CHAPTER 1 1.1 INTRODUCTION AND DESIGN OF STUDYFinance is a scare
resource and it has to be managed efficiently for the successful
functioning of an enterprise. Inefficient financial management has
resulted in failure of many business organizations. Irrespective of
any difference in structure, ownership and size, the finance
organization of the enterprise caught to be capable of ensuring
that the various finance functions- Planning and controlling are
carried out at the highest degree of efficiency. It is the
lifeblood of every business activity without which the wheels of
modern business organization system cannot be greased. Thus the
finance function assumes an important role in the affairs of
business management. The profitability and stability of the
business depends upon the manner how the finance function are
performed and related with other business functions. Finance has to
be systematically controlled and regulated so that it may
contribute to different functions of business administration such
as purchasing, production and marketing. It is difficult to
aggregate the finance function from that of general business
management. Simply finance is intertwined with every business
function. Before the turn of the present century finance was
studied as part of economics. It was only in the beginning of the
present century that corporation finance evolved as a separate
subject with special emphasis on the study of capital market. The
term Corporate Finance was used to describe what is now known in
the academic world as Finance Management. Broadly speaking finance
serves two important function first it is a means of assembling the
funds necessary to inherit a new activity second and much more
1
important is that, it provides the basis for continued operation
furnishing additional capital, covering the cost of operation and
generally synchronizing the various factors of a going business.
Underlying these two functions is the formulation of policy, which
provides a sense of direction and actual plan of operations.
Application of various management techniques in the area of finance
is essential to use or to employ the scare financial resources
available for a business enterprise, in an effective manner. In
this connection Haward and Upton observed Financial management
involves the application of general management principles to a
particular financial operation. It is a scientific evaluation of
profitability and financial strength of a business concern. It is a
process of scientifically making a proper and corporative
evaluation of the profitability and financial health of the given
concern on the basis of summarized and analyzed data, i.e., the
output of financial analysis. Financial management is the financial
activity of accounting cycle, where key financial decisions are
taken on the basis of clearly analysed, summarised and manipulated
accounting data, according to the required needs. In practice the
entire process of financial management is performed by two
different functional people, up to preparation and analysis of
financial statements comes under accounting department, basing on
this information other functional people i.e., management takes
decisions. Financial management may be defined as that part of
management which is concerned with raising funds in the most
economic and suitable manner, using these funds as profitable (for
a given risk level) as possible, planning future operations and
controlling current performance and future developments through
financial accounting, cost accounting, budgeting, statistics and
other means. It guides
2
investment where opportunity is the greatest, producing
relatively yardsticks for judging most of a firms operation and
projects and is continually concerned with achieving adequate role
of return on investment, as this is necessary for survival and
altercating of new capital. Finance is the life-blood of all
commercial activities. No undertaking can think of promoting,
expanding, or stabilizing without adequate financial resources.
Financial Management is concerned with raising of funds in the most
economic and suitable manner. Financial Management applies to an
organization, irrespective of its size, nature or ownership and
control whether it is a manufacturing or service organization.
According to Raymond chambers the term financial management may be
applied to any kind of under-taking or organization regardless of
its aims or constitutions. The assessment of business performance
is more complex and difficult, since it must deal with
effectiveness with which capital is employed. The efficiency and
profitability of operations depend on the value and safety of
various claims against the business. To know the performance of a
company can be done through a careful and critical analysis of
financial statements. Financial analysis helps manager in
controlling their enterprises performance. It does this by
providing them with a system and set of procedures for analysing
and understanding financial indicators of performance. The two
important financial statements are the Balance sheet and Profit and
Loss account. Although any formal statement expressed in money
value might be thought of as financial statement , the term has
come to be limited by most accounting and business writers to mean
the Balance sheet and Profit and loss account. Financial statement
indicate the operating results and financial position of
3
concern, therefore by analysing and interpreting these
statements performance can be appraised. For this purpose, analysis
of financial statements is made.
Financial statement analysis is a preliminary step towards the
final evaluation of the result drawn by the analyst or management
accountant. The management makes appraisal or evaluation of such
results. The analysis of financial statement spotlights the
significant facts and relationship concerning management
performance, corporate efficiency, financial strength and weakness,
which would have otherwise been hurried in a maze of detail.
Analysing financial statements, according to Metcalf and Titard
,is a process of evaluating the relationship between component
parts of financial statement to obtain a better understanding of a
firms position and performance. In the words of Myers, Financial
statement 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 purpose of financial
statements so as to judge the profitability and financial soundness
of the firm.
The financial statements contain all the data relating to
operating results and financial position of the business. Besides
this, other documents such as reports, schedules and explanatory
notes are also appended. Overall performance of the business is
appraised by analysing these statements. Analysis the financial
statements provides a method for assessing the financial strength
and weakness of the company. So this study aims to build new
methods of analysing the performance of the corporations, by taking
cues from accounting, statistics, finance and quantitative
method.
4
1.2. COMPANY PROFILEABOUT THE INDUSTRY Steel, the recycled
material is one of the top products in the manufacturing sector of
the world. The Asian countries have their respective dominance in
the production of the steel all over the world. India being one
among the fastest growing economies of the world has been
considered as one of the potential global steel hub
internationally. Over the years, particularly after the adoption of
the liberalization policies all over the world, the World steel
industry is growing very fast. Steel Industry is a booming industry
in the whole world. The increasing demand for it was mainly
generated by the development projects that has been going on along
the world, especially the infrastructural works and real estate
projects that has been on the boom around the developing countries.
Steel Industry was till recently dominated by the United Sates of
America but this scenario is changing with a rapid pace with the
Indian steel companies on an acquisition spree. In the last one
year, the world has seen two big M&A deals to take place :
The Mittal Steel, listed in Holland, has acquired the world's
largest steel company called Arcelor Steel to become the world's
largest producer of Steel named Arcelor-Mittal.
Tata Steel of India or TISCO (as listed in BSE) has acquired the
world's fifth largest steel company, Corus, with the highest ever
stock price.
It has been observed that Steel Industry has grown tremendously
in the last one and a half decade with a strong financial
condition. The most significant growth that
5
can be seen in the Steel Industry has been observed during the
period 1960 to 1974 when the consumption of steel around the whole
world doubled. Between these years, the rate at which the Steel
Industry grew has been recorded to be 5.5 %. This roaring market
saw a phase of deceleration from the year 1975 which continued till
1982. After this period, the continuous fall slowed down and again
started its upward movement from the early 1990s. Steel Industry is
becoming more and more competitive with every passing day. During
the period 1960s to late 1980s, the steel market used to be
dominated by OECD (Organization for Economic Cooperation and
Development) countries. But with the fast emergence of developing
countries like China, India and South Korea in this sector has led
to slipping market share of OECD countries. The balance of trade
line is also tilting towards these countries. The main demand
creators for Steel Industry are Automobile industry, Construction
Industry, Infrastructure Industry, Oil and Gas Industry, and
Container Industry. New innovations are also taking place in Steel
Industry for cost minimization and at the same time production
maximization. Some of the cutting edge technologies that are being
implemented in this industry are thin-slab casting, making of steel
through the use of electric furnace, vacuum degassing, etc. In
1991, a substantial number of economic reforms were introduced by
the Indian government. These reforms boosted the development
process of a number of industries the steel industry in India in
particular which has subsequently developed quite rapidly. The 1991
reforms allowed for no slicenses to be required for capacity
creation, except for some locations. Also, once Indias steel
industry was
6
moved from the listing of the industries that were reserved
exclusively for the public sector, huge foreign investments were
made in this industry. India continually posts phenomenal growth
records in steel production. In 1992, India produced 14.33 million
tones of finished carbon steels and 1.59 million tones of pig iron.
Furthermore, the steel production capacity of the country has
increased rapidly since 1991 in 2008, India produced nearly 46.575
million tones of finished steels and 4.393 million tones of pig
iron. In 2008, the total amount of domestic steel consumption was
43.925 million tones. With the increased demand in the national
market, a huge part of the international market is also served by
this industry. Today, India is in seventh position among all the
crude steel producing countries.
ABOUT THE SALEM STEEL PLANTThe Steel Authority of India Lts is
largest steel manufacturesr in India. The company has four
integrated steel plant and three specialized facilities produce a
variety of steels used in construction, engineering, utilities,
railways, automotive, and defense
7
industries. SAIL product line includes hot and cold-rolled
sheets and cols, galvanized sheets, electrical sheets, structural,
railway products, plats, bars and rods, stainless steel, and alloy
steels. While Indias government owns approximately 85 percent of
the company, SAIL operates under NAVARATHNA status, that is it
enjoys substantial operational and financial autonomy.SAIL ranks
amongst the biggest corporates in India with a turnover of over Rs.
40,000 cr. and a workforce of around 1.31 lakh. SAIL is the first
metal company to cross Rs. one trillion of market capitalization.
