A STUDY ON “RATIO ANALYSIS” WITH REFERENCE TO MADDI LAKSHMAIAH & CO. LTD., CHILAKALURIPET A Project report submitted to Acharya Nagarjuna University, Guntur In partial fulfillment of the Requirements for the Award of the degree Of MASTER OF BUSINESS ADMINISTRATION Submitted by K.VENGALA RAO (Reg. No. Y11BU11052) Under the Guidance of Sri R.RAJASEKHAR, M.Sc. (CSC), M.Tech. (CSE.)
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A STUDY ON “RATIO ANALYSIS”
WITH REFERENCE TO
MADDI LAKSHMAIAH & CO. LTD.,
CHILAKALURIPET
A Project report submitted to Acharya Nagarjuna University, Guntur In partial fulfillment of the
Requirements for the Award of the degreeOf
MASTER OF BUSINESS ADMINISTRATION
Submitted byK.VENGALA RAO
(Reg. No. Y11BU11052)
Under the Guidance of Sri R.RAJASEKHAR,
M.Sc. (CSC), M.Tech. (CSE.)
P G DEPARTMENT OF MANAGEMENT STUDIESV.R.S. & Y.R.N.COLLEGE, CHIRALA
(Affiliated to Acharya Nagarjuna University)2010 – 2012
P.G.DEPARTMENT OF MANAGEMENT STUDIESV.R.S. & Y.R.N.COLLEGE, CHIRALA – 523 157
(Affiliated to Acharya Nagarjuna University)(2010-2012)
CERTIFICATE
This is to certify that the Project entitled A STUDY ON “RATIO
ANALYSIS” with reference to “MADDI LAKSHMAIAHA & CO.
LTD.,” CHILAKALURIPET submitted by K.VENGALA RAO
(Y11BU11052) to the V.R.S. & Y.R.N. COLLEGE, CHIRALA Affiliated
to Acharya Nagarjuna University, Guntur in partial fulfillment of the
requirements for the award of degree in MASTER OF BUSINESS
ADMINISTRATION is a record of bonafied work carried out by him under
my guidance and supervision.
Head of the Department Project Guide
Sri D. GUNA SANKAR Sri R. RAJASEKHARM.B.A., M.Com. D.F.M., M.Phil. (Ph.D.,) M.Sc.,(CSc.), M.Tech.,(CSE.,)
DECLARATION
I hereby declare that this Project report entitled “RATIO
ANALYSIS” at “MADDI LAKSHMAIAH & CO.,” has been prepared by
me in partial fulfillment of the requirement for the award of Post graduate
degree of Master of Business Administration.
I also declare that this Project report is the result of my own effort and
it has not been submitted to any other university for the award of any Degree
or Institution.
Place:
Date:
K.VENGALA RAO
(Y11BU11052)
ACKNOWLEDGEMENT
The successful completion of any task is not possible without proper
suggestion, guidance and environment. Combination of these three factors
acts like backbone to my “RATIO ANALYSIS” Project.
It is great pleasure and privilege for me to express my graduate to
Dr. C.PAPARAO, Director PG Unaided Cources, V.R.S. & Y.R.N.COLLEGE,
CHIRALA for his continuous co-operation and encouragement during my
Project Work.
I am also grateful to Sri. D.GUNASANKAR, M.B.A., M.Com. D.F.M., M.Phil.,
(Ph.D.,) Asso. Professor & Head of the Department of Management Studies
for his continuous co-operation.
I am highly indebted to Sri R.RAJASEKHAR, M.Sc., (CSC), and M.Tech.
(CSE), Asst. Professor, P.G.Department of Management Studies, Project
Guide, for his valuable and constructive suggestions and guidance and who
has been a constant source of encouragement and guidance to make this
project work quite realistic and comprehensive.
I would like to express my special appreciation all my lecturers in
V.R.S. & Y.R.N.College for their valuable support and suggestions.
Thanks to one and all.
K.VENGALA RAO
CONTENTS
CHAPTER 1
INTRODUCTION
NEED OF THE STUDY
OBJECTIVE OF THE STUDY
SCOPE OF THE STUDY
METHODOLOGY OF THE STUDY
LIMITATIONS OF THE STUDY
CHAPTER 2
INDUSTRY PROFILE
CHAPTER 3
COMPANY PROFILE
CHAPTER 4
THEORITICAL FRAME WORK
CHAPTER 5
DATA ANALYSIS & INTERPRETATION
CHAPTER 6
FINDINGS AND SUGGESTIONS
GLOSSARY
ABBREVIATIONS
ANNEXURE
BIBLIOGRAPHY
CHAPTER – I
INTRODUCTION
INTRODUCTION TO FINANCIAL MANAGEMENT
Financial Management is an integral past of overall Management is
not a totally independent area. It draws on related disciplines and field of
study such as economics, accounting. These disciplines are interrelated.
These are key reference among them.
Financial management refers to its relationship with closely related
field, it function, scope and objectives. Finance is an academic discipline has
undergone fundamental changes in scope and coverage. In the easily years of
its evaluation it was treated synonymously with the rising of funds. In the
current literature pertaining to financial management in addition to
procurement of funds efficient use of resources is universally recognized.
DEFINITIONS:
Ezra Solomon has defined “The financial management deals with the
efficient use of an important economic resource namely capital funds.”
“Financial management is the activity concerned with the planning
raising, controlling and administrating the funds used in business.”
-Guthman and Dougall.
“Financial management is that managerial activity which is concerned
with the planning and controlling of the firm’s financial resources”.
-I.M.PANDAY.
“Financial management is concerned with the efficient use of an
important economic resource namely capital funds.”
-EZRA SOLOMAN.
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“Financial management is the operation activity of a business that is
responsible for obtaining and effectively utilizing the funds necessary for
efficient operations.”
-JOSEPH AND MASSIE.
SCOPE OF FINANCIAL MANAGEMENT
The approach to the scope and the functions of financial management
is divided for the purpose of expositions into two broad categories.
A) Traditional Approach:
Traditional approach to the finance function relates to the initial stages
of its evolution during 1920’s and 1930’s when term corporate finance was
used to describe in the academic world today as the financial management.
The approach was focused on procurement of long-term funds. In that
issue allocation of funds which is so important today is completely ignored.
The utilization of funds was considered beyond the pure view of finance
function.
B) MODERN APPROACH
The Modern approach views finance function in broader sense. It
includes both rising of funds as well as this effective utilization under the
preview of finance. The cost of raising and the returns from their use should
be compared. The utilization of funds requires decision making.
Finance functions covers financial planning rising of funds, allocation
of funds, financial control etc. Modern approach is an analytical way of
dealing with financial problems of firms.
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In that approach considers there are three basic management decisions
i.e., investment decisions, financing & dividend decisions with in the scope
of finance functions.
OBJECTIVES OF FINANCIAL MANAGEMENT
The objectives of financial management are
A) Profit Maximization:-
According to this approach actions that increase profits should be
under taken and those that decrease profits are to be avoided. In specific
operational terms as applicable to financial management, the profit
maximization implies that the investment financing and dividend policy
decisions of affirm should be oriented to the maximization of profits.
B) Wealth Maximization:
This is also known as value maximization or net present wealth
maximization. In current academic literature value maximization is almost
universally accepted and appropriate operational criterion for financial
management divisions as it removes the technical limitation criterion. It
operational features satisfy all the three requirements of a suitable
operational objective of financial courses of actions namely exactness,
quality of the benefits and the time value of money.
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AN OVERVIEW OF FINANCIAL MANAGEMENT
4
Financial Management
Maximization of share value
Financial Decision
Investment Decision
Financing Decision
Dividend Decision
Liquidity Decision
Return RiskTrade - Off
The financial manager, in a bid to maximize owner’s wealth, should
strive to maximize returns in relation to given risk. To ensure maximum
return, funds flowing in and out of the firm should be constantly monitored
to assure that they are safe guarded and properly utilized.
FINANCE FUNCTIONS:
It may be difficult to separate the finance functions from production,
marketing and other functions, yet the functions themselves can readily
identify. The function of raiding funds, investing them in assets and
distributing returns earned from assets to shareholders are respectively
known as financing, investing and dividend decisions. While performing
these functions, a firm attempts to balance cash inflows and outflows. This is
called liquidity decision.
Finance functions or decisions include:
Investment or long term – mix decision.
Financing or capital – mix decision.
