indroduction

A STUDY ON FINANCIAL PERFORMANCE OF

‘STANDARD TILE FACTORY’

1.1 INTRODUCTION

Finance is the lifeblood of any business. So management of finance is important to a business.

Financial Management refers to that part of the managerial activity which is concerned with the

planning and controlling of the firms financial resources. It involves the management & control

of money and money related operations within a business. Hence it is applicable to every type of

organization, irrespective of its size, kind or nature. Therefore it has a universal applicability and

is indispensable to any organization.

The basis for financial planning, analysis and decision making is the financial information.

Financial information is needed to predict, compare and evaluate the firm’s earning ability. It is

also required to aid in economical decision making – investment and financial decision making.

The financial information of an enterprise is contained in the financial statements or accounting

reports. A financial statement is the centre of annual report and is an organized collection of data

according to logical and consistent accounting procedures. Its purpose is to convey an

understanding of the financial aspects of a business. Three basic financial statements which are

of great significance to owners, management and investors are balance sheet, profit and loss

account and cash flow statement.

Users of financial statements can get further insights about the financial strength and weakness

of the firm if they properly analyze the information reported in these statements. Management

should be particularly interested in knowing financial strength of the firm so as to be able to

make their best use and be able to spot out financial weaknesses of the firm to take suitable

corrective actions. The future plans of the firm should be laid down in view of the firm’s

financial strengths and weaknesses. Thus financial analysis is the starting point for making plans,

before using any sophisticated forecasting and planning procedures.

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1.2 OBJECTIVE OF THE STUDY

Main objective:-To evaluate the financial performance of STANDARD TILE FACTORY

including the firm’s profitability, solvency and efficiency in utilisation of resources.

Sub objective:-

1. To evaluate the long term and short term solvency of the company.

2. To determine the profitability of the company.

3. To determine the efficiency in utilisation of resources of the company.

1.3 SCOPE OF THE STUDY

The study mainly deals with financial performance of STANDARD TILE FACTORY in

Feroke.The financial performance of the company is very important for effective running of the

business. So the scope of the study is to analysis the financial performance of the company. The

financial performance analysis is more technical exercise than information gathering. It is

mechanical to monitor whether the resources of the organisation are employed in the right

manner or not. The study is based on financial position of this business located in Feroke

(Calicut).

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1.4 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problems. It may be

understand as a science of a study of how research is done scientifically. It is the description,

explanation and justification of various methods of studies. The data used for study is collected

directly from STANDARD TILE FACTORY. We study the various steps that are generally

adopted by are searcher in studying the research problem along with the logic behind it. It is

necessary for the researcher to know not only the research method or technique but also the

methodology.

STATEMENT OF THE PROBLEM

A financial statement which is the centre of an annual report is an organized collection of data

prepared according to logical and consistent accounting procedures. Its purpose is to convey an

understanding of the financial aspects of a business. The users of the financial statements can get

further insight about financial strengths and weaknesses of the firm if they properly analyze

information reported in the financial statements. The management of a firm would be

particularly interested in knowing their financial strengths in order to make best use of the

resources and to be able to spot out financial weaknesses to take suitable corrective actions. The

future plans of the firm should be laid down in view of the firm’s financial strengths and

weaknesses. Thus, financial analysis is the starting for making plans, before using any

sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for

anticipating the future.

Financial analysis identifies the financial strengths and weakness of the firm by properly

establishing relationships between the items of the balance sheet and profit and loss account. A

mere look at the financial statement will not reveal crucial information. To bring out the hidden

information financial statements over a period are to be studied. Hence, the study is conducted to

evaluate the relationship between component parts of financial statement of STANDARD TILE

FACTORY and to obtain a better understanding of the company’s position and performance.

PERIOD OF THE STUDY

The period of the study was 21 days from 4-10-2010 to 24-11-2010.

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METHOD OF DATA COLLECTION

The financial statement analysis was collected from published records like balance sheet, profit

& loss account etc. of the company. All details necessary for conducting the study was available

within the company itself in the form of records.

TOOLS USED FOR ANALYSIS

The tools and techniques used in the study are:

1. Ratio Analysis

2. Trend Analysis

3. Graphical Analysis

4. Comparative Balance Sheet

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1.5 LIMITATIONS OF THE STUDY

1. The policy of the company does not allow getting all the information.

2. The report is based on the annual report, which is provided by the company that

cannot be relied upon.

3. Prediction of the based on the study is not reasonable.

4. The study is purely based on the secondary data.

5. The time constraint of the period of the study was limited to a short open of 5years

which is not significant to make and in-depth study on the working of STANDARD

TILE FACTORY.

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2.1 INDUSTRY PROFILE

Tile Industry in kerala

Tile industry is one of the most important traditional industries in Kerala first tile factory in

Kerala was started in 1873. Tile roofed houses and building have become a part of our culture.

There are about 400 small and big tile manufacturing units in Kerala. The tile industries of

Kerala are mainly concentrated at Trichur, Kollam, Kozhikode, Alappuzha and Kannur.Feroke

and Trichur are the most prominent places of tile manufacture.

Now a day’s most of the units have become sick. Entire industry is facing a recession. The fall

in demand and rising cost of production are major causes of recession. a recent study revealed

that around 200 of the tile units are becoming sick every year. Many of the units are struggling

for their existence.

There was a time when Kerala had the monopoly of tiles production in the country for a long time.

Though the first tile factory in this region was established in Mangalore by Basil Missionary Society

during the year 1865, Kerala became the home of the tile industry due to numerous rivers and back

waters providing chief transport. Therefore, it was quite natural that the number of tile factories had

come up in Calicut, Quilon, Trichur and Alwaye and in some other districts. Availability of suitable clay,

labour, firewood and suitable climatic condition were the main factors for the rapid growth tile industry

in Kerala. During the end of 19th century, this pioneer industry was established in Calicut &Quilon and in

the beginning of the 20th century it was set up in Trichur and Alwaye. But Mangalore pattern tiles

became popular very soon because of their intrinsic superiority over the existing patterns

The clay industry in Kerala mostly consists of enterprises with low capital investments. These are labour

intensive, seasonal and contribute substantially to the economic development by integrating local raw

material resources with employment generation through small and medium size of processing units

spread over widely in rural and urban areas.