Salem Steel Plant, a special steels unit of Steel Authority of
India Ltd., pioneered the supply of wider width stainless steel
sheets / coils in India. The plant can produce Austenitic,
ferritic, Martensitic and Low-nickel stainless steel in the form of
coils and sheets with an installed capacity of 70,000 tonnes / year
of cold rolled stainless steel and 1,86,000 / year tonnes of hot
rolled stainless steel / carbon steel flat products. In addition,
the country's first top-of-the-line stainless steel Blanking
facility with a capacity of 3600 t / year of coin blanks and
utility blanks / circles adds to the credit of the plant. The plant
is facilitated with hot rolling mill which can roll both stainless
& carbon steels and the mill caters mainly to the input needs
of stainless steel coils for the cold rolling mills. Special grades
of carbon steels other than Structural steels are also rolled from
the facility includes Weathering steels, High strength low alloy
steels etc., which are extensively used in industrial sectors. Hot
rolling mill complex is equipped with walking beam re-heating
furnace, primary descaler, 4-hi reversing roughing mill, 4-high
reversing steckel mill, down coiler, laminar cooling and roll
grinding machines, procured from world renowned suppliers.
8
The steckel mill, the mother unit of hot rolling with level - 2
automation is provided with hydraulic gauge setting and automatic
gauge control. The continuously variable crown(CVC) controls the
profile and flatness by roll shifting and Work roll bending system
provide additional fine control of flatness of the strip. Cold
rolling mill complex is equipped with the most modern stainless
steel production lines, sourced from leading manufacturers of the
world. Coil build up line, Bell anneal furnaces Continuous
annealing and pickling lines, Sendzimer Mills, Skinpass Mill, Strip
grinding line, Slitting and shearing lines to produce coils /sheets
with precise dimensional tolerance and flatness with superior
metallurgical characteristics. Ferritic and Martensitic stainless
steel are annealed/softened at bell annealing furnaces and
austenitic stainless steel is annealed/softened and descaled in
continuous annealing & pickling lines using Ruthner neutral
electrolytic pickling process and mixed acid pickling for superior
surface finish. The coils are rolled in 20-High computerized
sendzimer mills to required dimensional tolerances. A 2-high skin
pass mill with elongation control and constant hydraulic roll force
system ensures a product of bright finish and high flatness. A
shearing line with precision roller levelers, electronic flying
shear and vacuum piler facilitates defect-free piling of the
leveled cut sheets. Coils of narrow width and smaller weight are
produced by a precision slitting line equipped with latest features
like in feed car, grip feed device, tension pad and interchangeable
slitters. The shearing and slitting lines have online continuous
marking system to make the products customer-friendly. Salem Steel
Plant's cold rolling mill complex also includes a resquaring shear,
a recoiling line, a packing line for slit products and wider
coils.
9
In addition to the common No1, 2D and 2B finishes, a wide range
of finishes including No.3, No.4, No.8 (mirror)and special finishes
like Moon Rock, Chequered, Honeykom, Macromatt, Aqualine, Frondz,
Mystique, Linen, Fabrique finishes are also produced as per
requirement. Presently the modernisation and expansion of Salem
Steel Plant is on. The expansion envisages installation of Steel
Melting and Continuous Casting facilities to produce 1,80,000
tonnes of slabs along with, expansion of Cold Rolling Mill complex,
enhancing the capacity from 65,000 TPA to 1,46,000 TPA and an
additional Roll Grinding Machine for Hot Rolling Mill for
increasing production to 3,70,000 TPA by March 2010. MAJOR UNITS
INTEGRATED STEEL PLANTS 1. Bhilai Steel Plant (BSP) in Chhattisgarh
2. Durgapur Steel Plant (DSP) in West Brengal 3. Rourkela Steel
Plant (RSP) in Orissa 4. Bokaro Steel Plant (BSL) in Jharkhand 5.
IISCO Steel Plant (ISP) in West Bengal SPECIAL STEEL PLANTS 1.
Alloy Steel plant (ASP) in West Bengal 2. Salem Steel Plant (SSP)
in Tamil Nadu 3. Visvervaraya Iron and Steel Plant (VISL) in
Karnataka
10
SUBSIDIARY Maharashtra Elektrosmelt limited (MEL) in Maharashtra
Importance Features of SSP The most importance features of SSP are
1. The Cold Rolling Mill Complex (CRM) 2. The Hot Rolling Mill
Complex (HRM) 3. Stainless Steel Blanking Line Process of SSP The
Salem Steel Plant has the latest technology in cold rolling and the
most modern equipment, supplied by leading manufactures of
machinery from different parts of the world The raw material for
the manufacturing process is hot rolled stainless steel coils
called hot brands. This is partly imported and taken from Alloy
Steel Plant, Durgapur. There coils are built up on a coil build up
line. The built up coils are softened and decaled in Annealing and
pickling lines (APL). From here the coils are sent for cold rolling
in the sendzimir mill (Z-Mill) to get the desired final thickness.
The rolled coils are again softened and decaled to obtain the
optimum finish and mechincal properties. The coils are then passed
through the skin pass mill to give them bright finish and necessary
flatness. They are ultimately slit or sheared into finished
products in the form the slit / divided cils or cut lengths. The
special surface finishes are obtained in sheet form in the sheet
finding and in the coil from in the strip grinding lines. 11
Future Outlook Production of 1,244 million tonnes of crude steel
in the world in 2006 registered a growth of 8.9% over 2005. Global
steel trade also increased by 13% to 395 million tonnes in 2006.
This trend has continued in 2007, with world crude steel production
for the first seven months of the year reaching 762 million tonnes,
registering a growth of 8%. China produced 279 million tonnes in
this period, a growth of 18.5% over the corresponding period last
year. During 2007, global crude steel production is expected to
reach 1,300 million tonnes, of which more than one-third will be
contributed by China. With the continued strong demand for steel,
the international steel scenario remains buoyant. Strong positive
growth trends are foreseen in Africa, Asia and South America in
2007. However, the soaring prices of key inputs such as coal, coke,
iron ore, scrap, ferro-alloys, etc., have been the area of major
concern for steel producers. In 2006, the top 15 steel producers
accounted for one-third of global crude steel production as against
26% ten years ago. The process of consolidation in the global steel
industry got a major boost with the Arcelor-Mittal merger, thereby
forming a global giant accounting for about 10% of worlds
production. This trend is likely to continue and we can expect more
transnational mergers and acquisitions. China also has planned
consolidation whereby more than 50% of its production by the year
2010 shall be coming from the top 10 steel producers in the
country. All these developments would throw up new challenges for
your company for which several strategic initiatives are being
taken.
12
The record turnover & profits during 2007-08 have been
achieved on the back of the best ever production, sales, and
operating efficiency parameters with capacity utilization at 118%.
Production of value added/special grade steel items during 200708,
went up by as much as 28% over CPLY. We could also bring about
significant reduction in energy consumption by over 3% during the
year. This thrust on cost reduction has continued in the current
financial year too. Benefits offered presently by the Company
include medical facilities for self and family, company
accommodation or House Rent Allowance, Provident Fund, Gratuity,
LTC/LLTC, Leave Encashment, reimbursement of Local
Travel/HRD/Entertainment Expenses, Production Incentive etc. as
per rules.
13
1.3. STATEMENT OF PROBLEMThe process of nations growth, say in
specific industrial growth not only requires the availability of
raw materials and infrastructure but also the adoption of sound
financial management practices by individual companies as well as
the industry. The improper financial management could lead to loss
in profit, loss in human resources and Nations benefits and
ultimately resulting in the failure of business. Development of
industries depends on several factors such as financial, personnel,
technology, quality of the product and marketing. Out of these
financial aspect assumes a significant role in determining the
growth of industries. All of the companys operations virtually
affect its needs for cash. Unless top management appreciates the
value of good financial analysis, these will be a continuing
problem for the financial executives to know the profitability and
liquidity of the concern. The firm whose present operations are
inherently difficult should try to make its financial analysis to
enable its management to stay on top of its working position. In
this context the researcher interested in undertaking an analysis
the financial statement of Steel Authority of India Lt., to examine
and to understand how management of finance plays a crucial role in
the growth. Hence the present study entitled A STUDY ON FINANCIAL
PERFORMANCE OF SAIL has been undertaken.
14
1.4. NEED FOR THE STUDYThe checking of financial performance in
a business deserves much attention in carrying out finance
function. It requires retrospective analysis of operating period
for the purpose of evaluating the wisdom and efficiency of
financial planning. Analysis of what has happened should be of
great value in improving the standards, techniques and procedures
function.
1.5. OBJECTIVES OF THE STUDY1. To assess the long term solvency
and short-term solvency position of the company during the study
period. 2. To analyze the profitability position of the company
during the study period.
3. To analyze the trend of production, sales, net profit and net
worth of the company. 4. To offer suggestions for betterment of the
financial position based on findings of the study.
15
1.6. SCOPE OF THE STUDYThe present study highlights the
financial performance of the selected company, through statement
analysis, especially ratio analysis. All the financial analyses are
made from financial data of the SAIL for a period of 5 years from
2003-2004 to 20072008
1.7. LIMITATIONS OF THE STUDY1. This study is based on secondary
data taken from the published annual reports and accounts of
company and as such its finding depends entirely on the accuracy of
such data. 2. The study period covers only 5 years which restricts
to know more about the financial performance of the company. 3. The
present study is largely on ratio analysis which has its own
limitation
16
1.8 Chapter Scheme Chapter - 1: Introduction1. Introduction 2.
Company Profile 3. Statement of the problem 4. Objectives of the
Study 5. Scope of the study 6. Limitation of the study
Chapter 2: Research Methodology1. Research Design 2. Data
Collection Method 3. Period of Study 4. Data Analysis
Chapter 3: Review of Literature
Chapter 4: Analysis and Interpretation
Chapter 5: Findings, Suggestion and conclusions
17
CHAPTER 2
2. REVIEW OF LITERATURE
Pandey I.M (1984), Conducted a study about Financial Decision; A
survey of Management Undertaking the corporate managers attitude by
using a sample of 62 companies from engineering industry towards
use of borrowings in India revealed that practicing managers
generally preferred to borrow instead of using other sources of
funds because of low cost of debt due to interest tax deductibility
and the complicated procedures for raising the equity capital.
