FINANCE MANAGEMENT

Introduction
Financial management is that managerial activity which is concerned with the
planning and controlling of the firm’s financial recourses. As a separate activity or
discipline, it is of recent origin. The subject of financial management is of immense
interest to both academicians and practicing managers. Finance management means
in simple word getting the finance mean first planning of finance then find recourses
of finance then utilization of the same fund.

In every business activity finance is required continuously. For each and every
activity of the firm finance is required. For starting business, for running it, for its
development, modernization and diversification, for many other propose. Hence
finance is rightly termed as the ‘Life Line Of Business” & “Lubricant of business”.

According to Prof. S.C. Kutchal, “Finance is the axis around which all the
economic activities are having their merry -go-round”.

Financial management is an applies branches of general management. It looks after

the finance function of business. It itself constitutes a sub-system of the business
enterprises. Inter-related very closely with the production, marketing & personnel
function or sub system.

Financial management is the custodian of corporate funds. It has to plan, organize

and control the finance of an enterprise

5.1
There is three Major Decision

Investment Decision

Working Capital Management Capital Budgeting Decision

Financing Decision

Capitalization Capital Structure

Dividend Policy Decision

D/P Ratio Retained Earnings

5.2
 Financial Planning
A Firm should be managing efficiently and effectively. This implies that the firm
should be able to achieve its objective by minimizing the use of recourses. Thus
managing implies coordination and control of the efforts the firm for achieving the
organizational objective. Growth in sales is an important objective of most firms. An
increase in a market share will leads to higher growth. The firm would needs assets to
sustain the higher growth in sales. It may have to invest additional plant and
machinery to increase its production capacity therefore they need more current assets
and the fixed assets and more fund for same and increase sales also leads to increase
in debtor therefore fund is blocked there fore required a huge fund which will get by
proprietor or by borrowing. And determining the sources of fund is called financial
planning.

“Financial planning aims to match need of the company with those of investors with a
sensible gearing of short term and long term fixed interest securities. Working on
these notes KADVANI FORGE LTD. Has framed a very promising financial plan
prepared in light of future trends. KADVANI FORGE LTD. Has considered
following critical element:

1. Financial pattern & condition

2. Assets position and technological changes
3. Earning capacity and market condition
4. Policy for administration of capital
5. Advance programming of financial recourses
6. Capacity of generate internal funds
7. Position of financial control system
8. Capital market analysis
9. Prospects of growth and allocation for contingencies

5.3
 Capitalization
Capitalization is the sum total of all kinds of long-term securities issued by a company
and surplus which is not meant for distribution. In this regards the company can be
overcapitalized to under aggregate value of shares and debentures excluded the true
value fixed assets. Under capitalization is a situation where real worth of assets
excise their value. The details of capital of KADVANI FORGE LTD. Are as follows:

Capitalization

Capital Amount
1. Authorized capital 40,000,000
2. Issued &subscribe capital 30,000,000
3. Borrowing
a. Secured 45,629,247
b. Unsecured 41,004,654
4. Reserves and surplus (subsidy) 100,000
5. Fixed assets 56,061,635
6. Net Current Assets 53,382,129
7. Investment -------------

Over Capitalization
Total amount of capital should be enough to meet its present and future i.e. it must be
capitalized. The company is said to be overcapitalization if its earning are less in
relation to its capital investment or we can also say that when the real value or the
market value of share is less than its book value. The company is said to be
overcapitalized

Under capitalization
Under capitalization is a situation opposite over capitalization co. is said to be under
capitalized if its earning are more in relation to its capital investment or we can also
say that when the real value or the market value of shares is equa l or more than its
book value, than the co. is said to be undercapitalized. This type of company has very
high position according to the finance point of view.

Fair Capitalization
Fair capitalization means co. gets the return as his expected earning or we can say that
the real value or market value is equal to its book value. Therefore it is considered as
the idea situation for the company.

5.4
 Capital Structure
Capital structure refers to the mix of long term sources of fund, such as debenture,
long term debt, preference share capital, equity share capital, reserves and surplus. In
technical terms this finance mix is called optimum capital structure because
combination of debt and equity leads to maximum value of firm. KADVANI FORGE
LTD. Has got combination of both equity capital as well as borrowed capital.
Borrowed Capital

KADVANI FORGE LTD. Has arranged borrowing capital, through multiple

financing raining from long term borrowing to short term loans details of which is
given under.

Statement of it is shown below:

KADVANI FORGE LTD. Having only a equity share capital KADVANI FORGE
LTD. Have issued

3000000 equity shares of Rs 10 Each issued subscribed and paid up share capital

Enclosure no –1 (schedule 1,2 & 3)

5.5
 Management of Fixed assets
Long-term investment decisions are capital budgeting decisions. Capital budgeting
decision expected flow of benefits over a longer period of time.