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The total quantity of clay consumed by the industry per annum is estimated at 12 lakh tones. The total

number of work force employed is estimated at 1 lakh. If these employees and their dependants are

considered, clay industry in Kerala is the means of livelihood of 4 lakh people. The annual turnover of

the industry is Rs.90 crores approximately.

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2.2 COMPANY PROFILE

ShanmughaMuthaliyar and LokhanathaMuthaliyar from Mangalore started the Standard Tile Company

in 1916.It was a partnership firm. Its head office was situated at Elahankar, Bangalore. In 1956, the

company becomes private limited Company and the name was replaced by the Standard Tile and Clay

Works (p) Ltd and was incorporated in 1926, under the Companies Act 1956 with the object of

manufacturing, purchasing and marketing of Tiles.

In 1968, the managing director, VenugopalMuthaliyar died and his son VijayakumarMuthaliyar took

charger of the company. Its liability went on increasing and even threatened its own existence. The

creditors wanted to liquidate the firm. At this time were 400 workers. In 1978, the employee then

bought the shares which were previously owned by Muthaliyar’s family. After, Mr.Subhramanyan Nair

charged as the Managing Director of this company. Now there are about 350 shareholders and

employee holds 90% of the shar Tiles are the thin, flat slab or block used structurally or deceptively in

building.

Traditional tile have been made of glazed or unglazed fired clay, but modern tiles are also made of

plastic glass or asphalt or asbestos cement. The tile industry forms past of the ceramics group. Clay

articles used for building construction and civil engineering are generally grouped into structural clay

products in which the bricks and tile industry may also be included.The origin of tiles is form the desire

of mankind to have a permanent roof.

The practice of making tiles was known to Indians form very ancient times but as an organized industry

it is know only from the past 20th century in our country. Before the advent of modern tiles the

traditional ‘forte’ made by kulalas in their kulalachakra were popular. The final appearance of a tiled

roof depends upon its pitch, the inclusion of dormers, hips and valleys, the detailing of gables, eaves and

ridges and the colors and texture of the tiles. Developments in the production process have improved

the physical quality, versatility and availability of clay roof tiles which are now widely regarded as a

superior product commensurate in technical and pricing terms with alternative roofing materials. Clay

tiles come in two main formats - plain tiles and profiled tiles. Like bricks, tiles can be cut by hand and by

machine to fit even the most complex of shapes.

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The clay tile industry is not a large employer and its factories range from the traditional producing hand

made products to the highly mechanized with some robotic handling. However, the factories often

located in rural areas are significant local employers. Consequently, the welfare and development of the

personnel are important and the association with the much larger clay brick industry enables

participation in schemes that might not be possible for the industry alone.

The Industry can help its local communities by providing amenity facilities as well as

employment:

Clay extraction has a temporary disruptive and adverse environmental impact. However,

subsequent restoration often adds value through the provision of leisure facilities and areas

dedicated to wildlife and nature conservation.

Restoration of clay pits can also provide land for agricultural and other productive uses.

Waste disposal to landfill is the least desirable environmental option. Clay is accepted

geologically as the best receptor. Restoration of clay quarries through landfill meets one of

society’s basic needs.

The clay tile industry can make a significant contribution to local communities because:

The employment it provides is long-term.

The performance and continuity of a clay tile manufacturer’s operations encourages the

establishment of links with local schools, colleges and other institutions to the benefit of all

parties.

It is important to clay tile manufacturers that their operations and impacts take into account

the interests of the communities in which they are located, and are accepted by them. Local

liaison committees are an established means of achieving this end

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The Clay Tile Industry has set out to make the exploitation of clay as efficient as possible by:

Sourcing materials locally. The majority of clay tile works have their clay stocks on site or

within close proximity.

Working in conjunction with other operators such as surface mining to use clays that are a by-

product of their main activity.

Minimizing the waste of clay in the production process by recycling unfired decisions made by

our Feroke

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Diagrammatic Representation

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Organization Structure

Board of Directors

Managing Director

General Manager

Office staffs

Foreman

General Foreman

Mechanical Foreman

Supervisor in Firewood

Supervisor in General Works

Supervisor in clay

Supervisor in press

Supervisor in Drying Kiln& Load

Supervisor in store

Workers

Roofing tiles and flooring tiles are the main products of the tile factory. Roofing tiles are considered as

the most suitable roofing material that can be used by both the poor and the rich alike. The construction

expenditure for the tiled house is not doubt with in the reach of the common man. Decorative tiled

roofs gives ornamental beauty to the house & comfort to the rich. Clay is the main raw material used in

producing roofing tile. Clay is also used to produce bricks and ridges.

The Standard Tile and Clay Works (p) Ltd applies time card system for recording the arrival and

departure time of each employee. Under this each worker is given an attendance card bearing his roll

number. A board is kept at factory gate and the attendance cards are hanged on this board. On the

arrival of every worker they were took their card and put in a box kept inside the factory.

The origin of tiles is form the desire of mankind to have a permanent roof. The practice of making tiles

was known to Indians form very ancient times but as an organized industry it is know only from the past

20th century in our country. Before the advent of modern tiles the traditional ‘forte’ made by kulalas in

their kulalachakra were popular. The final appearance of a tiled roof depends upon its pitch, the

inclusion of dormers, hips and valleys, the detailing of gables, eaves and ridges and the colors and

texture of the tiles. Developments in the production process have improved the physical quality,

versatility and availability of clay roof tiles which are now widely regarded as a superior product

commensurate in technical and pricing terms with alternative roofing materials. Clay tiles come in two

main formats - plain tiles and profiled tiles. Like bricks, tiles can be cut by hand and by machine to fit

even the most complex of shapes.

Standard Tile and Clay Works (Pvt) Ltd is a well known company manufacturing quality tiles in Kerala.

