi location engineering company
with strong manufacturing bases at Pune, Satara, and Sarole. It
does its business through a nation wide sales and service through a
dedicated customer service center located at Thane.
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COMPANY S MILESTONES
Alfa Laval India Ltd traces its origin in the year 1937, when it
was incorporated as Vulcan Trading Company Pvt. Ltd., a wholly
owned subsidiary of the Swedish match company mainly engaged in
trading activities.
The company set up its manufacturing unit at Pune in 1961, for
the production of plants and equipment for food, chemical and
pharmaceutical industries.
In 1965, Vulcan Trading Company acquired the assets and
liabilities of Alfa Laval Ltd. By the way of amalgamation and was
re christened Vulcan Laval Ltd. Alfa Laval Sweden became a
shareholder of the merged company.
In 1983, a manufacturing unit was set up at Satara for the
production of Plate Heat Exchangers and subsequently, Spiral Heat
Exchangers.
The company s business was by and large based on Alfa Laval
technology. Hence the company s name was changed to Alfa Laval
(India) Ltd; in 1987.
In 1991, Alfa Laval Sweden merged with Tetra Pak, an
international organization that develops manufacturers and, markets
complete packaging systems.
It has been awarded as a GMU (Group Manufacturing Unit) status
by Alfa Laval, Sweden, to manufacture Centrifugal Separators and
Decanter Centrifuges for exports to Alfa Laval Sweden, Japan, Spain
and Denmark.
Lloyds Registered Quality Assurance LRQA (UK) for Thermal and
Separation business groups, has conferred it with the ISO 9001
certification.
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Products and Services
Alfa Laval India Ltd develops products that help to make
industry more efficient and contribute to the optimum utilization
of energy. The company offers key technologies like Separators,
Heat Transfers and Flow Technology that are of vital importance to
industry.
Separators:
Alfa Laval is the world s largest supplier of separation
equipment such as high speed Separators, Decanters and Separation
Systems. These are widely used in chemical, pharmaceutical and
process industries, onboard ships, power plants, water and waste
management and engineering industries.
Heat Exchangers:
Alfa Laval India Ltd supplies an extensive range of compact heat
exchangers plate and spiral heat exchangers in a variety of
materials for a large range of applications. With its
unique manufacturing facilities, experiences and expertise
gained over a years, Alfa Laval India Ltd is the undisputed market
leader for the supply of Plate and Heat Exchangers.
Fabrication:
Alfa Laval India Ltd has come a long since the start of its
fabrication factory in 1961. From catering the stainless steel
fabrication requirements in dairy industries in its early days Alfa
Laval India Ltd has built an enviable infrastructure to fabricate
exotic metals like Titanium, Hastelloy etc. and also Austenitic
Stainless Steel.
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Alcohol Plants/Distillery:
A well-known name in the distillery market, Alfa Laval India Ltd
was a pioneer in bringing Single Fermenter continuous fermentation
technology to India in the late eighties. Almost all distilleries
in India are associated with Alfa Laval. Besides, the company has
executed more than 51 complete distillery projects in India as well
as in Turkey, Vietnam, Indonesia, Thailand and Australia.
Customer Care:
For Alfa Laval, service is one of the most important competitive
tools. It is the most
important competitive tools. It is making sure its customer stay
in production. It is enabling them to be different, productive and
innovative. It is giving them reliable and relevant information
that genuinely relates to their business and getting them started
on time at all full capacity and on specification. It is permitting
their customers to be spectacularly successful.
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Industrial Applications
Alfa Laval India Limited has delivered more than:
100 Vegetable oil refining plants.
14 Brewery plants accounting for a sizeable Production of Beer
in India.
200 Dairy Plants.
31 Distillery Plants.
300 Spray Drying and Evaporation Plants for applications in
Dairy and Food, Dyestuff, Chemicals, Ceramic and Paper.
Alfa Laval India is also executing Plants in South Africa,
China, Oman, Nigeria, Nepal, Bangladesh and Sri Lanka.
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ORGANIZATION CHART:
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Finance & Legal Organization
The Finance & Legal group has the responsibility for:
Accounting standards Statutory and operational consolidation
Taxes
Legal structures
Systems for financial reporting Business analysis connected to
our financial reporting
Forecast process
Sales statistics reporting Production of management accounts
Development and implementation of direction for Information
Technology and Information System
Single source supplier in the Group for IT and IS
Overall funding matters for the Group
Funding for all group companies
Commercial guarantees
Financial derivatives
Standard terms of sales, mergers and acquisitions
Legal matters incl. trademarks
Monitoring & evaluation of risks within the company
Insurance covers for the Group
Investment and disposal of real estate
Maintenance and leasing of premises
Internal auditing (daily mgmt.)
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Financial Highlights of Alfa Laval (India) Limited over 5
Years
2001
2002
2003
2004
2005
Sales & Other Income 3027.4
3055.9
3919.6
5279.6
5878.4
Profit before Interest, Depreciation & Tax
627.4
725.7
915.9
1253.2
1065.4
Net Profit after Tax 379.9
453.5
650.4
785.1
648.6
Share Capital 181.6
181.6
181.6
181.6
181.6
Reserves & Surplus 1346.9
1455.3
1570.3
1850.1
1980.9
Shareholders Funds 1528.5
1636.9
1751.9
2031.7
2162.5
Dividend 336.0
345.0
454.0
454.0
454.0
Book Value of Share 84.10
90.10
96.40
111.80
119.0
Earnings per Share 20.90
24.90
35.80
43.20
35.70
Return on Shareholders Fund
24%
27%
37%
38%
30%
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Operations and Financial Results of Alfa Laval (India) Ltd over
5 years:
2001:
Sales turnover and other income for the year under review was at
Rs.3027.46 M. the profit before interest, depreciation,
amortization and tax improved to Rs.698.71 M. The company
registered a net profit for the year under review at Rs.379.90 M as
against a net profit of Rs. 389.38 M which included extraordinary
income of Rs.146.01 M for the previous financial year. The net
profit in real terms grew by about 56% as compared to previous
financial year.
