A SUMMER TRAINING REPORT ON Financial Analysis of FRIENDS ENGINEERING WORKS Co.

SUBMITTED TO Kurukshetra University, Kurukshetra

MASTER OF BUSINESS ADMINISTRATION (M.B.A.) (Session-2009-2011)

UNDER THE GUIDANCE OF:

Mrs. ANIKA SDDIET, GOLPURA

SUBMITTED BY: RAJENDER KUMAR M.B.A. (IIIrd SEM.)

SWAMI DEVI DAYAL INSTITUTE OF ENGINEERING & TECHNOLOGY VILL. GOLPURA, BARWALA DISTT. (PANCHKULA)

DECLARATION I, Mr. RAJENDER KUMAR, pursuing MBA from Department of Management Swami Devi Dyal Institute of Engineering & Technology (An ISO 9001:2000 Institute) affiliated to Kurukshetra University, Kurukshetra do here proclaim that in preparing this project report on Financial Position of FRIENDS ENGINEERING WORKSPVT. CO.. (SAHA) , I have not taken any help from anybody in or outside the Institute except from primary sources and secondary sources mentioned in the context. This project is an original work and the same has not been submitted to any other institution for the award of any other degree/diploma. All conclusion and recommendations are my own efforts. All the data collection by me has been done with the help of FRIENDS ENGINEERING WORKS manuals and annual reports issued by the Company. The entire analysis has been done by me with the guidance of FRIENDS ENGINEERING WORKS general manager.

RAJENDER KUMAR

Acknowledgement

Preservation, inspiration and motivation have always played a key role in the success of any venture. In the present world of cutthroat competition project is likely a bridge between theoretical and practical working, willingly I have prepared this particular project. First of all, I would like to thank the supreme power, the almighty god who is obviously the one who has always directed me to work on the right path of my life. With this grace this project could become a reality. I feel highly delighted with the way my report on topic Financial Analysis Of FRIENDS ENGINEERING WORKSPvt. Co.. (SAHA) has been completed. Any accomplishment requires the effort of many people and this work is not different. Firstly, I would like to extend my sincere thanks to Mr. RAJEEV CHUHAN(Chairman) and their staff for his kind to co-operation and providing me good environment to work on. Finally, I would like to thanks all the faculty members, respondent and other people whom directly or indirectly help me completing the project.

(RAJENDER KUMAR)

Preface

Theoretical knowledge without the practical exposure is of little value. Theoretical studies in classroom are not sufficient to understand the functioning and nature of research. Therefore it becomes necessary to undergo any research project work. Practical project supplements the theoretical studies i.e. it covers what is left uncovered in the classroom. It exposes a student to invaluable pleasure of experiences. I complete my research project on the topic Financial (RATIO) Analysis study of. During the research project I got an opportunity to learn valuable things, which I could have been able to learn from theory classes. In nutshell, whole of my project was invaluable experience in the pursuit of knowledge. In the forthcoming pages attempt has been made to present a comprehensive report concerning different aspects of my research. The overall gain to me will be reflected in the report itself

List of Figures Figure no. 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 Current ratio Quick ratio Absolute liquid ratio Debt equity ratio Debt to total fund ratio Interest coverage ratio Gross profit ratio Net profit ratio Operating profit ratio Material consumption ratio Factory expenses ratio Office and administration expenses ratio Selling expenses ratio Personal expenses ratio Return on capital employed Return on net worth Earnings per share Dividend per share Stock turnover ratio Debtor turnover ratio Average collection period Title Page no. 38 39 40 42 43 44 46 47 47 49 49 50 51 52 53 54 55 56 58 59 60 5

4.22 4.23 4.24

Creditor turnover ratio Average payment period Working capital turnover ratio

61 62 63

List of Tables Tables no. 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 Current ratio Quick ratio Absolute liquid ratio Debt equity ratio Debt to total fund ratio Interest coverage ratio Gross profit ratio Net profit ratio Operating profit ratio Material consumption ratio Factory expenses ratio Office and administration expenses ratio Selling expenses ratio Personal expenses ratio Title Page no. 37 39 40 42 43 44 46 46 47 48 49 50 51 51 6

4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24

Return on capital employed Return on net worth Earning per share Dividend per share Stock turnover ratio Debtor turnover ratio Average collection period Creditor turnover ratio Average payment period Working capital turnover ratio

53 54 55 56 58 59 60 61 62 63

LIST OF CONTENTS Topic Page No. 6 7 8-30 9 10-15 16-26 27-30 31-34 35-42 37 37 38 38 41 42 43-72 76-79 77 78-79 80-81 82 8

List of figures List of tables

1) INTRODUCTION (A) Statement of problem (B) Introduction of the company (C) Introduction of product (D) Introduction of financial analysis 2) REVIEW OF LITERATURE 3) RESEARCH METHODOLOGY A) OBJECTIVES OF THE STUDY B) SCOPE OF THE STUDY C) SIGNIFICANCE OF THE STUDY D) RESEARCH DESIGN E) LIMITATIONS OF THE STUDY F) ORGNISATION OF THE STUDY 4) ANALYSIS AND INTERPRETATION OF DATA 5) FINDINGS AND SUGGESTIONS A. Findings of the study B. suggestions & recommendations 6) CONCLUSION AND SUMMARY BIBLIOGRAPHY

Chapter-1 Introduction

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Statement of Project Problem

The statement of my project problem is to analysis the financial position of the IFEW PLASTICs. Financial Statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information in the financial statement is not an end in itself as no meaningful can be drawn from these statements alone. The information provided in the financial statement is of immense use in making decisions through analysis and interpretation of financial statements. The financial analysis is the process of identifying the financial strength and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and Profit & loss a/c. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. The analysis and interpretation of financial statements is essential to bring out the mystery behind the figures in financial statements. Financial statement analysis is an attempt to determine the significance and meaning of financial statement data so that forecast may be made of the future earning, ability to pay interest and debt maturities and profitability of a sound dividend policy. This helps in determining the strengths and weaknesses of IFEW PLASTICs. Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusion can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements.

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INTRODUCTION TO IFEW GROUP IFEW, established in 2008 surges ahead to establish itself as a reputed Industrial conglomerate with a wide ranging portfolio from Sheet metal, plastic bowls and injections blow moulding and plastic bowls and injections injection moulding components. . The Markets of the ifew group are crisscrossed allover the globe. The objective is meeting the buyers expectations with consistent quality backed by R&D divisions equipped with latest equipment, cream of highly qualified technocrats and adhering to the timely schedules of the companies. The year was 2008. While their beginnings were small the vision was big. The burning desire to evolve Grow & one day position itself as a responsible & reputed corporate entity playing out its role in improving the peoples quality of life through their products & service remained a driving force. It is their relentless spirit of enterprise, boundless enthusiasm, grit & determination to live the dream that enabled them to add a new dimension to their philosophy- where commitment leads, achievement follows. Propelled by new technologies and inspired by our exalted goal to explore new frontiers, our march towards blazing new trails to span new horizons takes on a new dimension setting the tone for a new millennium. Rajeev Chuhan Chairman Vision is the key. Without vision there can be no mission, no agenda to road map the future. Vision provides the vital differential between the ordinary & extra ordinary, defining the cutting edge that powers organizations way above & beyond competition. No progressive group can ignore this vital input. Sushil Verma Accountant Globalization offers exciting challenges that can be converted into rewarding opportunities only if you are sharply attuned to the ground realities pertaining to business and industry. At the end of the day, words remain words. Explanations remain explanations. Promises remain promises. Only performance speaks. Today's we step into the new millennium those nascent days of 800 spindle start-up become a distant memory as the IFEW Group surges ahead to establish itself as a reputed Industrial conglomerate with a wide ranging portfolio Sheet Metal, plastic bowls and injections blow moulding and plastic bowls and injections, injection moulding components , Infrastructure Development. 12