The company is situated on the banks of the river ‘Chaliyar’.Eco friendly durable cost effective and

elegant terra cotta building product manufactured and marketed by STCW have been considered as the

bench marks of quality . The STCW is the single largest tile unit in India and is well equipped with the

state of art machinery. Blending superior technology and expertise make their products highly durable

storages.

STCW are the first manufactures of untilator bricks and hollow bricks for load bearing floors in multi

stored floor slabs. The Standard Tile and ClayWorks(Pvt) Ltd was award silver medal in the Education

and Industrial Exhibition held on 8.5.1973 for its tile and clay products.

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A lot of tile factories are situated at Feroke, popularly known as “Tile city of Malabar” producing quality

tiles. The main reasons for the concentration in this area of tile industry are:

Easy transportation facilities.

Availability of raw materials.

Unlimited water supply.

Nearness to market

Roofing tiles and the flooring tiles are the main products of the tile factory. The construction

expenditure for the tiled house is no doubt with in the reach of a common man. Decorative tiled roofs

give ornamental beauty to the house and comfort to the rich. Clay is the main raw material used in

producing roofing tiles. Clay is also used to produce bricks and ridges.

Types of products:-

1. Roof Tiles: -These are used for covering the upper crust of the building.

2. Ridge Tiles: - These are used in placing on all the adjoining sides of the roof.

3. Valley Tiles: - This takes place of galvanized iron valleys.

4. Flooring Tiles: - They can withstand constant rough use and have a smooth surface and have a

light red color when laid on floors.

5. Ceiling Tiles: - These are laid underneath roofing tiles providing airspace between, and then

render protection from heat.

6. Hourdies: - These are designed for flat roofs; also used for partitioning walls.

7. Ventilator Bricks: - Good for compound walls partion wall.

8. Ventilator Tiles: -Well designed for the expulsion of heat, dust and smoke.

9. Flower Pots: - A beautiful flower pots makes home or garden highly attractive.

10. Jalleys.

11. Water Coolers.

The Standard Tile and Clay Works (p) Ltd was awarded silver medal in the education and industrial

exhibition held on 8.5.73(silver medal) for its Tile and Clay products.

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EMPLOYEES:

Total strength of the employee in 273 among them 243 are permanent and 30 are temporary worker. At

present there is one female workers employed in the company.

Facilities and Incentives available to the workers

1. Extra work payments - Pays twice in a month.

2. Salary advance facility- Pays Rs.200 on 7th of every Months.

3. ESI facility - Covers hospital charges , Accident benefits, Medicine

Expenses.

4. Pension - Children pension, Widow Pension, Nominee pension.

5. Leave facility -Include annual leave and Casual leave facilities.

6. Gratuity - If the workers complete a Minimum of 5years service.

7. Provident fund

8. Canteen facility - Company keeps a part of Rs.700000 every year.

9. Festival allowance like Onam, Bacrid advance

10. Bonus

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Labour Welfare Facilities

The company has much interest in providing all possible facilities provided by the management to the

workers are as follows:

1. Canteen facilities - Provides break fast and snacks With 8.5%susidiary.

2. Recruitment and selection of employees- Company adopts direct interviews & staffs are selected by

campus interviews, advertisement in journals and news papers etc.

3. Training - the managers and staff members are given off the training .This facilities then to attend the

seminars, conference, etc.

4. Wage payment system- It is based on the rules & regulations specifies as per the minimum wages Act

1948

The casual worker is paid wages at the end of every week. The permanent workers get a final rule of

salary every month.

5. Promotion & Retirement age of workers – The company considers seniority for the promotion of the

workers and given preference to the internal promotion.

The retirement age of employee in 5years this may be extended up to 58. Every employee who attains

the age of 50years is offered the facility of voluntary retirement.

6. Working days and holidays - The 26 days of work for each worker in a month, the working time 8.a.m

to 5.p.m with one hour lunch interval from 12 to 1.p.m. All national holidays are holidays for the

company.

The company, Standard Tile and Clay Works (p) Ltd is a well known company, manufacturing quality

Tiles in Kerala.The Company situated in bank of chaliyar. The present Directors of this company are:

Mr.Subhramanyan Nair (MD)

Mr.VijayakumarMuthaliyar

Mr.ReghuVenugopalMuthaliyar

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Mr.C.Gangatharan

Mr.M.Prabakaran

Mr.P.C.Rajan

Mr.K.Murugan

The working time of the Factory is 8.a.m to 5.p.m.This factory contains workers including one lady

worker. The office staff and workers get monthly salary.

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3.1 THEORITICAL PERPECTIVE

ANALYSIS OF FINANCIAL STATEMENTS

MEANING OF ANALYSIS

Analysis is the process of critically examining in detail accounting information given in

the financial statements. For the purpose of analysis, individual items are studied; their

interrelationships with other related figures established, the data is sometimes rearranged to

have better understanding of the information with the help of different techniques or tools for

the purpose. Analysing financial statements is a process of evaluating relationship between

component parts of financial statements to obtain a better understanding of firm’s position

and performance. In the words of Myer, “Financial Statements Analysis is largely a study of

relationship among the various financial factors in a business as disclosed by a single set of

statements and a study of the trend of these factors as shown in a series of statements”. The

analysis of financial statements thus refers to the treatment of the information contained in

the financial statements in a way so as to afford a full diagnosis of the profitability and

financial position of the firm concerned. For this purpose financial statements are classified

methodically, analysed and compared with the figures of previous years or other similar

firms.

MEANING OF INTERPRETATION

Analysis and interpretation are closely related. Interpretation is not possible without

analysis and without interpretation analysis has no value. Various account balances appear in

the financial statements. These account balances do not represent homogeneous data so it is

difficult to interpret them and draw some conclusions. This requires an analysis of the data in

the financial statements so as to bring some homogeneity to the figures shown in the

financial statements. Interpretation is thus drawing of inference and stating what the figures

in the financial statements really mean. Interpretation is dependent on interpreter himself.

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Interpreter must have experience, understanding and intelligence to draw correct conclusions

from the analysed data.

The most important objective of the analysis and interpretation of financial statements is to

understand the significance and meaning of financial statements data to know the strength

and weakness of a business undertaking so that a forecast may be made of the future

prospects of that business undertaking.