2002:
Sales turnover and other income for the year under review was at
Rs.3055.91 M. the profit before interest, depreciation and tax
improved to Rs. 725.70 M. After providing Rs.0.46 M for interest,
Rs.70.81 M for depreciation and Rs.200.90 M for taxation, the
company registered a net profit for the year under review of
Rs.453.53 M as against a net profit of Rs.379.91 M for the previous
financial year. The profit available for appropriation is Rs.697.34
M out of which the amount set aside for dividend is Rs.345.04
M.
2003:
Sales turnover and other income for the year under review at
Rs.3919.60 M recorded an increase of 28%. The profit before
interest, depreciation and tax IMPROVED TO Rs.915.90 M. After
providing Rs. 0.94 M for interest, Rs.72.17 M for depreciation and
Rs.192.39 M for taxation, the company registered a net profit for
the year under review of Rs. 650.40 M as against a net profit of
Rs.453.53 M for the previous financial year.
The profit available for appropriation is Rs.956.70 M out of
which the amount set aside for dividend including tax thereon is
Rs.535.45 M.
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2004:
Sales turnover for the year under review crossed the five
billion rupee while the total income stood at Rs.5279.63 M. In line
with the spurt in the sales turnover, the profit before interest,
depreciation and tax cruised past the billion rupee mark reaching
Rs.1253.16 M. After providing Rs.5.37 M for interest, Rs.68.57 M
for depreciation and Rs.394.09 M for taxation, the company
registered a net profit for the year under review of Rs.785.13 M as
against a net profit of Rs.650.40 M for the previous financial
year. The net profit after tax for the year under review without
considering the profit of SKANSEN Engineering and Consultancy
Company Ltd was Rs.774.45 M, an increase of about 19% as compared
to the net profit after tax of Rs.650.40 M for the previous
financial year.
2005:
Sales turnover for the year under review at Rs.5775.73 M
registering an increase of about 14% over the previous financial
year. The other income was lower at Rs. 102.64 M as compared to
Rs.222.68 M earned in the previous year which included some non
recurring income in the form of profit on sale of long term
investments and sale of office premises. While the total income
grew by about 11% to Rs.5878.37 M, the profit before interest,
depreciation and tax at Rs.1065.45 M was lowered by about 15% over
the previous year largely on account of cost overrun in a few long
term projects. After providing Rs.6.72 M for interest, Rs.67.59 M
for depreciation and Rs.342.57 M for taxation, the net profit for
the year under viewed at Rs.648.57 M was correspondingly lower by
about 18% as compared to the net profit of Rs.785.13 M for the
previous financial year.
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Graphical presentation of operational and financial Results of
Alfa Laval (India) Ltd, over ten years:
01000200030004000500060007000
2001 2002 2003 2004 2005Sales Turnover
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Financial Statement Analysis
Introduction:
A Financial Statement is a compilation of data, which is
logically and consistently organized according to accounting
principles. Its purpose is to convey an understanding of some
financial aspects of a business firm. It shows a position at a
movement in time, as in the case of balance sheet, or reveals a
series of activities over a given period of time, as in the case of
an income statement. Financial statements are the major means
through which firms present their financial situation to stock
holders, creditors and general public. The majority of firms which
include extensive financial statements in their annual reports,
which receive wide distribution.
Nature of financial statement Analysis:
Financial Statement Analysis consist 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 for 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 areas
of uncertainty that is present in all decision making processes.
Financial analysis does not lesson the need for judgment but rather
establishes a sound and systematic basis for its rational
application. Sources of Financial Information:
The financial data needed in financial analysis come from many
sources. The primary source is the data 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 footnote to these statements.
Besides this information such as the market price of securities
publicly traded corporations can be found in the financial
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press and the electronic media daily. The financial press also
provides information to stock price indices for industries and for
market as a whole.
The Principal Tools of Analysis:
In the analysis of financial statements, the analyst can have a
variety of tools available from which he can choose the best suited
to his specific purpose. The following are the important tools of
analysis.
The Principles Tools/Techniques of Financial Analysis:
Tools of Financial Analysis
Trend Analysis
Ratio Analysis
Funds Flow Analysis
Cash Flow Analysis
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Ratio Analysis:
This is the important tool available to financial analyst for
their work. An accounting ratio shows the relationship in
mathematical terms between two interrelated accounting figures. The
figures have to be interrelated, because no useful purpose will be
served if ratios are calculated between two figures, which are not
all related to each other.
Funds Flow analysis:
Funds flow analysis has become an important tool in the
analytical kit of financial analysis, credit granting institutions
and financial managers. This is because the balance sheet of the
business reveals its financial status at a particular point of
time. It reveals the changes in working capital position. It tells
about the sources from which the working capital was obtained and
the purpose for which it was used. It brings out the changes, which
have taken place behind the balance sheet.
