ASSIGNMENT

OF
ACCOUNTING
FOR
MANAGERS

ASSIGNMENT NO. II

TOPIC:-RATIO ANALYSIS AND FUND FLOW STATEMENT OF

STERLITE INDUSTRIES LTD.

SUBMITTED TO:- PRESENTED BY:-

LECT.MISS ANUSHITAL SINHA NAME:-ZAMEER AHMAD

CLASS:-MBA –IT IST SEM.

SEC.:-S1006

ROLL NO.:- B40

REG.NO.:-11000046

COMPANY INTRODUCTION
Sterlite Industries India Limited (SIIL) is the principal subsidiary of Vedanta
Resources plc, a diversified and integrated FTSE 100 metals and mining company,
with principal operations located in India and Australia.

Sterlite’s principal operating companies comprise Hindustan Zinc Limited (HZL) for
its fully integrated zinc and lead operations; Sterlite Industries India Limited (Sterlite)
and Copper Mines of Tasmania Pty Limited (CMT) for its copper operations in
India/Australia; and Bharat Aluminium Company (BALCO), for its aluminium and
alumina operations and Sterlite Energy for its commercial power generation business.

Sterlite is India's largest non-ferrous metals and mining company and is one of the
fastest growing private sector companies. Sterlite is listed on BSE, NSE and NYSE. It
was the first Indian Metals & Mining Company to list on the New York Stock
Exchange.

Sterlite has continually demonstrated its ability to deliver major value creating
projects, offering unparalleled growth at lowest costs and generating superior
financial returns for its shareholders. At the same time, it ensures that its expansion
projects meet high conservative financial norms and do not place an unwarranted
burden on its balance sheet and financial resources.

VISION 2015

To be the world’s leading copper producer delivering sustainable value to all

stakeholders by leveraging technology and best practices.

MISSION OBJECTIVE

• To build a knowledge and process driven organization through TPM

• To create sustainable value through safe, clean and green processes

• To sustain leadership position in domestic and global market through market

development and customer delight.

• To be the best and most respectable corporate citizen

• To leverage technology to its full potential across the business cycle

• To harness the profitable and growing CCR/value added product from

240KMT to 600 KMT per annum.
COMPANY HISTORY

1986

Sterlite Cables Limited, acquires the Shamsher Sterling Corporation, changes the
name to Sterlite Industries ( India) Limited.

1988

Sterlite Industries makes an initial public offering of its shares on the Indian stock
exchange.

1996

Sterlite Industries establishes India’s first continuous copper rod plant.

1997

Commissions first privately developed copper smelter in India at Tuticorin in Tamil

Nadu.

1999

Acquires Copper Mines of Tasmania Pty Ltd. Acquires Thalanga Copper Mines Pty
Ltd.

2005

Expansion of Tuticorin Smelter to 300,000 TPA and Successful ramp

up of ISA furnace in a record period of 45 days

2006

Expansion on Tuticorin smelter to 400 KTPA through innovative

debottlenecking

2007

Sterlite Industries primary listing on NYSE in June 2007

RATIO ANALYSIS:-

Ratio analysis is one of the powerful tool of the financial analysis. A ratio can be
defined as the indicated quotient of two mathematical expressions, and as the
relationship between two or more things ratio is thus, the numerical or an arithmetical
relationship between two figures. It is expressed where one figure is divided by
another. If 4,000 is divided by 10,000, the ratio can be expressed as 4 or 2:5 or 40%.
Ratio analysis helps the analysts to make quantitative judjment with regard to
concern’s financial position and performance.

1. LIQUIDITY RATIOS:-

If it is divided to study the liquidity position of the concerns, in order to

highlight the relative strength of the concerns in meeting their current
obligations to maintain sound liquidity and to pinpoint the difficulties if any in
it, then liquidity ratios are calculated. These ratios are used to measure the
firms ability to meet short term obligations. They compare short term
obligations to short term(or current) resources available to meet these
obligations. From these ratios, much insight can be obtained into the present
cash solvency of the firm and the firm’s ability to remain solvent in the event
of adversity.

(i)Current Ratio:- It is the ratio of current assets to current liabilities. It shows

a firm’s ability to cover its current liabilities with its current assets. It is
expressed as follows:

Current Ratio= Current Assets / Current Liabilities.

YEAR 2007 2008 2009

CURRENT
ASSETS 762.41 1,277.43 1,134.17
CURRENT
LIABILITIES 638.02 1,052.60 1,170.77
CURRENT 1.1949625 1.213594
RATIO 4 9 0.96873852
(STANDARD 2:1).

ANALYSIS:-

1.2007, as per standards liquidity ratio of the company is below the standards but we
can say that company’s liquidity ratio during the year 2007 is not good as it should
be.
2.2008, as per standards liquidity ratio little bit increases but again it is below the
standards, but it increases from previous year and again we can say that liquidity
position of the company is not good as per the standards.

3.2009, the liquidity position of the company is not good as current ratio is
decreasing from previous year which was 1.21:1 and in 2009 it is 0.97:1 which is very
much below the standards.

INTERPRETATION:-

Since the standards of the current ratio of the company is not stable during the three
years, so the liquidity position of the company is not good. The reason for this is that
there is much increase in current liabilities than current assets except during the year
2009. In order to make the liquidity position of the company good the company
decrease its current liabilities or increase its current assets.