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INDUSTRY PROFILE The Indian industry is very large and diverse and has its roots going back several thousand years. After the industrial revolution in Europe, this sector in India also saw growth of an Industrial complex. However, over the last 50 years the industry in India has shown a chequered performance. Today the industry contributes 14% to industrial production in the country, is estimated to directly employ approximately 35 million people apart from the indirect employment in allied sectors, accounts for about 27% to the countrys exports, and is, in sum, an important economic engine for the nation. It has gradually removed these restrictions, and has also brought down import duties on capital equipment, creating grounds for foreign investors to set up manufacturing plants competitively in India. In recent years, when India has started becoming a global manufacturing base it can certainly provide a competitive base for and apparel companies into which to invest. However, during the last 10 years, the industrys actions, government policies as well as market events have began to converge, providing several growth opportunities for the sector domestically as well as in the global market. As the MFA quota-regime draws to a close, India presents many

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opportunities for buyers, suppliers and investors to partner with its plastic bowls and injections industry, and to profit from the partnership.

PLASTIC BOWLS AND INJECTIONS AS A GROWTH ENGINE Plastic bowls and injections Industry plays a significant role in the Indian economy. It constitutes 20 per sent of Industrial production, 9 per cent of excise collections, 30 per cent of export revenue and 18 per cent of employment in industrial sector. On a relative basis, the industry is globally more competitive than other industries in the country. In addition, the industry has a high potential to grow, as it is labour intensive where India has natural advantage.

However, despite these advantages, industry performance has been sub-optimal in comparison to other countries. Indias share in re-location of world trade has been extremely low in comparison to 15

countries like china and even Sri-Lanka and Bangladesh. In addition, domestic per capita consumption of plastic bowls and injections products at 2.5 kilograms (USA-30kilograms, world average at 7.5kilograms) is among the lowest in the world. OPPORTUNITIES AND THREATS In the next decade, Indian plastic bowls and injections industry would be subjected to numerous opportunities and threats. As the domestic mettal sheet consumption is low, there is potential for increasing domestic consumption in tandem with the projected GDP growth of 6-8%. If structural rigidities can be removed, the domestic plastic bowls and injections

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market can grow at about 7% per annum in the coming 10 years. If the industry can be made globally competitive, India can also capitalize on opportunities available in the export market. A competitive industry has the potential of achieving export earning of over Euro 35 billion by 2010. High growth in plastic bowls and injections industry will also provide significant opportunity to create additional employment, as capital to employment, as capital to employment ratio in plastic bowls and injectionss industry is most favorable as compared to any other industry. Accordingly, if 17

the industry can realize its growth potential, it is estimated that 6 million direct jobs can be created in the organized sector by 2010. The increased direct employment in the industry would spin off substantial indirect jobs. As a result of the growth potential in the domestic and export market, the mettal sheet consumption in the country will grow from its present level of 4.5 million tons to above 8 million tons, which will induce growth in the farm sector and the manmade mettal sheet industry. However, the opportunity in the industry is limited as the current trend of re-location of world rate is expected to taper off by 2010. Accordingly, if the industry continuous to operate at the current competitiveness level, net exports are expected to stagnate at Euro 10 billion with limited or no impact economic indices. on the other

POLICY MEASURES The plastic bowls and injections and garments sector is a very diverse sector. It covers a wide variety of products based on different mettal sheets, at varying degree of value addition, based on different creation techniques like weaving or knitting, diversely processed and so on. Some of the factors to boost plastic bowls and injections and garment exports are covered in this part.

Technological up gradation Economies of scale-de-reservation, assembly lines production Stronger mettal sheet base higher crop productivity

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COMPANY PROFILE

FRIENDS ENGINEERING WORKS LIMITED (IFEW) was originally incorporated as During 1989,first time the Company offered its share to general public through convertible debentures to part finance toilet soap plant. The Company was successfully exporting of toilet soap products. In 1992, the company has been awarded status of a Recognised Export House for its export performance. The management conceived an idea of setting up a composite plastic bowls and injections unit of its own kind in India, in a phased manner.With a view to appropriately reflect the scope and extent of companys proposed multi-dimensional activities, it was considered expedient to change the name of the company to Saha Industrial Enterprises limited in1994.

STATUS OF IFEW LIMITED IFEW Limited is the unit of FRIENDS ENGINEERING WORKS Limited. It establish at SAHA(Ambala) place in HARYANA STATE. IFEW Co.. produce 15000 Plastic bowls and injections injection per day. It manufactures sheet metal, plastic bowls and injections blow moulding and other moulding.

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QUALITY POLICY

We are committed to produce as per customers requirement by using specified yarn, continuous improvement in process and optimum realization at all stages.

We shall achieve this by N Need fulfill of customers. A Adherence of standard norms. H Human Resource development through continuous training. A Adoption of latest technology. R Responding fastest to customers queries. F Flexibility in product mix. A Application of environment friendly technology. B Bringing sense of belongingness. R Reduction in rejects and wastes. I Innovation in process. C Continuous vendor development. S Striving to minimize non-conforming product.

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PRODUCT PROFILE WEAVES Sheet mettal

21

Plastic bowls and injections blows moulding

Plastic injections

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 Others components

DIFFERENT DEPARTMENTS

MATERIALS DEPARTMENT This department carries out all the functions of material management by fulfilling the needs of all departments. Departments in need of material place order either through HODs or SAP formalities. Once it is approved, it is passed on to purchase department. COMMERCIAL DEPARTMENT It deals with the raw material procurement, storage and issue with a close co-ordination with material department. COSTING DEPARTMENT Deals with product costing. Department has set standards for calculating cost. Cost is decided as per company expenses and not the market price. FINANACE & ACCOUNT DEPARTMENT 23

Finance department deals with actual figures (trading accounts and balance sheet) Various functions of Finance (like capital structure, dividend policy and working capital management) are centralized, which are prepared is accountant Implementation is done here . SECURITY DEPARTMENT Looks after entire setup from safety point of view and saves from theft, pilferage, fire etc. Controlling in-and-out movements of men as well as material. EDP DEPARTMENT Responsible for communication programming.

PERSONAL & ADMINISTRATION DEPARTMENT This department is responsible for: Wages and salaries- Which include Basic Salary, HRA, Conveyance, Medical, and LTA etc. Record keeping- The entire employees database is maintained, along with leaves etc. HR DEPARTMENT The main functions of this department are recruitment , selection , performance appraisal, training etc. placement , induction , details like

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SWOT ANALYSIS

Strengths: Strong Public Image Wide range of products

Weakness: Supply and Distribution system for products Availability of Finance for promotion Mix Unnecessary blockage of funds The company financials were impacted due to the labour unrest

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Financial analysis:Financial analysis is the process of Identifying the financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements, such as comparative statements, trend analysis, common size statements, schedule of changes in working capital, funds flow and cash flow analysis, cost-volume-profit analysis and ratio analysis. According to Metcalf and Titard, financial analysis is a process of evaluating the relationship between component parts of a financial statement to obtain a better understanding of a firms position and performance.

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TYPES OF FINANCIAL ANALYSIS Distinction between different types of financial analysis can be made either on the basis of material used for the analysis or according to modus operands of the analysis.