The information it contains in the selection, reclassification
and summarization of the data contained in profit and loss account
and balance sheet, it is no way replacement of either these
statements. To provide a comparative view of movement of funds by
the statement of changes in financial position is prepared for the
period covered by the profit and loss account as well as the
corresponding previous period.
Cash Flow Analysis:
Cash flow analysis is a statement, which measures inflows and
outflows of cash on account of any type of business activity. The
cash flow statement also explains reasons for such inflows and
outflows of cash. Cash flow statement maybe prepared on the basis
of actual or estimated data. A projected cash are the where came
part of the statement. Sources of cash can be both internal as well
as external. A proper planning of cash resources will enable the
management to have cash available when ever resources will enable
the management to have cash available whenever needed and put it to
some profitable or productive use in case there is surplus cash
available.
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Trend Analysis
Analysts make a trend analysis of performance over the past five
to ten years to get an overall picture. Trend analysis is made in
respect of sales, cost of sales, gross profit, net profit (before
tax), net profit (after tax), net worth, debt, dividend policy,
bonus and Rights issues, return on net worth, earnings per share,
etc.
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History of financial Analysis
Analysis of financial statements has had its greatest growth
since 1990 s. A major impetus came from increasing need from
increasing need on the part of grantors of commercial credit such
as bankers, financial institutions etc, to understand the condition
of their customer. At the same time businessman need to understand
their own conditions of their own enterprise in order to assure its
survival in stress of competition. Satisfaction of these needs has
been assisted by the continuous development of accounting as a
science and passing of income tax law in1993. This required
preparation of balance sheets and income statements, as they are
the basic statements required for the income tax purpose. Thus a
reasonably reliable data from which typical financial ratios could
be calculated has become increasingly available.
Between 1919 and 1929 four men pioneered in development of
financial ratios. These where James bliss who published a book on
this subject in 1923. Alexander wall, head of Robert Morris
associates and Raymond W Dunning, published a work on this subject
in 1928 and Roy Foulke, who made some of the first detailed
compilations and studies between 1925 and 1928.
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Conceptual Framework of Ratio Analysis
Financial ratios are always fascinating because they convey the
impression of precision in analyzing the financial position of the
company. Financial ratios are only tools of
analysis. However their effectiveness depends upon the know how
of using them for specific purpose. The ratio is relationship
between two variables. Any number of relationships that is ratio
can construct provided we first identify the variables to be
studied. Therefore there is nothing like standard set of ratios
which can be used at any time for any purpose. New ratio can be
developed specifically for the purpose or the mechanics of
constructing the given ratio can be suitably adjusted to suit the
purpose. Intact a resourceful financial analyst can develop novel
and fascinating ratios which can serve his purpose better than the
pedestrian stock.
Having established the point that ratios should be constructed
and used keeping in view the purpose, we shall examine generally
the purpose for which the ratio analysis could be employed. Ratios
are used as tools of appraising financial performance of the
company. There two distinct viewpoints in such analysis; the
managements viewpoint and the investors viewpoint. The interests of
both these groups are not mutually exclusive; they are
complimentary to each other. Both these groups are interested in
key areas that compromise the financial performance of the
company.
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Users of Accounting Information
The list of categories of readers and users of accounts includes
the following people and groups of people:
Investors
Lenders
Managers of the organization
Employees
Suppliers and other trade creditors
Customers
Governments and their agencies
Public
Financial analysts
Environmental groups
Researchers: both academic and professional
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What do the Users of Accounts Need to Know?
The users of accounts that we have listed will want to know the
sorts of things we can see in the table below: this is not
necessarily everything they will ever need to know, but it is a
starting point for us to think about the different needs and
questions of different users.
Investors To help them determine whether they should buy shares
in the business, hold on to the shares they already own or sell the
shares they already own. They also want to assess the ability of
the business to pay dividends.
Lenders To determine whether their loans and interest will be
paid when due
Managers Might need segmental and total information to see how
they fit into the overall picture
Employees Information about the stability and profitability of
their employers to assess the ability of the business to provide
remuneration, retirement benefits and employment opportunities
Suppliers and other trade creditors
Businesses supplying goods and materials to other businesses
will read their accounts to see that they don't have problems:
after all, any supplier wants to know if his customers are going to
pay their
bills!
Customers The continuance of a business, especially when they
have a long term involvement with, or are dependent on, the
business
Governments and their agencies
The allocation of resources and, therefore, the activities of
business. To regulate the activities of business, determine
taxation policies and as the basis for national income and similar
statistics
Local community Financial statements may assist the public by
providing
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information about the trends and recent developments in the
prosperity of the business and the range of its activities as they
affect their area
Financial analysts They need to know, for example, the
accounting concepts employed for inventories, depreciation, bad
debts and so on
Environmental groups
Many organizations now publish reports specifically aimed at
informing us about how they are working to keep their environment
clean.
Researchers
Researchers demands cover a very wide range of lines of enquiry
ranging from detailed statistical analysis of the income statement
and balance sheet data extending over many years to the qualitative
analysis of the wording of the statements
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Which ratios will each of these groups be interested in?
On this page you should complete the table below (you can do
this by printing it out). In the left hand column there is a list
of interest groups one by one .our job is to complete the right
hand column by giving two or three examples of ratios When you've
filled in the gaps you will appreciate that it gives us some ideas
about the ratios that each of the users we have identified would be
interested in looking at.