(ii)Quick Ratio:-This is the ratio of liquid assets to current liabilities. It shows firm’s
ability to meet current liabilities with its most quick (liquid) assets, 1:1 ratio is
considered ideal ratio for a concern because it is wise to keep the quick or liquid
assets equal at least equal to the current or liquid liabilities at all times. It is calculated
as under:

Quick Ratio Or Acid Test Ratio= Quick Assets/Current Liabilities.

Quick Assets = Current Assets – Prepaid Expenses – Inventory.

YEAR 2007 2008 2009

CURRENT ASSETS 762.41 1,277.43 1,134.17
(-)INVEVTORY 339.06 532.42 403.71
QUICK ASSETS 423.35 745.01 730.46
CURRENT LIABILITIES 638.02 1,052.60 1,170.77
0.70778073
QUICK RATIO 0.663537193 3 0.623914
(STANDARD 1:1).

ANALYSIS:-

1.2007, as per the standards of quick ratio of the company is not satisfactory, it is
below the standards.

2.2008, the quick ratio for this year is below the standards but it increases from the
year 2007 (0.66:1) and it increased to 0.71:1 in the year 2008, but again it is clear that
the liquidity position of the company is not good as per the standards.
3.2009, again the quick ratio is very much below the standards as it again decreased
from 0.71:1 in 2008 to 0.62:1 in 2009 which is below than the ratio of 2007(0.66:1),
so again liquidity position of the company for this year is again unsatisfactory.

INTERPRETATION:-

As the quick ratio of the company is not stable i.e, it increases first, its liquidity
position is not good as per the standards of quick ratio which means that company has
not sufficient assets to pay its liabilities, but the company has some inventory which
can be sold in the market to get some benefit.

(iii)ABSOLUTE LIQUIDITY (OR SUPER QUICK) RATIO :- Though

receivables are generally more liquid than inventories, there may be debts having
doubt regarding their real stability in time. So to get idea about the absolute liquid of
concern, both receivables and inventories are excluded from current assets and only
absolute liquid assets, such as cash in hand, cash at bank and readily realisable
securities are taken into consideration. Absolute liquidity ratio is calculated as
follows:

ABSOLUTE LIQUIDITY RATIO = CASH + BANK BALANCE +

MARKETABLE SECURITIES / CURRENT LIABILITIES

YEAR 2007 2008 2009

CASH AND BANK BALANCE 1.13 1.91 1.47
CURRENT LIABILITIES 638.02 1,052.60 1,170.77
ABSOLUTE LIQUIDITY 0.00177110 0.00181455
RATIO 4 4 0.001256
(STANDARD 0.5:1).

ANALYSIS:-

1.2007, as per the standards absolute liquid ratio is less, therefore liquidity position of
the company is not good.

2.2008, again the absolute liquid ratio is very much below the standards, so it obvious
that liquidity position of the company is very bad.

3.2009, absolute liquid ratio is same as the ratio of the year 2007, again it is very
much below than the standards, so liquidity position of the company is not
satisfactory.

INTERPRETATION:-
As the absolute liquidity ratio is decreasing, the liquidity ratio of the company is
unsatisfactory, as the absolute liquid ratio of the company is very much below the
standards, this means that company has not sufficient liquid assets to pay its
liabilities.

OVERALL ANALYSIS:-

After calculating the values of current ratio, quick ratio and absolute liquidity ratio it
is clear that the liquidity position of the company is not satisfactory this is because
there is increase in current liabilities and decrease in current assets. This means that
company is not paying its short-term obligations. In order to pay its short-term
obligations they have either increase their current assets or decrease their current
liabilities.

2.TURNOVER ACTIVITY RATIO / EFFICIENCY RATIO:-

These ratios are very important for a concern to judge how well facilities at the
disposal of the concern are being used or to measure the effectiveness with which a
concern uses its resources at its disposal. In short, these will indicate position of assets
usage. These ratios are usually calculated on the basis of sales or cost of sales and are
expressed in integers rather than as a percentage. Such ratios should be calculated
separately for each type of asset. The greater the ratio more will be the efficiency of
asset usage. The lower ratio will reflect the under utilisation of the resources available
at the command of the concern. The concern must always plan for efficient use of the
assets to increase the overall efficiency. The following are the important turnover
activity ratios usually calculated by a concern.

(i) Inventory Turnover Ratio:-It denotes the speed at which the inventory will be
converted into sales, thereby contributing for the profits of the concern. When all
other factors remain constant, greater the turnover of inventory more will be
efficiency of its management. Further, it will be higher when sales are maximum and
the average inventory is minimum. This ratio establishes relationship between costs of
goods sold during a given period and the average amount of inventory held during
that period. This ratio is calculated as follows:

Inventory Turnover Ratio = Cost of Goods Sold(COGS) / Average Inventory.

COGS= Sales – Gross Profit Or COGS= Sales + Closing Stock- Opening Stock-
Purchases –Direct Expenses.

YEAR 2007 2008 2009

Net Sales 1,404.16 1,655.2 2,127.98
 5
OPENING STOCK 262.17 339.06 532.42
CLOSING STOCK 339.06 532.42 403.71
AVERAGE INVENTORY 300.615 435.74 468.065
INVENTORY TURNOVER 4.67095
RATIO 8 3.79871 4.546334

ANALYSIS:-

1.2007, the company has used 4.7 times its inventory during this year for converting
them into sales.