TYPESOF OFFINACIAL FINACIALSYSTEM SYSTEM TYPES

According to Material Used

According to Objectives

According to Modus Operand

(A)

ACCORDING TO MATERIAL USED

1) EXTERNAL ANALYSIS:Those who do not have access to the detailed accounting Records for the company e.g. Bankers, Investors, Creditors and general public make external analysis of financial statements. 2) INTERNAL ANALYSIS:The Internal analysis is accomplished by those who have access to the books of accounts and all others information related to business. This type of analysis is made by the finance and department to help the top management in taking decision. Balance sheet & Income Statements are the two basic statements which help top management in decision making (B) (I). ACCORDING TO OBJECTIVES

SHORT TERM ANALYSIS:In the short term a company is mainly concerned with working capital for the purpose of knowing about the funds readily available to meet its current needs and sufficient borrowing 27

capacity to meet the contingencies. So under this analysis current assets and current liabilities are analyzed & liquidity position of the concern is determined. (II). Liquidity Ratios Current assets movement or efficiency ratios LONG TERM ANALYSIS:In the long run a company must maintain a suitable rate of return on investment to provide for the necessary growth and development of the company and to meet the cost of capital. In the long term analysis the fixed assets structure, leverage analysis, ownership pattern of securities etc. are analyzed. Debt-Equity ratio or External-Internal Equity Ratio Funded debt to Total Capitalization Ratio Proprietary or Equity Ratio Solvency Ratio or Ratio of Total Liabilities to Total Assets Fixed Assets to Net worth or Proprietors Funds Ratio Fixed Assets to Long term funds or Fixed Assets Ratio Ratio of Current Assets to Proprietors Funds Debt Service Ratio or Interest Coverage Ratio Cash to Debt service Ratio

(C) ACCORDING TO MODUS OPERAND (I) HORIZONTAL ANALYSIS:Analysis of change in different components of the financial statements over different periods with the help of series of the statements is known as Horizontal Analysis. E.g. preparation of comparative financial statements. Horizontally analysis is also known as ' Dynamic Analysis' since this reflects changes in financial position of firm over a long period of time. (II) VERTICAL ANALYSIS:28

Analysis of relationship as between different individual component and as between these components and totals for a given period of time. Such an analysis is known as vertical analysis. It is also named as Static Analysis". It is not conductive to a proper analysis of the firms position because comparisons not possible in this case. TOOLS OF FINANCIAL STATEMENT ANALYSIS A number of tools and devices are used to study the relationship between different statements. The basic purpose of the tools is to simplify or reduce the data under review to more understandable terms. The following tools can be used for the analysis of financial statements.

I.

RATIO ANALYSIS:Ratio analysis is the processing of determining and presenting in arithmetically terms the relationship between figures and groups of figures drawn from these statements. It includes establishing and interpreting various ratios for helping in making certain decision like financial position, liquidity, solvency, stability & profitability of the concern. The financial statements consists of two types of comparisons, firstly, the analyst can compare a present ratio with that of past & expected future ratios for the same company. Secondly, it may compare the ratio of one firm with those similar firms or with the industry ratio over the period of time.

II.

FUND FLOW STATEMENTS:Fund flow statements is designed to highlight changes in the financial conditions of a business concern between two points of time which generally confirm to beginning and ending financial statements dates for whatever period of examination is relevant

III. CASH FLOW STATEMENTS:It summaries the cause of change in cash position between dates of two balance sheet. A cash flow statement focuses attention on cash changes only. It is very useful for short term planning. 29

IV. STATEMENTS OF CHANGES IN WORKING CAPITAL:A statement of changes in working capital is prepared to show the change in the working capital between the two balance sheet dates. The statements are prepared with the help of current assets & current liabilities derived from the two balance sheet dates. The amount of working capital is calculated by deducting the current liabilities from current assets. V. COMPARATIVE FINANCIAL STATEMENTS:The comparatively financial statements are statements of the financial position at different periods of time. Such comparative statements are necessary for the study of trends and direction of movement financial position and operating results. Comparative statements enable horizontal analysis of figures

Chapter-2 Review of Literature

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Literature Review LITERATURE SURVEY is a process of developing an insight into both conceptual and research based study available on the area and the topic chosen. The objective of such review is to understand the importance of the topic and find out research gaps, if any in the chosen area. Thus the review of literature in the present study does consist of both published and unpublished research based and conceptual based studies available in India as well as in abroad. Books: o Lev. Baruch (page-11): In this how analysis of financial statements of organization is done and on the basis of that comment upon the financial position of the organization.

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o Kothari C.R. (168-174): Research is the systematic objective and exhaustive research for and study of facts related to any problem in the field of marketing.

o W.H. Beaver (1966): was the first researcher to the prediction of bankruptcy using financial data. His analysis was based on ratios and identified ratios, which have discriminating power to predict the bankruptcy of the companies using failed and non-failed 79 manufacturing companies in each of two matched pair groups.

o Prof. R.M. Srivastava, Dr.Diva Nigam (558-560): It tells the mission & vision.

o Gupta S.P (379,381,399): The information regarding the correlation as statistical tool.

o M.Y.Khan :(7-10):- The information regarding Indian financial system

o Pandey, I.M. (143-145): It tells the method of preparing of comparative Profit & Loss a/c and how can we evaluate it.

o Banerjee (1979): in his study established the relationship between liquid ratio, debtors turnover ratio, creditors turnover ratio, and the movement of overdraft. The study found out that when the liquid ratio was below the norm, debtors turnover ratio and creditors turnover ratio were high while the movement of overdraft showed declining trend.

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o Hooda R.P. (209-212):- Calculation of Trend Analysis and its interpretation.

o Maheshwari, S.N (B-40 to B48):- It explains ratio analysis as a tool to analyze the financial statements of organization. Different ratios depict the position of firm in market.

o Mittal.R.K (28-30):- It explains the preparing of comparative Balance Sheet and way of interpretating it.

o Ciaran Walsh P.No. (113-122):- Analysis of liquidity of any firm by calculating current & liquid ratio. o Jonah Aiyabei (2002): discussed the theoretical aspect of financial distressed firm based on a cyclical concept and examined the financial performance of small business firms based in Kenya using Z score model which uses different financial ratios to measure of corporate financial health. (Source:-the management accountant, June 2007.)

o Trevor W. Chamberlain : has done study on comparative performance of liquidity and profitability.The objective of the present study was to examine the role of liquidity variables in explaining the firms investment behaviour. For this purpose a model in which the firms goal is to maximize the probability of long run survival was compared with three interpretations of the value maximization theory, which focuses on profitability as the basis for investment. Wherever possible, the models were estimated 33

using both historical cost and replacement cost accounting data to measure the independent variables, to obtain some evidence on how the relationships that govern firm behaviour should be quantified.

CHAPTER-3 RESEARCH METHODOLOGY

34

Research Methodology

Research is a systematic and continues method of defining a problem, collecting the facts and analyzing them, reaching conclusion forming generalizations. Research methodology is a way to systematically solve the problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that all generally adopted by a researcher in studying his research problem along with the logic behind them. The scope of research methodology is wider than that of research method. Thus when we talk of research methodology we not only talk of research methods but also consider the logic behind the method we use in the context of our research study and explain why we are using a particular method.

PROBLEM STATEMENT

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The research problems, in general refers to sum difficulty with a researcher experience in the contest of either a particular a theoretical situation and want to obtain a salutation for same, my problem statement are to The present project has been undertaken to do the Financial Analysis at FRIENDS ENGINEERING WORKS....

OBJECTIVES OF THE STUDY

1). Primary objective 2). Secondary objective 1 Primary objective: Financial analysis of FRIENDS ENGINEERING WORKS... To analyze the financial statements of the Company to its true financial position.

2 Secondary objectives: To find out the shortcomings of IFEWPLASTIC. To inform the management about the financial condition of IFEWPLASTIC To spot out strengths and weakness of company.