Investors Return on Capital Employed
Lenders Gearing ratios
Managers Profitability ratios
Employees Return on Capital Employed
Suppliers and other trade creditors Liquidity
Customers Profitability
Governments and their agencies Profitability
Local Community This could be a long and interesting list
Financial analysts Possibly all ratios
Environmental groups Expenditure on anti-pollution measures
Researchers Depends on the nature of their study
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Information and Analysis
Financial analysis is the process of identifying the financial
strength and weaknesses of the firm by properly establishing
relationships between the items of the balance sheet and the profit
and loss account.
Analysis and Interpretation of Financial Statements:
Financial statement comprises the following:
Trading and Profit and Loss Account which give the results of a
year s working.
Profit and loss appropriation account, which gives details about
the disposal of the retained income.
Balance sheet which gives the financial position of the
undertaking as on the accounting date.
The meaning of Analysis and Interpretation:
The financial statements are of much interest to a number of
groups of persons. Apart from management, there are other
interested parties like shareholders, debenture holders, potential
investors, large and small bankers, trade creditors, journalists
etc. who are increasingly getting interested in the analysis and
interpretation of financial statements. According to F Wood
business accounting to interpret means, to put the meaning of a
statement into simple terms for the benefit of person . This is
essentially done through the tools of analysis such as comparative
statements, common size statements and ratio analysis. The tools of
analysis only help in establishing relationship between one
accounting figure and another in the financial statements and go no
far. It is the expert who has to grasp the significance of related
figures and from an opinion as to whether the ratio calculated
indicates the favorable or adverse state of affairs. Therefore,
while analysis comprises resolving the statement by breaking them
in to simpler statements by a process of understanding the terms of
such statement and forming opinions or inferences about the
financial health, profitability, efficiency and such other aspects
of the under taking.
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Ratio Analysis
Introduction:
Ratio analysis is a powerful tool of financial analysis. A ratio
analysis is defined as the indicated quotient of two mathematical
expressions and as the relationship between two or more things . In
financial analysis, a ratio is used as an index or yardstick for
figures reported in the financial statements do not provide a
meaningful understanding of the performance and financial position
of the firm. An accounting figure conveys meaning when it is a
related to some other relevant information. The relationship
between two accounting figures expressed mathematically is known as
a financial data and to make a qualitative judgment about the firm
s financial performance. Standard of Comparison:
The ratio analysis involves comparison for a useful
interpretation of the financial
statements. A single ratio in itself does not indicate favorable
or unfavorable condition. It should be compared with some standard.
Standard of comparison may consist of:
1. Ratios calculated from the past financial statements of the
same firm.
2. Ratios developed using the projected or pro forma, financial
statements of the same firm.
3. Ratios of some selected banks, especially the most
progressive and successful at the same point in time.
4. Ratios of the industry to which firms belongs.
To evaluate the performance of a firm, compare its current
ratios with the past ratios.
When financial ratios over a period of time are compared, it is
known as time series or trend analysis. It gives an indication of
the direction of change and reflects whether the firm s financial
performance has improved or deteriorated or remained same over
time. The analyst should not simply determine the change, but more
importantly he should understand why ratios have changed. The
change may be affected by changes in the accounting polices without
material change in the firm s performance.
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Sometimes future ratios are used as the standard of comparison.
Future ratios can be developed from the projected or Performa
financial statements. The comparison of past ratios with future
shows the firms relative strength and weaknesses in the past
corrective actions should be initiated. Another way of comparison
is to compare ratios of one firm with some selected firm in the
same industry at the same point in time. This kind of comparison is
known as the cross sectional analysis. In most cases it is more
useful to
compare the firm s ratios of carefully selected competitor,
which have similar operations. This kind of comparison indicates
the relative financial position and performance of the firm. A firm
can easily resort to such a comparison, as it is not difficult to
get the published financial statements of similar firms.
To determine the financial condition and performance of a firm,
its ratios may be compared with average ratios of industry to which
the firm belongs. This sort of analysis, known as the industry
analysis helps to ascertain the financial standing and capability
of the firm in the industry to which it belongs. Industry ratios
are important standards in view of the fact that each industry has
its characteristics, which influence the financial and operating
relationships. But there are certain practical difficulties in
using the industry ratios. First it is difficult to get average
ratios for the industries. Second, even if industry ratios are
available, they are the averages of the strong and weak firms.
Sometimes spread may be so wide that the average may belittle
utility. Third, the average may be meaningless and the comparison
futile if the firms with in the same industry widely differ in
their accounting polices and practices. If it is possible to
standardize the accounting data for companies in the industry and
eliminate extremely strong and extremely weak firms. The industry
ratios will prove to be very useful in evaluating the relative
financial condition and performance of the firm.
Ratios are generally expressed in various forms. They are:
a) Pure ratios which are arrived at by the simple division of
one number by other e.g. Current assets to current Liabilities
ratio are 2:1.
b) Rate, which is the ratio between two numerical facts usually
over a period of time e.g. stock turnover, is three times a
year.
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c) Percentage, which is special type of rate expressing the
relation in hundredth e.g. gross profit, is 25% on sales.
d) Ratio analysis when rightly used offers the following
advantages:
i. It facilitates the compression of financial statements and
evaluation of several aspects such as financial health,
profitability and operational efficiency of the undertaking.
ii. It provides inter firm comparison to measure the efficiency
and help the management to take remedial measures.
iii. It is also helpful in forecasting corporate sickness and
help the management to take corrective actions.
iv. Trend analysis with the help of ratios help in planning and
forecasting. It helps in investment decision in the case of
investors and lending decisions in the case of bankers and
financial institutions.