2.2008, during this year company has used 3.8 times its inventory for converting into
sales which is not good as compared to previous year which is better than the current
year’s ratio as we know that higher the turnover ratio better it is for company.

3.2009, during this year turnover ratio increases from 3.8 times to 4.55 which is good
but it is less than the ratio of the 2007 that was 4.7 times, so company is improving its
turnover ratio and company is trying to use its inventory efficiently.

(ii)Days of Inventory Holding = No. of Days in Year / Inventory Turnover Ratio.

YEAR 2007 2008 2009

NO. OF DAYS IN AYEAR 360 360 360
INVENTORY TURNOVER
RATIO 4.67 3.79 4.55
DAYS OF INVENTORY 77.0877 94.9868
HOLDING 9 1 79.12088

ANALYSIS:-

1.2007, means that after every 77 days the company’s inventories are converted into
sales.

2.2008, this means that after 95 days the company’s inventories are converted into
sales which increases from last year which means that company is not using its
inventory efficiently.

3.2009,during this year company’s inventories are converted into sales after every 79
days which means that company’s inventory efficiency is very good when compared
with previous year but it is not good when compared with the year 2007.
INTERPRETATION:-

The greater the inventory turnover ratio or efficiency ratio better it is for the company.
So during the year 2009 turnover ratio is greater as compared to the year 2008, which
means that turnover ratio for this company is improving.

(iii)Debtor Turnover Ratio:-It indicates the number of times on the average the
receivables are turn over in each year. The higher the value of ratio, the more is the
efficient management of debtors. It measures the accounts receivables (trade debtors
and bills receivables) in terms of number of days of credit sales during a particular
period. This ratio is calculated as follows:

Debtor Turnover Ratio= Net Credit Sales / Average Debtors.

Or

Total Sales / Total Debtors.

YEAR 2007 2008 2009

1,404.1 1,655.2
NET SALES 6 5 2,127.98
TOTAL DEBTORS 226.91 256.35 322.85
DEBTOR TURNOVER
RATIO 6.18818 6.45699 6.59123

ANALYSIS:-

1.2007, in this year debtor turnover ratio is 6.19.

2.2008, in this year debtor turnover ratio increases which is good for the company.

3.2009, during this year the ratio again increases which means that company is
receiving cash from outsiders in a good way .

(iv) Average Collection Period = No. of Days in Year / Debtor Turnover Ratio.

YEAR 2007 2008 2009

NO. OF DAYS IN AYEAR 360 360 360
DEBTOR TURNOVER RATIO 6.19 6.46 6.59
AVERAGE COLLECTION 58.158 55.727
PERIOD 3 6 54.6282

ANALYSIS:-
1.2007, average collection period for this year is 58 days i.e, company receives cash
from outsiders after 58 days.

2.2008, average collection period of company decreases from 58 days to 55 days

which is good for the company.

3.2009, again average collection period decreases from 55 days to 54 days which
means that company has efficient management of receivables.

INTERPRETATION:-

We know that higher the value of debtor turnover ratio, the more is the efficient
management of receivables. So company is improving its debtors or we can say that
company’s credit policy is improving year by year, this is due to the reason
company’s debtors are increasing from the year 2007 to the year 2009.

(v)Credit Turnover Ratio= Net Credit Purchases/ Average Creditors Or Total

Purchases / Total Creditors.

(vi)Average Payment Period= No. of Days in Year/ Credit Turnover Ratio.

{Note:-As there are not the values of creditors in the balance sheet so these values
have not been calculated.}

(vii)Asset Turnover Ratio:-

This ratio is calculated by dividing the net sales by the value of total assets (i.e,Net
sales / Total Assets).A high ratio is an indicator of over-trading of total assets while a
low ratio reveals idle capacity. The traditional standard for the ratio is two times.

Asset Turnover Ratio= Net Sales / Total Assets.

YEAR 2007 2008 2009

1,404.1 1,655.2
NET SALES 6 5 2,127.98
1,470.3 1,842.2
TOTAL ASSETS 8 1 2,482.44
ASSET TURNOVER RATIO 0.95496 0.89851 0.85721

ANALYSIS:-

1.2007, the ratio is 0.95.

2.2008, the asset turnover ratio is 0.90 which decreased from 0.95 in 2007.
3.2009, the ratio again decreased to 0.86 from 0.90 in 2008.

INTERPRETATION:-

We know that higher the value of asset turnover ratio there is over-trading of total
assets and lower ratio reveals idle capacity. The values of asset turnover ratio are
very low so, there is idle capacity of total assets in the company. The reason is that
there is increase in total assets of the company.

(vii)Sales to Capital Employed or Capital Turnover Ratio:- This ratio shows the
efficiency of capital employed in the business by computing how many times capital
employed is turned-over in a stated period. The higher the ratio, the greater the profits.
A low capital turnover ratio should be taken to mean that sufficient sales are not being
made and profits are lower. The ratio is ascertained as follows:

Sales to Capital Employed or Capital Turnover Ratio= Sales/Capital employed.

Capital employed=Share capital +Reserves +Long term liabilities

YEAR 2007 2008 2009

NET SALES 1,404.16 1,655.25 2,127.98
EQUITY SHARE CAPITAL 24 25.09 25.09
RESERVES 693.67 840.41 991.18
CAPITAL EMPLOYED 717.67 865.5 1016.27
CAPITAL TURNOVER 1.95655 1.91247
RATIO 4 8 2.093912

ANALYSIS:-

1.2007, the capital turnover ratio for this year is 1.96.