Fixed assets are those, which are permanent in nature and are not easily convertible
into cash. Fixed assets are distinguished from current assets on the basis of the length
of length of the physical & economical life and their convertibility in cash and their
place occupy in the business cycle.

Fixed assets has fixed cost burden having long term & huge investment and thus
bearing on the operational efficiency of the firm. They must be managed properly,
and effectively otherwise it may create danger for the survival of the firm. So, such
decisions are taken only after seeing the profitability of such assets and the fixed
assets are holding. Plant & machinery furniture & fixture etc. and the management of
such assets are done according to present government laws & company’s position.

In the company list prepared for all the fixed assets and any addition of dispositio n
given effect by the top authority. The management after consulting appropriate
engineers takes any decisions regarding these assets. Depreciation on these assets are
provided by the written down value method.

In KADVANI FORGE LTD. Capital budgeting decision rest with top management.
The fixed assets position of the company is given as under

Depreciation

The company has provided depreciation on the Written down Value (WDV) basis as
per the rates provided in schedule XIV of the companies act, 1956. Depreciation on
addition to fixed assets is provided for as and when the assets is put use.

Enclosure no-2 (schedule –4)

5.6
 Working Capital Management
Working capital is regarded as lifeblood of business. It is defined as “The excess of
current assets over Current liabilities”. Working capital may be gross or net,
permanent to temporary working capital. KADVANI FORGE LTD. Deals with the
various forging products. Hence to smooth up the operating cycle cautiously raw
material are required. Looking to the nature of production process also, working
capital management assumes critical important. For up of amount of working capital
executives takes into account volume sales, receivables, turnover time period,
liquidity, current assets position and production cycle. Technological changes and
risk factor, cash reserves are also considered.

Account
Receivable

Cash Debtor

Working
Capital
Raw Material Cycle Credit Sales

Semi-Finished Finished
Goods Goods

Current Assets Position

Particular As on 31-3-2002 As 0n 31-32001

Current Assets 62468993 63059955
Less: Current Liabilities 9086864 13628891
Net current assets (WC) 53382129 49411064

5.7
 Working capital is increase in the current year due to the there is decrease in the
current liabilities.

Current liabilities and assets is as follows

Enclosure no –3 (schedule 5 & 6)

Management of Components of Working

capital

A) Inventory Management
To the finance manager, inventory connotes “The value of raw material, consumables,
spares, work in progress, finished goods and scraps. Inventory is stock of goods and
major current assets. Inventory manage ment can becomes “cancer” for a
Organization

Norms for inventory Level

Raw Material 30 Days
Work in Progress 15 to 20 Days
Alloy Inventory 10 Days
Other Dies And chemicals 45 to 60 Days

Position of Inventory – Enclosure no –4 (schedule No-5)

B) Receivables Management
Receivables are assets, which are created as a result of sale of goods, or services in
ordinary coerces of business. There is “Debt owned to the firm by the customers
arising from sale of goods or services”. Trade credit is an “Indispensable instrument
of a accelerating sales”. Thus trade credit management of account receivables
management encircles the theme of the point where Return on investment (ROI) is
less than the cost of funds, Receivables carry with them risk and return. Costs are
capital, delinquency and default cost.

Determination of Size of Receivables

Credit Operating Credit Policy Terms Of credit

Collection Efficiency

Volume of credit sales Collection Period Profits Markets

5.8
KADVANI FORGE LTD. Provides a credit periods of 45 days if purchases are made
in bulk and after that they start charging int.

C) Cash Management
Cash management is one of the key area of working capital Management apart from
being most liquid assets it governs the entire business KADVANI FORGE LTD. Has
a favorable cash position because there is a balance between cash and cash demanding
activities. Cash inflow and outflow estimates are made by “cash Management
System” (CMS) internal audit system and costing department cash and bank balance
position is quite favorable.

Cash And Bank balance

Description 31-3-2002 31-3-2001

HDFC Bank 707071 109998
Cash on Hand 85595 100000
Total 792666 209998

5.9
 Capital Budgeting
Capital budgeting is a process of making decision regarding investment in fixed
assets, which are not meant for the sales such as buildings, machineries or furniture
etc. The word investment refers to the expenditure, which is required to be made on
connection with the acquisition and development of long-term facilities including
fixed assets. It refers to a process by which management select those investment
proposals which are worthwhile for investing available funds.

According to Prof. Lynch that capital budgeting consists of planning and budgeting of
available capital for the purpose of maximizing the long-term profitability.

The finance manager is ultimately responsible for minimization of cost i.e. right
allocation & utilization. For right allocation capital budgeting decision is a most
important i.e. right allocation & utilization. For right allocation capital budgeting
decision is most important i.e. all allocating the given capital in most profitable option
so this project is known as capital budgeting.

Management of Profit
The main objective of any organizations is to run the business with a view to earn
profit. Profit is the primary object of the business. It measures not only to success of
products but also the development of market. It implies comparison of business
operations between two specific dates, which are usually separated by an interval of
one year.