3.1.2 USES OF FINANCIAL ANALYSIS

Financial analysis is helpful in assessing the financial position and profitability of a

concern. This is done through comparison by ratios for the same concern over a period of

years; or for one concern against another; or for one concern against the industry as a whole

(inter-firm comparison); or for one concern against the predetermined standards; or for one

department of a concern against other departments of the same concern (intra-firm

comparison). Accounting ratios calculated for a number of years show the trend or the

change of position, i.e., whether the trend is upward or downward or static. The

ascertainment of trend helps us in making estimates for the future. For example, ratios of

gross profit to sales for the last five years indicate a rising trend, we can safely estimate that

ratio of gross profit to sales for the next year will also rise. Keeping in view the importance

of accounting ratios the accountant should calculate the ratios in appropriate form, as early as

possible, for presentation to the management for managerial control.

The main objectives of analysis of financial statements are to assess:

The present and future earning capacity or profitability of the concern,

The operational efficiency of the concern as a whole and of its various parts or

departments,

The short-term and long-term solvency of the concern for the benefit of the debenture

holders and trade creditors,

The comparative study in regard to one firm with another firm or one department with

another department,

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The possibility of developments in the future by making forecasts and preparing budgets,

The financial stability of a business concern,

The real meaning and significance of financial data, and

The long-term liquidity of its funds.

TECHNIQUES OF ANALYSIS AND INTERPRETATION

The following techniques can be used in connection with analysis and interpretation of

financial statements.

a) Ratio Analysis

b) Comparative Statements Balance Sheet

c) Trend Analysis

Ratio analysis

Ratio analysis is one of the techniques of financial analysis to evaluate the financial

condition and performance of a business concern. Simply, ratio means the comparison ofone

figure to other relevant figure or figures. According to Myers , “Ratio analysis offinancial

statements is a study of relationship among various financial factors in abusiness as disclosed

by a single set of statements and a study of trend of these factors

Advantages and Uses of Ratio Analysis

There are various groups of people who are interested in analysis of financial position of a

company. They use the ratio analysis to work out a particular financial characteristic ofthe

company in which they are interested. Ratio analysis helps the various groups in thefollowing

manner:₪ To workout the profitability: Accounting ratio help to measure the profitability of

the business by calculating the various profitability ratios. It helps themanagement to know

about the earning capacity of the business concern. In this way profitability ratios show the

actual performance of the business.

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To workout the solvency: With the help of solvency ratios, solvency of thecompany

can be measured. These ratios show the relationship between theliabilities and assets.

In case external liabilities are more than that of the assets ofthe company, it shows the

unsound position of the business. In this case thebusiness has to make it possible to

repay its loans.

Helpful in analysis of financial statement: Ratio analysis help the outsiders justlike

creditors, shareholders, debenture-holders, bankers to know about theprofitability and

ability of the company to pay them interest and dividend etc.

Helpful in comparative analysis of the performance: With the help of ratioanalysis a

company may have comparative study of its performance to theprevious years. In this

way company comes to know about its weak point and beable to improve them.

To simplify the accounting information: Accounting ratios are very useful as they

briefly summarize the result of detailed and complicated computations

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Classification of Ratios

Ratios may be classified in a number of ways to suit any particular purpose. Differentkinds of

ratios are selected for different types of situations. Mostly, the purpose for which the ratios

are used and the kind of data available determine the nature of analysis. Thevarious

accounting ratios can be classified as follows:

Liquidity ratios:

It shows the relationship between the current assets & current liabilities of theconcern

E.g. liquid ratios & current ratios.

1. Current Ratio: Definition:

Current ratio may be defined as the relationship between current assets and current liabilities.

This ratio is also known as "working capita l ratio ". It is a measure of general liquidity and is

most widely used to make the analysis for short term financial position or liquidity of a firm.

It is calculated by dividing the total of the current assets by total of the current liabilities.

2.Liquid or Liquidity or Acid Test or Quick Ratio

Liquid ratio is also termed as "Liquidity Ratio ”, “Acid Test Ratio " or "Quick Ratio ". It is

the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm

to pay its short term obligations as and when they become due.

3.CASH RATIO

This is also called as super quick ratio. This ratio considers only the absolute liquidity available

with the firm.

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Activity ratios :

It shows relationship between the sales & the assets. It is also known as Turnover ratios &

productivity ratios e.g. stock turnover ratios, debtors turnover ratios.

1.Inventory Turnover Ratio or Stock Turnover Ratio (ITR)

Stock turnover ratio and inventory turnover ratio are the same. This ratio is a relationship

between the cost of goods sold during a particular period of time and the cost of average

inventory during a particular period. It is expressed in number of times. Stock turnover ratio /

Inventory turnover ratio indicates the number of time the stock has been turned over during

the period and evaluates the efficiency with which a firm is able to manage.

2.Debtors Turnover Ratio or Receivables Turnover Ratio:

Debtors turnover ratio indicates the velocity of debt collection of a firm. In simple words it

indicates the number of times average debtors (receivable) are turned over during a

year.

3.Fixed Assets Turnover Ratio

Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measures

the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the

intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets.

Leverage ratios or long term solvency ratios :

It shows the relationship between proprietors funds & debts used in financing the assets of

the concern e.g. capital gearing ratios, debt equity ratios, & Proprietory ratios.

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1.Debt –to- Equity Ratio

Debt-to-Equity ratio indicates the relationship between the external equities or outsiders

funds and the internal equities or shareholders funds. It is also known as external internal

equity ratio. It is determined to ascertain soundness of the long term financial policies of the

company.

Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of the outsiders to

be paid out of such profit e.g. dividend payout ratios & debt service ratios.

1.Interest Coverage Ratio:

Interest coverage ratio is also known as debt service ratio or debt service coverage ratio.

This ratio relates the fixed interest charges to the income earned by the business. It indicates

whether the business has earned sufficient profits to pay periodically the interest charges.

Profitability ratios :

a) It shows the relationship between profits & sales e.g. operating ratios, gross profit

ratios, operating net profit ratios, expenses ratios

b) It shows the relationship between profit & investment e.g. return on investment,

return on equity capital.