2.2008, the capital turnover ratio decreases from 1.96 to 1.91.

3. 2009, this year capital turnover ratio increases from 1.91 to 2.09 which is good for
the company.

INTERPRETATION:-

Whenever there is increase in capital turnover ratio there is increase in total profits, so
company’s capital turnover ratio is increased and there is automatically increase in
profits of the company. The reason is that as the net sales of the company is increased
from 2007 to 2009, so it is clear that there is increase in the capital turnover ratio.

(viii)Working Capital Ratio:-This ratio shows the number of times working capital is
turned-over in a stated period. This higher is the ratio, the lower is the investment in
working capital and the greater are the profits. However, a very high turnover of
working capital is a sign of overtrading and may put the concern into financial
difficulties. On the other hand, a low working capital turnover ratio indicates that
working capital is not efficiently utilised. It is calculated as follows:

Working Capital Ratio= Sales / Working Capital.

YEAR 2007 2008 2009

NET SALES 1,404.16 1,655.25 2,127.98
CURRENT ASSETS 762.41 1,277.43 1,134.17
CURRENT LIABILITIES 638.02 1,052.60 1,170.77
WORKING CAPITAL 124.39 224.83 -36.6
WORKING CAPITAL 11.2883 7.36222 -
RATIO 7 9 58.1415

ANALYSIS:-

1.2007, working capital ratio for this year is 11.29.

2.2008, working capital ratio decreases from 11.29 to 7.36.

3.2009, there is very much decrease in working from 11.29 in 2007 to 7.36 in 2008
and -58.14 in 2009.

INTERPRETATION:-

As we know higher the working capital ratio, the lower is the investment in working
capital and greater are the profits. The working capital ratio of the company decreases
during the three years which means that the working capital is not efficiently utilized
in the company. The reason is that current liabilities are increasing very much than the
current assets.

OVERALL ANALYSIS:-

These ratios indicates the position of asset usage of the concern. As these ratios are
calculated separately for each type of asset. As per the ratios of inventory turnover it
is improving as these ratio shows improvement, so inventory management is efficient.
As for debtor turnover ratio management of receivables is efficiently utilised because
there is increase in debtor turnover ratio. There is idle capacity of assets as there is
decrease in asset turnover ratio. The capital turnover rartio for the company is very
good as there is increase in total profits and for the working capital ratio it is
decreasing which means that the working capital is not efficiently utilised in the
company. From the above ratios calculated we can say that company’s efficiency
ratio is satisfactory.
3.SOLVENCY OR LEVERAGE RATIO:-

The leverage ratio explain the extent to which the debt is employed in the capital
structure of the concerns. All concerns use debt funds along with equity funds, in
order to maximize the after tax profits, thereby optimizing earnings available to equity
shareholders. The basic facility of debt funds is that after tax cost of them will be
significantly lower and which can be paid back depending upon their terms of issue.
Further debt funds will not dilute the equity holders control position. However, the
debt funds are used very carefully by considering the liquidity end risk factor. The
debt will increase the risk of the company. In order to analyse the leverage position of
the concerns. Total debt to Total Assets Ratio, Debt Equity Ratio and Time Interest
Earned (i.e, Earnings before tax / Interest) can be calculated.

It may be favourable or unfavourable. When earnings are more than the fixed cost of
the funds, it is called favourable. An unfavourable leverage exists if the rate of return
remains to be lower. It can be used as a tool of financial planning by finance manager.

(i)Debt Equity Ratio:- This ratio is calculated to measure the relative proportions of
outsider’s funds and shareholder’s funds invested in the company. This ratio is
determined to ascertain the soundness of long term financial policies of that company
and is also known as external-internal equity ratio. It is calculated as follows:

Debt Equity Ratio= Outstanding Funds(Total Debts)/Shareholders Fund.

Shareholders Funds = Equity share capital+Preference shares +Reserves &

Surpluses(Retained earnings).

YEAR 2007 2008 2009

TOTAL DEBTS 749.37 943.2 1,466.15
EQUITY SHARE CAPITAL 24 25.09 25.09
RESERVES 693.67 840.41 991.18
SHARE HOLDERS FUNDS 717.67 865.5 1016.27
1.089774
DEBT EQUITY RATIO 1.044170719 7 1.44268

ANALYSIS:-

1.2007, the ratio for this year is 1.04.

2.2008, in this year ratio increases from 1.04 to 1.09 which is not good for the
company.

3.2009, for this year debt equity ratio increases very much i.e, 1.44.
INTERPRETATION:-

As we know lower the debt equity ratio favourable it is for company. But the
company’s debt equity ratio is increasing year by year. The reason for this is that there
is very much increase in total debts from 2007 to 2009 as compared shareholders
funds there is very less increase.

(ii)Proprietory Ratio:- A variant of debt to equity ratio is the propriety ratio which
shows the relationship between shareholders’ funds and total assets. This ratio is
worked out as follows:

Proprietory Ratio = shareholders Funds / Total Assets.

YEAR 2007 2008 2009

EQUITY SHARE CAPITAL 24 25.09 25.09
RESERVES 693.67 840.41 991.18
SHARE HOLDERS FUNDS 717.67 865.5 1016.27
TOTAL ASSETS 1,470.38 1,842.21 2,482.44
0.469816
PROPRIETORY RATIO 0.488084713 1 0.40938

ANALYSIS:-

1.2007, for this year the ratio is 0.49 which means that near about 50% investment is
made by the owner in the total assets.