We may considered management of profits as the planning, co-ordination and control

of the capital engaged in the business in such a way so as to earn regular, adequate
and increasing return on capital. The necessary for the maintenance and preservation
of capital provided by the owners of the business, creation of necessary reserves to
meet the seen and unseen liabilities of the concern and to provide the margin of safty
and payment of dividend to the owners at a fair rate.

KADVANI FORGE LTD. Earns good profit and with good profitability. Earn the
profit at an increasing rate. They also create a reserves and surplus to meet viable and
unviable liabilities of the company. But in initial year company earns very less profit.
Then also now it is sufficient profit in the company.

5.10
 Financial Highlights
In year 2000-2001 the profit was 71795 in current year, which is, 79286 most
probably increase of 12% in initial starting in first year the profit is very less because
there is problem in exports of goods. Than in next year it increases at higher rate and
after that the profitability is at increasing rate.

In previous year Machinery is of 42348679, which increase at 56061635 there, is

higher increase in the machinery therefore there is also decrease in the profit and
company also make a debt to meet the cost of the machinery.

The company recorded a higher turnover at Rs.1350.44 Lakhs compared to

Rs.1283.61 Lakhs in the previous year. The company reported a higher profit. The
company has increase its higher production capacity by installing of new hammer
having a capacity of 6.25 tons

During the year under review the company has received additional sanction of
working capital from Bank of India to the tune Rs.175 Lakhs.

Companies working capacity is also increase by 8.33% therefore investment in

current assets is decrease and a liabilities also some what increase that is the result of
increase in the working capital.

Foreign Earning & Export

Earning in Foreign Amount 2001-2002 2000-2001
Exchange
Exports of Foreign at Rs.(Indian Rupees) 41,47,921 97,14,921
FOB Value
$ (US ) 86,744 2,16,211

5.11
 Accounting Policies
The accounts are prepared under the historical cost convention and materially comply
with mandatory accounting standards issued by the Institute of chartered Accountant
of India. The significance accounting policies followed by the company are as stated
below.

1) Fixed Assets
Capitalization at the acquisition cost including directly attribute cost of bringing the
assets to their working condition for intended use.

2) Depreciation
The company has provided depreciation on the written down value basis as per the
rates provided in schedule XIV of the companies Act.1956. Depreciation on the
addition to fixed assets is provided for as when the assets are put to use.

3) Inventories
The method of valuation of various categories is as Follows:

A) Raw material and stores are values at cost

B) Finished goods and scrape are valued at cost or net realizable value
whichever is lower
C) Year end inventory of finished goods has been valued inclusive of excise
duty amounting to the Rs.7,83,660/- in accordance with the revised
guidance note on “Accounting treatment of Excise Duty” Issued by The
institute of chartered accountant of India. This change in accounting
policy had no impact on the profit for the year.

4) Revenue
Sales of alloy forging are accounted at the point of Dispatch.

5) Foreign currency Transaction

Any exchange difference on export sales arising from the transaction undertaken by
the company is dealt with the profit and loss account.

6) Miscellaneous Expenditure Written Off

Company formation expenses are written off U/s. 35D of the Income Tax Act, 1961
over a period of 10 years.

Director do not recommend any dividend for the year ended on March 31,2002

5.12
 RATIO Analysis
A ratio is an arithmetical relationship between two figures Financial Ratio analysis is
a study of ratios between various items or group of items in Financial Statement.
Ratio are Classified From different point of view as under

A. ON THE BASIS OF FINANCIAL STATEMENT

a) Profit & Loss A/C Ratio
b) Balance Sheet Ratio
c) Combine Ratio

B. VIEW POINT OF MANAGEMENT

a) Profitability Ratio
b) Activity or Turnover Ratio
c) Financial Ratio
I. Liquidity Ratio
II. Position Ratio
III. Leverage Ratio

In KADVANI FORGE LTD. Prepared ratio on basis of Management view point.

5.13
 Profitability Ratio
Profitability reflects the final result of business operation. This ratio indicates
profitability of a firm, every management expects higher profitability in the business
ultimate aim to a firm is to make profit therefore the ratio should be computed
frequently and compared with ratio of previous years.

Profit is the difference between revenue-expense over period of time. Profit is the
ultimate output of a company manager should continuously evaluate the efficiency of
it company in terms of profit. The profitability ratios are calculated to measure the
operating efficiency of the company. Ion KADVANI FORGE LTD. Is in the path of
profitability through their efficiency. Following Ratios of profitability calculated by
KADVANI FORGE LTD. Is as under.

(a) Gross Profit Ratio

The Gross Profit Ratio reflects the efficiency with which management produces both
unit of product. This ratio indicates the average spread between the cost of good sold
and revenue. It shows the percentage by which the selling price can fall and the
percentage by which the cost of good sold can increase before gross profits can be
nullified. The ratio of Gross Profit of KADVANI FORGE LTD. Is as Under.