George Paul (1985), studied The Financial Performance of
Diversified Companies in India and also it involves a comparative
study of Diversified company. The financial performance of 32
relatively mached pairs of diversifying and nondiversifying
companies in five Indian industries was compared. The findings
indicate that diversifies generally outperform non-diversifiers on
indicators of growth, profitability, safety and market evaluation.
However, inter-industry differences in the benefits of
diversification indicate that diversification is selectively
useful
G. Foster(1986) in his study on financial analysis stated that
it is the process of identifying financial strength and weakness of
firm by properly established relationships between the items of
balance sheet and the profit & loss account. Financial analysis
can be under taken by the management of firm on by parties outside
the firm, viz.., owners, creditors, investors and others.
18
Daga V.R(1985) in his thesis entitled, Analysis of Financial
Statements of Aluminium Industry in India was aimed at analyzing
the complex financial situation in which the Indian Aluminium
Industry had sailed during the period of study from 1973 to 1983.
Mr. Daga had made an attempt to analyse the financial statements of
Aluminium companies in India which was hitherto been a neglected
area of study. An attempt had been made to find out the financial
problems of different units engaged in industry. The study helped
to arrive at useful solutions to major problems associated with
them. He has collected data for the study from the published
accounting reports of aluminium with facts through correspondence
from the Indian Aluminium Manufactures Association. For
interpreting data ratio, common size and trend techniques of
financial analysis had been applied. The process of analyzing the
financial statements involved the competition, comparison and study
of financial data. The financial data one concern had been compared
with related data of other concern. He reported that the aluminium
industry in India had a lot of financial problems and gave many
suggestions as solution to the problems.
19
Kevin Watson (1986), in his article tiled The effect of
manufacturing strategies on financial performance Companies must
use their resources effectively and productively if they are to
compete in an increasingly competitive globalized economy.
Effective performance measurement can support this
competitiveness. To be able to do this, companies must know the
factors that influence their performance and manage these factors
in an effective manner. This study seeks to investigate the effect
of manufacturing strategies of manufacturing companies on their
financial performance and also the effect of firm size on the
impact of manufacturing strategies.
R.A. Wilmott (1992) in his article tiled Measurement of
Financial Performance Increases in productivity have their origins
at the level of the individual firm and are reflected through
improved efficiency. Improved efficiency is brought about by more
effective use of scarce economic resources and unless some
satisfactory measure exists for the evaluation of the effectiveness
of industry in utilising the resources at its disposal, national
objectives aimed at securing growth without inflation cannot be
incorporated into the individual objectives of industrial firms
themselves. Irrespective of the needs of the economy for growth
most industrial firms have their own growth targets the assessment
of which equally require a reliable measure of efficiency. To be
satisfactory, the measure of efficiency employed must permit
comparison of performance by firms over time, as well as comparison
with other firms in the same industry and, ideally, in other
industries also. There is no unanimity of opinion as to what is the
most reliable single yardstick of industrial efficiency.
20
Kallu Rao (1991) has made a study of Inter Company Financial
Analysis of Tea Industry retrospect and prospect. An attempt has
been made in this study to analyse the important variable of tea
industry and projected future trends regarding sales and profit for
next 10 year period, with a view to help the policy makers to take
appropriate decisions. Various financial ratios have been
calculated for analysing the financial positon of firm cconstitues
analysis of financial statements. Dr. Abhimam Das (1993), in his
article titled Profitability of public sectors Bank analysed
different profitability ratios and formulated a new
profitability
decomposition model. He expressed profitability as a ratio of
operating profit to working fund. Jacob M. Rose (1993) in his
article titled Performance evaluations based on financial
information: how do managers use situational information
Organizations regularly use budgets as benchmarks for performance,
and budgets represent a key control feature for almost every
organization (Brown and Solomon (1993)). Research has demonstrated
that outcome effects are pervasive in performance evaluation
processes, and that performance evaluators do not interpret
situational information consistently. An experiment is conducted to
examine the effects of situational information on managers
performance and ability attributions under conditions of favorable
and unfavorable financial outcomes. The findings indicate that when
financial outcomes are unfavorable, outcome effects dominate the
performance evaluation process, and situational information has
little effect on performance evaluations. The results of cognitive
load manipulations indicate that situational information is not
ignored, but rather discounted when financial outcomes are
favorable.
21
Mr.R.P.Rustagi(199!) in his book titled Financial Management
Theory, concept and Problems added that the complete figures given
in the financial statements are to be dissected into simple and
valuable elementns of the same statements. This process of
dissection, establishing relationship and interpretation there of
to understand the working and financial position of firm
constitutes analysis of financial statements. Noel capon and John
V.James M. Hulburt (1994) studied the strategic planning and
financial performance more evidence. A recently published Meta
analysis of the impact of strategic planning on financial
performance omitted a major study of corporate planning in fortune
500 manufacturing firms, the overall conclusion is that a small but
positive relationship between strategic planning and performance
exists and persists.
Navdeep Aggarwal and S.K.Singla (2001) have developed a single
index for the appraisal of financial performance. They have
analyzed eleven ratios in distinguishing profit making and loss
making units. Only four ratios namely net profit to assets,
interest coverage ratio, earning per share and inventory turnover
ratio was significant as the discriminatory variables. M.Y .Khan
and P.K.Jain(2000) in his book on Theory and Problem in Financial
Management stated that ratio analysis is a widely used tool of
financial analysis. It is defined as the systematic use of ratios
to interpret the financial statements, so that strengths and
weakness of a firm as well as its historical performance and
current financial condition can be determined. Shasi.K.Gupta and
R.K.Sharma (2000) in their book stated that finance function of
business is closely related to tis other functional areas. Most of
the important decisions of business enterprise are taken on basis
of availability of funds however
22
finance function, in practice should not limit the general
running of business. Financial policies of firm should be devised
in such manner so as to match the requirement of other functional
areas. Prasanna Chandra(2000), in his book Financial Statement
Analysis that if properly analysed and interpreted, financial
statement can provide valuable insights into a firms performance.
Analysis of financial statement is of interest to lenders ( short-
term as well as long-term), investors, security analysts, managers
and others. Financial statement analysis may be done for a variety
of purpose, which may rage from a simple analysis of short-term
liquidity position of the firm to a comprehensive assessment of
strengths and weaknesses of the firm in various areas, it is
helpful in assessing corporate excellence, judging
creditworthiness, forecasting bond ratings, predicting bankruptcy
and assessing market risk. Apte,P.g(2002) in his book titled
International Financial Management pointed that firms globally are
subjected to financial decision making problem on a day to day
basis, irrespective of the size or nature of business. Solution are
mystery, manager attempt in their spirit of success to provide best
of solutions. The decision in today scenario range from purchase of
raw materials domestically across borders. Corporate finance
decisions are perpetually being influences by the globalization and
liberation in trade and capital. The product and factor markets are
changing and posing intensified competitive platforms for all firms
to operate. The skills of labour with the information technology
have broken the boundaries of countries to materialize. Totally as
capital account convertibility sees its growth in Indian finance
and its management has gained new dimensions
23
CHAPTER 3
3. RESEARCH METHODOLOGY 3.1 RESEARCH DESIGN The collected data
were presented in tables and these tables were analyzed
systematically. Ratio analysis and Trend Analysis is the vital tool
used to study the Financial performance of Steel Authority of India
Limited. Various charts are used to explain the analysis clearly.
It is an undisputed truth that graphs and diagrams render any
complicated discussion and any intricate subject very simple to any
casual reader of the thesis. 3.2 DATA COLLECTION Secondary data are
used in the analysis. The main sources of the data are the
published financial statements and other reports of the SAIL. In
addition a number of standard textbooks, Journals and reports were
referred to formulate theoretical background for the study.
Applying standard financial tools and relevant ratios makes this
analysis. 3.3 PERIOD OF STUDY
24
Data of 5 financial years are used for the purpose of study. The
5 years of study ranges from 2004 to 2008. 3.4 TOOLS OF ANALYSIS
The researcher used tools to analysis the financial performance of
the firm, are used 1. Ratio analysis 2. Trend Percentage
CHAPTER 4 4. THEORETICAL FRAMEWORK OF FINANCIAL STATEMENT
ANALYSISMeaning and Types of Financial Statements A financial
statement is an organized collection of data according to logical
and consistent accounting procedures. Its purpose is to convey an
understanding of some financial aspects of a business firm. It may
show a position at a moment of time as in the case of a balance
sheet, or may reveal a series of activities over a given period of
time, as in the case of an Income Statement. The term financial
statements generally refers to two basic statements; (i) the Income
Statement, and (ii) the Balance Sheet. Of course, a business may
also prepare (iii) a Statement of Retained Earnings, and (iv) a
Statement of Changes in Financial Position in addition to the above
two Statements.