SCOPE OF THE STUDY 36

The financial analysis of FRIENDS ENGINEERING WORKShas been done on the basis of FRIENDS ENGINEERING WORKS manuals, in depth study of annual reports and other financial statements, Comparative analysis of various annual reports, recent trends in capital structure and profitability structure for the last three years and the causes for such changes.

SIGNIFICANCE OF THE STUDY An insight of relative financial performance can be studied over the past 3-5 years and using various ratios to measure the performance and consistency. The study will throw light on existing financial position of FRIENDS ENGINEERING WORKSand will suggest remedial measures for effective financial management. The ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analyze and interpret the financial health of enterprise. It is with the help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis. The use of ratios is not confined to

financial managers only.

There are different parties interested in the ratio analysis for knowing the financial position of the firm for different purposes. The supplier of goods on credit, banks, financial institutions, employees and management all
37

make use of ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investments in the firm. With the use of ratio analysis one can measure the financial condition of a firm and can point out whether the condition is strong, good, questionable or poor. The conclusions can also be drawn as to whether the performance of the firm is improving or deteriorating.
RESEARCH DESIGN A research is the arrangement of the conditions for the collections and analysis of the data in a manner that aims to combine relevance to the research purpose with economy in procedure. In fact, the research is design is the conceptual structure within which research is conducted; it constitutes the blue print of the collection, measurement and analysis of the data. As search the design includes an outline of what the researcher will do from writing the hypothesis and its operational implication to the final analysis of data. The design is such studies must be rigid and not flexible and most focus attention on the following;

o What is the study about? o Why is the study being made? o Where will the study be carried out? o What type of data is required? 38

o Where can be required data be found? o What period of time will the study include? o What techniques of data collection will be used? o How will the data be analyzed? o In what style will the report be prepared?

TYPE OF RESEARCH DESIGN

Descriptive research

Exploratory research

Casual research

DATA COLLECTION The task of data collection is begins after a research problem has been defined and research designed/ plan chalked out. Data collection is to gather the data from the population. The data can be collected of two types: 39

Primary data Secondary data

PRIMARY DATA:The Primary data are those, which are collected afresh and for

the first time, and thus happened to be original in character. Methods of collection of Primary data are as follows: o Interview o Observation Method

SECONDARY DATA:The Secondary data are those which have already been

collected by some one else and which have already been passed through the statistical tool. Methods of collection of Secondary data are: Journals, Websites Books. Balance sheet Profit & Loss

LIMITATIONS OF THE STUDY The main limitations of the study are: 40

The study had to be basically carried out by getting information from the Internet and also annual reports of FRIENDS ENGINEERING WORKSwere not available of current financial year.

It being my first attempt to undertake such an analysis. Thus the lack of experience is also obstacle to accomplish the project in proper way.

Dealing with data on which work has already been done. So changes in data have not been possible.

The time duration for working with the plant was less. To make a better interpretati on

a number of ratios have to be conclusion.

calculated which is likely to confusion than helping in making Meaningful

There were no well accepted rules or standards for all the ratios. No interpretation for future can be made from the past ratios.

While making the study no consideration is made to the changes in price levels and this makes the interpretation invalid.

ORGNISATION OF STUDY

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The whole study was organized in six chapters. The description regarding these Chapters is given below. CHAPTER 1 - Chapter 1 is Introduction Chapter. This chapter has further two parts. First part deals with Statement of the problem which deals with the main problem of study and introduction of the problem. Second chapter deals with Introduction of company. In this section the whole introduction the company in which the study takes place is given. CHAPTER 2 - Chapter 2 is Review of literature. This chapter deals with the review of related literature. It highlights various dimensions of the problem that have already been studied in the past by different research scholars and their conclusions and recommendations have also been mentioned here. CHAPTER 3 - Chapter 3 is Research Methodology. This chapter has further sections as Objective of study, organization of study, Scope of study, Research design, Data collection technique, Data analyses technique, Need of the study, and Limitation of study. CHAPTER 4 - Chapter 4 is Analysis of data. This chapter contains all the analyses part of the study. The data collected is analyzed in this chapter. The data is arranged in table form and then interpreted with the help of graphs. Interpretation is given with the graphs. CHAPTER 5 - Chapter 5 is Findings and suggestions. This chapter has further two sections. First findings second suggestions. CHAPTER 6 - Chapter 6 is conclusion and summary. This chapter has further two sections. First conclusion second summary.

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CHAPTER-4 ANALYSIS AND INTERPETATION OF DATA

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BALANCE SHEET

Years Sources of funds Owner's fund Equity share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-inprogress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes:

Mar ' 07

Mar ' 06

Mar ' 05

Mar ' 04

Rs. cr Mar ' 03

17.04 81.82 104.03 22.02 224.91

17.04 64.63 48.81 23.04 153.52

5.07 57.13 22.11 31.45 115.76

5.07 50.9 23.17 47.75 126.89

5.07 45.91 23.67 3.45 78.1

110.55 35.55 75 8.14 17.1

79.7 31.22 48.48 0.92 6.43

66.52 27.39 39.13 0.24 4.02

60.64 23.74 36.90 0.13 1.53 -

51.43 20.11 31.32 1.32

182.61

134.95

113.92

122.81

90.72

57.94 124.67 -

37.26 97.69 -

41.55 72.37 -

34.48 88.33

45.41 45.31 0.15

224.91

153.52

115.76

126.89

78.1

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45

PROFIT AND LOSS Rs. Cr Period & months INCOME Net Operating Income EXPENSES Material Consumption Manufacturing Expenses Personel Expenses Selling Expenses Administrative Expenses Capitalized Expenses Cost of Sales Reported PBDIT Other Recuring Income Adjusted PBDIT Depreciation Other Writeoffs Adjusted PBIT Finanical Expenses Adjusted PBT 109.61 28.39 21.23 17.44 12.98 0 189.65 97.63 27.62 19.92 16.08 11.86 0 173.11 88.59 24.81 16.42 14.94 9.64 0 154.4 88.32 25.82 15.23 16.84 8.72 0 154.93 30.64 4.31 4.86 4.34 3.85 0 48 2007/03 2006/03 2005/03 2004/03 2003/03

222.4

205.15

177.75

177.4

59.42

32.75

32.04

23.35

22.47

11.42

1.02 33.77 4.63 0 29.14

0.21 32.25 4 0 28.25

0.3 23.65 3.71 0 19.94

0.21 22.68 3.64 0.15 18.89

0.32 11.74 3.15 0.06 8.53

8.88 20.26

4.83 23.42

7.07 12.87

5.68 13.21

0.79 7.74 46

Tax Charges

2.49

5.36

3.75

4.22

1.71

METHODS OF FINANCIAL ANALYSIS A numbers of methods can be used for the purpose of analysis of financial statements. These are also termed as tools and techniques of financial analysis. These are:-

Methods of Financial Analysis

Ratio Analysis

Comparative Financial Statement

Common-size Statement

I use ratio analysis as a tool of financial analysis:

Ratio
Ratio analysis is a technique of analysis and interpretation of financial statement. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strengths and weaknesses of a firm. Calculation of mere ratios does not serve any purpose, unless several appropriate ratios are analyzed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the objective of analysis. The ratios may be used as a symptom like blood pressure. The pulse rate or the body temperature and their interpretation depend upon the caliber and competence of the analyst. 47

Classification of Ratios:The use of ratio analysis is not confined to financial manager only. There

are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. In view of various users of ratios, there are many types of ratios which can be calculated from the information given in the financial statements. Various accounting ratios can be classified as follows:

CLASSIFICATION OF RATIOS

Liquidity Ratios Leverage/Solvency Ratios

A). Liquidity Ratios:-

Activity/Turnove r Ratios Profitability Ratios

These are the ratios which measure the short term solvency or financial position of a firm. These ratios are calculated to comment upon the short term paying capacity of a concern or the firms ability to meet its current obligations. The various liquidity ratios are: current ratio, liquid ratio and absolute liquid ratio, Further to see the efficiency with which the liquid resources have been employed by a firm, debtors turnover and creditors turnover ratios are calculated.