1. Gross profit ratio (GP ratio ):-

Gross profit ratio is the ratio of gross profit to net sales expressed as a percentage.It

expresses the relationship between gross profit and sales.

2. Net profit ratio : -

Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage.

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3. Return on share holder’s investment:-

It is the ratio of net profit to share holder's investment. It is the relationship between net

profit (after interest and tax) and share holder's/proprietor's fund. This ratio establishes the

profitability from the share holders' point of view. The ratio is generally calculated in

Percentage.

4. Return on Equity Capital (ROEC) Ratio

In real sense, ordinary shareholders are the real owners of the company. They assume the

highest risk in the company. (Preference share holders have a preference over ordinary

shareholders in the payment of dividend as well as capital. Preference share holders get a

fixed rate of dividend irrespective of the quantum of profits of the company). The rate of

dividends varies with the availability of profits in case of ordinary shares only. Thus

ordinary shareholders are more interested in the profitability of a company and the

performance of a company should be judged on the basis of return on equity capital of the

company. Return on equity capital which is the relationship between profits of a company

and its equity.

TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account. In other

words, whether the financial position of a firm is improving or deteriorating over the years.

This is made possible by the use of trend analysis. The significance of the trend analysis of

ratio lies in the fact that the analysts can know the direction of movement, that is, whether the

movement is favorable or unfavorable. For example, the ratio may be low as compared to the

norm but the trend may be upward. On the other hand, though the present level may be

satisfactory but the trend may be a declining one.

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Calculation of Trend Ratios

While calculating trend percentages, the following precautions may be taken:

i. The accounting principles and practices must be followed constantly over the period for

which the analysis is made. This is necessary to maintain consistency and comparability.

ii. The base year selected should be normal and representative year. Every item in the base

statement should be stated as 100.

iii. Trend percentages should be calculated only for those items which have logical

relationship with one another.

iv. Trend ratios of each item in other statement is calculated with reference to the same item

in the base statement by using the following formula:

Absolute value of item in the statement under study

* 100

Absolute value of the same item in the base statement

v. Trend percentages should also be carefully studied after considering the absolute figures

on which these are based. Otherwise, they may give misleading conclusions.

vi. To make the comparison meaningful, trend percentages of the current year should be

adjusted in the light of price level changes as compared to the base year.

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DATA ANALYSIS AND INTERPTATION

4.1 RATIO ANALYSIS

1. LIQUIDITY RATIOS

a. CURRENT RATIO

Current ratio is the oldest of all financial ratios. The current ratio is a measure of the firm’s

short term solvency. It indicates the availability of current assets in rupees for every one rupee of

current liability.

Table 1.1 CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES

YEAR CURRENT ASSETS CURRENT LIABILITIES

CURRENT RATIO

2006 15513915.69 4276880.82 3.62

2007 16198817.54 7304323.02 2.21

2008 20192621.76 10487937.58 1.92

2009 25751023.63 14730488.03 1.74

2010 26406293.97 12025367.11 2.19

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Chart 1.1

2006 2007 2008 2009 20100

0.5

1

1.5

2

2.5

3

3.5

43.62

2.21

1.921.74

2.19

CURRENT RATIO

INTERPRETATION

The current ratio of 2:1 is considered ideal. If the actual current ratio is 2:1 or more than 2:1,

it can be taken as a sign of the liquidity or short term solvency of the concern.Here the current

ratios for all the years are above the standard with the exception of 2009. The current ratio of

2010 is showing slight increase from the previous year.

27

b. QUICK RATIO

Quick ratio is worked out to test the short term liquidity of the firm in the correct form.If from

current assets the stock and prepaid expences are removed, the remainder is known as liquid

asset.

QUICK RATIO=LIQUID ASSET/CURRENT LIABILITIES

LIQUID ASSET=CURRENT ASSET –PREPAID EXPENCES-INVENTORY

Table 1.2

YEAR LIQUID ASSET CURRENT LIABILITIES

QUICK RATIO

2006 5390133.48 4276880.82 1.26

2007 6061931.93 7304323.02 0.83

2008 16091569.16 10487937.58 1.53

2009 21109084.07 14730488.03 1.43

2010 15014264.2 12025367.11 1.24

28

Chart 1.2

2006 2007 2008 2009 20100

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1.26

0.830000000000001

1.531.43

1.24

QUICK RATIO

INTERPRETATION

Quick ratio also shows the short-term solvency of the company. This ratio reveals the actual

financial ability of the company to pay off its immediate impending liabilities. The standard ratio

is 1:1. Here the quick ratios for the previous years are above the standard except in the year

2007. Ater 2007 it is showing a fluctuating trend. The ratio was satisfatory in the year 2010.

hence it can be inferred that the solvency position of the company is good.

29

c. CASH RATIO

Cash ratio is also known Absolute Liquid Ratio. Cash is the most liquid asset. Cash ratio

should be calculated together with current ratio so as to exclude even recievables from the

current assets and find out the absolute liquid assets.

CASH RATIO=CASH/CURRENT LIABILITIES

Tale 1.3

YEAR CASH CURRENT LIABILITIES

CASH RATIO

2006 559699.47 4276880.82 0.130

2007 841979.73 7304323.02 0.115

2008 9541259.69 10487937.58 0.909

2009 11800741.30 14730488.03 0.801

2010 7137610.90 12025367.11 0.59

30

Chart 1.3

2006 2007 2008 2009 20100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0.13 0.115

0.909

0.801

0.59

CASH RATIO

INTERPRETATION

Cash ratio shows the absolute liquidity position of the firm. The standard norm for the ratio

is 0.5:1 .m the above table it can beseen that the cash ratio of the company was high in the year

2008 and it was very low in the year 2007. in the year 2010 the ratio was 0.59. hence itcan be

inerred that the company is in a position to meet its immediate working requirements as it has

enough funds.

31

2. LEVERAGE RATIOS

A. DEBT-EQUITY RATIO

Debt-equity ratio is to measure the relative proportion of debt and equity in financing the

assets of a firm. It indicates the extent to which the company depends upon outsiders for its

existance.