Dividend or profit allocation – mix.
Liquidity or short – term asset – mix decision.
Investment Decision:
Investment decision or capital budgeting, involves the decision
of allocation of capital or commitment of funds to long-term assets that
would yield benefit in the future. Two important aspect of investment
decision are:
a) Evaluation of prospective return on new investment.
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b) The measurement of a cut-off rate against that the prospective return
of new investment. Investment proposal should therefore be evaluated in
terms of both expected return and risk.
Financing Decision:
Financing decision is the second important function to be
performed by the financial manager. The main issue is to determine the
proportion of equity and debt. The mix of debt and equity is known as the
firm’s capital structure. The financial manager must strive to obtain the best
financing mix or the optimum capital structure for the firm. The firm’s
capital structure is considered to be optimum when the market value of share
is maximized. A proper balance has to be struck between return and risk.
Dividend Decision:
The financial manager must decide whenever the firm should
distribute all profits, or retain them, or distribute a portion and retain the
balance. Like the debt policy, the dividend policy should be determined in
terms of its impact on shareholders’ value.
The optimum dividend policy is one that maximizes the market
value of the firm’s share. The financial manager must determine the
optimum dividend payout ratio.
Liquidity Decision:
Investment in current assets affects the firm’s profitability and
liquidity. Current assets management that affects a firm’s liquidity is yet
another important finance function.
Current assets should be managed efficiently for safeguarding the
firm against the risk of illiquidity. Lack of liquidity (or illiquidity) in
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extreme situations can lead to the firm’s insolvency. A conflict exists
between profitability and liquidity while managing current assets.
If the firm does not invest sufficient funds in current assets, it may
become illiquid and therefore, risky. But it would lose profitability, as idle
current would not earn anything.
Thus, a proper trade-off must be achieved between profitability and
liquidity. The profitability-liquidity trade-off requires that the financial
manager should develop sound techniques of managing current assets.
RATIO ANALYSIS:
Fundamental Analysis has Avery broad scope. One aspect looks at the
general factors of company. The other side considers tangible and
measurable factor. This means crunching and analyzing numbers from the
financial statements. If used in conjunction with other methods, quantitative
analysis can produce excellent results.
Ratio analysis isn’t just comparing different numbers from the balance
sheet, income statement. It’s companies, the industry, or even the economy
in general. Ration look at the relationships between individual values and
relate them to how a company has performed in the past, and might perform
in the future.
MEANING OF RATIO ANALYSIS:
A ratio is one figure express in terms of another figure. It is a
mathematical yardstick that measures the relationship two figures, which are
related to each other and mutually interdependent. Ratio is express by
dividing one figure by the other related figure. Thus a ratio is an expression
relating one number to another. It is simply the quotient of two numbers. It
can be expressed as a fraction or as a decimal or as pure ratio or in absolute
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figures as “so many times”. As accounting ratio is an expression relation two
figures or group contain in the financial statements.
Ratio analysis is the method or process by which the relationship of
items or group or items in the financial statement are computed, determined
and presented.
Ration analysis is an attempt to derive quantitative measure or guides
concerning the financial health and profitability of business enterprises.
Ratio analysis can be used both in trend and static analysis. There are several
ratios at the disposal of an analyst but their group of ratio he would prefer
depends on the purpose and the objective of analysis.
While a detailed explanation of ratio analysis is beyond the scope of
this section, we will focus on technique. This is easy to use. It can provide
you with a valuable investment analysis tool.
This technique is called cross-sectional analysis. Cross-sectional
analysis compares financial ratio of several companies from the same
industry. Ratio analysis can provide valuable information about a company’s
financial health. A financial ratio measures a company’s performance in a
specific area. For example, you could use a ratio of company’s determine
which company uses greater debt in the conduct of its business. A company
whose leverage ratio is higher than a competitor’s has more debt per equity.
You can use this information to make a judgment as to which company is a
better investment risk.
8
How ever, you must be careful not to place too much importance on
one ratio. You obtain a better indication of the direction in which a company
is moving when several ratios are taken as a group.
OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organization
A) Solvency
1) Long Term
2) Shore Term
3) Immediate
B) Stability
C) Profitability
D) Operational efficiency
E) Credit Standing
F) Structural Analysis
G) Effective utilization of resources
H) Leverage or external financing
FORMS OF RATIO:
Since a ratio is a mathematical relationship between to or more
variables/accounting figures, such relationship can be expressed in different
ways as follows.
A) As a pure ratio:
For example the equity share capital of a company is Rs.20, 00,000 &
the preference share capital of a company Rs.5, 00,000. The ratio of equity
share capital to preference share capital is 20, 00,000: 5, 00,000 or simply
4:1.
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B) As a rate of times:
In the above case the equity share capital may also be described as 4
times that of preference shred capital similarly the cash sales of a firm are
Rs.2.5 [30,00,000/12,00,000] or simply by saying that the credit sales are 2.5
times that of cash sales.
C) As a percentage:
In such a case, on item may be expressed as a percentage of some
other item, for example, net sales of the firm are Rs.50,00,000 & the amount
of the gross profit is Rs.10,00,000 then the gross profit may be described as
20% of sales [10,00,000/50,00,000].
Steps in ratio analysis:
The ratio analysis required two steps as follows:
1. Calculation of ratio
2. Comparing the ratio with some predetermined standards.
The standard ratio may be the past ratio of the same firm or industry’s
average ratio of a projected ratio or the ratio of the ratio of the most
successful firm in the industry. In interpreting the ratio of a particular firm,
the analyst cannot reach any fruitful conclusion unless the calculated ratio is
compared with some predetermined standard. The importance of a cross
standard is oblivious as the conclusion is going to be based on the standard it
self.
Types of Comparisons:
The ratio can be compared in three different ways
1) Cross section analysis:
One of the way of comparing the ratio or ratios of the firm is to
compare them with the ratio or ratios of some other selected firm in the same
industry at the same point of time, so it involves the comparison of two or
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more firms financial ratio at the same point of find out as to how a particular
firm has performance may be compared with the performance of the leader
in the industry in order to uncover the major operational in efficiencies. The
cross section analysis is easy to be under taken as most of the data required
for this may be available in financial statement of the firm.
2) Time Series Analysis:
The analysis is called time series analysis when the performance of a
firm is evaluated over a period of time. By comparing the present
performance of a firm with the performance of the same firm over the last
few years, an assessment can be made about the trend in progress of the firm.
Time series analysis helps to the firm to assess whether the firm is
approaching he long-term goals or not. The time series analysis looks for 1)
important trends in financial performance 2) shift in trend over the years 3)
significant deviation any from the other set of data.
3) Combined Analysis:
If the cross section & time analysis, both are combined together to
study the behavior & pattern of ratio, then meaningful & comprehensive
evaluation of the performance of the firm can definitely be made. A trend of
ratio of a firm compared with the trend of the ratio of the standard firm can
give good result, for example, the ratio of operating expenses to net sales for
firm may be higher than the industry average however, over the years if has
been declining for the firm, where as the industry average has not shown any
significant changes.
Figure 2:1: combined analysis of cross-section and time series.
The combined analysis as depicted in the above diagram, which
clearly show that the ratio of the firm is above the industry average, but it is
decreasing over the years & is approaching the industry average.
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Pre-requisites to ratio analysis:
In order to use ratio analysis as device to make purposeful conclusion,
there are certain pre-requisites. This must be taken care of it may be noted
that these prerequisites are not conditions fro calculations for meaningful
conclusions. The accounting figures are in active in them can be used for any
ratio but meaningful & correct inter predation & conclusion can be arrived at
only if the following points are well considered.
1) The dates of different financial statements from where data is taken
must be same.
2) If possible, only audited financial statements should be considered,
other wise there must be sufficient evidence that the data is correct.
3) Accounting policies followed by different firms must be same in case
of cross section analysis would be distorted.
4) One ratio may not throw light on any performance of the firm.
Therefore, a group of ratios must be preferred. This will be conductive
to counter checks.
5) Last but not least, the analyst must find out that the two figures being
used to calculate a ratio must be related to each other, otherwise there
is no purpose of calculating a ratio.
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NEED FOR THE STUDY
The main need of the study is to analyze the financial information of the ML
group of industries.
To find out the liquidity or short term solvency of the ML limited.
To know the different types of ratio analysis how it shows impact on
different Organizations.