2.2008, the ratio decreases from 0.49 to 0.47 which shows that below 50% investment
is made by owner to the total assets.

3.2009, the ratio again decreases very much from last year which is not good for the
company as we know the owner’s contribution should be high.

INTERPRETATION:-

Propriety ratio indicates the portion of investment made by the owner in the total
assets. This ratio should be higher to maintain the solvency ratio of the company. The
propriety ratio is decreasing year by year due to the reason that there is very much
increase in the total assets during the three years.

OVERALL ANALYSIS:-

The solvency or leverage ratio of the company is not satisfactory as there is increase
in debt equity ratio due to increase in total debts of the company and also propriety
ratio is also decreasing year by year due to increase in total assets of the company.
Hence it is clear from the figures calculated above that the solvency of the company is
not good as it should be.

4. PROFITABILITY RATIO:-

Profitability ratio is the overall measure of the companies with regard to efficient and
effective utilisation of resources at their command. It indicates in a nutshell the
effectiveness of the decisions taken by the management from time to time.
Profitability ratios are of utmost importance for a concern. These ratios are calculated
to enlighten the end results of business activities which is the sole criterion of the
overall efficiency of the business concern. The following are the important
profitability ratios:

(i)Gross Profit Ratio:- This ratio tells gross margin on trading and is calculated as
under:

(i)Gross Profit Ratio= Gross Profit / Net Sales*100.

[Note:- The values of COGS is not given so we cannot calculate the values of gross
profit.]

(ii)Net Profit Ratio:- This ratio measures the relationship between net profit and
sales of a firm. It is calculated as follows:

Net Profit Ratio = Net Profit / Net Sales *100.

YEAR 2007 2008 2009

NET PROFIT 101.48 144.83 146.56
NET SALES 1,404.16 1,655.25 2,127.98
7.22709 8.74973
NET PROFIT RATIO 7 6 6.887283

ANALYSIS AND INTERPRETATION:-

The ratio of net profit first increases from 2007 to 2009 and the ratio then decreases
from 2008 to 2009. This is due to the reason that there is very much increase in net
sales from 2007 to 2009 as compared to net profit there is not too much increase in net
profit.

(iii)Operating Ratio:-

This ratio indicates the proportion that the cost of sales bears to sales. Cost of sales
includes cost of goods sold as well as other operating expenses, administration, selling
and distribution expenses which have matching relationship with sales. It excludes
income and expenses which have no bearing on production and sales, i.e, non-
operating income and expenses as interest and dividend received on investment,
interest paid on long-term loans and debentures, profit or loss on sales of fixed assets
or long-term investments. It is calculated as:

Operating Ratio= Operating Expenses/Net Sales *100.

Operating Expenses= COGS+Office Expenses+Selling & Distribution Expenses.

YEAR 2007 2008 2009

1,373.0
OPERATING EXPENSES 1,176.36 0 1,666.16
1,655.2
NET SALES 1,404.16 5 2,127.98
83.7767
OPERATING RATIO 8 82.9482 78.29773

ANALYSIS:-

1.2007, the ratio for this year indicates that 83.77% of sales bears to sales.

2.2008, this year the ratio of sales decreases to 82.95% from last year.

3.2009, the ratio for this year again decreases to 78.30% when compared with last two
years

INTERPRETATION:-

There is continuous decrease in the percentage of operating ratio during the three
years, the reason for this is that there is gradual increase in raw-material cost, power
and fuel cost, employee cost, selling and distribution cost and miscellaneous costs.

(iv)Operating Profit Ratio:-

This ratio establishes the relationship between operating profit and sales and is
calculated as follows:

Operating Profit Ratio= Operating Profit/ Net Sales*100

Where Operating Profit = Net Profit + Non-operating Expenses – Non-operating

Income Or = Gross Profit – Operating Expenses.

This ratio indicates the portion remaining out of every rupee worth of sales after all
operating costs and expenses have been met. Higher the ratio the better it is.
YEAR 2007 2008 2009

OPERATING PROFIT 273.98 324.98 493.93

NET SALES 1,404.16 1,655.25 2,127.98
OPERATING PROFIT 19.63328
RATIO 19.51202142 8 23.2112

ANALYSIS AND INTERPRETATION:-

As this ratio establishes relationship between operating profit and net sales of the
company, higher the ratio better it for the company. As the ratio is increasing year by
year which means that company is establishing good relationship between operating
profit and net sales, this is due to the reason that there is continuous increase in
operating profit.

5.PROFITABILITY RATIO RELATED TO INVESTMENT:-

(i)Interest Coverage Ratio:-

It really measures the ability of the concern to service the debt. This ratio is very
important from lender’s point of view and indicates whether the business would earn
sufficient profits to pay periodically the interest charges. The higher the ratio, the
more secured the lenders will be in respect of their periodical interest income. It is
calculated as under:

Interest Coverage Ratio = Earnings Before interest and Taxes / Interest. Charges.