DEBT-EQUITY RATIO=TOTAL DEBT/NET WORTH

Table 2.1

YEAR TOTAL DEBT NETWORTH DEBT-EQUITY RATIO

2006 5953231.81 11908646 0.499

2007 1803011.76 12150796 0.148

2008 37018.60 19271517.2 1.920

2009 43522.60 22307568.83 1.951

2010 37018.60 25888655.32 1.429

32

Chart 2.1

2006 2007 2008 2009 20100

0.5

1

1.5

2

2.5

0.499000000000002

0.148

1.92 1.951

1.42899999999999

DEBT-EQUITY RATIO

INTERPRETATION

The debt-equity ratio indicates the relative proportions of debt and equity in financing the

assets of a firm. This ratio reflects the relative contribution of creditors and owners of business in

its financing.Here 2007 got the least ratio and 2009 got the highest ratio.In2010 the debt equity

ratio is slight above average.Hence it can be inferred that there is no relative proportions of debt

and equity.

33

3. COVERAGE RATIOS

a. INTEREST COVERAGE RATIO

The interest coverage ratio shows the number of times the interest charges are covered

by funds that are ordinarily available for their payment.

INTEREST COVERAGE RATIO=EARNINGS BEFORE INTEREST TAXES, DEPRECIATION AND AMORTISATION (EBITDA)/INTEREST

Table 3.1

YEAR EBITDA INTEREST INTEREST COVERAGE RATIO

2006 1415340.62 697857.53 2.02

2007 4543665.7 416472.50 10.90

2008 6624434.32 182597.50 36.27

2009 7139222.42 197084.08 36.22

2010 7669136.26 110239.00 69.56

Chart 3.1

34

2006 2007 2008 2009 20100

10

20

30

40

50

60

70

80

2.02

10.9

36.27 36.22

69.56

INTEREST COVERAGE RATIO

INTERPRETATION

This ratio indicates the extent to which earnings may fall without causing any

embarrassment to the firm regarding the payment of interest charges. A higher ratio is desirable

but too high a ratio indicates that the firm is very conservative in using debt, and that it is not

using credit to the best advantage of shareholders. A lower ratio indicates excessive use of debt,

or inefficient operations. Here in 2010, the company has got a too high ratio which indicates that

the company is not using the credit to the best advantage of shareholders.

4. ACTIVITY RATIOS

35

a. INVENTORY TURN OVER RATIO

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its

product.

INVENTORY TURN OVER RATIO=COST OF GOOD SOLD/AVERAGE STOCK

Cost of goods sold=opening stock +purchases +direct expences-closing stock.

Table 4.1

YEAR COST OF GOODS SOLD

AVERAGE STOCK

INVENTORY TURN OVER RATIO

2006 23600069.4 8986955.16 2.626

2007 28176411.62 9061467.165 3.109

2008 36243890.00 6248716.565 5.800

2009 46560771.66 3319760.27 14.025

2010 8216615.86 7151238.97 1.148

Chart 4.1

36

2006 2007 2008 2009 20100

2

4

6

8

10

12

14

16

2.6263.109

5.8

14.025

1.14799999999999

INVENTORY TURN OVER RATIO

INTERPRETATION

This ratio shows how rapidly the inventory is turning into recievable through sales.

Generally a high inventory turnover indicative of good inventory management. A low inventory

turnover implies excessive inventory levels than warranted by production and sales activities, or

a slow-moving or obselete inventory. Here in the previous year 2009, the inventory turnover

ratio indicates a good inventory management, but in 2010 it remains highly decreased, which

indicates that there exists excessive inventory.

b. DEBTORS TURNOVER RATIO

37

A firm sells goods for cash and credit. Credit is used as a marketing tool by a number of companies. When the firm extent credit to its customers, debtors are created. The liquidity position of the firm depends on the quality of debtors to a great extent.

DEBTORS TURNOVER RATIO=CREDIT SALES/DEBTORS

Table 4.2

YEAR CREDIT SALES DEBTORS DEBTORS TURNOVER RATIO

2006 31069527.10 4203754.06 7.39

2007 39315081.59 4127308.45 9.52

2008 50062403.52 3004247.88 16.66

2009 61251142.70 3489026.30 17.55

2010 51016193.75 3655737.22 13.95

Chart 4.2

38

2006 2007 2008 2009 20100

2

4

6

8

10

12

14

16

18

20

7.39

9.52

16.6617.55

13.95

DEBTORS TURNOVER RATIO

INTERPRETATION

Debtors turnover indicates the number of times debtors turnover each year. Generally the

higher the value of debtors turnover, the more efficient is the management of credit. In this

company we assumes total sales are credit sales. Here in 2009, debtors turnover ratio indicates

good management, But it decreased in 2010,hence we can infer that the management of credit of

the firm is satisfactory.

c.TOTAL ASSET TURNOVER RATIO

39

The asset turnover ratio measures the efficiency of a firm in managing and utilising its

assets.In operational terms, it implies that the firm can expand its activity level (in terms of

production and sales) with requiring additional capital investments.

TOTAL ASSET TURNOVER RATIO=SALES/TOTAL ASSETS

Table 4.3

YEAR SALES TOTAL ASSETS TOTAL ASSET TURNOVER RATIO

2006 31069527.10 15672370.81 1.982

2007 39315081.59 16443408.66 2.390

2008 50062403.52 20796473.38 2.407

2009 61251142.70 28081579.46 2.181

2010 51016193.75 28951041.03 1.762

Chart 4.3

40

2006 2007 2008 2009 20100

0.5

1

1.5

2

2.5

3

1.98200000000001

2.39 2.4072.181

1.762

TOTAL ASSET TURNOVER RATIO

INTERPRETATION

The total asset turnover ratio indicates how effectively a company is utilising its

assets. From the graph it is clear that,the ratio is high in the year 2008 and from 2008 the total

asset turnover ratio is in a decreasing trend. This indicates that the company is not utilising its

total assets to its advantage.