TYPES OF LIQUIDITY RATIOS

48

Current Ratio

Quick Ratio

Absolute Liquid Ratio

Current Ratio:Current ratio may be defined as the relationship between current assets and current liabilities. This ratio, also known as working capital ratio, is a measure of general liquidity and is most widely used to make the analysis of a short term financial position or liquidity of a firm. It is calculated by dividing the total of current assets by total of the current liabilities.

Current Assets Current Ratio = Current Liabilities Or Current Assets: Current Liabilities

Table 4.1 Year Current Ratio 2004-05 1.37 2004-05 1.47 2005-06 1.78 2006-07 1.31

49

Current Ratio 2 1.5 1 0.5 0 1.37 1.47 1.78 1.31

Ratios

2003-04 2004-05 2005-06 2006-07 Years

FIG. 4.1 As per figure 4.1, the ratio is used to assess the firms ability to meets its short term liabilities on time. 2:1 is considered as satisfactory ratio, but the graph shows that for all the years the ratio is less than 2:1. In compression to last years it has increased but it is not up to satisfactory level. So the organization has to invest in current assets to improve it.

Quick Ratio:Quick Ratio, also known as Acid test ratio or Liquid ratio, is a more rigorous test of liquidity than the current ratio. The term liquidity refers to the ability of a firm to pay its short term obligations as and when they become due. The two determinants of current ratio, as a measure of liquidity, are current assets and current liabilities. Current assets include inventories and prepaid expenses which are not easily convertible into cash within a short period. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities.

Quick Ratio =

Quick/Liquid Assets

Current Liabilities Or Quick Assets/Quick Liabilities

50

Table 4.2 Year Quick Ratio 2004-05 0.87 2004-05 0.94 2005-06 1.7 2006-07 0.76

Quick Ratio 2 1.5 1 0.5 0 1.7 0.87 0.94 0.76

Ratios

2003-04 2004-05 2005-06 2006-07 Years

FIG. 4.2 As per figure 4.2, Quick ratio measures those assets, which are immediately converted into cash without much loss. Idle ratio is 1:1. Quick ratio increased in the year 2004-05 it was 0.94:1 which was less but it has improved in year 2005-06 but it decreased in year 2006-07 to 0.76:1. This is not a good sign for the company.

Absolute Liquid Ratio:Although receivables, debtors and bills receivable are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time, Hence, some authorities are of the opinion that the absolute liquid ratio should also be calculated together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets

Absolute Liquid Ratio =

Absolute Liquid Assets Current Liabilities

51

Table 4.3 Year Absolute liquid ratio 2004-05 0.040 2004-05 0.042 2005-06 0.10 2006-07 0.079

Absolute liquid ratio

0.1

0.1 0.08 0.06 0.04 0.02 0 ALR

0.04 0.042

0.079

2003-04

2004-05

2005-06

2006-07

Years

FIG 4.3 As per figure 4.3, the absolute liquid ratio increase is year 2004-05 but less than the ratio of year 2005-06 and decrease in year 2006-07. B). Leverage/Solvency Ratios:The term solvency refers to the ability of a concern to meet its long term obligations. The long term indebtedness of a firm includes debenture holders, financial institutions providing medium and long term loans and other creditors selling goods on installment basis. The long term creditors of a firm are primarily interested in knowing the firms ability to pay regularly interest on long term borrowings, repayment of the principal amount at the maturity and the security of their loans. Accordingly, long term solvency ratios indicate a firms ability to meet the fixed interest and coasts and repayment schedules associated with its long term borrowings. 52

TYPES OF LEVERAGE/SOLVENCY RATIOS

Debt-Equity Ratio

Debt to Total Funds Ratio

Interest Coverage Ratio

Debt-Equity Ratio:Debt Equity Ratio, also known as External Internal Equity Ratio is calculated to measure the relative claims of outsiders and owners against the firms assets. This ratio indicates the relationship between the external equities or the outsiders funds and the internal equities or the shareholders funds. The two basic components of the ratio are outsiders funds, i.e., external equities and shareholders funds, i.e., internal equities. The outsiders funds include all debts/liabilities to outsiders, whether long term or short term or whether in the form of debentures bonds, mortgages or bills. The shareholders funds representing accumulated profits and surpluses like reserves for contingencies, sinking funds, etc. The accumulated losses and deferred expenses, if any, should be deducted from the total to find out shareholders funds. When the accumulated losses and deferred expenses from the shareholders funds, it is called net worth and the ratio may be termed as debt to net worth ratio.

Debt-Equity Ratio =

Debt

Equity Or External Equity/Internal Equity

53

Table 4.4 Year Debt-Equity Ratio 2004-05 1.27 2004-05 0.86 2005-06 0.87 2006-07 1.28

Debt-Equity Ratio 1.5 1.27 0.86 0.87 1.28

DER

1 0.5 0

2003-04 2004-05 2005-06 2006-07 Years

FIG. 4.4 As per figure 4.4, The Debt equity ratio of company is significantly improved in 2006-07. The idle ratio is 2:1. long term debt were only 1.28% of shareholders equity but a financially strong organization like liberty can use Near abut 60% debt in Capital structure.

Debt to Total Funds Ratio:The ratio establishes a like between the long term funds raised from outsiders and total funds available in the business. The two words used in the ratio are (i) Debt, and (ii) Total funds. Debt = Debentures + Mortgage loans + Bonds + Other long term loans. Total funds = Equity share capital + Pref. share capital + Reserves and surplus + Other undistributed reserves + Debentures + Mortgage loans + Bonds + Other long term loans.

Debt to Total Funds Ratio =

Debt Total Funds

54

Table 4.5 Year Debt to total fund ratio 2004-05 0.56 2004-05 0.46 2005-06 0.47 2006-07 0.56

Debt to total fund ratio

FIG 4.5 As per figure 4.5, the debt to total fund ratio
DTFR

0.6 0.4 0.2 0

0.56

0.46

0.47

0.56

2003-04 2004-05 2005-06 2006-07 Years

decrease in the year 2004-05 and increase in year 2005-06 but less than the ratio of year 2006-07.

Interest coverage Ratio:Net income to debt service ratio or simply debt service ratio is used to test the debt-servicing capacity of a firm. The ratio is also known as interest coverage ratio or coverage ratio or fixed charges cover or times interest earned. This ratio is calculated by dividing the net profit before interest and taxes by fixed interest charges:

Interest Coverage Ratio =

N/P Profit (before I/T) Fixed Interest Charges

Table 4.6 Years 2004-05 2004-05 2005-06 2006-07 55

Interest Coverage Ratio

3.99

3.34

6.68

3.8

Interest Coverage Ratio 8 6 4 2 0 6.68 3.99 3.34 3.8

ICR

2003-04

2004-05

2005-06

2006-07

Years FIG. 4.6 As per figure 4.6, Interest coverage ratio has decreased drastically in 2006-07 from 2005-06. Which shows less security for fixed interest charges securities. C) Profitability Ratios:The Primary objective of a business undertaking is to earn profits. Profit earning is considered essential for the survival of the business. In the words of Lord Keynes, Profit is the engine that drives the business enterprise. A business needs profits not only for its existence but also for expansion and diversification, the investors want an adequate return on their investments, workers want higher wages, creditors want higher security for their interest and loan and so on. A business enterprise can discharge its obligations to the various segments of the society only through earning of profits. Profits are, thus, a useful measure of overall efficiency of a business. Profits to the management are the test of efficiency and a measurement of control; to owners, a measure of worth of their investment: to the creditors, the margin of safety; to employees, a source of fringe benefits; to government, a measure of tax-paying capacity and the basis of legislative action; to a customers, a hint to demand for better quality and price cuts; to an enterprise, less cumbersome source of finance for growth and existence and finally to the country, profits are an index of economic progress profitability ratios are calculated to measure the overall efficiency of the business.