To allow the relationship among various aspects in such a way that it
allows drawing conclusion about the performance, strength, and
weaknesses of the company.
To know the short term surviving ability of the company.
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OBJECTIVES OF THE STUDY
The main objective of the study is to analyze the financial information of the ML
Group of companies.
To know the performance of the company in different time periods.
To know the future liquidity of the company.
To verify liquidity and its impact on ratio analysis.
To know the profitability and activity position of ML group of
industries.
To know the accurate financial position of the company
To make appropriate suggestions and measures for the effective
working of the Company
To analysis the financial performance of the company from the point
of ratio analysis is through various ratios.
14
SCOPE OF THE STUDY
An extensive study is done on the financial transactions and
financial information of the ML Group of industries. The study covers the
historical financial information of the company to find.
Growth, strategy and weakness of the company. The study
covers all the transactions of the ML Group of industries in the Ratio
analysis. The study covers the measurement of profitability of the firm and its
operating Efficiency and the relationship among different financial aspects.
15
METHODOLOGY OF THE STUDY
Methodology is scientific and systematic search for pertinent
information on specific Topic. The reliability of management decision depends up
on the quality of data. Basically we have two types of data.
Primary data Secondary data
Primary Data:-
Primary data can be collected either through experience or through survey.
That which is collected afresh and for the first time and thus happens to be original
in character is called primary data. Primary data can be collected in the following
ways.
By Observation
Through personal interview
Through telephone interviews.
Secondary Data:-
Secondary data means data that is already available which was
collected and analyzed by some one else and which have already been passed
through the statistical process. Secondary data May either is published data or UN
published data.
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LIMITATIONS OF THE STUDY
While the study is undertaken about the ratios of the ML Groups of
industries the Following were encountered.
Due to shortage of time the overall analysis of the financial information
of ML Group of industries becomes difficult.
Some of the information was with registered office of the company due
to some Statuary requirements, so it became difficult to get the overall
information of the company.
Since we are new to the company, company refused to provide its
financial Information.
The calculated ratios are not compared with competitor’s ratios.
The smaller time frame available for understanding this study is also one
of the significant limitations of the study.
Due to lack of information my study is limited to some selected ratios
only.
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CHAPTER – II
INDUSTRY PROFILE
INDUSTRY PROFILE
IN THE BEGINNING:
Tobacco is a plant that grows natively in north and South America. It is in
the same family as the potato, pepper and the poisonous nightshade on very dead
plant. The seed of a tobacco plant is very small. A “1” ounce sample contains
about 3, 00,000 seeds. It is a believed that tobacco began growing in the America
about 6,000 B.C., American Indians began using tobacco in many different ways.
Such as in religious and medicinal practices. Tobacco was believed to be a cure all
and was used to dress wounds, as well as a pain killer. Chewing tobacco was
believed to relieve the pain of a toothache. Soon after, sailors brought tobacco
back to Europe and the plant was being grown all over Europe. The major reason
for tobaccos growing popularity in Europe was its supposed healing properties.
Europeans believed that tobacco could cure almost anything, from bad breath.
In 1571, a Spanish doctor named Nicolas Monardes wrote a book about the
history of medicinal plants of the new world. In this he claimed that tobacco could
cure 36 health problems. In 1588, a Virginian named Thomas Harriet prompted
smoking tobacco as a viable way to get ones dose of tobacco. Unfortunately, he
died nose cancer (because it was popular them to breath the smoke out through the
nose).
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During the 1600’s, tobacco was so popular that it was frequently used as money!
Tobacco was literally “as good as gold”! This was also a time when some of the
dangerous effects of smoking tobacco were being realized by some individuals. In
1610 Sir Francis Bercon noted that trying to quit the bad habit as really hard.
In 1632, 12 years after the mayflower arrived on Plymouth Rock, it was
Illegal to smoke publicly in Massachusetts! This had more to do with moral
benefits of the day than health cancers about smoking tobacco. In 1760, Pierre
Lorillard established a company in New York City to process tobacco, cigar and
snuff. Today P.Lorillard is the oldest tobacco company in the U.S.
TOBACCO: A GROWTH INDUSTRY:
In 1776, during the American revolutionary war, tobacco helped
finance the Revolution by serving as collateral for loans the American borrowed
from finance! Over the years, more and more scientists began to understand the
chemical in tobacco, as well as the dangerous health affects smoking produces.
In 1826, the pure form of nicotine was finally discovered. Soon after,
Scientists concluded that nicotine was dangerous poison.
In 1836, New Englander sacral green stated that tobacco was an
insecticide, a poison and can kill a man.
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In 1847, the famous Phillip Morris was established selling hand rolled Turkish
cigarettes. Soon after in 1849, J.E.Liggette and brother was established in stylus,
MO- (the company that has settled out of the big lawsuits recently) cigarettes
became popular around this when soldiers brought it back to England from the
Russian and Turkish soldiers. Cigarettes in the U.S. were mainly made from scraps
left over after the production of other tobacco products, especially chewing
tobacco. Chewing tobacco became quite popular at this time with the “Cowboys”
of the American west.
In 1875, R.J.Reynolds Tobacco Company (better known for its Reynolds
wrap aluminum foil) was established to produce chewing tobacco. It was not until
the 1900’s that the cigarette became the major tobacco product made and sold.
Still, in 1901, 3.5 billion cigarettes were sold, while 6 billion cigars were sold.
Along with the popularity of cigarettes however, was a small but growing anti-
tobacco campaign, with some states proposing a total ban on tobacco?
In 1902, the British Phillip Morris set up a New York headquarters to
market its cigarettes including a new famous Marlboro brand. The demand for
cigarettes grew however, and in 1913 R.J.Reynolds began to market a cigarette
brand called camel.
20
WAR & CIGARETTES: A DEADLY COMBO:
The cigarette exploded during world war (1914-1918), where
cigarettes were called “soldiers smoke”. By 1923, camel controls 45% of the U.S.
market! In 1924, Phillip Morris began to market Marlboro as a woman’s cigarette
that is a “Mild as May”! To battle this, American tobacco company, maker of the
lucky strike brand, began to market its cigarettes to women and gains 38% of the
market. Smoking rates among female teenagers soon tripled during the years
between 1925-1935. In 1939, American Tobacco Company introduced a new
brand, Pall Mall, which allowed American to become the largest tobacco
company in the U.S. During World War II (1939-1945), cigarette rates were at an
all time high. Cigarettes were included in soldiers C-Rations (like food). Tobacco
companies sent millions of cigarettes to the soldiers for free, and when these
soldiers came home, the companies had steady stream of loyal customers. During
the 1950’s, more and more evidence was surfacing the smoking linked to lung
cancer
I n 1952, P.Lorillard markets its Kent brand with the ‘Micronite’ filter,
which contained asbestos! This was fortunately discontinued in 1956. In 1953,
DR.Ernst L.Wynders fined that putting cigarette tar on the back of mice causes
tumors! In 1954, RJ Reynolds introduced the Salem brand, which was the first
filter tripped menthol cigarette.
21
HEALTH HAZARDS REVEALED
IN 1964, the surgeon Generals Report on “smoking and health” came
out. This report assisted in allowing the government to regulate the advertisement
and sales of cigarettes. The 1960’s in general was a time when much of health
hazards of smoking were reported.
In 1965, television cigarette ads were taken off the air in Great
Britain. In 1966, those health warnings on cigarette packs began propping up. In
1968, Bravo a non tobacco cigarette brand was marketed made primarily of
Lettuce, it failed: miserably. Because of the negative press about tobacco, the
major tobacco companies began to diversity their products Phillip Morris began to
buy in to the Miller Brewing company, makers of Miller Beer, Miller lite, and Red
Dog Beer. RJ Reynolds Tobacco Company drops the “tobacco company” in its
name, and becomes RJ Reynolds industries.
It also began to buy into other products, such as aluminum.
American Tobacco Company also drops “tobacco” from its name, becoming
American brands, Inc. In 1971, television ads for cigarettes are finally taken off the
air in the U.S.cigarettes. However, was still the most heavily advertised product
second to automobiles? In 1977, the first national great American smoke art took
place. In 1979, the surgeon general reported on the health consequences of
smoking for women. This is in light to the increasing number o women who were
taking up the bad habit. Some attribute is to slick and campaign of the Virginia
slims brand, “you‘ve come a long way baby”.