YEAR 2007 2008 2009

PAT 101.48 144.83 146.56
(+)TAX 36.96 55.93 67.58
(+)INTEREST 77.51 87.5 132.73
EARNINGS BEFORE TAX
AND INTEREST 215.95 288.26 346.87
INTEREST 77.51 87.5 132.73
INTEREST COVERAGE 2.78609
RATIO 2 3.2944 2.61335

ANALYSIS AND INTERPRETATION:-

The ratio for the year 2007 is 2.8 which means that fixed interest cover is 2.8 times
and for 2008 3.3 times the profit is available which means that it increases from 2007
which is good for the lender as in this PAT increases very much. But in 2009 the
ratio decreases to 2.6 which is not good from lender’s point of view as this ratio
measures the ability of the concern to service the debt because of this higher the
interest coverage ratio better it is for company. The reason for this that there is very
less increase in PAT as compared to interest which is very much high.

(ii)Earnings Per Share(EPS):- This helps in determining the market price of equity
shares of the company and in estimating the company’s capacity to pay dividend to its
equity shareholders. It is calculated as follows:

Earnings Per Share(EPS)=Earnings available to Equity Shareholders-Preference

dividend/No. Of Equity Shares Outstanding*100.

YEAR 2007 2008 2009

EARNINGS BEFORE TAX AND
INTEREST 215.95 288.26 346.87
(-)TAX 36.96 55.93 67.58
(-)INTEREST 77.51 87.5 132.73
EARNINGS AVAILABLE TO EQUITY
SHAREHOLDERS 101.48 144.83 146.56
NO. OF EQUITY SHARES
OUTSTANDING 478.73 2,502.42 2,502.42
21.197752 5.7875976
EARNING PER SHARE 4 1 5.856731

ANALYSIS AND INTERPRETATION:-

The above data shows that the EPS decreases very much from 2007 to 2009 but there
is little increase in this ratio from 2008 to 2009. The ratio indicates that the company
had paid more dividend in 2007 or they had issued bonus shares as compared to the
ratios of 2008 and 2009. This is due to the reason that there is very much increase in
no. of equity shareholders from 2007 to 2008 and it remains same for the years 2008
and 2009 as compared to PAT there is very less increase.

(iii)Price-Earnings Ratio(P/E):-This ratio indicates the market value of every rupee

earning in the firm and is compared with industry average. High ratio indicates the
share is overvalued and low ratio shows that share is undervalued. It is computed by
the following formula:

Price-Earnings Ratio(P/E)=Market Price/Earning Per Share.

[Note:- Market Price is presumed to be Rs.100 because the value was not given.]
YEAR 2007 2008 2009
MARKET PRICE 100 100 100
EARNING PER SHARE 21.19 5.79 5.88
4.71920 17.2711
PRICE EARNING RATIO 7 6 17.0068

ANALYSIS AND INTERPRETATION:-

The values of price earning ratio is increasing from 2007 to 2009 but it remains
almost same from 2008 to 2009 because there is no increase in earnings per share
from 2008 to 2009. The values of P/E ratio are also not too much high which means
that the shares are undervalued.

(iv)Return on Investment (ROI) Ratio=EBIT/Capital Employed *100.

ROI. A measure of a corporation's profitability, equal to a fiscal year's income divided

by common stock and preferred stock equity plus long-term debt. ROI measures how
effectively the firm uses its capital to generate profit; the higher the ROI, the better.

More generally, the income that an investment provides in a year.

YEAR 2007 2008 2009

EARNINGS BEFORE TAX AND
INTEREST 215.95 288.26 346.87
EQUITY SHARE CAPITAL 24 25.09 25.09
RESERVES 693.67 840.41 991.18
CAPITAL EMPLOYED 717.67 865.5 1016.27
30.0904 33.305
RETURN ON INVESTMENT RATIO 3 6 34.13168

ANALYSIS AND INTERPRETATION:-

The ROI ratio increases year by year which means that profit of the company is also
increasing. This is due to the reason that there is increase in capital employed. ROI
also describes the percentage of investment on fixed assets.

(v)Dividend Per Share(DPS):-

DPS. The amount of dividend that a stockholder will receive for each share of stock
held. It can be calculated by taking the total amount of dividends paid and dividing it
by the total shares outstanding.
Dividend Per Share=Total Dividend available for equity shareholders/No. Of Equity
Shares.

YEAR 2007 2008 2009

EARNINGS BEFORE TAX AND INTEREST 215.95 288.26 346.87
(-)TAX 36.96 55.93 67.58
(-)INTEREST 77.51 87.5 132.73
(-)RESERVES 693.67 840.41 991.18
TOTAL DIVIDEND AVAILABLE FOR EQUITY
SHAREHOLDERS -592.19 -695.58 -844.62
2,502.4
NO.OF EQUITY SHARES 478.73 2,502.42 2
- -
1.23700 0.27796 -
DIVIDEND PER SHARE 2 2 0.33752
ANALYSIS AND INTERPRETATION:-

Since the value of dividend per share is in negative which means that the company is
not distributing its funds among the shareholders due to the reason that there is
decrease in total dividend available for equity shareholders as compared to no. of
equity shares there is very much increase.

(vi)Dividend Pay out Ratio:- This ratio indicates as to what proportion of earning per
share has been used for paying dividend and what has been retained for ploughing
back. This ratio is very important from shareholders point if view as it tells that if a
company has used whole or substantially the whole of its earnings for paying dividend
and retained nothing for future growth and expansion purposes, then there will be
very dim chances of capital appreciation in the price of shares of such company. In
other words, an investor who is more interested in capital appreciation must look for a
company having low payout ratio. This is determined as follows:

Dividend Pay out Ratio=DPS/EPS.