Gross
Profit 1999-2000 2000-2001 2001-2002
Ratio
= (Gross =(16077365/123172061)*100 =(181083/128361104)*100 =(2105691/135043541)*100
Profit / = 13.05 % =14.14 % =15.59
Sales)*100

The ratio should be higher which indicates higher profitability of the firm. This ratio
of the company increase 1.09% is the good sign of the company In KADVANI
FORGE LTD. Is in the path of profit. So it shows that the High Gross Profit is a sign
of good management.

(b) Net Profit Ratio

Net profit Ratio established a relationship between net profit and sales and it indicates
management efficiency in manufacturing administering and selling the product. This
is the over all measure of the firm’s ability to turn each rupee sales in to net profit.
This ratio indicates the firm’s capacity to which stands adverse economic condition.
The Net
Profit Ratio of the KADVANI FORGE LTD. Is as under –

Net Profit
1999-2000 2000-2001 2001-2002
Ratio
= (Net =(445588/123172061)*100 =(71795/128361104)*100 =(79286/135043541)*100
Profit / = 0.36 % = 0.06 % =0.06 %
Sales)*100

5.14
 Above calculation we can easily measure that net profit ratio of current year decrease
by 0.30% in KADVANI FORGE LTD. It indicates that due the increase in operating
expenses. In KADVANI FORGE LTD. Decrease in Net Profit Ratio due to two
Reasons.

1. Company deduct Depreciation 12% More

2. Current Year they make provision for Tax Rs. 6000.

current year ratio remain same because there is prop senate increase in sales, profit,
expenses etc. Therefore there is slight chance in ratio.
If company can decrease its operating expenses they should earn more net profit but
company tries to improve their hard working management.

(C ) Return on Equity
The Return on Equity measure the Profitability of Equity funds invested in the firm.
It is regarded as a very important measure because it reflects the productivity of the
ownership capital employed in the company. The Ratio of Return On Equity of
KADVANI FORGE LTD. Calculated ad under.

Return On
1999-2000 2000-2001 2001-2002
Equity
= (Profit =(445588/30000000)* =(71795/30000000)* =(79286/30000000)*
After Tax / 100 100 100
Paid up = 1.49 = 0.24 =0.26
Eq.Share
Capital)*1
00

Above calculation In KADVANI FORGE LTD. Current year Return on Equity is

decrease due to the reason minimization in profit in this year we can analysis that
company can not used the maintain profit it can be increase profit of the company.
They gave more efficient result to use of the resources of owners. So that market
value of share is increase.

(d) Return on Capital Employed

This Ratio also known as Return on Investment (ROI). The term inve stment may
refer to total asset or net assets. The funds employed in net assets are as “Capital
Employed”. This ratio indicates overall profitability of the company on his financial
resources. The management is invested to keep this ratio high. The ratio so
KADVANI FORGE LTD.is as under

Return on
Capital 1999-2000 2000-2001 2001-2002
Employed
= (Earning =(8872084/83440087)*100 =(8526531/95871317)*100 =(9568926/116733901)*100
Before Tax = 8.89 % = 10.63 % =11.05 %
/ Capital

5.15
E’yed)*100
EBIT = Earning Before Tax & Interest

EBIT = Net Profit + Tax + Interest

1999-2000 = 445588 + 8426496

= 8872084

2000-2001 = 71795 + 6000 + 8448735

= 8526530

2001-2002 = 79286 + 6500 + 9483139

= 9568926

Capital Employed = Share Holder Fund + Loan Fund

1999-2000 = 30000000 + 53440087

= 83440087

2000-2001 = 30000000 + 65871317

= 95871317

2001-2002 = 30100000 + 86633901

= 116733901

Above calculation we can analysis that KADVANI FORGE LTD. Ratio is increasing
by 1.74 and in second year 0.42 it is good sign for company it should be happen due
to the reduce long term liability. Investment is decrease.

(e) Return on Total Assets

This ratio indicate how much company earn on its total assets that is fixed assets ,
current assets it shows that how total assets should be use effectively. The ratio of
KADVANI FORGE LTD. Is as under

Return on
Total 1999-2000 2000-2001 2001-2002
Assets
= (Profit =(8526530/82242792)*100 =(8872084/105408634)*100 =(9568926/118530628)*100
Before = 10.32 = 8.42 =8.07 %
Interest &
Tax / Total
assets)*100

EBIT = Earning before interest & Tax

1999-2000 = 8526530

2000-2001 = 8872084

5.16
2001-2002 = 9568926
Total assets = Current Assets + Fixed Assets

1999-2000 = 41274644 + 40968148

= 82242792

2000-2001 = 42348679 + 63059955

= 105408634

2001-2002 = 56061635 + 62468993

= 118530628

Above calculation we can analysis that a ratio decrease up to 1.95 % it due to the
reason of decrease profit and increment in total assets it should be improved by
i ). Increase Profitability
ii ). Decreasing total assets of company

In current year ratio 0s 8.07 because of there is decrease in current assets and high
increase in fixed assets but then also profit is increase.