22
THE RECENT PAST”
During the 1980’s there were many lawsuits failed against the
tobacco industry because of the harmful effects of its products. Smoking became
politically in correct, with more public places forbidding smoking. In 1982, the
surgeon general reported that second hand smoke may cause lung cancer. Smoking
in public areas was soon restricted, especially at the work place. In 1985, lung
cancer became the No.1 killer of women, beating out breast cancer! Phillip Morris
continued to diversity into other products, buying into general foods corporation
and Kraft Inc in 1985. R Reynolds also diversified, buying Nabisco and becoming
RJR/NABISCO.
In 1987, congress banned smoking on all domestic flights lasting less
than two hours. In 1990, smoking is banned, expect to Alaska and Hawaii. In
1990, Ben & Jerry’s (of ice cream fame) boy cots RJR/ NABISCO, and dropped
Oreos from its ice cream products.
During the 80’s and 90’s the tobacco started marketing heavily in
areas outside the U.S, especially developing countries in Asia. Marlboro is
considered the worlds No1 most valuable brand of any product with a value over $
30 billion! Over this period, there is a battle between coca cola and Marlboro as
the No1 brand in the world.
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In the recent years there is growing evidence that the tobacco industry has known
all along that cigarettes are harmful, but continue to market and sell them. There is
also evidence that they know that nicotine was addictive and exploited this hidden
knowledge to get millions of people hooked on this dangerous habit. Tobacco
industry is an agro based industry. Tobacco is cultivated mainly in the states of
Andhra Pradesh and Karnataka. Most of the tobacco used for the manufacture of
cigarettes and for exports (is produced from these two states).Tobacco is also
grown in Tamilnadu, West Bengal, Uttar Pradesh, Gujarat, Madhya Pradesh,
Maharashtra and Orissa also. However the tobacco grown in these states is of very
less quantity and is not used for manufacture of cigarettes and exports. Several
varieties of tobacco such as Virginia flue cured, Virginia air cured, light soil burly,
sun cured Virginia, nature, chewing tobacco, HDBRG, Wrapper tobacco, Bidi
tobacco and Hookah tobacco etc., are grown in India. Virginia flue cured is a
major variety grown in India. More than 80% of Indian tobacco crop belongs to
this variety.
The tobacco cultivation exports and some other industrial activities
are regulated by central government (Ministry of commerce) through tobacco
board. Tobacco board is headed by I.A.S officer of senior category generally from
the central government.
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The board consists of several Central government officers, state government
officers, political leaders, representatives of farmers and reputed Industrialists. One
of the directors of ML Group is always representing the industrialists in the
tobacco board.
Tobacco board issues licenses to the farmers who are permitted to
grow tobacco. The license regulates the cultivation area. The farmers have to
restrict the cultivation to the given area and must sell the grown tobacco through
tobacco board auctions only. Any violation is an offence and is punishable.
In Virginia flue cured variety the tobacco leaves are separated from
the plant and are cured in tobacco barns are like a furnace when the fumes are used
to cure the green leaves of tobacco plant. Tobacco barns appear like small
godowns with firing chambers at the bottom fixed to the walls. The green tobacco
leaves of the plant will be arranged in the form of rows inside the barns. The
temperature inside the barn will be regulated by means of flow of hot air through
the firing chambers.
This is a simple technical process by which the green leaf exposed
to hot air at high temperature and cooled slowly over a period of time. After the
curing process, the primary leaf tobacco turns into leman yellow colour, gold
colour, brownish yellow colour, brown colour and dark brown colour. This
tobacco is called katcha tobacco leaf and is ready for sale. The formers pack
different colours in different packages as each colour generally will be classified as
a separate grade which will have a separate price in the market?
25
Tobacco must be sold only through tobacco board auction platforms
under strict rules and regulations. Former or buyer as permitted to transact in
tobacco board auction platforms. Central Government has also established several
tobacco research institutes for betterment of quality of tobacco in India. The other
varieties of tobacco are not regulated by tobacco board.
The tobacco purchased from the tobacco board auction platforms will
be graded further whenever required. Grading is a process of manual separation of
one variety of leaf from the other and is done mainly on the basis of colour. Each
grade will generally have unique quality parameters. The graded tobacco is further
processed either manually or on machines. The processing is called DEBUTTING
and SRRIPPING. Workers separate the butt of the tobacco leaf from the leaf. This
process can also be done on machines. The machine processing is called
THRESHING. After stripping/ threshing, the tobacco will be further processed for
stabilization of moisture. The process is called “REDRYING”. In the process the
tobacco first of all will be derived completely then it will be given stream at the
required temperature. After redrying process, the tobacco will be packed in the
required packing say bale packing/ case packing etc. The packed tobacco is ready
for export. In India, the first threshing plant which is working uninterruptedly for
the last 25/30 years an imported one by Maddi Lakshmaiah and co.ltd. This was
installed at Ganapavaram and the plant is still running at high efficiency levels in
the country with 98% average efficiency level for the last three years. There are
two plants owned by ITC which can be compared with this plant in the country.
ITC uses their threshing plants for their own consumption.
26
Tobacco industry is fetching more than Rs 9,000 crores of revenue to
the central Government. It is providing employment two lakhs of people directly
and millions of people indirectly and is also contributing Rs 1,000 crores of forex
reserves to the country. The central Government is announcing several restrictions
on advertisement and consumption of cigarettes in the country. It is encouraging
the formers by providing several subsidized fertilizers and by supporting through
tobacco board.
The major players in tobacco industry in India are as under:
Name of the company Occupation % of business in India
ITC LTD Cigarette manufacturing and unmanufacturing tobacco exports
50%
VST INDUSTRIES LTD Cigarette manufacturing and unmanufacturing tobacco exports
12%
GTC INDUSTRIES LTD Cigarette manufacturing and unmanufacturing tobacco exports
6%
GODFREY PHILLIPS INDIA LTD
Cigarette manufacturing and unmanufacturing tobacco exports
8%
27
The consumption is linked with the habits of the people; the tobacco usage
cannot be eradicated. Even in countries like USA where anti tobacco campaign
started in 1962. The production of cigarettes and consumption of cigarettes is still
progressing.
EXPORTERS:
S.No Name of the company
Occupation % of business in India
A ML GROUP Cigarette manufacturing and unmanufacturing tobacco exports
5%
B POLISETTY GROUP
Cigarette manufacturing and unmanufacturing tobacco exports
5%
C BOMIDALA GROUP
Cigarette manufacturing and unmanufacturing tobacco exports
3%
D MITTAPALLI GROUP
Cigarette manufacturing and unmanufacturing tobacco exports
3%
E OTHER EXPORTES
Cigarette manufacturing and unmanufacturing tobacco exports
8%
28
Our ML Company has developed strong relationship with overseas manufacturing
in Europe, Russian and Middle East. Through there is very good demand from
Russian market. Our company is not exporting much because of poor economic
conditions of the country. M.L.company as now exporting cigarettes to Middle
East and USA by manufacturing the cigarettes on job work basis. The company
foresees a very bright future for this company in tobacco in the coming years.
M.L. Group is the first tobacco company who exported tobacco to China
and is the first company who imported from China. There was no imported
tobacco in Indian tobacco history before this and after this till now. The group
maintains good relationship with the Chinese tobacco monopoly.
One of the trade delegates that accompanied our honorable prime minister
during his recent visit to china is from ML Company. Three ambassadors of china
have visited our company in the past as our guests and expressed their satisfaction
on our infrastructure facilities.
29
CHAPTER – III
COMPANY PROFILE
COMPANY PROFILE
ML Group was a multifacilitated corporate leader of which the group
Consists of five concerns namely.
ML Agro Products LTD -- Tobacco threshers, packers
and Exporters.
K.S.Subbiah Pillai and co (India) Ltd --- Tobacco Export
M.L.Exports --- Export house
Coramandal Agro Products and oils Ltd --- Bulk producers of oils
ML GROUP:-
The highly competitive tobacco market represented tremendous growth
potential to Mr.Maddi Lakshmaiah. Foreseeing the demand for quality Indian
tobacco, a long term strategy was formulated. Right from its inception, the
company adhered to international standards and made rapid into global tobacco
markets. A sophisticated threshing plant of international standards was
commissioned in 1976 first in Andhra Pradesh. It created a revaluation in tobacco
processing and led to a huge Upsurge in demand. This led to the commissioning of
two modern plants with threshers, redryers and other sophisticated equipment for
the processing of quality tobacco.