YEAR 2007 2008 2009

DIVIDEND PER SHARE -1.24 -0.28 -0.34
EARNING PER SHARE 21.18 5.79 5.86
- -
0.05854 0.04835 -
DIVIDEND PAY OUT RATIO 5 9 0.05802

ANALYSIS AND INTERPRETATION:-

As the dividend payout ratio is almost constant for the three years which means that
company is not paying its dividend and investor is also interested in capital
appreciation. The reason is that there is very much decrease in earning per share from
2007 to 2009.

(vii)Return on Gross Capital Employed:-

The term gross capital employed refers to the total investment made in the business
and is represented by the total assets, fixed as well as current assets used in the
business. The ratio eashtablishes the business b/w earning before interest and taxes
and gross capital employed. The conventional approach is to divide earnings before
interest and tax by gross capital employed , that is,

Return on Gross Capital Employed=EBIT/Gross Capital*100.

YEAR 2007 2008 2009

EARNINGS BEFORE TAX AND
INTEREST 215.95 288.26 346.87
TOTAL LIABILITIES 1,470.38 1,842.21 2,482.44
(-)PRE-OPERATING EXPENSES -2.43 -9.36 -12.98
GROSS CAPITAL 1472.81 1851.57 2495.42
RETURN ON GROSS CAPITAL 15.5684095
EMPLOYED 14.66244797 1 13.90027

ANALYSIS AND INTERPRETATION:-

The return on gross capital employed first increases from 2007 to 2009 and then
decreases from 2008 to 2009. This is due to the reason that there is very much
increase in gross capital as compared to EBIT there is not too much increase.

(viii)Return on Net Capital Employed:- This ratio is an indicator of the earning

capacity of the capital employed in the business. This ratio is considered to be the
most important ratio because it reflects the overall efficiency with which capital is
used. This ratio is a helpful tool for making capital budgeting decisions, a project
yielding higher return is favoured. This ratio is calculated as follows:

Return on Net Capital Employed=EBIT/Net capital Employed*100.

YEAR 2007 2008 2009

EARNINGS BEFORE TAX AND
INTEREST 215.95 288.26 346.87
GROSS CAPITAL 1472.81 1851.57 2495.42
(-)NET CURRENT LIABILITIES 611.76 1,014.43 1,133.43
NET CAPITAL 861.05 837.14 1,361.99
RETURN ON NET CAPITAL 34.43390
EMPLOYED 25.07984438 6 25.4679

ANALYSIS AND INTERPRETATION:-

Return on capital employed increases from 2007 to 2008 but it decreases to same ratio
that was in 2007 which means that capital employed remains almost same from 2007
to 2009. The reason for this is that there is very much increase in net capital of the
company as compared with EBIT, gross capital and net current liabilities there is very
less increase.

OVERALL ANALYSIS:-

The profitability ratio measures the overall efficiency of the company. After
calculating the values of profitability some ratios are satisfactory while some ratios
are unsatisfactory which means that company’s overall efficiency is not satisfactory.

CONCLUSION:-

After calculating the values of current ratio, quick ratio and absolute liquidity ratio it
is clear that the liquidity position of the company is not satisfactory this is because
there is increase in current liabilities and decrease in current assets. This means that
company is not paying its short-term obligations. In order to pay its short-term
obligations they have either increase their current assets or decrease their current
liabilities.

Efficiency turnover ratios indicates the position of asset usage of the concern. As
these ratios are calculated separately for each type of asset. As per the ratios of
inventory turnover it is improving as these ratio shows improvement, so inventory
management is efficient. As for debtor turnover ratio management of receivables is
efficiently utilised because there is increase in debtor turnover ratio. There is idle
capacity of assets as there is decrease in asset turnover ratio. The capital turnover
rartio for the company is very good as there is increase in total profits and for the
working capital ratio it is decreasing which means that the working capital is not
efficiently utilised in the company. From the above ratios calculated we can say that
company’s efficiency ratio is satisfactory.

The solvency or leverage ratio of the company is not satisfactory as there is increase
in debt equity ratio due to increase in total debts of the company and also propriety
ratio is also decreasing year by year due to increase in total assets of the company.
Hence it is clear from the figures calculated above that the solvency of the company is
not good as it should be.

The profitability ratio measures the overall efficiency of the company. After
calculating the values of profitability some ratios are satisfactory while some ratios
are unsatisfactory which means that company’s overall efficiency is not satisfactory.