(f) Earning Per Share Ratio

The profitability of the common shareholder’s investment can be measured by earning
per share. This ratio indicates the how much company per equity share. Higher
earning is desirable because it may result in higher dividend. The ratio of KADVANI
FORGE LTD. Calculated as under

Earning Per
1999-2000 2000-2001 2001-2002
Share
=Profit after-Tax / =445588/3000000 =71795/3000000 =79286/3000000
No. Of Equity = 0.149 = 0.024 =0.026
Share

Above calculation we can analysis that due the low profitability earning per share is
decreasing Company can improve their situation by increase profitability of the
Company. And in current year there is increase in ratio by 0.002, which is good sign.

Activity or Turnover Ratio

Turnover ratio, activity ratio also called asset management ratio. It measure how
efficiently the assets are employed by company. These ratio are based on the
relationship between the level of activity represented by sales or cost of foods sold,
and level of various assets. This ratio also indicates how speedily the company is
doing business. If this ratio is higher it can be said that company’s business is fast
that prior.

The funds of creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales Activity

5.17
ratio are employed to evaluate the efficiency with which firm managers and utilizes
its assets.
(A) Total Capital Turnover Ratio
This ratio indicates how efficiency the total capital use in business. It is indicate that
capital is used efficiently and with result in higher profit. The ratio KADVANI
FORGE LTD. Is as under

Total
Capital 1999-2000 2000-2001 2001-2002
Turnove
r Ratio
Sales / =123172061/8344008 =128361104/9587131 =135043541/11673390
Total 7 9 1
Capital = 1.48 = 1.34 =1.16

Total Capital = Shareholder Fund + Loan Fund

1999-2000 = 30000000 + 5344087

= 83440087

2000-2001 = 30000000 + 65871317

= 95871317
2001-2002 = 30100000 + 8663301
= 116733901

Above calculation we can measure that Turno ver Ratio is decrease in 0.14 and 0.18
times so that due to the reason of increase loan fund and this situation is improved by

I. Increasing Sales
II. Decreasing long term debt

(b) Fixed Assets turnover ratio

This ratio indicates how efficiently fixed assets of the company are use in the
business. It is higher ratio indicates that the efficient use of fixed assets with result in
higher profit. This ratio serves as a secondary test of the adequacy of the sales
volume. The ratio of KADVANI FORGE LTD. Is as under

Fixed
Assets 1999-2000 2000-2001 2001-2002
Turnove
r Ratio
Sales / =123172061/4127464 =128361104/4234867 =135043541/5606163
Fixed 4 9 5
Assets = 2.98 = 3.03 =2.41

5.18
As per calculation this ratio is increase in comparison to last year because company
sales increase & use of fixed assets is efficiently so that the reason behind that it ratio
is increase at 0.05 %.

Current year Ratio is decrease by 0.62 because of there is a increase in the fixed assets
which is more in proportion of sales increase.

(c ) Working capital turnover ratio

Assets are used to generate sales working Capital means the net asset when assets
deduct by Current liability it means Working Capital. This ratio indicates how
efficiently the Working Capital assets use in the business. It higher ratio indicates
efficient use of working its mean increase sales. The sales of the KADVANI FORGE
LTD. Calculate as under.

Working
Capital
1999-2000 2000-2001 2001-2002
Turnover
Ratio
Sales / =123172061/37964752 =128361104/4911064 =135043541/53382129
Working = 3.24 = 2.06 =2.53
Capital

Working Capital = Current Assets – Current liability

1999-2000 = 40968148 – 3003396

= 37964752

2000-2001 = 63059955 – 13648891

= 49411064
2001-2002 = 62468993 - 9086864
= 53382129

As per calculation we analysis that Working capital turnover ratio is decrease because
working capital is increase current year inventory increase in cost and bank balance as
well as debtor increase in current year the ratio is increase considering the current
year because of there is increase in sales.

(d) Inventory Turnover Ratio

The inventory turnover ratio shows how rapidly the inventory is turning in to
receivable through sales, generally a high inventory turnover ratio is indicative of
good inventory management. The ratio of KADVANI FORGE LTD. As under

Inventory
Turnover 1999-2000 2000-2001 2001-2002
Ratio
Sales / =123172061/8868976 =128361104/8769506 =135043541/8078851

5.19
Average = 13.89 = 14.64 =16.72
Stock

Average stock = (Opening stock + Closing Stock) / 2

1999-2000 = (872271 + 90152240) / 2

= 17737951 /2
= 8868976

2000-2001 = (8816301 + 8722711) / 2

= 17539012 / 2
= 8769506

2001-2002 = (9015240 + 7142463) / 2

= 8078851

As per calculation this ratio is increase this is good sign of efficient use of inventory.
This ratio is increase due to increase sales.