56

TYPES OF PROFITABILITY RATIOS

PROFITABILITY RATIOS BASED ON SALES

PROFITABILITY RATIOS BASED ON INVESTMENT

Gross Profit Ratio Return on Capital Employed Net Profit Ratio Return on Proprietors Funds Operating Profit Ratio ~ Return on Total Proprietors Expenses Ratio funds ~ Material Consumed Ratio ~ Earning per Share ~ Factory Expenses Ratio ~ Dividend per Share ~ Office & Adm. Expenses Ratio ~ Selling Expenses Ratio ~ Personal Expenses Ratio

PROFITABILITY RATIOS BASED ON SALES

Gross Profit Ratio:Gross profit ratio measures the relationship of gross profit to net sales

and is usually represented as a percentage. This it is calculated by dividing the gross profit by sales:

Gross Profit Ratio =

Gross Profit Net Sales

* 100

Table 4.7 Year Gross Profit Ratio 2004-05 10.61 2004-05 11.05 2005-06 13.42 2006-07 12.61

57

Gross Profit Ratio 15 10.61 11.05 13.42 12.61

GPR

10 5 0 2003-04 2004-05 2005-06 2006-07

Years

FIG. 4.7

As per figure 4.7, there is increase in gross profit ratio from 2003 to 2005 which shows efficiencies in manufacturing activities in these years. But in 2006 ratio has decreased due to company new investment.

Net Profit Ratio:Net profit ratio establishes a relationship between net profit (after tax)

and sales, and indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm. This ratio is the overall measure of firms profitability and is calculated as:

Net Profit Ratio =

N/P Profit (after Tax) Net sales

* 100

Table 4.8 Year Net Profit Ratio 2004-05 4.72 2004-05 5.44 2005-06 8.98 2006-07 7.61

58

Net Profit Ratio 10 4.72 5 0 8.98 5.44 7.61

NPR

2003-04

2004-05

2005-06

2006-07

Years

FIG. 4.8 As per figure 4.8, the net profit is increased from 2003 to 2006 which is showing better operating activities. But in 2006 it is decreased because of huge investment.

Operating Profit Ratio:This ratio is calculated by dividing operating profit by sales. Operating profit is calculated as:

Operating Profit Ratio =

Operating Profit Sales

* 100

Table 4.9 Year 0perating Profit Ratio 2004-05 12.66 2004-05 13.13
0perating Profit Ratio 20 15 10 5 0 15.61 14.72

2005-06 15.61

2006-07 14.72

12.66

OPR

13.13

2003-04 2004-05 2005-06 2006-07

Years FIG. 4.9 59

As per figure 4.9, Operating profit decreased from 15.61% in 2005 to 14.72% in 2006.still 14.72% operating ratio is not sufficient.

Expenses Ratio:Expenses ratios indicate the relationship of various expenses to net sales. The operating ratio reveals the average total variations in expenses. But some of the expenses may be increasing while some nay be falling. Hence, expense ratios are calculated by dividing each item of expenses or groups of expenses with the net sales to analyze the causes of several of the operating ratio. The ratio can be calculated for each individual item of expenses or a group of items of a particular type of expense like cost of sales ratio, administrative expenses ratio, selling expense ratio, material consumed ratio, etc. the lower the ratio, the greater is the profitability and higher the ratio, lower is the profitability . While interpreting the ratio, it must be remembered proportion to sales shall remain nearly the same. A). material consumption ratio:

A). Material consumed Ratio =

Material Consumed Net Sales

* 100

Table 4.10 Years material consumption ratio 2006-07 57.77% 2005-06 56.40% 2004-05 57.37% 2004-05 57.01% 2002-03 63.83%

60

Material consumption ratio

64.00% 62.00% 60.00% 58.00% 56.00% 54.00% 52.00% 63.83% 57.77% 57.37%

MCR

56.40%

57.01%

2006-07

2005-06

2004-05 years

2003-04

2002-03

Fig 4.10 As per figure 4.10, in year 2005-06 material consumption decrease then year 2004-05 and it increase in year 2006-07. B). Factory Expenses Ratio:

B). Factory Expenses Ratio =

Table 4.11 Years Factory Expenses Ratio 2006-07 14.96%

Factory Expenses Net Sale

* 100

2005-06 15.95%

2004-05 16.06%

2004-05 16.66%

2002-03 8.97%

Factory Expenses Ratio

20.00% 15.00% FER 10.00% 5.00% 0.00% 2006-07 2005-06 2004-05 2003-04 2002-03 Years 14.96% 15.95% 16.06% 16.66% 8.97%

Fig 4.11 61

as per figure 4.11, in the year 2002-03 the factory expenses is too low because of initial stage of the company and it is increase in year 2004-05 and 2005-03 and than it is decrease than after. C).office and administration expenses ratio:

C).Office & Adm. Expenses Ratio =

Offi. & Adm. Expenses Net Sales

*100

Table 4.12 Years Offi. & Adm. Expenses ratio 2006-07 6.84% 2005-06 6.85% 2004-05 6.24% 2004-05 5.62% 2002-03 8.02%

Office & Administration Ratio

10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 6.84% 6.85% 6.24% 8.02% 5.62%

OAER

2006-07 2005-06 2004-05 2003-04 2002-03 Years

Fig 4.12 As per figure 4.12, the office and administration expenses are high at initial stage of the company and it decrease after that. D). selling expenses ratio:

D).Selling Expenses Ratio

Selling Expenses Net Sales

* 100

62

Table 4.13 Years Selling Expenses Ratio 2006-07 9.19% 2005-06 9.28% 2004-05 9.67% 2004-05 10.84% 2002-03 9.04%

Selling Expenses Ratio

10.84% 11.00% SER 10.00% 9.00% 8.00% 2006-07 2005-06 2004-05 2003-04 2002-03 Years 9.19% 9.28% 9.67% 9.04%

Fig 4.13 As per figure 4.13, the selling expenses is high in the year 2004-05 and than it continuously fowl down from year 2004-05. E). Personal Expenses Ratio:

E). Personal Expenses Ratio =

Personal Expenses Net Sales

* 100

Table 4.14 Years Personal Expenses Ratio 2006-07 11.19 2005-06 11.51 2004-05 10.63 2004-05 9.83 2002-03 10.13

63

Personal Expenses Ratio

12 PER 11 10 9 8 2006-07 2005-06 2004-05 2003-04 2002-03 Years 11.19 11.51 10.63 9.83 10.13

Fig 4.14 As per figure 4.14, the personal expenses is decrease in year 2004-05 and after that it is increase year by year but it decrease in last year 2006-07.

PROFITABILITY RATIOS BASED ON INVESTMENTS

Return on Capital Employed:Return on capital employed establishes the relationship between profits and the capital employed. It is the primary ratio and is most widely used to measure the overall profitability and efficiency of a business. The term capital employed refers to the total of investments made in a business and can be defined in a number of ways. The three most widely used definitions of this term are: a). Gross capital employed. b). net capital employed. c). proprietors net capital employed.