We can simply make a list of the ratios we can use here but it's
much better to put them into different categories. If we look at
the questions in the previous section, we can see that we talked
about profits, having enough cash, efficiently using assets - we
can put our ratios into categories that are designed exactly to
help us to answer these questions. The categories we want to use,
section by section, are:
1. Profitability: has the business made a good profit compared
to its turnover?
2. Return Ratios: compared to its assets and capital employed,
has the business made a good profit?
3. Liquidity: does the business have enough money to pay its
bills?
4. Asset Usage or Activity: how has the business used its fixed
and current assets?
5. Gearing: does the company have a lot of debt or is it
financed mainly by shares?
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Classification of Ratios
Several ratios calculated from the accounting data can be
grouped in to various classes according to financial activities or
functions to be evaluated. The parties, which generally undertake
financial analysis, are short term and long term creditors, owners
and management. Short term creditor s main interest is in the
liquidity position or the short term solvency and profitability of
the firm. Similarly owners concentrate on firm s profitability and
analysis of the firm s financial positions. Management is
interested in evaluating every aspect of the firm s performance.
They have to protect the interest of the
parties and see that the firm grows profitably.
One of the ways of classification according to the following
basis is more effective for analyzing and interpreting the
financial statements:
Profitability Ratio
Turnover Ratio
Financial Ratio
Leverage Ratio
Financial Ratios
Leverage Ratio
Financial Ratio
Turnover Ratio
Profitability Ratio
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TABLE SHOWING SUMMARY OF FINANCIAL RATIOS OVER LAST 5 YEARS:
2001
2002
2003
2004
2005
Gross profit ratio (%) 37.18 39.47 37.00 35.63 32.41
Net profit ratio (%) 13.20 15.61 17.27 15.53 11.23
Return on shareholders Fund (%)
40.56 42.60 54.61 56.61 55.70
Current ratio 1.70 1.58 1.80 1.65 1.55
Inventory turnover ratio 4.11 3.85 4.24 4.28 4.05
Debtors turnover ratio 5.6 4.55 4.65 4.22 3.66
Creditors turnover ratio 2.21 2.16 2.48 2.49 2.18
Earning per share 2.09 2.50 3.58 4.32 3.57
Working capital ratio 5.00 5.00 4.40 5.00 5.00
Turnover to capital employed 1.81 1.71 2.07 2.41 2.59
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Profitability Ratios:
Profitability is an indication of the efficiency with which the
operations of the business are carried on. The primary objective of
a business undertaking is to earn profits. Profit earning is
considered essential for the survival of the business.
Profit is the engine that drives the business enterprise . A
business needs profits not only for its existence but also for its
expansion and diversification. The investors want an adequate
return on their investments, workers want higher wages, creditors
want higher security for interest and loan and so on.
The following ratios are included in this category:
Gross Profit Ratio:
This ratio expresses relationship between gross profit and net
sales. The formula is:
Year 2001
2002
2003
2004
2005
Gross Profit 1075.65
1146.99
1390.26
1794.77
1871.88
Net Sales 2879.94
2905.69
3764.64
5056.95
5775.73
Gross Profit Ratio (%) 37.34
39.47
37.00
35.49
32.41
Gross Profit Gross Profit Ratio = X 100 Net Sales
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05
1015202530354045
2001 2002 2003 2004 2005
Gross Profit Ratio (%)
Significance:
This ratio indicates the degree to which the selling price of
goods per unit may decline without resulting in losses from
operations to the firm. It also helps in ascertaining
whether the average percentage mark up on the goods is
maintained.
In this case increase in the percentage of gross profit as
compared to previous year, it is indicator of following
factors:
1. Selling price of goods has gone up without corresponding
increase in cost of goods sold.
2. The cost of goods sold has gone down without corresponding
decrease in the selling price of goods.
Interpretations:
A lower gross profit ratio, generally indicates high cost of
goods sold due to the unfavorable purchasing polices, lesser sales,
lower selling prices, excessive competition, over investment in
plant and machinery.
Gross profit ratio is decreasing, which means the profitability
of the company is decreasing. Gross profit ratio is decreasing due
to more increase in sales as compared to gross profit for the year
2003-2005. but for the year 2002 gross profit is increasing which
shows that profitability of the company is good and healthy for
this year. This ratio is increasing due to more increase in gross
profit as compared to increase in sales.
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Net Profit Ratio:
This ratio indicates net margin earned on a sale. It is
calculated as follows:
0
5
10
15
20
2001 2002 2003 2004 2005
Net Profit Margin
Significance:
This ratio helps in determining the efficiency with which the
affairs of the business are being managed. As increase in the ratio
over the previous period indicates improvement in the operational
efficiency of the business provided the gross profit is
constant.
2001 2002 2003 2004 2005
Net Profit 379.91 453.53 650.40 785.13 648.57
Net Sales 2879.94 2905.69 3764.64 5056.95 5775.73
Net Profit Margin (%) 13.20 15.61 17.27 15.53 11.23
Net Profit Net Profit Ratio = X 100 Net Sales
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Interpretations:
This ratio indicates the firm s capacity to face adverse
economic conditions such as price competition, low demand etc.
obviously, higher the ratio, the better is the profitability.
Net profit ratio is increasing for the year 2001-2003. This
exhibit that the profitability of the company is good. The
shareholders of the company are happy as their earnings are getting
better day by day.
But for the year 2003-2004 the net profit ratio is decreasing,
which indicates that profitability of the company is decreasing.