Types of Financial Analysis
25
Financial Analysis can be classified into different categories
depending upon (i) the material used, and (ii) the modus operandi
of analysis. (i) On the Basis of Material Used According to this
basis, financial analysis can be of two types: External analysis:
This analysis is done by those who are outsiders for the business.
The term outsiders include investors, credit agencies, government
agencies and other creditors who have no access to the internal
records of the company. These persons mainly depend upon the
published financial statements.
Internal analysis: This analysis is done by persons who have
access to the books of account and other information related to the
business. Such an analysis can, therefore, be done by executives
and employees of the organization or by officers appointed for this
purpose by the Government or the Court under powers vested in them.
The analysis is done depending upon the objective to be achieved
through this analysis.
(ii) On the basis of modus operandi According to this, financial
analysis can also be of two types:
Horizontal Analysis: In case of this type of analysis, financial
statements for a number of years are reviewed and analysed. Such an
analysis gives the management considerable insight into levels and
areas of strength and weakness. Since this type of analysis is
based on the data from year to year rather than on one date, it is
also termed as Dynamic Analysis.
26
Vertical Analysis: In case of this type of analysis a study is
made of the quantitative relationship of the various items in the
financial Statements on a particular date. Since this analysis
depends on the data for one period, this is not very conducive to a
proper analysis of the companys financial position. It is also
called Static Analysis as it is frequently used for referring to
ratios developed on one date or for one accounting period.
Steps Involved in Financial Statements Analysis The analysis of
the financial statements requires: (i) (ii) Methodical
classification of the data given in the financial statements.
Comparison of the various inter-connected figures with each other
by different Tools of Financial Analysis.
Limitations of Financial Analysis Financial analysis is a
powerful mechanism which helps in ascertaining the strengths and
weaknesses in the operations and financial position of an
enterprise. However, this analysis is subject to certain
limitations. Most of these limitations are because of the
limitations of the financial statements themselves. These
limitations are as follows: Financial analysis is a means to an end
and not the end itself. Ignores price level changes. Financial
statements are essentially interim reports. Accounting concepts and
conventions.
27
Influence of personal judgement. Disclose only monetary
facts.
Techniques of Financial Analysis A financial analyst can adopt
one or more of the following techniques/tools of financial
analysis: Ratio Analysis Ratio analysis is the process of
identifying the financial strengths and weaknesses of the firm by
properly establishing relationships between the items of the
balance sheet and the profit and loss account. In financial
analysis, a ratio is used as an index or yardstick for evaluating
the financial position and Performance of a firm. The relationship
between two
accounting figures, expressed mathematically is known as a
financial ratio. Ratio means reason in Latin, a ratio is defined as
the indicated quotient of two mathematical expressions and as the
relationship between two or more things. Ratio analysis is a
process of ascertaining and interpreting numerical relationship
based on financial statements. The ratio analysis as a tool of
financial management is employed with maximum advantages in order
to appraise, interpret and review the effectiveness of working
capital. The financial performance of the company is analyzed with
the help of above tools under the following two stages: Ratio
Analysis 1. Testing of Long - term solvency 2. Testing of short
term solvency
28
3. Testing of Profitability Trend Analysis 1.Trend percentages
Solvency means the ability of the business to repay its outside
liabilities. These liabilities are categorized as short-term
liabilities and long-term liabilities. The Long term financial
plannings of the business is generally made on the basis of past
experiences and the Investment proposal are analyzed with reference
to Long term solvency ratios. In case of new projects the technique
of Investment decisions like Payback period, Discounted Cash flow
and Accounting rate of return methods are used on the basis of pre
determined assumptions. The relationship between external equities
and internal equities are studied by using Solvency ratios. The
Long - term requirements must be met out of long term funds such as
funds for purchase of fixed assets like Land and Building, Plant
and machinery must by financed out of share capital or long term
loans. The capital structure of the company can also be analyzed
with the help of long term solvency ratios. The following are the
important long term solvency ratios: 1. Debt Equity Ratio 2.
Capital Gearing Ratio 3. Fixed Assets Ratio and 4. Proprietary
Ratio.
1. DEBT EQUITY RATIO:
29
As a part of judgment of effectiveness of long - term financial
policy of the business the financial managers will use this ratio.
This ratio relates the owners stake in the enterprises vis a vis
that of outsiders. It reflects the relative claims of creditors and
shareholders against the assets of the company. This ratio can also
be viewed as indicating the relative proportion of debt and equity
in financing the assets of the business house.
Total Long-term debt Debt-equity ratio = Share holders funds
Table 4.1 Debt Equity Ratio(Rs. In crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Total Long Term Debt 8689 5770 4298 4180 3045
Share Holders Fund 4659 10011 12386 17184 23004
Ratio in Times 1.86 0.58 0.35 0.24 0.13
Source: Published Annual Report of the company The table 4.1
showed that the amount of debt during the first year a increasing
trend and thereafter decreasing trend and the same situation are
also found in case of 30
net worth. The trend in debt and Shareholders funds in absolute
terms is also presented in chart 4.1 for the quick understanding of
the changes. The healthy reserve position helped the company to
maintain the Debt equity ratio in an improved level that is 1.86
times in the year 2003-04 as against 0.13 times in the current year
2007-08.. Hence, the Debt-Equity ratio of the company was
maintained highest level of 1.86 times in the year 2003-2004
Chart 4.1
DEBT-EQUITY RATIO2 1.8 1.6 1.4 R ATIOS 1.2 1 0.8 0.6 0.4 0.2 0
2003-2004 2004-2005 2005-2006 YEARS 2006-2007 2007-2008 0.58 0.35
0.24 1.86
0.13
31
2. CAPITAL GEARING RATIO: Capital-gearing ratio and is also
known as capitalization ratio or leverage ratio. The relation of
equity capital including all reserves and undistributed profits as
may be regarded the share of equity shareholders to preference
share capital and the other types of fixed interest bearing loans
is described as Capital gearing.
In other words, the technique of raising finances for the
company by resorting to fixed interest or dividend carrying
securities is called gearing the capital. Therefore, if company
collects capital by issuing debentures or preference shares or by
inviting public debts, which bear fixed rates of interest, the
company is said to have geared the capital. Capital gearing ratio,
therefore, establishes a meaningful relationship between the equity
shareholders funds on the one hand, and the funds bearing fixed
interest or fixed dividend on the other.
If an organization is having large funds bearing fixed interest
and/or fixed dividends as compared to the equity shareholders
funds, the organizations is said to be highly geared. On the other
hand, the organization is said to be low geared, if the fixed
interest and/or fixed dividend bearing funds are lower than the
equity shareholders funds, If both the components are equal, the
organization is said to be evenly geared. In the case of
high-geared capital, market value of equity shares via dividend
rates becomes too much sensitive to the fluctuation in profit and
thus there are considered to be paradise for the speculators. Under
this circumstance there will be a direct positive relationship
between the fluctuations in profit and fluctuations in value of
equity shares can also be identified. In the case of low-geared
capital, financial
32
management may not be able to avail the benefit of low cost of
preference share capital or debenture capital. The utility of the
gearing ratio lies in indicating the extra residual benefit
accruing to the equity shareholders. This benefit accrues because
the company earns a certain percentage on the total funds employed
but pays only a fixed return against loans and preference capital.
This would result in a high percentage return, even higher than the
percentage earned by the company. Thus, if the company earns a 20
percentage of rate of return, the equity shareholders may get a 30
percentage of rate of return. Such a situation is known as Trading
on equity or Leverage. Even if an organization is having an evenly
geared ratio, there may be a trading on equity or leverage
depending upon the overall profitability, tax rate and rates of
interest and dividend to preference shareholders. The trading on
equity or leverage is a necessary reward for the risk taken by the
equity shareholders. But this reward is uncertain. Further there is
an uncertainty about the dividend and they may also have to forego
their capital. It can be calculated as shown below.
Preference share capital + long - term bearing fixed interest
Capital gearing ratio =
-----------------------------------------------------Equity share
capital
33
Table 4.2 Capital Gearing Ratio Years 2003-2004 2004-2005
2005-2006 2006-2007 2007-2008 Fixed Return on Securities 8689 5770
4298 4180 3045 Equity Share Capital 413.04 413.04 413.04 413.04
413.04 (Rs. in Crores) Ratio ( in times) 21 14 10.4 10.1 7.37
Source: Published Annual Report of the company The table 4.2
shows In the year 2003-04 the Capital Gearing Ratio is 21.00 times
which is the maximum during the study period and this level is
decreased year by year and by the end of current year 2007-08 the
ratio is 7.37 times. A minimum of 7.37 has been maintained by the
company in the year 2007-08. At present the financial institutions
and Banks are interested in extending more finance to the needed
persons on the basis of sound securities and the rate of interest
is also deregulated, so the management has to think to borrow funds
to make a new investment. Before deciding the new proposal the
viability and rate of return required must be studied with the help
of modern technologies. Hence, it is clear from the table in the
year 2003-04 the Capital Gearing ratio was 21.00 times which is
maximum during the study period.