Return on Capital Employed =

Profit before Int., Tax and Dividend Capital Employed

* 100
64

Table 4.15 Year Return on Capital Employed (in %) 2004-05 2004-05 2005-06 2006-07

29.73

28.06

18.62

25.64

Return on Capital Employed (in %)

ROCE

30 20 10 0

29.73

28.06 18.62

25.64

2003-04 2004-05 2005-06 2006-07

Years FIG. 4.15 As per figure 4.15, Return on capital employed is showing decreasing trend but marginally increment in 2006. Due to raising long term loan secured & unsecured debt ROCE has decreased drastically

Return on Proprietors Funds:Return on Proprietors funds popularly known as R O I or return on shareholders funds is the relationship between net profits and the proprietors funds. Thus the ratio is generally calculated as a percentage by multiplying the above with 100. The two basic components of this ratio are net profits and shareholders funds. Shareholders funds include equity share capital, preference share capital, free reserve such as share premium, revenue reserve, capital reserve, retained earnings and surplus, less accumulated losses, if any. Net profits are visualized from the viewpoint of owners, i.e., shareholders. Thus net profits are arrived at after deducting interest on long term borrowing and income tax, because those will be the only profits available for shareholders.

Return on Total Proprietors Funds:65

Return on total proprietors funds are calculated as follows:

Return on Proprietors funds =

N/P after Int. & Tax Total Proprietors Funds

* 100

Table 4.16 Year Return on net worth (in %) 2004-05 16.05 2004-05 14.66 2005-06 22.63 2006-07 17.97

Return on net worth(in%)

RONW

30 20 10 0 16.05 14.66

22.63

17.97

2003-04 2004-05 2005-06 2006-07

Years FIG. 4.16

As per figure 4.16, there is a decreasing trend in R.O.A. In 2005 it increased marginally, but in 2006 it decreased from 22.63 to 17.97 Reason being company has increased assets but in same proportion return could not achieved in one year.

Earning per share:66

Earning per share is a small variation of return equity capital. It establishes the relationship between net profit after tax and pref. dividend. It is calculated as net profit after tax and pref. dividend divided by the number of equity shares.

Earning per share =

N/P after Tax & Pref. Dividend No. of Equity Share

Table 4.17 Year Earning Per Share (in Rs.) 2004-05 16.56 2004-05 19.12 2005-06 10.85 2006-07 9.99

Earning Per Share (in Rs. ) 20 15 10 5 0 16.56 19.12 10.85 9.99

EPS

2003-04 2004-05 2005-06 2006-07

Years FIG. 4.17 As per figure 4.17, Earning per share decreased Rs. 19.12 in 2004 to 9.99 in 2007 due to large increases in expenditure on new investment in these Years.

Dividend per share:Dividend per share establishes the relationship between dividend

paid to equity shareholders divided by the number of equity shares. It is calculated by dividing the dividend paid to equity shareholders by number of equity shares.

Dividend per share =

Dividend paid to equity shareholder

67

No. of Equity Share

Table 4.18 Year Dividend Per Share (In Rs.) 2004-05 5.50 2004-05 6.00 2005-06 5.00 2006-07 0.00

DIVIDEND PER SHARE

5.5

DPS

4 2 0 0 2003-04 2004-05 2005-06 2006-07

Years FIG. 4.18 As per figure 4.18, the company follows a stable dividend policy but in 2007 company did no declare dividend due to requirement of funds for expansion.

D). Activity/Turnover Ratios:Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, the larger is the amount of sales and the profits. Activity ratios are also called turnover ratios because they indicate the speed with which assets are converted or turned into sales. For example, inventory turnover ratio indicates the rate at which the funds invested in inventories are converted into sale. Depending upon the purpose, a

68

number of turnover ratios can be calculated, as debtors turnover, stock turnover, capital turnover, etc.

TYPES OF ACTIVITY/TURNOVER

Inventory/ stock Turnover Ratio

Debtors Turnover Ratio

Creditors Turnover Ratio

Working Capital Turnover Ratio

Inventory/Stock Turnover Ratio:For every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Inventory turnover ratio also known as stock velocity is normally calculated as sales/average inventory or cost of goods sold/average inventory. It would indicate whether inventory has been efficiency used or not. The purpose is to see whether only the required minimum funds have been locked up in inventory. Inventory evaluates the efficiency with which a firm is able to manage its inventory. Inventory turnover ratio also known as stock velocity is normally calculated as sales/average inventory or cost of goods sold/average inventory. It would indicate whether inventory has been efficiently used or not.

Inventory Turnover ratio =

Cost of Goods Sold Average Stock

69

Table 4.19 Year Stock Turnover Ratio 2004-05 4.49 2004-05 4.75 2005-06 4.12 2006-07 3.12

Stock Turnover Ratio 6 4 2 0 2003-04 2004-05 2005-06 2006-07 Years 4.49 4.75 4.12

Ratios

3.12

FIG. 4.19 As per figure 4.19, Level of inventory should neither be too high nor too low. Inventory turnover ratio indicates the number of time the stock has been turned over during the period. In the context of FRIENDS ENGINEERING WORKSratio decreases in the year 2005-06 and further decreases in 2006-07 which shows that the stock has not been efficiently used in comparison to last year.

Debtors Turnover Ratio:A concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The volume of sales can be increased by following a liberal credit policy. But the effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. Hence, the 70

liquidity position of a concern to pay its short term obligations in time depends upon the quality of its trade debtors.

Debtors Turnover ratio =

Net credit Annual Sales Average Trade Debtors

Table 4.20

Year Debtor Turnover Ratio

2004-05 5.68

2004-05 4.06

2005-06 4.63

2006-07 3.94

Debtor Turnover Ratio 5.68 6 4.06 4.63

DTR

3.94

4 2 0 2003-04 2004-05 2005-06 2006-07

Years

FIG. 4.20

As per figure 4.20, Debtor Turnover Ratio is decreased in 2004-05, but in 2005-06 there is a little bit increase in it. But again it falls in 2006-07 up to 3.94. The years 2004-05 & 2006-07 show now companys cash realization from debtors is slow as compare to previous years that indicates toward a lenient debt policy.

Average Collection Period Ratio:The average collection period represents the

average number of days for which a firm has to wait before its receivables are converted into cash. The ratio can be calculated as follows: 71

Average Collection Period ratio =

No. Of Working Days Debtors Turnover Ratio

Table 4.21 Year Average Collection Period 2004-05 64 2004-05 89 2005-06 78 2006-07 92

Average Collection Period 100 89 64 78 92

ACP

50 0

2003-04 2004-05 2005-06 2006-07 Years

FIG. 4.21 As per figure 4.21, Shorter the period better it is because it implies quick payment by debtors. Average collection period of the FRIENDS ENGINEERING WORKSPHARMACEUTICALS Pvt. CO. has decreased in the year 2005-06. But it increases in the year 2006-07 in comparison of 200506, which shows inefficient collection performance and the more chances of bad debts.