(e) Debtor Turnover ratio

The debtor’s turnover indicates the number of times on the average that debtor’s
turnover each year. This ratio gives the quality of receivables. It indicates the
wisdom or otherwise of the credit granting policies of a corporation as well as the
effectiveness of its qualitative policy. Debtor turn over represents a valuable test of
the collect ability and currency of receivable.

Debtor
Turnove 1999-2000 2000-2001 2001-2002
r Ratio
Sales / =123172061/2226185 =128361104/2426492 =135043541/2444643
Average 7 6 9
Debtor = 5.53 = 5.28 =5.53

Average Debtor = (Opening Debtor + Closing Debtor) / 2

1999-2000 = (22597185 + 21926529) / 2

= 44523714 / 2
= 22261857

2000-2001 = (21926529 + 26603323) / 2

= 48529852 / 2
= 24264926

2001-2002 = (22289555 + 26603323) /2

= 24446439

Collection Period = (Average Debtor * 360) / sales

5.20
1999-2000 = (22261857 * 360) / 123172061
= 65 days

2000-2001 = (24264926 * 360) / 128361104

= 68 days

2001-2002 = (24446439 * 360) / 135043541

= 65 DAYS

As above calculation we can analysis that no as mush as decrease it indicates speedily

collection from debtor with results in lower chances of bad debt and lower need of
working capital within 65 or 68 days collector period is allowed for debtor. In the
current year the ratio increase due to increase in debtor and collection period goes to
65 days.

(F) Creditor Turnover Ratio

This ratio indicates how fast the firm Makes payment to suppliers if ratio is higher the
indicates fast payment to supplier which result in increasing goodwill in the market.
The ratio of the KADVANI FORGE LTD. Is as under.

Creditor
Turnover 1999-2000 2000-2001 2001-2002
Ratio
Credit =16099326/463184 =25177720/6753674 =34811751/8579814
Purchase / = 3.47 = 3.72 =4.06
Average
Creditor

Average Creditor = (Opening creditor + Closing Creditor) / 2

1999-2000 = (11656880 + 1849267) / 2

= 13506147 / 2
= 6753074

2000-2001 = (7347100 + 1849267) / 2

= 9286367 / 2
= 4643184

2001-2002 = (7604600 + 9555029) / 2

= 8579814

Payment Period = 360 / Creditor Turnover Ratio

1999-2000 = 360 / 3.47

= 104 days

2000-2001 = 360 / 3.72

= 97 days

5.21
2001-2002 = 360/ 4.06
= 89 days

As above calculation it should be analysis that creditor provide current year 97 days
for payment and creditor turnover ratio is high as it indicate that payment to suppliers
within 97 days which results increasing goodwill in market and in current year is goes
to only 89 days which show good image of company in payment.

Liquidity Ratio

Liquidity refers to the ability of a firm to meet its obligations in the short run. Usually
one-year liquidity ratios are generally based on the relationship between current assets
and current liabilities. This ratio indicates company’s liquidity that is cash and
equivalent to cash recourses. This ratio indicates short-term solvency of the company
while lending money for a short period or while selling good on credit.

The liquidity ratio are useful in obtaining and indicating of a firm’s ability to meet its
current liabilities, but it does not reveal how effectively the cash recourses can be
managed this ratio should be taken in to consideration by KADVANI FORGE LTD.
Are as Under

(A) Current Ratio

An important test by which the financial health of a company can with reasonable
reliability be judged in the concept of current ratio. The current ratio, a very popular
financial ratio, measures the ability of the firm to meet its current liabilities current
assets get converted in to cash in the operational cycle of the firm and provide the
funds needed to pay current liabilities. The ratio of the KADVANI FORGE LTD.
Calculated as under.

Current Ratio 1999-2000 2000-2001 2001-2002

Current Assets =40968148/3003396 =63059955/13648891 =62468993/9086864
/ Current = 13.64:1 = 4.62:1 =6.87
Liability

This ratio should be 2:1 in the other words current assets should be double than
liability that one can easily paid to creditor. The Ratio of KADVANI FORGE LTD.
Previous year is 4.62:1 it is good sign for the company but as compared to previous
ratio is decrease. Due to the reason of increased current liability. And in current year
are 6.87.

(B) Liquid Ratio

This Ratio is also known as quick ratio or acid test ratio. This ratio established a
relationship between quick or liquid assets and current liabilities. An assets is liquid

5.22
if it can be converted in to cash immediately or reasonably soon without a loss of
value. Cash is the most liquid asset. This ratio indicate how for the company should
have enough resources to pay current obligation on demand. The ratio of KADVANI
FORGE LTD. Is as under.