5. PROFITABILITY RATIOS

41

a. GROSS PROFIT MARGIN

The gross profit margin reflects the efficiency with which management produces each

unit of product. This ratio indicates the average spread between the cost of goods sold and the

sales revenue.

GROSS PROFIT MARGIN=GROSS PROFIT/SALES*100

Gross profit=sales- cost of goods sold.

Table 5.1

YEAR GROSS PROFIT SALES GROSS PROFIT MARGIN

2006 7469457.7 31069527.10 24%

2007 11138669.97 39315081.59 28%

2008 13818513.52 50062403.52 28%

2009 14690371.04 61251142.70 24%

2010 42799577.89 51016193.75 84%

Chart 5.1

42

2006 2007 2008 2009 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

24%28% 28%

24%

84%

GROSS PROFIT MARGIN

INTERPRETATION

A high gross profit margin relative to the industry average implies that the firm is

able to produce at relatively lower cost. A low gross profit margin may reflect higher cost of

goods sold due to firms inability to purchase raw materials at favourable terms, inefficient

utilisation of plant and machinary resulting in higher cost of production. Here in 2010 the

company has got a high gross profit margin ratio, which indicates that the firm is able to produce

at relatively lowercost.

b. NET PROFIT MARGIN

43

This ratio is the overall measure of the firm’s ability to turn each rupee sales into net profit.

This ratio also indicates the firm’s capacity to withstand adverse economic conditions.

NET PROFIT MARGIN=NET PROFIT (AFTER TAX)/SALES*100

Table 5.2

YEAR NET PROFIT SALES NET PROFIT MARGIN

2006 1284765.62 31069527.10 4.1%

2007 1651665.70 39315081.59 4.2%

2008 1911346.59 50062403.52 3.8%

2009 2224151.63 61251142.70 3.6%

2010 2712347.49 51016193.75 5.3%

Chart 5.2

44

2006 2007 2008 2009 20100.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

4.10% 4.20%3.80%

3.60%

5.30%

NET PROFIT MARGIN

INTERPRETATION

Net profit ratio establishes the relationship between net profit and sales and indicates the

management’s efficiency in manufacturing, administering and selling the product. Here the net

profit margin is least in 2009 and high in 2010. So we can infer that the company have enough

efficiency in manufacturing and selling the product.

c. RETURN ON INVESTMENT (ROI)

45

ROI reflects the overall profitability. It is used as a base for various managerial decisions like

expansion and diversification of activities. It shows how efficiently the resources invested in

business are being used.

RETURN ON INVESTMENTS=EBITDA/TOTAL ASSETS*100

Table 5.3

YEAR EBITDA TOTAL ASSETS ROI

2006 1415340.62 15672370.81 9%

2007 4543665.7 16443408.66 27.6%

2008 6624434.32 20796473.38 31.8%

2009 7139222.42 28081579.46 25.4%

2010 7669136.26 28951041.03 26.4%

Chart 5.3

46

2006 2007 2008 2009 20100%

5%

10%

15%

20%

25%

30%

35%

9.00%

27.60%

31.80%

25.40% 26.40%

ROI

INTERPRETATION

The Return on Investment indicates how efficiently the long term funds of owners and

lenders are being used. This is a key ratio to measure the performance of a company. It provides

a broad measure of managements operating success. Here ROI is in a fluctuating trend, which

indicates the overall efficiency of the company is not bad.

d. RETURN ON EQUITY (ROE)

47

ROE indicates how well the firm has used the resources of owners. In fact, this ratio is one of

the most important relationships in financial analysis.

ROE=PROFIT AFTER TAX AND PREFERENCE DIVIDEND/EQUITY FUND*100

Table 5.4

YEAR PROFIT AFTER TAX

EQUITY ROE

2006 1284765.62 11493400 11.1%

2007 1651665.70 11493400 14.3%

2008 1911346.59 15118900 12.6%

2009 2224151.63 15466900 14.3%

2010 2712347.49 15818300 17.1%

Chart 5.4

48

2006 2007 2008 2009 20100.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

11.10%

14.30%

12.60%

14.30%

17.10%

ROE

INTERPRETATION

The return on shareholders’ equity indicates the profitability of owners’ investment.The

earning of a satisfactory return is the most desirable objective of a business. The ratio of net

profit to owner’s equity reflects the extent to which this objective has been accomplished. From

this graph the return on equity is high in the year 2010.So we can infer that the earning of the

company is satisfactory.

4.2TREND ANALYSIS

49

A trend analysis is a device to find out the changes that is occurring in a variable over a

period of time. In other words, it is the comparative analysis of a company’s financial ratio over

time. In trend analysis we attempt to find out the trends of variable under study. Here the trend

for five years is taken for comparison.

a. TREND ANALYSIS OF SALES

Table 6.1

YEAR 2006 2007 2008 2009 2010

SALES 31069527.10

39315081.59

50062403.52

61251142.70

51016193.75

INCREASE\DECREASE

- 8245554.49

18992876.42

30181615.6

19946666.65

TREND PERCENTAGE

100 127 161 197 164

INTERPRETATION

The trend analysis of sales shows the growth of the company. Here sales of the

company have got an increasing trend except 2010.The company have highest sale in 2009.

b. TREND ANALYSIS OF PROFIT BEFORE INTEREST AND TAX

50

Table 6.2

YEAR 2006 2007 2008 2009 2010

EBIT 1396099.62

4511595.70

6522233.32

7033296.63

7583327.49

INCREASE\DECREASE

- 3115496.08

5126133.7 5637197.01

6187227.87

TREND PERCENTAGE

100 323 467 504 543

INTERPRETATION

The trend analysis shows that the EBIT increases till 2010 in an increasing trend.

This is a good sign to the company.

c. TREND ANALYSIS OF PROFIT AFTER TAX

51

Table 6.3

YEAR 2006 2007 2008 2009 2010

PAT 1284765.62

1651665.70

1911346.59

2224151.63

2712347.49

INCREASE\DECREASE

- 366900.08 626580.97 939386.01 1427581.87

TREND PERCENTAGE

100 129 149 173 211

INTERPRETATION

The trend analysis shows that the PAT increases till 2010 in an increasing trend. This is a good sign to the company.