34
Chart 4.2CAPIT GEARINGRATIO AL25 21.04 20
15
13.97 10.41 10.12 7.37
O I T A R
10
5
0 2003-2004 2004-2005 2005-2006 YE S AR 2006-2007 2007-2008
35
3. FIXED ASSETS RATIO: The ratio of long-term funds to fixed
assets is analyzed. One of the key principles of financial policy
is that fixed assets acquisitions should be financed by long-term
funds only. Short terms funds should not be used in purchasing the
fixed assets. The fixed assets ratio indicates the extent to which
the Net fixed assets are financed by long term funds of the
firm.
The net fixed assets will mean cost less depreciation. It will
also include trade investments and shares in subsidiaries.
Long-term funds or Capital Employed will mean equity share capital,
preference share capital, reserves, debentures and longterm loans.
This ratio will be 1 if long-term funds are equal to fixed assets.
If this ratio is less than 1, it may be concluded that the concern
has followed a policy of inefficiency and short sightedness in the
use of short-term fund. On the other hand, a very high ratio would
indicate that long-term funds are being used for short-term
purposes i.e., for financing working capital. It is not good from
the firms point of view because it is usually more difficult to
raise long-term funds. This ratio also indicates as to what extent
fixed assets are financed out of longterm solvency. Generally, the
total of fixed assets should be equal to the total of the long term
funds and the ratio should be 1. If it is less than 1, it means
that the firm has followed the wrong policy of using short-term
funds for long term needs.
This ratio is calculated with the help of the following formula:
Fixed assets ratio = Net fixed asset
-----------------------------------------------Long-term funds or
Capital employed
36
Table 4.3 Fixed Assets Ratio(Rs. in Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Fixed Assets 13168 12485 12162 11598 11571
Long Term Funds 13726 16077 16899 21494 26109
Ratio (in times) 0.96 0.78 0.72 0.54 0.44
Source: Published Annual Report of the company The table
4.3shows during the period of study, in the first and last year the
company maintained a normal level of 0.96 and 0.44 times. But in
the last two years the company fails to maintain such norms and the
value also shows a declining trend. In the year 2007-08 the ratio
is 0.44 times is not advisable. The company has to take immediate
step to overcome this improper matching of fixed asset level with
the longterm funds. Hence, fixed assets ratio was observed from the
table in the first and Preceding year of the company maintained a
normal level of 0.96 and 0.72 times. In the year 2007-08 the ratio
is 0.44 times is not advisable.
37
Chart 4.3
FIXED ASSETS RATIO1.2 1 0.8 0.6 0.96 0.78 0.72 0.54 0.44 0.4 0.2
0 20032004 20042005 20052006 YEARS 20062007 20072008 -
4. PROPRIETARY RATIO: 38
O I T A R
This ratio establishes the relationship between the proprietors
funds and total tangible assets. Proprietary ratio throws long on
the general financial position of the concern. As the ratio
represents the relationship of owners funds to total tangible
assets, higher the ratio or the share of the shareholders in the
total capital of the company better is the long-term solvency
position of the company. This ratio is of importance to the
creditors who can ascertain the proportion of shareholders funds in
the total assets employed in the firm. While a high proprietary
ratio indicates a relatively secure position to the creditors in
the event of liquidation, a low proprietary ratio will include
greater risk to the creditors. As a very rough guide, it may be
suggested that 2/3 to of total assets should be financed by
proprietors fund. The optimum ratio is different in different lines
of business. A ratio below 50 per cent may be alarming for the
creditors since they may have to lose heavily in the event of
companys liquidation on account of heavy losses. Therefore the
company has to take much effort to maintain this ratio in a
required level then only the longterm solvency position can be
improved. The formula for this ratio is as follows.
Proprietors funds (or) Shareholders funds Proprietary ratio =
--------------------------------------------------------Total
tangible assets
Table 4.439
Proprietary Ratio(Rs. in Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Share Holders Fund 4659 10011 12386 17184 23004
Total Tangible Assets 21786 27289 29838 32491 38427
Ratio (in times) 0.21 0.37 0.42 0.53 0.60
Source: Published Annual Report of the company The table 4.4
highlights the result of the above ratio and it can be identified
that in the year 2004-05 the ratio was 0.37 times only which is not
desirable one. In the year 2007-08 highest level of 0.60 times was
maintained. But from the year 200405 and 2005-06 on wards the
company made an effort to strengthen this ratio position. Hence,
the Proprietary ratio of the company was maintained highest level
of 0.60 times in the year 2007-2008.
40
Chart 4.4
PROPRIETARY RATIO0.7 0.6 0.5 0.4 0.37 0.42 0.60 0.53
O I T A R
0.3 0.2 0.1 0
0.21
2003 -2004
2004 -2005
2005 -2006 YEARS
2006 -2007
2007 -2008
SHORT TERM SOLVENCY OR WORKING CAPITAL RATIOS
41
Working capital ratios are useful or valuable aid to management
and also to banks and creditors. Working capital ratios are useful
in checking the efficiency with which working capital is being
employed in the business. They help to analyze the liquidity and
the technical solvency position of the business. The following
working capital ratios are studied here to diagnose the financial
strength of the selected unit and to give some clues about its
future conditions with respect to the working capital management.
They are, 1. Current ratio 2. Quick ratio 3. Absolute Liquid ratio
4. Working capital turnover ratio 5. Inventory turnover ratio 6.
Debtor Turnover Ratio 7. Fixed Assets Trunover Ratio Each of these
ratios is analyzed in detail. 1. CURRENT RATIO: Current ratio will
test the solvency and determine the short-term financial strength
of the firm. Current assets include cash and those assets, which
can be converted into cash within a year. Current liabilities
include creditors, bills payable, accrued
expenses and long-term debt maturing in the current year. It is
a quantitative test. The ratio is 2:1 of current assets and current
liabilities is regarded as a satisfactory standard of financial
soundness. A big and successful organization operates
efficiently on current ratio of 1:1. A firm with a quick
turnover of stocks and quick collection requires less working
capital than the firm having longer turnover of stocks and slow
collection.
42
A relatively high value of the current ratio is considered as an
indication that the firm is liquid and has the ability to pay its
bills. On the other hand, a relatively low value of the current
ratio is considered as an indication that the firm will find
difficulty in paying its bills. The current ratio represents a
margin of safety, i.e., a cushion of protection for creditors, the
higher the current ratio, greater the margin of safety to the
creditors. The larger the amount of current assets in relation to
current liabilities, the more the firms ability to meet its current
obligations. However, from the management point of view, higher
current ratio is an indication of poor planning since an excessive
amount of funds are invested in current assets and lie idle. It is
not always correct that a firm maintaining a high current ratio
will be able to meet its obligations or it may also be possible
that a firm maintaining a high current ratio below 2:1 standard may
feel no difficulty in meeting its obligations. This is because the
current ratio is a measure of quantity and not of quality.
It is calculated by the following formula.
Current assets Current ratio = ---------------------Current
liabilities
Table 4.5 Current Ratio
43
(Rs. in Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Current Assets 8075 14187 17384 20379 26318
Current Liabilities 6025 6608 8108 6984 9439
Ratio (in Times) 1.34 2.15 2.14 2.92 2.79
Source: Published Annual Report of the Company Table 4.5 shows
the current ratio of the Steel Authority of India Limited, for the
study period. The highest and lowest ratio of 2.92 and 1.34 were
reported in 2006-07 and 2003-2004 respectively. The highest ratio
was due to increase in current assets in relation to current
liabilities. But the lowest ratio was due to the company would have
diverted their shortterm finances towards long-term investments
because of urgency and lack of longterm finances. Another reason
for the lowest ratio was increase in current liabilities. Thus when
compared with the table, during the study period the Steel
Authority of India Limited has maintained better current ratio in
all the year except 2003-2004. In the case of industries like Steel
Authority of India Limited, the ratio cannot be same throughout the
year. Hence, the Current ratio of the company was maintained
highest level of 2.92 times in the year 2006-2007. But Cleared from
the table has maintained better current ratio in all the year
except 2003-04.
44
Chart 4.5CURRENTRA TIO3.5 3 2.5 2 2.15 2.14 2.92 2.79
O I T A R
1.5 1 0.5 0
1.34
2003-2004
2004-2005
2005-2006 YE AR
2006-2007
2007-2008
2. QUICK RATIO: The quick, liquid or acid test ratio is a
measure of the firms liquidity. This ratio establishes a
relationship between quick or liquid assets and current
liabilities. An
45
asset is liquid if it is converted into cash immediately or
reasonably soon without a loss of value. The quick ratio is found
out by dividing quick assets by total current liabilities. Quick
assets include cash and book debts (debtors and bills receivables
only. Inventory including finished products namely steel is
excluded from the quick assets. Inventories are excluded because it
takes time to convert them into cash. In actual practice steel is
almost a quick assets in the sense that it could be easily
converted into cash as and when the release order is issued. Under
existing market conditions of steel, it may be presumed that it is
not locked up in the company for unduly long periods. Of course,
item like stores and spare parts, etc., are not liquid. Prepaid
expenses are also excluded in quick assets because they cannot be
converted in to cash. Quick Ratio indicates that ability of the
firm to meet its current obligations. It provides a more stringent
test of solvency. It is a qualitative test. Generally, Quick Ratio
1:1 represents a satisfactory one. It indicates that the firm has
short-term finance strength to pay off its current liabilities. In
general, the firms are not
considered sound in financial position, unless quick assets are
equal to or more than quick liabilities. In the analysis the term
quick liability value and current liability value are taken as same
since there is no bank overdraft. The quick or acid test ratio is
sometimes called Liquidity ratio. Quick or liquid assets Quick
ratio = ---------------------------Current liabilities
Table 4.6 Quick Ratio
46
(Rs. in Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Liquid Assets 4994 9967 11174 13728 19461
Current Liabilities 6025 6608 8108 6984 9439
Ratio (in Times) 0.83 1.51 1.38 1.97 2.06
Source: Published Annual Report of the Company. The analysis of
the quick ratio Steel Authority of India Limited shown in Table
4.6, the ratio varies widely from year to year. The ratio varies
0.83 to 2.06. The highest ratio was in the year 2007-2008 and the
lowest ratio was in 2003-04. The highest ratio was due to increase
in accrued incomes, loans and advances and deposits, decreasing in
outstanding liabilities. The lowest ratio was due to the company
would have directed their short-term finances towards long-term
finances. It is concluded that the standard quick ratio was not
maintained in the Steel Authority of India Limited in the first two
years of the period study and in the year 2005-06, 2006-07 and
2007-08 the ratio of quick assets to current liability was more
than the standard required. Hence, observed from the table highest
quick ratio was 2.06 in the year 20072008 and the lowest ratio was
0.83 in 2003-04.