30
ML Group has taken its credo of total quality to the furthest, whether in the
Quality of processes, products or working conditions for the vast workforce. The
foresighted Innovations of Sri Maddi Lakshmaiah have given the group a strong
edge. The personal involvement of the directors in all aspects of the business has
resulted in high quality operational parameters.
The company can proudly claim some of the most skilled workforce and a
Highly efficient management, who have contributed significantly to the prominent
position. The Company has earned recognition from apex institutions and is a
recognized leader in tobacco markets the world over. The quantum growth in of
ML Company spread of investment in infrastructure And diversification in to other
business.
“ML Group” under its umbrella the various companies has an annual
turnover of Rs 1550 million and an asset base of Rs 200 million. A real estate
development wing was set up to Develop and lease commercial properties with
working environments that rival the best internationally.
The information about the establishment of the group which consists of five
Concerns are as follows displayed on the preceding pages. Let us have a look on
the various concerns of ML Group individually.
31
MADDI LAKSHMAIAH AND COMPANY LTD:-
ML and company limited, the fore runner of all the companies of ML
Group, the Company enjoys a pre-eminent standing in the world of tobacco,
exporting to china, Russia, Western Europe, Africa and Bangladesh among others.
Supported by a team of experts, technicians, engineers and a skilled workforce,
The Company has forged a head setting standards that have become benchmarks in
the industry. Today
Chilakaluripet is a well known name in the global tobacco business in no little
measure due to the Pioneering efforts of the intrepid founder, Sri Maddi
Lakshmaiah.
ML AGRO PRODUCTS LTD:
ML Agro products ltd was born of a increase in demand for quality tobacco
in Both the domestic and foreign markets. Building on the rich experience of
running a profitable operation A new plant was set up in 1976 at Martur, Prakasam
district. It is fully self-sufficient with modern threshers, lamina redryers, automatic
double ram press, sophisticated quality control laboratory and mammoth
warehouses. It ranks among the Largest threshing unity in the country. Apart from
its export commitments. The company also processes tobacco for domestic
cigarette manufacturers. The Company today has a global vision.
32
K.S. SUBBIAH PILLAI AND COMPANY (INDIA) LTD:-
K.S.S.P and company limited was acquiring in 1982 with all its assets K.S.
Subbaiah pillai and company (India) limited is the groups leading tobacco
exporting unit. In a field that Is extremely competitive, the excellent performance
of the company is an indicator of the trust that it Enjoys across the globe.
CORAMANDAL AGRO PRODUCTS OILS LIMITED (CAPOL):-
CAPOL started in 1976, extracts and refines cotton seed oil. Today it is a
multi Product Company with equipments to process all kinds of oil seeds. The
plant has a storage capacity of 2100 tonnes for different types of oil. Extreme care
is taken to ensure that at every stage in the process of production Right from
selecting of the raw material to packaging the products, only the best is passed.
Minimum human intervention and rigorous application of quality control
Processes to ensure that the final product conforms to all appropriate standards.
The by products of the Process in the form of linters, Hulls and De-oiled cakes are
in high demand in many parts of the world.
ML EXPORTS:
ML Exports is a totally export oriented unit, with clients in a
variety of markets around the world. The company enjoys a reputation for
excellent delivered schedules and transparent Business practices in global markets.
33
SHARE HOLDING PATTERN AND MANAGEMENT OF GROUPS:
Sri Maddi Lakshmaiah and his family members are holding 100% of shares
of the entire group. The group is totally managed and controlled by Sri Maddi
Lakshmaiah and his family Members only. The group has been successfully
improving its business in all of its activities such As domestic sales, export sales,
tobacco processing and other tobacco development activities, Warehousing
facilities etc. The group has two tobacco processing plants and one solvent
extraction Plant in south India. The group owns around 1 00,000 square meters of
warehousing complexes in south India.
IN CORPORATION:
ML Company is a limited company (M/s Maddi lakshmaiah and company
limited) Which was originally incorporated on 8th day of October 1970 under the
name, Maddi lakshmaiah and Company private limited having passed the
necessary special resolution on the 23rd day of March 2002, In terms of sec
31(1)/44 of the companies act 1956 the name of the company changed to Maddi
Lakshmaiah and company limited.
34
NATURE OF ACTIVITY:
o This factory produces good quality tobacco
o The production capacity per each day is one lakh 20 tonnes.
o The production capacity per year is around 15/16 million tonnes
o The current assets capacity per year is around 1.5 million tonnes.
FINANCIAL STRUCTURE:
The initial investment of ML company is 10, 00,000.
TURNOVER OF THE GROUP:
The turnover of the group for the financial year 1989-99 standard is at
around Rs800 millions. The net earnings after taxes of the group have been
maintained at Rs150/200 millions per anum. The group has second asset base
having assets spread in most of the prime centers and parts of south India.
The group has developed excellent infrastructure during the past 30 years.
Which have been yielding a promising regular income of more than Rs 225
millions every year?
35
THE PRODUCTS OF THE M.L.COMPANY AND THEIR MAIN USES:
The various products of the M.L. Company and their economic uses are as
follows.
1. Karnataka light soil-My sore:
This tobacco is preferred for low nicotine content, high filling capacity and
Suitability to blend well any tobacco.
2. Monson burly:
Used in us blended cigarettes..3...Traditional burly:
Used for pipe mixtures, chewing plugs and hookah tobacco paste.
4. Kurnool and telangana (NATU):
Primarily used for cigarette blending and for hookah tobacco paste making.
5. Eluru (Natu tobacco):
Mainly used for cheroots, snuff pipe tobacco, cigarette blending and for
hookah Paste making.
6. Oriental:
Used for cigarette blending.
7. Century fire cured tobacco:
Used in pipe mixtures and hookah tobacco paste.
8. BIDI Tobacco:
Used in the manufacture of Bidis, a hand rolled smoking products made by
Wrapping tobacco with natural bony leaves.
36
9. Cigar wrapper tobacco:
Mainly used for wrapping the cigars.
10. Cigar filters tobacco:
Mainly used in the manufacture of cigars and exported to some countries
for use in hookah tobacco paste.
11. Cheroot tobacco:
Used for the manufacture of cigars and hookah tobacco paste.
12. Lanka tobacco:
For the manufacture of cigars and cheroots.
13. Tamilnadu:
Chewing and cheroot.
14. Black chopadia:
Used as chewing tobacco.
15. Red chopadia:
Mostly for chewing also called lal-chopadia and safna. The export packing
Ranges from 250 grams- 100 grams and is available in bales of up to 100
kages
16. Rustica tobacco:
Used as chewing tobacco, hookah tobacco, for tobacco sheet making for
kreteks In Indonesia, pipe mixers and cigarette blending to some extent.
37
17. Motihari:
Used in the manufacture of various tobacco products such as chewing
tobacco, Hookah paste, bidies etc.
18. Southern light soil:
Blend with any tobacco.
19. Black soil (Traditional):
Blends well with any tobacco.
20. Northern light soil:
This tobacco is flavored to semi flavored with excellent ageing properties.
OBJECTIVES OF THE COMPANY:
To serve the nations vital interest in the tobacco related sectors.
To earn a reasonable return on investment
To create a strong research and development in the field of tobacco and
stimulate research and development of developing of exports
To maximize utilization of the existing facilities in order to improve
efficient and increased productivity.
To work towards achievement of self reliance in the field of tobacco,
threshing Formulation and distribution systems.
To import training, conduct seminars, workshops and educational courses
on computers, Computer maintenance, software development and
software export and to develop and Design software in India
38
A broad and to start software technology park in India or abroad and to
other relationship Management solutions for individuals and organizations
both individually and through Strategic alliances with other companies.
To employ experts to investigate and examine in to the condition,
prospects, value, Character and circumstances of any business concern
and under takings and generally of Any assets property or rights.
To carry on all kinds of agency business.
To carry on business as merchants in all kinds of goods.
To improve, manage, work, develop, lease, mortgage, abandon or
otherwise deal with all Or any part of the property, right and concessions
of the company.
To maintain victinity of suppliers through M.L. tobacco and marketing
network at Optimum costs and provide up to date technical assistance to
the consumer to conceive the Valuable energy resources.
ORGANIZATION STRUCTURE:
Departmentalization of function: - The group has following different
departments.