52

d. TREND ANALYSIS OF TOTAL ASSETS

Table 6.4

YEAR 2006 2007 2008 2009 2010

TOTAL ASSET 15672370.81

16443408.66

20796473.38

28081579.46

28951041.03

INCREASE\DECREASE

- 771037.85 5124102.57

12409208.65

13278670.22

TREND PERCENTAGE

100 105 133 179 185

INTERPRETATION

The trend analysis shows that TOTAL ASSETS increases over periods. This is a

sign of good management.

53

4.3COMPARATIVE BALANCE SHEET

A comparative balance sheet shows the assets, liabilities, and owner’s equity of a

business enterprise at the beginning and at the end of the accounting period with increase

and decrease in the absolute data in terms of rupees and percentage. The single balance

sheet focuses on the financial status of the firm as on a particular date, while the

comparative balance sheet focuses on the changes that have taken place in one

accounting period. The changes in the balance sheet items are the result of acquisition or

sale of assets, changes in current assets and current liabilities, issue of shares, profit or

loss etc.

A comparative balance sheet has two columns is used to show increase or

decrease in figures. A fourth column may be added for giving percentages of increases or

decreases. Comparative balance sheet indicates whether the business is moving in a

favourable or unfavourable direction.

54

COMPARATIVE BALANCE BSHEET FOR THE YEAR ENDED 2009 AND 2010Table 7.1

PARTICULARS

2009 2010 CHANGE % CHANGE

LIABILITIES & CAPITAL:

Current liabilities

14730488.03 12025367.11 -2705120.92 -18

Long-term liabilities

43522.60 37018.60 -6504 -15

Share capital 6666900 7018300 351400 5

Reserves & surplus

6640668.83 9870355.32 3229686.49 49

TOTAL 28081579.46 28951041.03 869461.57 3

ASSETS:

Current assets

25751023.63 26406293.97 655270.34 2.5

Fixed assets 2302051.83 2516243.06 214191.23 9

Investments 28504.00 28504.00 0.00 0.00

TOTAL 28081579.46 28951041.03 869461.57 3

55

INTERPRETATION

In the above analysis all the items are increasing except liabilities. From this we can

infer that the organization concerned 2009-2010 was a profitable year.

56

FINDINGS

The present study was undertaken with the object of assessing the financial performance of

STANDARD TILE FACTORY . The period of study was from2006to 2010.Financial

performance of theSTANDARD TILE FACTORY was measured with the help of ratio analysis

and trend analysis.From the analysis it is understood that the performance of STANDARD TILE

FACTORY was good.On the study of the above details,the following findings have been arrived

at:

1. The current ratio of 2:1 is ideal in all the years except 2009.Therefore the company has

short term solvency and high liquidity.

2. The quick ratio of the company is ideal and shows a fluctating trend.In 2007 the quick

ratio was below the standard, but in the recent years company achieves the standard.

3. Regarding the super quick ratio\cash ratio, the company has not able to achieve the

standard at all,here the working capital of the company shows fluctuating condition.

4. The debt –equity ratio of the company was always below the standard,this indicates that

financial risk of the company is very low and long-term solvency of the company is not

satisfactory.

5. The interest coverage ratio shows an increasing trend,but in 2010 it is too high.This

indicates that the company is more cnservative in using debt and the company does not

uses the credit to the best advantage of shareholders.

6. The inventory turnover ratio shows arapid increase till 2009,but in2010 it comes too

low.This shows inventory management becomes very poor.

7. Debtors turnover ratio shows an increasing trend till 2009,but there is a considerable

decrease in 2010.This indicates that efficiency of credit management becomes poor

compared to the previous year.

8. The total asset turnover ratio shows a decreasing trend from 2008,this indicates that the

company is not utilising its total assets efficiently.

9. The gross profit margin shows relatively high in 2010.Thi reveals that the company is

able to produce at relatively lower cost.

57

10. The net profit margin is high in 2010 when compared with the previous years.so this firm

can make better use of favourable conditions.

11. The ROI shows a fluctuating trend.this indicates that the performance of the company is

average.

12. The ROE shows an increasing trend after 2007,this indicates that the company is earning

a satisfactory return.

13. The trend analysis of sales shows an increasing trend till 2009.In 2010 sales becomes go

down.

14. The trend analysis of EBIT shows an increasing trend till 2010.This indicates the success

of the business.

58

SUGGESTIONS

The study on financial performance of STANDARD TILE FACTORY reveals that

the profitability performance of the company is satisfactory.So attempts shouid be

needed to keep the profitability.

The study result shows that the cash ratio of the company not at all achieves the

standard, so the company must improve the working capital management.

The debt-equity ratio shows that the financial risk of the company in the current

year is very high,so better management is needed to look on.

The interest coverage ratio of the current year is too high .so the company needs to

utilise the credit for the advantage of share holders.

The company needs to improve the inventory management system as the inventory

turn over ratio in 2010 is very low.

While comparing the previous year the company is not utilising its assets

effectively,so proper asset management should be implimented.

CONCLUSION59

The study of financial performance analysis is undertaken from STANDARD TILE FACTORY,

FEROKE. The financial statement analysis focuses on key figures in the financial statements and

tries to identify significant relationships that exist between them. The financial statement

analysis of STANDARD TILE FACTORY reveals that the liquidity, profitability, short-term and

long-term solvency position of the company is highly satisfactory. Their operational efficiency is

also good and it is able to effectively utilize the owners’ funds and provide good returns to

them.The organisation should try to improve the coverage ratio and inventory turnover ratio in

order to increase production and sales.this will helps to increase the profitability of the

organisation.

5.4 BIBLIOGRAPHY

60

Reference Books:

Annual reports of STANDARD TILE FACTORY from 2006 to 2010. Financial management : I.M Pandey Management Accounting : Sharma & Gupta management accountancy : Pillai & bagavati

Websites:

www.ntpc.co.in www. moneycontrol.com www.myiris.com www.indiabudget.nic.in

Search Engine:

www.google.com www.wikipedia.com

61