47
Chart 4.6
QUICK RATIO2.5 2 1.5 1.51 1.38 1.97 2.06
O I T A R
1 0.5 0
0.83
2003 -2004
2004 -2005
2005 -2006
2006 -2007
2007 -2008
YEARS
3. ABSOLUTE LIQUID RATIO: Absolute Liquid ratio is calculated to
measure the current debts with cash in hand. The Absolute liquid
ratio indicates liquidity position of the company to pay off its
current liabilities within a shorter period. It is calculated as
Cash + short term securities 48
Absolute Liquid Ratio =
or Absolute Liquid asset
-------------------------------------Current liabilities
Table 4.7 Absolute Liquid Ratio(Rs. in Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Cash and Bank Balances + Marketable Securities 2560 6739 6465
10124 14297
Current Liabilities 6025 6608 8108 6984 9439
Ratio ( in times) 0.42 1.02 0.8 1.45 1.51
Source: Published Annual Report of the Company. Table 4.7 shows
Steel Authority of India Limited during the period of under study
the Absolute liquid ratio was as high as 1.51 in 2007-2008 and as
low as 0.42 in 2003-04. It fluctuates widely during the period
under study. The high percentage was due to the keeping of the idle
cash. investments. The funds are not used in the long-term
The low percentage was due to repayment of bills in time,
low
collection of cash and the short term funds are diverted into
long term investments. Thus proper cash management should be
evolved to avoid the idle keeping of the cash and also to repay the
bills in time. Hence, the absolute liquid ratio of the company was
maintained highest level of 1.51 times in the year 2007-2008 and
also lowest level of 0.42 times in 2003-04.
49
Chart 4.7
50
CAS POS H ITION RATIO1.6 1.4 1.2 1 0.8 1.02 0.80 1.45 1.51
O I T A R
0.6 0.4 0.2 0
0.42
2003-2004
2004-2005
2005-2006 YEARS
2006-2007
2007-2008
4. WORKING CAPITAL TURNOVER RATIO: Working capital turnover
ratio indicates whether the net working capital has been
effectively utilized in making sales. It is calculated as Working
capital Turnover Ratio = Net sales ----------------------Net
working capital
The higher ratio is indication of favourable one and vice
versa.
Table 4.8
51
Working Capital Turnover Ratio(Rs. in Crores)
Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Sales 24178 31805 32280 39189 45555
Net Working Capital 2050 7579 9276 13395 16879
Ratio (in Times) 11.8 4.20 3.48 2.93 2.70
Source: Published Annual Report of the Company. Table 4.8 shows
the working capital turnover ratio of the Steel Authority of India
Limited it was widely varied from year to year. The highest
turnover ratio is 11.8 in 2003-2004 and the lowest ratio of 2.70 in
2007-08. The highest ratio was due to increase sales, decreases in
stock-in-trade, accrued income, sundry debtors, loans and advances,
deposits and also increases in current liabilities. The lowest
ratio was due to sales was not increased in proportionate with
working capital level. Hence, the working capital turnover ratio
was maintained highest turnover ratio 11.8 in 2003-2004 and the
lowest ratio of 2.70 in 2007-08
52
Chart 4.8
53
WORKINGCAPIT TURNOVERRATIO AL14 12 10 8 11.79
S O I T A R
6 4 2 0 2003-2004
4.20
3.48
2.93
2.70
2004-2005
2005-2006 YEARS
2006-2007
2007-2008
5. INVENTORY TURNOVER RATIO: Inventory turnover ratio indicates
that efficiency of the firms inventory management. It is found out
by dividing cost of goods sold by average inventory.
54
Inventory turnover ratio =
Cost of goods sold ----------------------------Average
inventory
The cost of goods sold is computed by sales minus gross profit.
The average inventory is average of opening and closing inventory.
A high inventory turnover ratio indicates brisk sales. It measures
to discover the possible trouble in the form of overstocking or
overvaluation. A low inventory ratio results in blocking of funds
in inventory which may ultimately result in heavy losses due to
inventory becoming obsolete or deteriorate in quality.
Table 4.9 Inventory Turnover Ratio(Rs. in Crores)
Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Cost of Goods Sold 555 1005 770 1181 1272
Average Inventory 103 173 276 246 228
Ratio in times 5.38 5.80 2.79 4.80 5.58
Source: Published Annual Report of the Company. The Table 4.9
shows the inventory turnover ratio trend over a period of five year
was analyzed and it was found that the inventory turnover ratio has
fluctuated every year and has decreased in the following year from
2007 to 2008. This shows that an idle turnover ratio was maintained
and this is considered as a positive indicator of operating
efficiency and good from the point of view of liquidity. The
average inventory turn over days will come around days 80.56
55
Chart 4.956
INVENTORY TURNOVER RATIO7 6 5 RATIO 4 3 2 1 0 2003-2004
2004-2005 2005-2006 YEAR 2006-2007 2007-2008 2.79 5.39 5.81 4.80
5.58
6. DEBTORS TURNOVER RATIO: The term working Capital includes
debtors as a one of the important component and the ageing of
receivables affects the working capital structure and 57
therefore it is essential to measure the
liquidity of the receivable or to find out the
period over which receivables remain uncollected. The amount of
trade debtors at the end of the accounting period should not exceed
a reasonable proportion of net sales. The larger the amount of
trade debtors in relation to net sales, the greater would be the
expense in connection with uncontrollable accounts. Sales Debtors
Turnover Ratio = Debtors
Table 4.10 Debtor Turnover Ratio(Rs. in Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Total Sales 24178 31805 32280 39189 45555
Debtors 1550 1908 1882 2315 3048
RatiO (in times) 15.6 16.7 17.2 16.9 14.9
In Days 23 22 21 22 24
Source: Published Annual Report of the Company.
Table 4.10 presents the sales to total debtors ratio of the
Steel Authority of India Limited. The highest ratio was reported at
17.20 times in 2005-06 and lowest ratio was reported at 14.97 times
in 2007-2008. The remaining period varied between 15.6 times and
16.9 times it fluctuated by normal business causes. An over
investment in receivables may be the result of over extension of
credit, liberalization of credit 58
terms, ineffective credit investigation, lack of effective
collection policies or the inability of the collection department
to make collection in periods of depression. In case of the company
which is under study there is no over investment in receivables and
almost which is under the control.
To analyze the ageing of debtors the average collection period
technique is also used and depicted in Table 4.10 and it shows that
the receivable having an average age of less than 60 days. In the
year 2005-06 the ageing period was 21 days, which is the minimum
period of collection during the period of study and the highest
collection period during the study period was 24 days in the year
2007-08. This shows the company having enough control over its
debtors and undue delay in recovery of debt is avoided. Hence, the
Debtors turnover ratio cleared from the table highest ratio was
reported at 17.2 times in 2005-06 and lowest ratio was reported at
14.9 times in 20072008. And also the highest average collection
period during the study period was 24 days in the year 2007-08.
59
Chart 4.10
D T EB ORSTURNOVERRA TIO17.5 17 16.5 16 15.60 14.95 16.67 17.15
16.93
O I T A R
15.5 15 14.5 14 13.5 2003-2004 2004-2005 2005-2006 2006-2007
2007-2008
YE S AR
7.FIXED ASSETS TURNOVER RATIO: The ratio determines efficiency
of utilisation of fixed assets and profitability of business
concern. Higher the ratio indicates more in efficiency in
utilization of fixed asset. A lower ratio is the indication of
under utilization of fixed assets. Generally , the higher ratio
better because high ratio indicates your business has less
60
money tied up in fixed assets for each dollar of sales revenue.