Personal Department:
This department deals with the masters of industrial relations, HRD, welfare
activities, Labour legislations, recruitment and issues of wages etc. This is the
main deparment in the organization.
39
Leaf Department:
This department deals with the matters of tobacco leaf. It looks after buying
of tobacco from the formers for the processing of tobacco.
Export Department:
It looks after the export matters of the organization. This organization
exports tobacco Leaf to China, Bangladesh and U.K.
Production Department:
This department takes care to produce quality tobacco to customers.
.Marketing Department:
This department takes care of marketing the company tobacco to other
countries such as Russian, Europe, Middle East, Bangladesh, African countries etc.
They sell varieties of tobacco in market and maintain good relations with the
customers. This is one of the main/ important departments in this organization.
M.L.Group was concentrating on domestic market.
It ties up with Indian strongest cigarette manufacturing company, ITC.
MARKET EXPORTS:
M.L.Company was exporting tobacco to Russia, Europe, Middle East,
Bangladesh, African countries etc. These are the various countries in which M.L.
Company is exporting their tobacco.
40
FUTURE PLANS:-
The company (Maddi Lakshmaiah) for an ECB fro 50 million dollars
and development of regular trade and also infrastructure projects in
India.
ML Company is also working on joint venture basis with U.K.based
Commodities Company for supply of agro products to South Asian
countries.
The company already entered in to joint venture with an U.S. based
company by name CARGIL for their entire South Indian needs.
They have worked for joint venture arrangement with Yugoslavian
Government for their Requirement for India.
This is for above five million dollars of investment in supply of 5000
tones every year.
The company is working with Chinese Government for long term
association in tobacco.
Negotiation of ambassador level which are completed and favorable
reports are submitted to respective Government.
The only delegating from tobacco industry that is permitted along with
P.M (Mr.Atal Bihari Vajpayee) to the recent tole to china is from M.L.
Company.
41
ACHIEVEMENTS / AWARDS:-
M.L.Company has no particular / peculiar achievements / awards.
M.L.Group (CAPOL Chirala, Prakasam Dt.) got several achievements
and awards.
CAPOL:-
All Indian cotton seed crushers association, Mumbai awarded CAPOL
as III highest Exporter and III highest domestic seller of cotton seed
extraction for the year 1992-1993.
CAPOL is the highest exporter and III highest domestic set of cotton
seed extraction for the year 1993-1994.
CAPOL is the III highest domestic seller of cotton seed extraction for
the year 1994-95.
CAPOL is the II highest domestic seller of cotton seed extraction for the
year 1995-96.
CAPOL is the II highest domestic seller of cotton seed extraction for the
year 1997-98
CAPOL is the III highest domestic cotton seeds in the year 1999-2000.
CAPOL is the II highest exporter of cotton linter in the year 2000-2001.
CAPOL is the III highest exporter of cotton linters and II highest
domestic seller of Cotton seed extraction in the year 2001-2002.
The Company (CAPOL) has been awarded may commendation led by
Government of AP For its continuous harmonious relations with its
employees in the years 1994-1997.
42
The Company (CAPOL) received “Gold Udyoga Patra” award for its
best quality and Productivity through Sri Pranam Mukharhee, honorable
union commerce minister in 1993 and on this Occasion, the company
(CAPOL) M.D. has been facilitated by honorable president of India,
Dr.Sankar Dayal Sharma.
The company got productivity council awards.
The company goy II best sport persons in companies in prakasam
district.
MARKETING CHANNELS:
Normally they send samples and varieties.
At the time of requirement they send samples through couriers.
Participating in exhibitions every year M.L.company was taking
participation in 56years.
The people who have connection in tobacco may visit tobacco stalls
usually, even from Europe, Russia and china.
People like manufacturers, dealers, bankers, merchants of tobacco may
visit the tobacco exhibitions.
43
TOBACCO EXPORTERS IN INDIA & COMPETITORS OF
M.L.COMPANY:-
In India, the tobacco exporters as well as the same exporters are the
competitors of M.L. Group.
TOBACCO EXPORTERS IN INDIA:-
The important tobaccos exported in our country are,
o ML GROUP
o Mittapalli Group mmidal
o Boa group
o I.T.C. and some other small companies.
In tobacco exports, I.T.C and out of countries (other countries) like China comes
as competitors to this company.
In which China produces 50 times more of tobacco than India.
During exporting of tobacco to other countries freight charges may
be bared by the Company it self.
For door delivery some other charges may be bared by the company.
Tobacco is usually stored in warehouses, redrying plants, threshing
plants.
44
MODE OF TRANSPORTATION:-
Generally the mode of transportation may be four types.
o FOB: Free on board -- The responsibility may be on the board.
o C & F; Cost & freights -- Responsibility of boat and freight
o CIF: Cost insurance and freight -- ware house insurance other
o DDC: Door delivery up to.
FINANCE DEPARTMENT:-
In this department deals with,
Cash payments will be checked by cashiers.
Cash bills and credit bills may get from threshing factory engineering
department.
Concerned accounts may be generalized by the accountants and may be sent
to concerned heads.
Credit bills payments will be given in the form of cheques / D.D
In season tobacco may be purchased through action platforms
Tobacco board will rise invoices
Before purchasing they have to give bank guarantee.
The company will give payments by encase the cheques to tobacco boards.
45
CHAPTER – IV
THEORITICAL
FRAME WORK
THEORETICAL FRAME WORK
Financial Analysis the process of determining the significant
operating and financial characteristics of a firm from an accounting data and
financial statements. Financial analysis is the process of identifying the financial
strengths and weakness of the firm. It is done by establishing relationship between the
items of financial statements viz. balance sheet and profit and loss account. Financial
statement analysis is a process of evaluating the relationship between the
component parts of the financial statements to obtain a better understanding of a firm's
position and performance.
The analysis and interpretation of financial statements reveal each and
every aspect regarding two well being financial soundness, operational efficiency and
credit worthiness of the concern concerned. It may be made for a particular purpose in
view. However the following are generally considered to the object of financial analysis.
To find out the financial stability and soundness of the business enterprise.
To estimate and evaluate the earning capacity of the business.
To evaluate the administrative efficiency of the business enterprise.
TYPES OF ANALYSIS:
Two types of analysis are undertaken to interpret the position of an
enterprise they are
1. Vertical analysis
2. Horizontal analysis
46
VERTICAL ANALYSIS:
It is the analysis of relationships as between different individual
components. It is also the analysis between these components and their totals for a
given period of time. It does not focus light on changing behavior of the above
relationships. It is also regarded as static analysis. The vertical analysis can be made in
the following ways.
By preparations of common size statements of the two similar units.
By preparing common size statements of different years of the same
business unit.
HORIZONTAL ANALYSIS:
It is the analysis of changes in different components of the financial
statements over different periods. With help of a series of statements. Such an
analysis makes it possible to study periodic fluctuations in different components of
the financial statements. It is also known as 'dynamic analysis' it reflect changes in
financial position of the company over a long period of time.
Comparison of the financial statements of different years of the same
business unit.
Comparison of financial statements of a particular year of different business
unit.
47
INTERNAL USERS:
Financial Executions
Top management
EXTERNAL USERS:
Investors
Creditors
Workers
Customers Government Public
Researchers
TOOLS & TECHNICS OF FINANCIAL ANALYSIS:
1. Ratio analysis
2. Cash flow analysis or cash flow statements
3. Funds flow analysis or funds flow statements
4. Comparative statements
Comparative income statements
Comparative balance sheet statement
5. Common size statements
Common size Income statements
Common size balance sheet statements
6. Trend analysis
48
Ratio analysis is widely used tool of financial analysis. This analysis
establishes the numerical or quantitative relationships between to items or
variables of financial statements. So that the strength and weaknesses of a firm as
well as its historic performance and current financial position can be determined.
Ratio helps to summarize large quantitative of financial data and to make
Quantitative judgment about firm’s financial performance.
MEANING:
A ‘Ratio’ is defined as “the desired quotient of two mathematical
expressions”.
Ratio is defined as a fixed relationship in degree or number between two
items. The term “Ratio” refers to the Quantitative relationship between the variable
in the numerator and the variable in the denominator. It is a mathematical
relationship between two quantities. It engages qualitative measurement and show
precisely how adequate is one key item in relation to another.