Net profit ratio is decreasing as increase in sales is much more
than the increase in net profit. For the year 2004-2005 also the
net profit ratio is decreasing. Here net profit ratio is decreasing
as sales are increasing but net profit is decreasing. Thus we can
say the company s overall strength is better for the first three
years and for the last two years company s position is going
down.
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Overall Profitability Ratios:
Profits are the measures of overall efficiency of a business.
Overall profitability or efficiency of a business can be measured
in terms of profits related to investments made in the business.
Higher the profits, the more efficient is the business
considered.
Return on Share-holders Fund:
This ratio indicates the percentage of return on the total
capital employed. It is calculated on the basis of following
formula:
*Net profit after interest, tax.
#Equity Capital + Reserves and Surplus.
0 5 10 15 20 25 30 35 40 45
2001
2002
2003
2004
2005
Return on Share Holders Fund
2001 2002 2003 2004 2005
Profit available for equity shareholders 379.91 453.53 650.4
785.13 648.57
Equity shareholders fund 1528.5 1636.9 1751.9 2031.7 2162.5
Return on shareholders fund (%) 24.85 27.70 37.12 38.64 30
*Profit available for Equity Shareholders
Return on shareholders fund = X100 #Equity Shareholders fund
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Significance:
This ratio indicates percentage of net profit available for
equity share holders to equity shareholder s fund. It indicates the
productivity of the ownership capital employed in the firm.
Interpretations:
This ratio is one of the most important ratios used in overall
efficiency of the firm. This ratio is of great importance to the
present and prospective shareholders as well as the management of
the company. As this ratio reveals how well the resources of the
firm are
being used, higher the ratio, better are the results. The
inter-firm comparison of this ratio determines whether investments
in the firm are attractive or not as the investors would like to
invest where the returns are higher. The return on shareholders
fund in Alfa Laval is relatively increasing since five years.
This shows that company is utilizing its resources better year
by year, which indicates that overall efficiency of the company is
increasing. As the returns are higher, the
investments in the company are attractive.
Earnings Per share:
This ratio indicates the amount of net profit available per
equity share of a business firm. The formula for calculation of
this ratio is as follows:
2001 2002 2003 2004 2005
Profit available for Equity Shareholders 379.91
453.53
650.4 785.13
648.57
No. of Equity shareholders 181.6 181.6 181.6 181.6 181.6
Net Profit available for Equity shareholders E P S = Number of
Equity Shareholders
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Earnings Per Share (in Rs.) 20.90 24.90 35.80
43.20 35.70
0
10
20
30
40
50
2001 2002 2003 2004 2005Earning Per Share
Significance:
The earning per share helps in determining the market price of
the equity shares of the company. A comparison of earning per share
of the company with another will also help
in deciding whether the equity share capital is being
effectively used or not. It also helps in estimating the company s
capacity to pay dividend to its shareholders. If earning per share
increases, the possibility of the higher dividend paid by company
increases.
Interpretations:
The earning per share is a good measure of the profitability and
when compared with E.P.S of previous 5 years, it gives a view of
the comparative earnings power of a firm. Calculated for 4 years
indicates the earning power of the company is increasing. The
earning per share of the company for five years for 2001 is 20.90%
which increased up to 35.70% in the year 2005.
Earning per share is increasing for the year 2001-2004. EPS is
increasing as profit available for appropriation is increasing and
Number of equity shares is constant for the five years. This
indicates that earning power of the firm is increasing for the year
2001-2004. But in 2004-2005 EPS is decreasing, due to decrease in
profit available for appropriation. However number of equity shares
remains constant. This indicates the earning power of the company
is decreasing for year 2004-2005.
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Liquid Ratios:
Liquidity refers to the ability of a concern to meet its current
obligations as and when they become due. The short term obligations
are met by realizing amounts from current, floating or circulating
assets. The current assets should either be liquid or near
liquidity. If current assets can pay off current liabilities, then
liquidity position will be satisfactory. On the other hand, if
current liabilities may not be easily met out of current assets
then liquidity position will be bad. The bankers, suppliers of
goods and short term creditors are interested in liquidity position
of the concern.
Current Ratio:
This ratio indicates the margin of safety available with the
company. The formula for calculating is as follows:
1.41.45
1.51.55
1.61.65
1.71.75
1.81.85
2001 2002 2003 2004 2005Current Ratio
2001 2002 2003 2004 2005
Current Assets 1520.21 1657.25 1958.94 2844.84 3320.74
Current Liabilities 892.62 1048.54 1094.53 1720.82 2147.28
Current Ratio 1.70 1.58 1.80 1.65 1.55
Current Assets Current Ratio = Current Liabilities
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Significance:
The current ratio indicates the margin of safety available with
the company to meet short term liability. i.e. higher the current
ratio, the larger the amount of rupees available per rupee of
current liability, the more is the firms ability to meet current
obligations and the greater is the safety of funds of short term
creditors. Thus current ratio, in a way is the measure of margin of
safety to the creditors.
Interpretations:
Current ratio 2:1 shows excellent liquidity position of the
firm.
Current ratio between 1:1 to 2:1 shows satisfactory position of
the company.
Ratio less than 1:1 shows no liquidity at all.
For SSI it should be at least 1.33:1.
Current ratio of any company may be 2:1. But according to USA
accounting standards any company should maintain ratio of 1.33:1.