A declining ratio may indicate that you have over invested in
plant, equipment or other fixed assets. Net Sales Fixed Assets
Turnover Ratio = Net Fixed Assets
Table 4.11 Fixed Assets Turnover Ratio(Rs. in Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Sales 24178 31805 32280 39189 45555
Average Net Fixed Asset 13168 12485 12162 11598 11571
Ratio (in times) 1.84 2.55 2.65 3.38 3.94
Source: Published Annual Report of the Company. From above table
Fixed assets turnover ratio shown an increasing trend during the
study period 2003-2004 to 2007-2008. In the year 2003-2004, it was
1.84 times and it has increased gradually year by year and reached
upto 3.94 times in the year 2007-2008
Chart 4.1161
F EDAS ETSTURNOVERRA IX S TIO4.5 4 3.5 3 2.5 2.55 1.84 2.65 3.38
3.94
O I T A R
2 1.5 1 0.5 0
2003-2004
2004-2005
2005-2006 YE S AR
2006-2007
2007-2008
PROFITABILITY PERFORMANCE According to Sam R. Goodman, Profit is
a residual. It is a static historical term more geared to a
reporting function than to decision marking. He further
differentiates profit from profitability saying, Profit is an
owners-oriented concept and is tied in to the ownership shares of
national income and the provision. On the other hand, as a concept
is akin to levels of profits, which lead themselves to be least
62
number of alternative accounting measures, the profit is
directly attributable to the existence of a product and identifies
marginal contributions. It is essentially an internal measure of
new wealth creation. Thus, whereas the accounting concept of profit
measures what have been accumulated, the analytical concept of
profitability is concerned with future accumulation of wealth.
Profits alone justify the survival and growth of the business as
most of the key operational activities of the business are carried
on at the different unit level, major contributions to the
profit-poll emanates from the units. Since the substantial portion
of the working funds are invested in fixed assets, it is imperative
on the part of the units to maximize their earnings so that not
only the interest cost of funds and also the operating costs are
recovered, thereby resulting in a substantial amount of earnings
for further growth. Profit is the simplest and the most convenient
measuring rod for appraising the performance and efficiency of the
business. The survival and sustained growth are possible only when
there is a regular flow of profits. Above all, the service value
being often elusive and intangible, profit may be only the
justification for the existence of business. The efficiency of a
business concern is measured by the amount of profit it earned. A
business cannot continue to exist if it loses money, or if the
money it makes is not sufficient to meet the normal risk to be
taken. Profits are useful The
intermediate beacon towards which a firms capital should be
directed.
profit of a concern not only affects its proprietors but also
the Income Tax authorities, Managers, Directors, etc, who are to be
paid a percentage of the net profit. Therefore the question is:
What is profit? Law has not defined the word profit. Even the
accountants are not unanimous on this matter. The word profit is
variously defined.
63
It is said, Generally speaking, the profit of a business during
a given period is the excess of income over expenditure for the
period. Profit is the positive and fruitful difference between
total revenue and total expenses over a period of time. The word
profits has been viewed in a number of ways. The meanings profit
differs according to use and purpose of the figures. In the view of
financial management, profits are the test of efficiency and
investment; to the creditors, a margin of safety; to the employees,
a sources of fringe benefits; to the government, a measure of
taxable capacity and the basis of legislative action; to the
customers, a demand for price cut and finally to the country, an
index to the economic powers, national income generated and raise
in the standard of living. Profit is
the primary motivating force for an economic activity. Business
undertaking essentially being an economic organization has to
maximize the welfare or the interest of the members associated with
it. To this end, the business undertaking has to earn surplus or
profit or savings from its operations. In other words, its receipts
from operations should be more than the expenses over a period of
time, usually an accounting year. Profits are essential for a
company to survive and grow over a long period of time. But, it
would be wrong to assume that every action initiated by the
management of a company should be aimed at maximization of profits,
irrespective of social consequences. Profits are the report card of
the past, the inventive gold star for the future. If an enterprise
fails to make profit, capital invested is eroded and if this
situation prolongs the enterprise ultimately ceases to exist.
ACCOUNTING PROFIT In accounting, the word profit is almost
invariably with some qualifying words of phrases. In the report of
a special committee of the American Institute of
64
Accountants, the word profit is modified in thirty different
ways. According this report the accountants usually means by the
term profit the excess of the selling price over the cost of
anything. In the assets and liabilities view, earnings (profit) are
equal to the difference between revenue a cost of earning that
revenue. In this sense, accounting profit is known as the excess of
total revenues over their total costs of during a given period.
Thus, accounting profit lies in the difference between the current
value of sales minus the historic costs expenses plus the retained
capital gains i.e. the difference between the proceeds from
irregular disposal of assets minus historic cost minus deprecation
of irregularly disposed assets. TYPES OF ACCOUNTING PROFIT In
business the term profit. Income and earnings are similar and they
are used interchangeably. Generally the income statement can be
Multiple steps income statement or single step income statement.
The profit under multiple steps income statement is determined in
various steps like gross profit, the operating profit, or the
operating profit before interest and taxes, the net profit viz; the
net profit before tax and the net profit after tax and the profit
available to share holders. GROSS PROFIT Sales and other direct
revenues are compared with the cost of goods sold to give gross
profit (if cost of goods sold goods sold exceeds the sale revenue
and other operating revenue then there will be a gross loss).
OPERATING PROFIT Operating profit includes all net income before
taxes produced by operating assets and excludes any items of non-
operating income, such as rental income from
65
leased property, and non-operating expenses, such as interest
payments. In other words, the operating asset produces a stream of
income known as operating income. NET PROFIT To the operating
profit other non-operating incomes are added and there from
non-operating expenses are deducted, the resulting figure is net
profit before tax. If the provision for tax is deducted from the
net profit before tax, the result is net profit after tax. If the
preference dividend is deducted from the net profit after tax, the
rest income is profit available to equity shareholders. Financial
Management is concerned with the efficient use of an important
economic resource, namely, capital funds. Modern micro economic
theory on now the private firm should and does behave is based on
profit maximization as a decision criterion. Actions that increase
the firms profit are under taken and those that decrease profit are
avoided. To maximize profit the firm maximizes output for a given
set of scarce inputs or equivalently, minimizes the cost of
production of a given output. As pointed out by Mc Alpine, profit
cannot be ignored since it is both a measure of the success of the
business and the means of its survival and growth. Profitability of
total capital employed is the objective of an enterprise and a
criterion of efficient operations. PROFITABILITY RATIO Profit
making is the main objective of business. Aim of every business
concern is to earn maximum profits in absolute terms and also in
relative terms. i.e., Profit is to be maximum in terms of risk
undertaken and capital employed. Ability to make maximum profit
from optimum utilization of resources by a business concern is
termed as Profitability. Profit is an absolute measure of earning
capacity.
66
Profitability depends on sales, costs and utilization of
resources. The following are various ratio used to analyze
profitability. 1. RETURN ON INVESTMENT RATIO This ratio measures
the sufficiency or other wise profit in relation to capital
employed. It is used to measure the operational and managerial
efficiency. Return on investment in calculated by using the
following formula.
Operating Profit Return on Investment Ratio =
-----------------------Capital Employed
Table 4.12 Return on Investment Ratio(Rs. In Crores)
Years 2003-2004
Operating profit 4652
Capital Employed 15218
Ratio ( in times) 0.31
67
2004-2005 2005-2006 2006-2007 2007-2008
11097 7381 10966 12955
20064 21782 25476 28450
0.55 0.34 0.43 0.46
Source: Published Annual Report of the company From above
table4.12, the ratio of return on investment in the year 2002-2004
was 0.31. In the next year 2004-2005 it has gradually increased to
0.55. But in the next year it decreased to 0.34 times in the year
in 2005-2006, the ratio reached to 0.46 in year 2007-2008 the years
2004-2005 and 2007-2008 shows a higher value than the other
periods, it indicates higher performance during the study periods.
Hence the company maintained a high level return 0.55 times in the
year 2004-2005 due to low interest and finance charges.
Chart 4.12
68
RETURNON INVES TMENT RA TIO0.6 0.5 0.4 0.31 0.34 0.55 0.43
0.46
O I T A R
0.3 0.2 0.1 0 2003-2004 2004-2005 2005-2006 YE S AR 2006-2007
2007-2008
2. RETURN ON SHAREHOLDERS FUND This ratio determines the
profitability from the shareholders point of view. Return on
shareholders fund, which is the relationship between profits of the
company and its shareholders fund. Return on Shareholders Fund
Ratio = Net Profit after Interest & Tax
-------------------------------------Shareholders Fund
69
Table 4.13 Return on Shareholders Fund(Rs. In Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Net Profit 2512 6817 4013 6202 7537
Shareholders Fund 4659 10011 12386 17184 23004
Ratio (in Times) 0.54 0.68 0.32 0.36 0.33
Source: Published Annual Report of the company From the above
table4.13, return on shareholders fund ratio in the year 20042005
was 0.68 which was the highest and 0.32 was the lowest in the year
in 20052006. But in the next years its shows a decreasing trend. It
shows that in year 20032004 and 2004-2005 it indicates the
performance was good during the study period.