Current
1999-2000 2000-2001 2001-2002
Ratio
Liquid Assets =24868822/3003396 =37882235/13648891 =27657242/90868993
/ Liquid = 8.28:1 = 2.78:1 =3.04:1
Liability

Liquid Assets = Current Assets – Stock

1999-2000 = 404968148 – 16099326

= 24868822

2000-2001 = 63059955 – 2517720

= 37882235

2001-2002 =62468993 – 34811751

=27657242

Liquid ratio should be 1:1 in other word they must be enough liquid asset to pay the
creditor quickly ratio of the KADVANI FORGE LTD. Is more than 1:1 so it should
paid quickly but company by to remove the maintain acid test ratio in future.

Position Ratio
This ratio also knows as capital structure ratio they indicate company long-term
financial position Must be sound. This ratio indicates how much resources are, what
is the company’s capital mix following ratio indicates companies long-term financial
position.

(A) Debt equity ratio

One of the most difficult components of financial planning is the choice between debt
equity capital since both form of capital have obvious advantages to the firm. The
decision is often the result of the conflicting opinion and evidence. This is a
correlation between equity and debt. It indicates the cushion ownership fund
available to debt- holders. The ratio of the KADVANI FORGE LTD. Calculated as
under

Debt Equity
1999-2000 2000-2001 2001-2002
Ratio
Loan Fund / =53440087/30000000 =65871317/30000000 =86633901/30100000
Holder Fund = 1.78 = 2.20 =2.87

5.23
This ratio should be 2:3 to 3:4 if this ratio is lower than 2:3 it ind icates lower
proprietor of loan fund, which is good for moneylender but the company, will not
benefit of trading on equity but in KADVANI FORGE LTD. Ratio is high. It is good
sign of management this ratio current year increase 0.58 times due to the reason of
decrease loan fund and takes advantages of trading or equity. And in current rear it
goes to 2.87 there is increase of 0.67.
(B) Proprietary Ratio
This proprietary ratio indicates how much of the total assets of the company belong to
share holder. Higher ratio indicates higher proportion belongs to share holder and
lower proportion belongs to moneylender. In the other word shareholder fund is
higher than loan fund the security of moneylender will be higher but benefit of trading
or equity will be lower.

Debt
Equity 1999-2000 2000-2001 2001-2002
Ratio
Shareholde =30000000/8224279 =30000000/10540863 =30000000/11853062
r Fund / 2 4 8
Total = 0.36 = 0.28 =0.25
Assets

This ratio should be 1:2 or 50% but in KADVANI FORGE LTD. Ratio is less than
50% because of higher assets as compare to total assets it should be improve by

1. Reducing Assets
2. Increase Share holder Fund

(c ) FIXED assets ratio

This ratio indicates how much of fixed assets have been purchase out long-term fund.
Fixed assets are permanent therefore they should be less than one if it is more than
one it indicates some of the fix assets have been purchase out of short term liability
which is not desirable. The ratio of KADVANI FORGE LTD. Calculated as under.

Fixed
Assets 1999-2000 2000-2001 2001-2002
Ratio
Fixed =41274644/83440087 =423486679/95871317 =56061635/116733901
Assets / = 0.49 = 0.44 =0.48
Long-term
Fund

Long term Fund = Share Holder Fund + Loan Fund

1999-2000 = 30000000 + 5344087

= 8340087

2000-2001 = 30000000 + 65871317

5.24
 = 95871317

2001-2002 =30000000+86633901
= 116733901

As per calculation we can mention that the ratio of both year is less than one it is good
sign of management. If company can maintain of 50% level it should be more
preferable for company.

(D) Current Assets to fixed assets ratio

This ratio indicates the proportion of current asset to fixed asset it no fixed specified
standard of ratio. It is depend upon the nature of business. The ratio of the
KADVANI FORGE LTD. Is as under

Current
Assets to 1999-2000 2000-2001 2001-2002
Fixed Assets
Ratio
Current =40768148/41274644 =63059955/42348679 =62468993/56061635
assets/fixed = 0.99 = 1.49 =1.12
assets

As above calculation analysis that company current assets is increase in current year
so that the ratio is increase

5.25
 Ratio of KADVANI FORGE LTD.
NO. RATIO 1999-2000 2000-2001 2001-2002
(1) Profitability Ratio
(A) Gross Profit Ratio 13.05% 14.14% 15.59%
(B) Net Profit Ratio 0.36% 0.06% 0.06%
(C) Return On Equity 1.49% 0.24% 0.26%
(D) Return On Capital Employed 8.89% 10.63% 11.05%
(E) Return On Total Assets 10.37% 8.42% 8.07%
(F) Earning Per Share 0.149% 0.024% 0.026%
(2) Activity or Turnover Ratio
(A) Total Capital Turnover Ratio 1.48 1.34 1.16
(B) Fixed Assets Turnover Ratio 2.98 3.03 2.41
Working Capital Turnover
(C) 3.24 2.60 2.53
Ratio
(D) Inventory Turnover Ratio 13.89 14.64 16.72
(E) Debtor Turnover Ratio 5.53 times 3.72 times 5.53 times
(F) Creditor Turnover Ratio 3.47 times 3.72 times 4.06
Collection Period 65 days 68 days 65 days
Payment Period 104 days 97 days 88 days
(3) Liquidity Ratio
(A) Current Ratio 13.64:1 4.62:1 6.87:1
(B) Liquid Ratio 8.28:1 2.78:1 3.04:1
(4) Position Ratio
(A) Debt Equity Ratio 1.78 2.20 2.87
(B) Proprietary Ratio 0.36 0.28 0.25
(C) Fixed Assets Ratio 0.49 0.44 0.48
(D) Current Assets to Fixed assets Ratio 0.99 1.49 1.12