Ratio Analysis is a powerful tool of financial analysis; it is a widely used
tool of financial analysis and interpretation of ratios should give experienced,
skilled analysts a better understanding of the financial. Condition and performance
of the firm than they would obtain from the analysis of financial data alone. A
ratio analysis is analyzing the information by comparing two different variables.
49
RATIO:
Ratio Analysis lies in the fact that it makes related information comparable.
A simple figure itself has no meaning but when expressed in terms of related
figure, it yields significant inferences. For instance, the fact that the net profits has
be considered in relation to other variables is, how does it stand in relation to sales.
What does it represent by way of return on total assets used or capital employed?
If net profits are shown in terms of their relationship with sales, assets, capital
employed etc., a meaningful conclusion can be drawn regarding their adequacy. A
ratio indicates a quantitative relationship which intern helps in qualitative
judgment.
Financial ratio is an index that relates two accounting numbers and is
obtained by dividing one accounting variable with another variable. Financial
Ratio analysis is the principal tool of financial statement analysis. It is the process
of analyzing the relation between two financial variables. It is also defined as the
systematic use of ratio is to interpret the financial statements so that the strengths
and weaknesses of a firm as well as its historical performance and current financial
condition can be determined. The relationship can be expressed as percentages,
fractions or stated comparison between numbers. These methods of expressing
items that are related with each other are for the purpose of financial analysis,
referred to as ratio analysis.
But comparing ratios merely doesn’t add any information of profits and
sales. They reveal the relationship in more meaningful way which enables to draw
better conclusions.
50
PROCESS:
Financial Ratio Analysis involvers 3 steps.
1. Calculation of appropriate ratios from the financial statements.
2. Comparison of ratios with standard and past ratios.
3. Drawing the final conclusion so to make suitable better decisions regarding
the firm’s profit maximization.
SIGNIFICANCE AND USES:
Used to analyze and interpret the financial health of the firm.
Analysis of financial statements with the aid of ratios helps the
management in decision-making and control.
Use of ratio analysis in not confined to financial managers only but also
to investors, creditors and financial executives.
Ratios can highlight the factors associated with successful &
unsuccessful firms. They can reveal strong & weakness firms,
overvalued & undervalued firms.
Unique set of operating and financial characteristics of an industry can
be identified.
51
Importance of analysis for which people seek differs considerably reflecting
the purpose that the statements to serve. Investors are concerned with the firm’s
earning capacity where as creditors including Bankers and financial institutions are
interested in knowing the ability of the enterprise to meet its financial obligations
timely. Financial executives are concerned with evolving analytical tools that will
measure and compare costs efficiency, liquidity and profitability with a view to
making intelligent decisions. Thus ratio analysis has wiser applications and is of
immense use.
As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that it presents facts on a comparative
basis and enables the drawing of inferences regarding the performance of a firm.
USERS OF RATIOS:
These ratios are used by different people and organizations based upon
their specific need and convenience.
Trade creditors use ratios in measuring the firm’s liquidity position
while granting short-term loans where as bondholders analyze the firm’s
capital structure as their claims are long-term.
Investors are concerned primarily with present and expected future
earnings and its stability.
Management also employs financial analysis for the purpose of internal
control.
52
Government regulatory agencies are concerned with the rate of return a
company earns on its assets as well as the proportion of non-equity
funds employed in the business.
TYPES OF RATIOS:
Broadly speaking the operations and financial position of a firm can be
described by studying a short term and long term liquidity position, profitability
and its operational activities.
Therefore ratios can be classified in to following categories.
Liquidity Ratios
Capital Structure Ratios
Activity Ratios
Profitability Ratios.
Liquidity Ratios:
Conclusions regarding liquidity position of a firm can be drawn with the
help of liquidity ratio analysis. The liquidity position of a firm would be
satisfactory if it is able to meet its short-term or current obligations when they
become due. A firm can be said to have the ability to meet its short-term liabilities
if it has sufficient liquid fund to pay the interest on its short-term maturing debt
usually within a year as will as to pay the principal. This ability is reflected in the
liquidity ratios of a firm. The liquidity ratios are particularly useful in credit
analysis by banks and other suppliers of short- term loans. The important liquidity
ratios are,
53
Current ratio
Quick ratio
Absolute liquidity ratio
Current Ratio:-
Current Ratio is also called as working capital ratio. It establishes
relationship between total current assets and current liabilities. The current assets
of a firm represent those assets this can be converted into cash with in a short
period of time. The current ratio is a measure of the Firm’s short time solvency.
Current Assets
Current Ratio =
Current Liabilities
Quick Ratio:-
Quick Ratio is also called as acid test ratio or liquid ratio. It is concerned
with Relationship between liquid assets and liquid liabilities. An assets is liquid it
can be converted into cash immediately on reasonable soon with out loss of value.
Cash is the most liquid assets. Other assets that a Are considered to be relatively
liquid and included in quick assets are debtors and bills receivable and Marketable
securities.
Quick Assets
Quick Ratio = ------------------------
Current Liabilities
54
Absolute Liquid Ratio :-
This Ratio establishes a relationship between absolute liquid assets to quick
Liabilities. Which can not included bills receivable, sundry debtors and marketable
securities.
Absolute Liquid AssetsAbsolute Liquid Ratio = ------------------------------
Quick Liabilities
Capital Structure Ratios:-
Conclusions regarding the long-term solvency or long-term financial
Viability of a firm can also be assessed through ratio analysis. This aspect of the
financial position of a borrower is concerned with long-term creditors, security
analysts, present and potential owners of a business. The long-term solvency is
measured by the leverage / capital structure and profitability ratios, which focus on
earning power and operating efficiency. Ratio analysis reveals the firm’s strengths
and weaknesses in this aspect. The leverage ratios will indicate whether a firm has
a Reasonable proportion of various sources of finance or if it is heavily loaded
with debt in which case its solvency is exposed to serious strain. The
important leverage ratios are:
Debt – Equity Ratio
Debt Ratio
Fixed Assets Ratio
Proprietary Ratio
55
Uses of Leverage Ratios:
To identify sources of funds
To measure financing risk
To forecast borrowing prospects.
Debt – Equity Ratio
This Ratio indicates proportion of debts fund in relationship to equity.Debt
ratio shows the relative contribution of creditors and owners debt equity ratio is
measure of the long term Financial solvency of a firm. This ratio indicated the
relative proportion of debt and equity in financing the assets of the firm.
Debt
Debt Equity Ratio = ------------
Equity
Debt Ratio:-
This Ratio indicates proportion of owners funds to total fund invested in the
Business. Debt ratio is used to analyse the long term solvency of a firm. It helps in
knowing the Proportion of the interest bearing debt in the capital structure. Debt
ratio is computed by dividing total Debt by capital employed or net assets.
Owner’s Fund
Owners Ratio = --------------------
Total Equity
56
Proprietary Ratio:-
It establishes the relationship between the proprietary funds and total assets.
The total share holder’s funds are compared with the total tangible assets of the
company. The ratio indicates the general financial strength of the concern.
Proprietary Funds
Proprietary Ratio = -------------------------
Total Assets
Activity Ratios
These are also called as turnover ratios or asset management ratios. The
other Dimension of the use of ratio analysis from the viewpoint of management is
that, it throws light on the degree of operating efficiency in the management and
utilization of its assets. The various activity ratios measure this kind of operational
efficiency. These are based on the relationship between the levels of activity and
the level of various assets. In fact, the solvency of a firm is in the ultimate analysis,
dependent upon the sales revenues general by the use of the assets total as well as
its component. The important activity ratios are:
Inventory Turnover Ratio
Debtor’s Turnover Ratio
Creditors Turnover Ratio
Total assets Turnover Ratio
Fixed Assets Turnover Ratio
Working Capital Turnover Ratio
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Fixed Assets Turnover Ratio:-
This Ratio establishes the relationship between fixed assets and sales. This
Ratio Is a measure of ratio is a measure of how well the firm was its long term
(fixed) assets and shows how many rupees of sales are supported one rupee of
fixed assets.
Sales
Fixed assets Turnover Ratio = ---------------
Fixed Assets
Debtors Turnover Ratio:-
It is also called as receivables turnover ratio. The purpose of this ratio is to
Measure the liquidity of the receivables or to find out the period over which
receivables remain Uncollected.
Total Net Sales
Debtors Turnover Ratio = -----------------------
Avg Net Debtors
Creditors Turnover Ratio:-
This Ratio shows the velocity of debt payment by the firm.