As the current ratio of Alfa Laval is more than 1.33:1 for the year
2001-2005.this shows that current ratio is favorable from the
company s as well as shareholders point of view. Thus company is in
position to meet its current liabilities out of its current
assets.
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Quick Ratio:
Quick ratio, also known as Acid Test Ratio, is a more rigorous
test of liquidity than the current ratio. The term liquidity refers
to ability of the firm to pay its short term obligations as and
when they become due.
The quick ratio can be calculated by dividing the total assets
by total current liabilities. Thus,
2001 2002 2003 2004 2005
Liquid Assets 1118.78
1146.58
1349.5 1931.22
2308.06
Current Liabilities
892.62 1048.54
1094.53
1720.82
2147.28
Quick Ratio 1.25 1.09 1.23 1.12 1.07
0.951
1.051.1
1.151.2
1.251.3
2001 2002 2003 2004 2005
Acid Test Ratio
Significance:
Usually, a high acid test ratio is an indication that the firm
is liquid and has the ability to meet its current or liquid
liabilities in time and so on the other hand a low quick ratio
represents that the firms liquidity position is not good. Quick
ratio may be defined as the relationship between liquid assets and
current or liquid liabilities. As a thumb rule or as a convention
quick ratio 1:1 is considered as satisfactory.
Current Assets - Inventory Quick Ratio = Current Liabilities
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Interpretations:
The standard of liquid ratio is 1:1. The company s liquidity
ratio for the last five years is more than 1, which indicates the
liquidity position of the company is good. Thus liquid assets are
more than current liabilities. So company is in position to pay its
obligations.
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Turnover Ratio:
Funds are invested in various assets in business to make sales
and earn profits. The efficiency with which assets are managed
directly affects the volume of sales. The better the management of
assets, the larger is the amount of sales and the profits. Activity
ratio measures the efficiency with which a firm manages the assets.
These ratios are called as turnover ratios because they indicate
the speed with which assets are converted or turned over in to
sales.
Inventory Turnover Ratio:
This ratio indicates whether investment in inventory is
efficiently used or not. It therefore explains whether the
investment in inventories is with in proper limits or not. The
ratio is
calculated as follows:
365 Inventory Conversion Period: Inventory Turnover
2001
2002
2003
2004
2005
Inventory conversion period (Days)
89 95 86 85 90
2001 2002 2003 2004 2005
Cost of Goods Sold 1804.29 1758.7 2374.38 3262.18 3903.85
Average Inventory 438.54 456.05 560.08 761.56 963.15
Inventory Turnover Ratio 4.11 3.85 4.24 4.28 4.05
Cost of Goods Sold Inventory Turnover Ratio = Average
Inventory
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3.63.73.83.9
44.14.24.34.4
2001 2002 2003 2004 2005
Inventory Turnover Ratio
Significance:
Average inventory is calculated by taking stock levels of raw
materials work in process, finished goods at the end of each month,
adding them up and dividing by twelve. The inventory turnover ratio
indicates the liquidity of the inventory. A high inventory turnover
ratio indicates the brisk sales. The ratio is therefore, a measure
to discover the possible trouble in the form of over stocking and
overvaluation.
It is difficult to establish the standard ratio of inventory
because it will differ from industry to industry.
Interpretations:
Provision for obsolete stock, slow moving items is deducted from
the inventory. Faster the production, fewer product lines, just in
time ordering will reduce overall inventory. The ratio is sticky
and not showing improvement during the last 5 years. It is nearly
4.10, which indicates, for sale of Rs. 100/- the company has to
keep inventory of Rs. 25/- in stores. There is scope of
improvement.
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Debtors Turnover Ratio:
Debtors constitute an important constituent of current assets
and therefore the quality of debtors to a great extent determines a
firm s liquidity. The formula for calculating is as follows:
No of Working Days (360) Average Collection Period: Debtors
Turnover
2001
2002
2003
2004
2005
Average Collection Period (Days)
64 79 77 85 98
0
1
2
3
4
5
6
2001 2002 2003 2004 2005
Debtors Turnover Ratio
2001 2002 2003 2004 2005
Credit Sales 2879.94 2905.69 3764.64 5056.95 5775.73
Average Accounts Receivables 575 638.5 810.35 1197 1578.11
Debtors Turnover Ratio 5.60 4.55 4.65 4.22 3.66
Credit Sales Debtors Turnover Ratio= Average Accounts
Receivables
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Significance:
Sales to account receivables ratio indicates the efficiency of
the staff entrusted with collection of book debts. The higher the
ratio, the better it is, since it would indicate that debts are
being collected more promptly. For measuring the efficiency, it is
necessary to set up a standard figure. A ratio lower than a
standard will indicate inefficiency.
The ratio helps in cash budgeting since the flow of cash from
customers can be worked out on the basis of sales.
Interpretations:
Since the ratio of debts is declining in comparison to preceding
years and the debt collection period is increasing. This also shows
that company s sales are increasing to preceding year. But to
maintain profitability and sales the company has to decrease the
debt collection period. Thus, to decrease the debt collection
period the company has to adopt certain policy s to attract the
customers to pay debts. Policies like trade credit, cash
credit.