5.26
 Leverage Analysis
In literal terms, leverage is defined as, “ The action of lever, and the mechanical
advantages gained by it”. Leverage is a process, which permits magnification of
force. In financial terminology, leverage is defined as “ Employment of an asset or
sources of fund for which the firm has to pay fixed cost for fixed return”. It is a
process of magnification of earnings; Leverage is an excellent device for financial
analysis. The higher the degree of leverage, the higher expected returns.

Leverage

Operating Leverage Financial Leverage

Operating Leverage
It is leverage associated with the investment activities “It results from the existence of
fix charges or operating expenses in the income stream”. These expenses may be
fixed, variable or semi variable cost. There are fixed over a certain level of sales
volume the operating leverage is defined as:

“The firm’s ability to use fixed operating costs to magnify the effect of changes in
sales in its earning before interest and tad (EBIT)”.

The Degree of Operating Leverage (DOL) measures in Qualitative terms the extent ot
the degree of operating leverage.

DOL = % Change in EBIT

% Change in Sales

YEAR AMOUNT PERCENTAGE (%)

Sales
2000-2001 128,361,104 100%
2001-2002 135,411,845 105.50%
Total Increase in sales 7,050,741 5.50%
EBIT
2000-2001 8,526,530 100%
2001-2002 9,568,926 112.22%
Total Increase in EBIT 1,042,396 12.22%

5.27
DOL = % Change in EBIT
% Change in Sales

= 12.22
5.50

= 2.22
Degree of operating Leverage is favorable because it indicates that if sales increase by
1 times than EBIT increase by 2.22 times or if sales increase 100% than EBIT
increase by 222% which is good and increase in sales leads more chance in EBIT.

Financial Leverage
The Leverage associated with the financial activities of the firm called financial
leverage. The sources of fund may be those carrying fixed financial charge and those
not carrying the same. Long term debts including bonds and debenture and
preference shares came under the first category. These have to be paid regardless of
profit. Financial leverage is defined as:

“The ability of a firm to use fixed financial charges to magnify the effects of changes
in EBIT on firms EPS”.

DFL = %Change in EPS

% Change in EBIT

YEAR AMOUNT PERCENTAGE (%)

EBIT
2000-2001 8,526,530 100%
2001-2002 9,568,926 112.22%
Total Increase in EBIT 1,042,396 12.22%
EPS
2000-2001 0.024 100%
2001-2002 0.026 108.33%
Total Increase in EPS 0.002 8.33%

DFL = %Change in EPS

% Change in EBIT

= 8.33
12.22

= 0.68

5.28
KADVANI FORGE LTD. Has favorable degree of financial leverage which signifies
that the mix of various sources of long term and short term, ownership and borrowed
sources are appropriated to provide high income to equity owners and to increase EPS
proportionately.
Combined Leverage
Operating and Financial leverage together cause wide fluctuation in EPS for a given
change in sales. If a company employs high levels of operating and financial
leverage, even small change in the level of sales will have dramatic effect on EPS. A
company with a cyclical sales will have fluctuating EPS: but the swing in EPS will be
more pronounced if the company also used high amount of operating and financial
leverage
Degree of Combined Leverage (DCL) is as follow:

DCL = DOL X DLF

=% change in EBIT X %Change in EPS

%Change in Sales % Change in EBIT

= % Change in EPS
% Change in sales

= 8.33
5.50

= 1.15

In KADVANI FORGE LTD. The combined leverage is also favorable because it

show a 1.15 which indicates that if there is 1 time change in sales than in EPS there is
change is 1.15 times or 100% change in sales then 115% change in EPS. This show
that proportionate change in EPS is more than Proportionate change in sales.

5.29
 Trend In Last Three Years
Profit
Year Profit
1999 – 2000 445588
2000 – 2001 71795
2001 – 2002 79286

Graph Of Profit

Profit

500000 445588
400000
300000
200000
71795 79286
100000
0
1 2 3

Sales
Year Sales
1999 – 2000 123,272,061
2000 – 2001 128,361,104
2001 – 2002 135,043,541

Graph Of Sales

Sales

140000000 135043541
135000000
128361104
130000000
123272061
125000000
120000000
115000000
1 2 3

5.30