Chart 4.1370
RETURNON S AREH D H OL ERSF UNDRA TIO0.8 0.7 0.6 0.5 0.54
0.68
O I T A R
0.4 0.3 0.2 0.1 0 2003-2004 2004-2005
0.32
0.36
0.33
2005-2006 YE S AR
2006-2007
2007-2008
3.OPERATING PROFIT RATIO It is the ratio of profit made from
operating sources to the sales. It shows the operational efficiency
of the sales. It determines the operational efficiency of the firm
and is measure of the managements efficiency in running operation
of firm. Operating Profit ----------------------Sales
Operating Profit Ratio =
71
Table 4.14 Operating Profit Ratio(Rs. In Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Operating Profit 4652 11097 7381 10966 12955
Sales 24178 31805 32280 39189 45555
Ratio (in times) 0.19 0.35 0.23 0.28 0.28
Source: Published Annual Report of the company Table 4.14
highlights the details regarding amount of profit before payment of
interest on borrowed capital and tax to the government and the rate
of profit on sales. From the table it is ascertained that the
company earned a profit of Rs.4652 crores in the year 2003-04,
Rs.11,097 in the year 2004-05, Rs.7381 in the year 2005-06,
Rs.10,966 in the year 2006-07 and Rs.12,955 in the year
2007-08.
In all the company performance showing increasing trend in the
recent past track record of sales revenue and the profit rate is
showing increasing trend. Hence, it is clear from the table profit
before Interest and Tax ratio of the company earned a maximum rate
of profit in the year 2007-08, which were 0.28 times and a minimum
rate 0.19 per cent in the year 2003-04.
72
Chart 4.14
73
OPERA TINGPROF RA IT TIO0.4 0.35 0.3 0.25 0.23 0.19 0.35 0.28
0.28
O I T A R
0.2 0.15 0.1 0.05 0
2003-2004
2004-2005
2005-2006 YE S AR
2006-2007
2007-2008
4. NET PROFIT RATIO This ratio is also called net profit to
sales ratio. It is a measure of management efficiency in operating
the business successfully from owners point of view. It indicates
the return on shareholders investments. Higher the ratio better is
the operational efficiency of business concern.
Net Profit Ratio =
Net Profit after Tax ---------------------------
74
Net Sales
Table 4.15 Net Profit Ratio(Rs. In Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Net Profit After Tax 2512 6817 4013 6202 7537
Net Sales 24178 31805 32280 39189 45555
Ratio ( in times) 0.10 0.21 0.12 0.16 0.17
Source: Published Annual Report of the company It is worth to
analyze the net result of the company, which will enable one to
have idea of investment in any business they will think about the
net result of the company in general is traditional one, in such a
way the table 4.15 reflects the relevant details of the company
during the period of study. It is found in the table that the rate
of net profit on sales showed an increasing trend in all the years.
In the year 2004-05 the net profit ratio was 0.21 which is highest
and in the year 2003-04 it was 0.10 which was lowest due
fluctuation in sales
75
Chart 4.15
76
NETPROF RA IT TIO0.25 0.21 0.2 0.16 0.15 0.17
O I T A R
0.12 0.10
Series1
0.1
0.05
0 2003-2004 2004-2005 2005-2006 YE S AR 2006-2007 2007-2008
5. EARNING PER SHARE This ratio measures the profit available to
the equity shareholders on a per share basis. It is calculated by
dividing the profit available to shareholders by the numbers of
outstanding shares. A comparison of EPS of the company with others
will also help in deciding whether the equity share capital is
being effectively used or not. Net Profit after Tax Earning per
Share = ---------------------------No of Equity Shares
77
Table 4.16 Earning Per Share(Rs. In Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Net Profit After Tax 2512 6817 4013 6202 7537
No of Equity Share 413.04 413.04 413.04 413.04 413.04
Ratio ( in times) 6.082 16.5 9.716 15.02 18.25
Source: Published Annual Report of the company From the above
table 4.16, the earning per share in year 2003-04 it was 6.08 and
it shoew a increasing trend in preceding years. In the year 2007-08
the earning per share was 18.25 which was the highest due to
increasing the net profit the overall performance was satisfactory
during the study period.
Chart 4.16
78
EARNINGPERS ARE H20 18 16 14 12 9.72 Series1 6.08 16.50 15.02
18.25
O I T A R
10 8 6 4 2 0 2003-2004 2004-2005
2005-2006 YE S AR
2006-2007
2007-2008
6. INTEREST COVERAGE RATIO This ratio is meaningful to debenture
holders and tenders of longterm loans. It highlights the ability of
the concern to meet interest commitments and its capacity to raise
additional funds in future. Higher the ratio, better is the
position of long-term creditors and the companys risk is
lesser.
79
Profit before Interest & Tax Interest Coverage Ratio =
-------------------------------------Fixed Interest Charges
Table 4.17 Interest Coverage Ratio(Rs. In Crores)
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Profit Before Interest and Tax 3529 9970 6174 9755 11720
Fixed Interest Charges 901 605 468 332 251
Ratio ( in times) 3.91 16.48 13.19 29.38 46.69
Source: Published Annual Report of the company From the above
table 4.17, interest coverage ratio in the year 2003-04 it was 3.91
but in the next years 2004-05 it has gradually increased to 16.48
but in next
80
year it was decreased to 13.19 but in next years it was
increased to 29.38 and 46.69 in years in 2006-07 and 2007-08. Hence
the company maintained a high level of interest coverage in the
year 2007-08 was 46.69.
Chart 4.17INTERES COVERAGERA T TIO50 45 40 35 30 29.38 Series1
16.48 13.19 3.92 46.69
O I T A R
25 20 15 10 5 0 2003-2004 2004-2005 2005-2006 YE S AR 2006-2007
2007-2008
81
TREND ANALYSIS The Trend Analysis is Carried out mainly to focus
on Values of the Variables for the next three years from 2008 based
on the past five year data. The variables selected for the forecast
are as follows 1. Net profit 2. Net Worth 3. Production 4.
Sales
1. NET PROFIT
Table 4.18 Net Profit Trend Year 2003-2004 2004-2005 2005-2006
2006-2007 2007-2008 Net Profit 2512 6817 4013 6202 7537 Trend Value
( in Crores) 3529 4473 5416 6360 7303
Source: Published Annual Report of the company
82
The table 4.21 analyses the changes happened in the variable
under the study Net Profit. The result indicates that Net Profit
has increased Rs.943 crores per year and also forecast the value by
carrying out trend analysis
Forecasted Trend Value Year 2008-2009 2009-2010 Trend Value ( in
Crores) 8247 9190
Chart 4.18
83
NET PROFIT TREND9400 9200 9000 TREND VALUE 8800 8600 8400 8200
8000 7800 7600 2008-2009 YEAR 2009-2010 8247 9190
2. NET WORTH TREND
Table 4.19 Net Worth Trend Year 2003-2004 2004-2005 2005-2006
2006-2007 2007-2008 Net Worth 4659 10011 12386 17184 23004 Trend
Value (in Crores) 4676 9063 13449 17835 22221
84
Source: Published Annual Report of the company The table 4.19
analyses the changes happened in the variable under the study Net
Worth.The result indicates that Net Worth has increased Rs.4387
crores per year and also forecast the value by carrying out trend
analysis
Forecasted Trend Value Year 2008-2009 2009-2010 Trend Value (in
Crores) 26608 30994
85
Chart 4.19
NET WORTH TREND32000 31000 30000 TREND VALUE 29000 28000 27000
26000 25000 24000 2008-2009 YEAR 2009-2010 26608 30994
3. PRODUCTION TREND
86
Table 4.20 Production Trend
Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Production 11026 11030 12051 12581 13044
Trend Value ( in Crores) 10829 11388 11946 12505 13064
Source: Published Annual Report of the company The table 4.20
analyses the changes happened in the variable under the study
Production. The result indicates that Production has increased
Rs.559 crores per year and also forecast the value by carrying out
trend analysis.
87
Forecasted Trend Value Year 2008-2009 2009-2010 Trend Value ( in
Crores) 13623 14181
Chart 4.20
88
PRODUCTION TREND14300 14200 14100 TREND VALUE 14000 13900 13800
13700 13600 13500 13400 13300 2008-2009 YEAR 2009-2010 13623
14181
4. SALES TREND
Table 4.21 Sales Trend
89
Years 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
Sales 24178 31805 32280 39189 45555
Trend Value ( in Crores) 24610 29606 34601 39597 44593
Source: Published Annual Report of the company The table 4.21
analyses the changes happened in the variable under the study
sales. The result indicates that sales has increased Rs.4996 crores
per year and also forecast the value by carrying out trend
analysis
90
Forecasted Trend Value Year 2008-2009 2009-2010 Trend Value
49589 54585
Chart 4.21SALES TREND55000 54000 53000 TREND VALUE 52000 51000
50000 49000 48000 47000 2008-2009 YEAR 2009-2010
54585
49589
91
FINANCIAL TREND PERCENTAGES:
Trend percentages are immensely helpful in making a comparative
study of the financial statements for several years. The method of
calculating trend percentages involves the calculation of
percentage relationship that each item bears to the same item in
the base year. Any year may be taken as the base year. It is
usually the earliest year. Any intervening year may also be taken
as the base year. Each item of base year is taken as 100 and on
that basis the percentages for each of the items of each of the
years are calculated. These percentages can also be taken as Index
Numbers showing relative changes in the financial data resulting
with the passage of time. The method of trend percentages is a
useful analytical device for the management since by substituting
percentages for large amounts, the brevity and readability are
achieved. However, trend percentages are not calculated for all of
the items in the financial statements. They are usually calculated
only for major items since the purpose is to highlight important
changes.
92
1. NET PROFIT TREND PERCENTAGE
Table 4.22NET PROFIT TREND PERCENTAGE
Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008