Creditors Turnover Ratio:
It is similar to Debtors Turnover Ratio. It indicates the speed
with which the payments for credit purchases are made to the
creditors. The ratio can be computed as follows:
2001 2002 2003 2004 2005
Creditors Turnover Ratio 2.21 2.16 2.48 2.49 2.18
Credit Purchases Creditors Turnover Ratio = Average Accounts
Receivables
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No. of days Average Payment Period = Creditors Turnover
Ratio
2001
2002
2003
2004
2005
Average Payment Period (Days)
1.92
2.12.22.32.42.52.6
2001 2002 2003 2004 2005Creditors Turnover Ratio
Significance:
The term accounts payable include Trade Creditors and Bills
Payable. Both the creditor s turnover ratio and the debt payment
period indicate about the promptness or otherwise in making the
payment of credit purchases. A higher creditors turnover ratio
signifies that creditors are paid promptly, thus enhancing the
credit worthiness of the company. However, a very favorable ratio
to this effect also shows that the business is not taking full
advantage of credit facilities which can be allowed by
creditors.
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Working Capital Turnover Ratio:
This is also known as working capital leverage. This ratio
indicates whether or not working capital has been effectively
utilized in making sales. The formula for calculating is as
follows:
4
4.2
4.4
4.6
4.8
5
5.2
2001 2002 2003 2004 2005
Working Capital Turnover Ratio
Significance:
This ratio indicates whether or not working capital has been
effectively utilized in making sales. In case a company can achieve
higher volume of sales with relatively small
amount of working capital, it is an indication of the operating
efficiency of the company. However it should be kept in mind that
EPS of different companies may vary due to the following of
different practices regarding stock in trade, depreciation etc.
2001 2002 2003 2004 2005
Net sales 2879.94 2905.69 3764.64 5056.95 5775.75
Working Capital 627.59 608.33 864.41 1124.02 1173.46
Working Capital Turnover Ratio 5.00 5.00 4.40 5.00 5.00
Net Sales Working Capital Turnover Ratio = Working Capital
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Interpretations:
The working capital turnover ratio of the company indicates that
the working capital of the company has been effectively utilized
for the five years. The company is achieving higher volume of sales
with relatively small amount of capital. The company has
achieved sales of RS.3764.64 M in the year 2003 with relative
small amount of working capital. The company has maintained the
stability in effective utilization of working capital for five
years.
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OBSERVATIONS AND FINDINGS
Based on the interpretations and calculations of my project, I
can conclude that though the Alfa Laval (India) Ltd is earning the
consistent profit.
The financial performance of the company for the 5 years
reflected a good growth in sales and though all the market segments
sustained or bettered their performance over the previous years.
Cost overrun in a few long term projects impacted the
profitability. However, the company s track record has always been
oriented towards profitable growth and with the strong
fundamentals; the company is well placed to grow continuously on
major fronts.
Sales turnover for the year 2005 under review was at RS. 5775.73
registering an increase of about 14% over the previous year. The
turnover for the year 2004 stood at Rs. 5279.63 M which crossed
five billion rupee mark. The turnover for the year review at Rs.
3919.60 M recorded an increase of 28%. The other income was lowered
at Rs. 102.64 M (2005) as compared to Rs. 222.68 M earned in the
previous year which included some non recurring income in the form
of profit. The total income grew by 11% to Rs. 5878 M (2004: 5279
M). The PBIDT at Rs. 1065.45 M (2004: Rs. 1253.16 M) was lower
about 15% over the previous year largely on account of cost overrun
in a few long term projects.
The book value of the company s shares for the year 2005
improved to Rs. 119.00, the Earnings Per Share was lower at Rs.
35.71 as compared to previous year (2004).
The return on shareholders funds and the return on total capital
employed declined to 30% and 44% for the year 2005
respectively.
The margins across all business segments for the 5 years were
better. The company has to absorb the extra costs in a long term
projects due to which the profitability was low impacting the
overall performance of the company.
The overall performance of the company is good and there is a
continuous flow of project business. The company is continuing its
drive for volume with continued focus on profitability.
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In the year 2004 sundry debtors are1433.11 and in 2005 it is
1723.10. it shows that company investment increased in debtors. And
company s working capitals major portion invested in sundry
debtors, which in turn requires more working capital?
Excellent cash flow management of the company is the forte of
the company.
Purchasing policy and smooth procedure is efficient and
smooth.
Importance is given to work in progress and efforts are taken to
reduce the working capital cycle and to maintain minimum cost.
It is found that inventory is low and movement of inventory is
slow.
The initial credit period allowed for the company is 90 days,
but the company can stretch it to 120 days due to market
conditions.
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CONCLUSIONS AND SUGGESTIONS
The business environment of the company is reasonably good. The
company s track record is always oriented towards profitable growth
and with strong fundamentals.
As major portion of working capital is invested in sundry
debtors, company has to adopt factoring services so that cash
realization will be faster.
Company should take corrective actions to write off or sell off
the inventory, which is of no use and occupies unnecessary
space.
Action on priority basis should be taken against pending jobs
for more than three months. Smooth functioning will release locked
up capital and improve the cash flow.
Other factory capital deals with the expenditure that is done on
assets of less value, building and other direct assets. Capital
consumption on this head is in company s own hands hence more
importance can be given to this head. The capital should be used
effectively with the improvement in manufacturing activity and
minimizing cost.
Acquisition of new assets of heavy costs should be done with
proper capital budgeting supported by pay back period.
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BIBLIOGRAPHY
1. I M Pande FINANCE MANAGEMENT Vikas Publication.
2. DR. S N Maheshwari FUNDAMENTALS OF FINANCIAL MANAGEMENT
Sultan Chand & Publications.
3. N M Vechlekar FINANCIAL MANAGEMENT Vikas Prakashan.
4. www.alfalaval.com
5. www.myiris.com
6. www.google.co.in
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