Creditors Turnover Ratio:In the course of business operations, a firm has to make credit purchases and incur short term liabilities. A supplier of goods, creditors, is naturally interested in finding out how much time the firm is likely to take in repaying its trade 72

creditors. The analysis for creditor turnover is basically the same as of debtor turnover ratio except that in place of trade debtors, the trades creditors are taken as one of the components of the ratio and in place of average daily sales, average daily purchases are taken as the other components of the ratio. Same as debtor turnover ratio, creditors turnover ratio can be calculated in two forms:

Creditors Turnover ratio =

Net Credit Annual Purchases Average Trade Creditors

Table 4.22 Year Creditor Turnover Ratio 2004-05 7.08 2004-05 8.74 2005-06 7.32 2006-07 4.92

Creditor Turnov er Ratio

CTR

10 5 0

7.08

8.74

7.32 4.92

2003- 2004- 2005- 200604 05 06 07 Years

FIG. 4.22 As per figure 4.22, Creditors turnover ratio shows the relation between credits purchases and average trade creditors. Higher the ratio better it is for organization. There is decrease in the ratio in 2005-06 and 2006-07 which indicates that it is unfavorable for the organization.

Average Payment Period Ratio:The average payment period ratio represents the

average number of days taken by the firm to pay its creditors. Generally, lower the ratio, the

73

better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm.

Average Payment Period ratio =

No. of Working Days Creditors Turnover Ratio

Table 4.23

Year Average Payment Period

2004-05 52

2004-05 42

2005-06 50

2006-07 74

Average Payment Period

APP

80 60 40 20 0

52

42

50

74

2004-05

2005-06

2006-07

2007-08

Years

FIG. 4.23 As per figure 4.23, the average payment period ratio represents the average number of days taken

by the firm to pay it creditors. Lower the ratios better the liquidity position of the firm. In year 200405 payment period is 52 days & in 2004-05 it decreased to 42 days from 52 days in 2004-05. But in 2005-06 and 2006-07 it increased to 50 and 74 days. Management should look this matter seriously otherwise it will hamper the goodwill of organization.

74

 Working Capital Turnover Ratio:Working capital of a concern is directly related to sales. The current assets like debtors, bills receivables, cash, stock etc. change with the increase or decrease is sales. The working capital is taken as: Working capital = current assets current liabilities Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficiency utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio is not a good situation for any firm and hence care must be taken while interpreting the ratio. This ratio can at best be used by making of comparative and trend analysis for different firms in the same industry and for various periods. This ratio can be calculated as:

Working Capital Turnover ratio =

Cost of Goods Sold Working Capital

Table 4.24 Year Working Capital Turnover Ratio 2004-05 6.05 2004-05 5.32 2005-06 3.73 2006-07 5.5

75

Working Capital Turnover Ratio 8 6 4 2 0 6.05 5.32

WCTR

3.73

5.5

2003-04

2004-05

2005-06

2006-07

Years

FIG. 4.24 As per figure 4.24, this ratio reveals that how efficiently working capital has been utilized in making sales. A high working capital turnover ratio shows efficient use of working capital and quick turnover of current assets like stock and debtors. The turnover of working capital is getting slow in 2004-05 and it decries to 3.73 in 2005-06.In 2006-07 it shows a little bit growth. It means the working capital utilization is not efficient. It shows inefficiency in production & receivable cycle.

CHAPTER- 5 FINDINGS AND SUGGESTIONS

FINDINGS

The net profit of company decrease from 18.02crore to 17.68 cores.

76

Liquidity position has a sheet anchor role in profitability, market share and manufacturing. Company has weak liquidity position with 1.31 as current ratio and 0.76 as liquid ratio. As Parma manufacturing is a lengthy process, so inventory holding period is 116 days i.e. more than 3 months.

Debt collection period is also large i.e. 92 days which shows the lenient debt policy. Company is availing good credit facilities as credit payment period is 74 days. Constitution of current assets is unbalanced. As 42.04% of current assets are made from inventories and cash is only 2.55% which can create juncture for organization in payment of debt.

Organization is paying its in debt in 74 days which is less than tae competitors. It will positively affect its goodwill in long run.

a) Organizations long term debt has increased by Rs. 56.21 crore. b) Organization raised such a high debt for the purpose, The Company has also set-up another plant in Uttaranchal, at an investment of Rs 22.5 crore. .Due to these reasons in year 2006-07 return on capital employed & return on assets decreased drastically. No sudden return from these investments, so year 2006-07 showed decrease in all profitability ratios Organization will continue with trend as shown in 2006-07, because it has invested largely now it is time to Getting return.

77

SUGGESTIONS

FRIENDS ENGINEERING WORKS(p) limited is uncouthly holding a very good market share. But no one is perfect in this world except all mighty God. So some suggestions given below can help it to perform more efficiently.

Companys current ratio is 1.31:1, as the rule of thumb says that ideal ratio is 2:1. Management should try to increase it to 2:1.

Near about 42.01% of current assets constitute inventories. Stock of goods should be reduced up to reasonable level.

Organizations credit payment period is 74 days, which is more than enough. It should pay its debt as soon as possible to create a better image among creditors.

Debt collection period is 92 days which shows lenient debt policy. Debt policy should make strict to reduce the risk of bad debts.

Cash constitutes 2.55%. Management should invest more in marketable securities so that some return could be earned on blocked cash.

As there is an inverse relationship between profitability and liquidity. Company should avoid conservative policy of risk avoidation by maintaining a higher level of current assets.

The policy regarding the management of working capital should be moderate, so that it can earn more profit and should be safe enough in liquidity position.

In capital structure of company near about 58% is debt. Company is on right proportion of debt & equity. But in future it should avoid more debt.

Company preference capital is still unused, so it should use it & pay off debt to reduce financial risk. 78

As interest coverage ratio decreased from 6.68 times in 2005-06 to 3.8 in 2006-07. As 3.8 times interest coverage ratio is sufficient, but still after seeing such a big fall in years in this ratio it is suggested that company should pay off fixed charges securities to make his position more secure.

From 2004-05 to 2006-07 EPS &DPS significantly differ which means a considerable amount is going for reserves, But in 2006-07 EPS is 9.99 & DPS is 0.0, company should avoid such a strict dividend policy & declare a reasonable share of earning as dividend to make the interest of shareholders.

Organizations operating profit is just 14.72% which means operating Expenses are forming 85.28% of sales. Organization should try to control on its operating expenses.

POLICY IMPLICATIONS Some other suggestions that I have given to the company and following are the result of those suggestions are as follows; I suggest them to reduce the debtor turnover ratio for this company should adopt the discount scheme and it is in the process. I suggest them to use the idle cash in some short term investments which will one side increase the profit and also reduce the opportunity cost of that cash so it is in the process. Current Ratio of the company is 1.31:1.so I suggest them to increase that to 2:1 and they are working upon it. Company working capital period is too long the main reason behind it is the holding of excess stock I suggest them to reduce the creditor turnover ratio one side it will make good relation ship and also reduce the requirement of holding more raw materials. The company is thinking for the same.

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CHAPTER - 6 CONCLUSION AND SUMMARY

CONCLUSION & SUMMARY Success is achieved by those who try where there is nothing to loose by trying and a great deal to gain if successful, by all means try. From the above study it can be concluded that:

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Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. Credit analysts, those interpreting the financial ratios from the prospects of a lender, focus on the "downside" risk since they gain none of the upside from an improvement in operations. They pay great attention to liquidity and leverage ratios to ascertain a company's financial risk. Equity analysts look more to the operational and profitability ratios, to determine the future profits that will accrue to the shareholder.

Bibliography

Books referred:a) b) c) d) Khan M.Y., Indian Financial System, Tata McGraw Hill, 2000. Bhole L.M., Management of Financial Institutions, Tata McGraw Hill, 2001. Kothari C.R., Research Methodology, New Age Publishing House, Second Edition. Shashi k. Gupta, Management Accounting, Ninth Revised Edition.

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Articles:-

Trevor W. chamberlain, Comparative performance on liquidity and Profitability

Dr. Richard Berwick, Risk management in commercial banks of Vietnam

Nancy Marie Dodge, Cross border mergers and acquisitions

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