ANNEXURE:-

PROFIT AND LOSS ACCOUNT OF STERLITE INDUSTRIES LTD

Particulars Mar '07 Mar '08 Mar '09

Income
1,573.6 1,852.6
Sales Turnover 1 8 2,307.21
Excise Duty 169.45 197.43 179.23
1,404.1 1,655.2
Net Sales 6 5 2,127.98
Other Income 17.86 38.25 -66.29
Stock Adjustments 46.18 42.73 32.11
1,468.2 1,736.2
Total Income 0 3 2,093.80
Expenditure
Raw Materials 712.83 875.78 1,067.27
Power & Fuel Cost 142.91 151.32 161.14
Employee Cost 82.05 91.12 98.74
Other Manufacturing
Expenses 60.16 60.27 69.45
Selling and Admin
Expenses 157.16 178.47 243.82
Miscellaneous
Expenses 23.68 25.4 38.72
Preoperative Exp
Capitalised -2.43 -9.36 -12.98
 1,176.3 1,373.0
Total Expenses 6 0 1,666.16
Operating Profit 273.98 324.98 493.93
PBDIT 291.84 363.23 427.64
Interest 77.51 87.5 132.73
PBDT 214.33 275.73 294.91
Depreciation 76.28 75.92 85.04
Other Written Off 2.17 1.84 1.17
Profit Before Tax 135.88 197.97 208.7
Extra-ordinary items 2.56 2.79 5.45
PBT (Post Extra-ord
Items) 138.44 200.76 214.15
Tax 36.96 55.93 67.58
Reported Net Profit 101.48 144.83 146.56
Total Value Addition 463.53 497.21 598.89
Preference Dividend 0 0 0
Equity Dividend 18.77 25.02 25.02
Corporate Dividend
Tax 3.19 4.25 4.25
Per share data
(annualised)
2,502.4
Shares in issue (lakhs) 478.73 2 2,502.42
Earning Per Share
(Rs) 21.2 5.79 5.86
Equity Dividend (%) 75 100 100
Book Value (Rs) 149.91 34.59 40.61

BALANCE SHEET OF STERLITE INDUSTRIES LTD

Particulars Mar '07 Mar '08 Mar '09

Sources Of Funds
Total Share Capital 24 25.09 25.09
Equity Share Capital 24 25.09 25.09
Share Application
Money 3.33 33.5 0
Preference Share Capital 0 0 0
Reserves 693.67 840.41 991.18
Revaluation Reserves 0 0 0
Networth 721 899 1,016.27
Secured Loans 744.14 867.06 1,466.15
Unsecured Loans 5.23 76.14 0
Total Debt 749.37 943.2 1,466.15
 1,470.3 1,842.2
Total Liabilities 7 0 2,482.42
Application Of Funds
1,573.9 1,680.7
Gross Block 3 2 1,938.35
Less: Accum.
Depreciation 673.92 735.02 815.91
Net Block 900.01 945.7 1,122.44
Capital Work in Progress 281.98 503.39 1,208.64
Investments 160.96 166.68 187.23
Inventories 339.06 532.42 403.71
Sundry Debtors 226.91 256.35 322.85
Cash and Bank Balance 1.13 1.91 1.47
Total Current Assets 567.1 790.68 728.03
Loans and Advances 159.36 442.3 331.14
Fixed Deposits 35.95 44.45 75
Total CA, Loans & 1,277.4
Advances 762.41 3 1,134.17
Deffered Credit 0 0 0
1,014.4
Current Liabilities 611.76 3 1,133.43
Provisions 26.26 38.17 37.34
1,052.6
Total CL & Provisions 638.02 0 1,170.77
Net Current Assets 124.39 224.83 -36.6
Miscellaneous Expenses 3.04 1.61 0.73
1,470.3 1,842.2
Total Assets 8 1 2,482.44

Fund Flow Statement

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Fund Flow Statements summarize a firm’s inflow and outflow of funds. Simply put, it tells
investors where funds have come from and where funds have gone. The statements are often
used to determine whether companies efficiently source and utilize funds available to them.
How to Prepare a Fund Flow Statement
Fund flow statements are prepared by taking the balance sheets for two dates representing the
coverage period. The increases and decreases must then be calculated for each item. Finally,
the changes are classified under four categories: (1) Long-term sources, (2) long-term uses, (3)
short-term sources, (4) short-term uses.
It is also important to zero out the non-fund based adjustments in order to capture only the
changes that are accompanies by flow of funds. However, income accured but received and
expenses incurred but not received reckoned in the profit and loss statement should not be
excluded from the profit figure for the fund flow statement.
Fund flow statements can be used to identify a variety of problems in the way a company
operates. For example, companies that are using short-term money to finance long-term
investments may run into liquidity problems in the future. Meanwhile, a company that is using
long-term money to finance short-term investments may not be efficiently utilizing its capital.

SCHUDLE OF CHANGES IN WORKING CAPTIAL

IMPACT ON WORKING
PARTICULARS 2008 2009 CAPITAL
CURRENT ASSETS(A) INCREASE DECREASE
SUNDRY DEBTORS 256.35 322.85 66.5
INVENTORY 532.42 403.71 128.71
CASH AND BANK 790.68 728.03 62.65
1579.4 1454.0
TOTAL (A) 5 3
CURRENT LIABILITIES(B)
1277.4 1134.1
LOANS AND ADVANCES 3 7 143.26
PROVISIONS 183.41 100.3 83.41
TOTAL CL AND 1170.7
PROVISIONS 1052.6 7 118.17
2342.2
TOTAL (B) 2368.2 8
A-B -788.75 -887.69
NET DECREASE IN WC -108.94 108.94
355.82
-887.69 -887.69 355.82

ADJUSTMENT PROFIT AND LOSS ACCOUNT:-

To reserves 150.77 By p/l account 176.74

To depriciation 80.89 By funds for operation 54.92
Total 231.66 231.66

FUNDS FLOW STATEMENT ACCOUNT

Sources Applications
Funds from operations 54.92 Dividend paid 128.71
Loss of share capital 0 Purchase of machinery 55.7
Sale of investment 20.55
Net decrease in w.c 108.94
Total 184.41 184.41

BIBLOGRAPHY:-

MANAGEMENT ACCOUNTING

RK.SHARMA

SHASHI

K GUPTA

ADVANCED ACCOUNTING II