Net Credit Purchases
Creditors Turnover Ratio = -----------------------------
Avg Creditors
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Total Assets Turnover Ratio:-
Total assets turnover measure the turnover of the all the company’s assets
and is Calculated by total assets average.
Net Sales
Total Assets Turnover Ratio = ----------------
Total Assets
Inventory Turnover Ratio:-
Inventory turnover ratio indicates the efficiency of the firm in producing
and Selling its product. It is called by dividing net sales by average stock. The
average
Stock is the average of Opening and closing balances of stock.
Net Sales
Inventory Turnover Ratio = --------------------
Avg Stock
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Profitability Ratios :
The overall profitability and effectiveness of the firm cane assessed with the
help of profitability ratios. Unlike the outside parties which are interested in one
aspect of the financial position of a firm, the management is constantly concerned
about the overall profitability of the enterprise. The parties are concerned about the
ability of the firm to meet its short-term as well as long- term obligations to its
creditors in order to ensure a reasonable return to its owners and secure optimum
Utilizations of the assets of the firm. This is possible if an integrated view is taken
and all the ratios are considered together. These reflect the final result of business
operations. The profitability ratios would reveal whether the firm is able to offer
adequate return to its owners in consistent with the risk involved. The important
profitability ratios are:
Gross Profit, Ratio
Net Profit Ratio,
Operating Expenses Ratio
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Gross Profit Ratio:-
This Ratio is measure of general profitability of the business. This ratio
helps to find the gross margin of the company over its sales. Grass Profit is the
differences between net sales and Cost of goods sold. The gross profit margin
reflects the efficiency with which the management Producers each unit of product.
This ratio indicates the average spread between the costs of goods sold and sales
revenue.
Gross Profit
Gross Profit Ratio = ----------------- * 100
Sales
Net Profit Ratio:-
This Ratio is widely used as a measure of overall profitability.Net profit
margin establishes a relationship between net profit and sales. It indicates
management’s efficiency in Manufacturing and administrations and selling the
product. This ratio is the overall measure of the firms Ability to turn each rupee
sales in to net profit.
Net Profit
Net Profit Ratio = --------------- * 100
Sales
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Operating Expenses Ratio:-
The operating expenses ratio depending the office and administrative and
selling and distribution expenses.
Operating expensesOperating Expenses ratio = ----------------------------
Sales
62
CHAPTER – V
DATA ANALYSIS &
INTERPRETATION
DATA ANALYSIS AND INTERPRETATION
(A). Liquidity Ratios
1. Current Ratio:
Current assets include cash and those assets which can be converted in to
cash within a year, such marketable securities, debtors and inventories. All
obligations within a year are include in current liabilities. Current liabilities
include creditors, bills payable accrued expenses, short term bank loan income tax
liabilities and long term debt maturing in the current year. Current ratio indicates
the availability of current assets in rupees for every rupee of current liability.
Year Current Assets Current Liabilities Ratio
2006-07 274243926 115648358 2.37
2007-08 281256454 151643144 1.85
2008-09 365193725 211523300 1.73
2009-10 391784538 180032666 2.17
2010-11 399857758 89728008 4.45
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Current Assets
Current Liabilities
INTERPRETAION:
The above table shows the current ratio of ML Company for the successful
five years i.e., 2006-07, 2007-08, 2008-09, 2009-2010, and 2010-11.
The current of ML Company is decreased for the past three years and in the
next two years it is increased i.e. the current liabilities are increased from the year
2007 to 2009 and in the next two years i.e. from 2010 and 11 the current liabilities
are decreased.
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Ratio
00.5
11.5
22.5
33.5
44.5
5
2006-07
2007-08
2008-09
2009-10
2010-11
Ratio
2. Quick Ratio:
Quick ratios establish the relationship between quick or liquid assets and
Liabilities. An asset is liquid if it can be converting in to cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset .other assets
which are consider to be relatively liquid and include in quick assets are debtors
and bills receivable and marketable securities. Inventories are considered as less
liquid. Inventory normally required some time for realizing into cash. Their value
also is tendency to fluctuate. The quick ratio is found out by dividing quick assets
by current liabilities
Year Quick Assets Current Liabilities Ratio
2006-07 101987605 115648358 0.08
2007-08 93322442 151643144 0.62
2008-09 125313650 211523300 0.59
2009-10 154808776 180032666 0.86
2010-11 297543660 89728008 3.31
65
Quick Assets
Current Liabilities
INTERPRETAION:
The above table shows the quick ratio of ML Company for the successful
five years i.e., 2006-07, 2007-08, 2008-09, 2009-2010, and 2010-11. The quick
ratio of ML Company is decreased from the year 2007 to 10 due to the increase in
the current obligations; this ratio is increased in the current year.
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Ratio
0
0.5
1
1.5
2
2.5
3
3.5
200
6-07
200
7-08
200
8-09
200
9-10
201
0-11
Ratio
3. Cash Ratio:
Even though debtors and bills receivables are considered as more liquid
then inventories, it can not be converted in to cash immediately or in time.
Therefore while calculation of absolute liquid ratio only the absolute liquid assets
as like cash in hand cash at bank, short term marketable securities are taken in to
consideration to measure the ability of the company in meeting short term financial
obligation. It calculates by absolute assets dividing by current liabilities.
Year Cash + Bank balance Current Liabilities Ratio
2006-07 33465753 115648358 0.29
2007-08 6059037 151643144 0.04
2008-09 7150276 211523300 0.03
2009-10 13998934 180032666 0.07
2010-11 61538293 89728008 0.68
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Cash + Bank balance
Current Liabilities
INTERPRETATION:
Absolute liquid ratio indicates the availability of cash with company is
sufficient because company also has other current assets to support current
liabilities of the company. When observe the above graph absolute liquid ratio of
the company is decreased from the year 2007-10. In terms of this ratio the
company is unsatisfactory in those four years and this company maintained
standard ratio in the current year.
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Ratio
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2006
-07
2007
-08
2008
-09
2009
-10
2010-11
Ratio
(B). LEVERAGE RATIOS
4. Debt Equity Ratio:
The term external equities refers to total outside liabilities that
consists of both short term and long term liabilities and the term internal equities
refer to share holders funds that consists of both equity and preference capital. In
case the ratio 1(i.e., outsiders funds are equal to shareholders funds it is considered
to be quite satisfactory). The debt equity ratio is determined to ascertain the sound
ness of the long term financial policies of the company. It is also known as
“external internal” equity ratio. It may be calculated as follows:
Year Debt Equity Ratio
2006-07640764231 148167525 4.32
2007-08589603737 143270036 4.11
2008-09572516150 164136957 3.48
2009-10560278204 207200158 2.70
2010-11161283036 215747706 0.74
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Debt
Equity
INTERPRETATION:
The general norm for debt equity ratio is 1:2 (or) 1:1 this is applicable only
for developed countries. In case of developing countries like India, a general norm
of 3:1 or 2:1 is maintained by the firms. Because the firms are depending on
borrowed capital rather than equity capital. The debt position of the company is
decreased from the 2007to 2011. The company did not maintain idle ratio of debt
equity ratio.
70
Ratio
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2006-07 2007-08 2008-09 2009-10 2010-11
Ratio
5. Debt to total funds ratio:
This ratio is also called solvency ratio. A measurement of a
company's financial leverage, calculated as the company's debt divided by its
total capital. Debt includes all short-term and long-term obligations. Total capital
includes the company's debt and shareholders' equity, which includes common
stock, preferred stock, minority interest and net debt.
Year Debt Total funds Ratio
2006-07640764231 794455378 0.95
2007-08589603737 738669982 0.74
2008-09572516150 742900639 0.77
2009-10560278204 773002348 0.75
2010-11161283036 380869464 0.20
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Debt
Total funds
INTERPRETATION:
The solvency ratio of the ML Company is decreased from the past five
years i.e. this ratio decreased in the years 2007, 2008, 2009, 2010 and in 2011
respectively.
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Ratio
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
2006-07 2007-08 2008-09 2009-10 2010-11
Ratio
(C). TURNOVER RATIOS
6. Inventory turnover ratio:
In accounting, the Inventory turnover is a measure of the number of
times inventory is sold or used in a time period such as a year. The equation for
inventory turnover equals the cost of goods sold divided by the average inventory.
Inventory turnover is also known as stock turnover ratio.