INTRODUCTION

The most prevalent method of analyzing a balance sheet is through ratio analysis. The
ratio analysis can be for a single year or it may extend to more than one year. The ratios can
also be compared with similar ratios of others concerns to make a comparative study.
First, all ratios will be worked out for each year and each set of comparable items.
The ratios worked out will be put in the context of a trend over several years.
They will be compared with similar companies/ standard ratios.
i) For the year concerned, and
ii) ver a period of time.
!ny number of ratios can be prepared by comparing any two figures available in the
balance sheet or profits and loss account or both. "ut to serve its purpose, the figures
compared should be meaningful, having a link between them, and should satisfy the needs of
the person who analysis the financial statements.
#atios are also classified differently on different bases. The mostly used one is the financial
classification under which the ratios are broadly divided into the following five classes$

1
NEED OF THE STUDY

Financial statements provides sample information for knowing the
financial position of the madhucon sugar and power industries %T& .The information
provided in financial statements server the purpose of different groups .such as inventory
creditors ,s general public.
OBJECTIVES OF THE STUDY
To know about the 'ndian sugar 'ndustry scenario.
To know about the (adhucon )ugars %imited
To know the %i*uidity position of (adhucon )ugars %imited,
Through %i*uidity #atios.
To study the meaning of #atio !nalysis and its %i*uidity
#atios.
SCOPE OF THE STUDY
The study includes analysis of financial performance through ratios of (adhucon
sugar and power industries ltd #a+eswarapuram.,ven through the no.of companies are there
in madhucon group madhucon sugar and power industries ltd has been taken for study as it is
more converted.
2
RESEARCH METHODOLOGY
(ethodology is a systematic procedure of collecting information in order to analysis
and verity a phenomenon. The collection is done through two principle sources viz..
') -rimary data
'') )econdary data
I) Primary data: 't is the information collected directly with out any reference. 'n this study
it was mainly interviews, with concerned officers and staff, either individually or collectively
some of the information had been verified or supplemented conducting personal with
observations.
The data includes$
'nterviews with (adhucon employees
rganization .hart has been drawn through observation
II) S!"#dary data: The )econdary data was collecting from already published source such
as -amphlets, !nnual reports, returns and internal records.
The data includes$
.ollection of re*uired data from the annual reports of (adhucon )ugars %imited. 'n
house magazines, -ublications, and /ebsites.
#eference from text books and 0ournals, relating financial management
3
LIMITATIONS OF THE STUDY
The analysis is made on the basis of secondary data
Time is the main constraint in completing the study with in the stipulated period allowed.
't is not possible to analysis that in detail all documents.
The !vailability of data is only pertaining to four years is one of the constraints.
!s there is more dependency in secondary data realistic conclusion may not be possible to
be made.
,ven through there are 1o of indicators for analyzing the financial performance, the study
includes only about #!T'2).
4
INDUSTRY PROFILE
SUGAR INDUSTRY SCENARIO
'1&'! is the Fourth (a+or sugar producing country in the world. The first three being
in #ussia, "razil and .uba in that order sugar industry occupies an important place among
organized industries in 'ndia. 't ranks third largest industry in terms of its contribution to the
net value added by manufacturing and employees, nearly 3.45 %acks workers, besides
creating extensive indirect employment for 45 (illion cultivators of sugar cane the various
agencies of distributive trade and through subsidiary industries such as confectionery. 't is
also an important source excise duty for the central govt.
There are now 647 sugar factories in 'ndia, with a total installed capacity of 85
million tons, against this 677 factories were in operation of which 847 were in the private
sectors, 97 in the public sector and 447 in the co:operative sector.
'n 'ndia before independence co:operative sugar were established and the First co:
operative sugar factory being the co:operative sugar factory at ,T';--!;! '1 !1&<#!
-#!&,)<. The govt. encouraged the co:operative sector in the sugar industry. 'n the fifties
and new series of co:operative sugar factories started in the fifties.
!t present the co:operative sector consists of 57= of the factories in 'ndia, and
account for more than 57= of total sugar production. !t present these are 8> sugar factories
under co:operative sector and ? in private sector.
#egarding sugar can price the govt. of 'ndia fixes the minimum sugar cane price
linked to recovery of adhoc payment due to high cost of cane cultivation linked to a recovery
of >.5= the concerned state govt. recommended to pay another adhoc payment due to high
cost of cane cultivation linked to a recovery of >.5=. The factories are liable to pay a extra
5
amount of 4/: per each point of recovery percentage per each ton of sugar cane, if the
recovery of sugar reaches above >.5=.
SUGAR ABROAD
/orld sugar production will +ump ?= in the season that began in ctober mainly
because of increased output in "razil and 'ndia, the @.).&.! said, /orld production will be
855.4 million tonnes, up 87.5 million tonnes, from a year earlier and up 9 million tonnes from
the may forecast. .onsumption is forecast at 869 million tonnes, up 3.4 million from a year
earlier. "razil will produce 37.A million tonnes and 'ndia 45.8 million tonnes, the @)&!
said, with each country2s output up 6 million tonnes from the previous year.
BRA$IL:
,xports of "razil to the !rab countries broke a new record in ctober. They generated
@)B ?37.9 million, an increase of 5?= when compared to the same month last year. The
product the most influenced the performance in the month was sugar. )ales of the commodity
to the !rbas generated @)B345.5 million, presenting growth of almost 8?7= when compared
to last year. The "razillian sugar is taking over more and more space that was supplied by
,@ sugar.
THAILAND:
The cabinet recently announced a pre:harvest sugarcane price for the 4779:7? milling
year at >77 bath per tonne. The return for sugar production and distribution was set at
364.>9baht per tonne of sugarcane crushed. The cane and sugar "oard said, the price is
almost same as it was last season.
6
GUATEMALA:
!ll sugar for he domestic market is sold through a distribution company owned by the sugar
industryC !sazgua, and association that represents sugar millers, handles all marketing of
sugar for export. The monopoly power exercised by these organizations enables the industry
to maintain domestic sugar prices well above world market levels. Duatemala exports 8 to 8.3
million tonnes of sugar per year.
ABSTRACT:
)ugarcane, labor and capital are the well known common on inputs for the production
of sugar. utput of sugar behaves in response to some increase in one particular input or all
inputs. !ssuming that the amount of factors of production Eoutput) will depend exclusively on
change in technology by decomposition of unidentified iron complexes applying electrolytic
clarification using optimized lime dose from cane +uice during sugar manufacturing. The iron
content was deposited at cathode after decomposition of iron complexes. !s a result
percentage of sucrose as well as purity Eoutput) show increasing pattern, which can be
treated as increasing returns to the scale of a sugar industry
INTRODUCTION:
'ndia2s highest production had been 47.86 million tonnes in the year 4774:73 when
the area under cultivation was about 6.6 million hectares and a sugar recovery of 87.39= on
cane. The Dovernment said it would liberalize sugar exports encouraged by prospects of a
good domestic crop and from global prices. Food minister said as a first step the Dovernment
will allow a state trading firm to export up to 377,777 tonnes of sugar to meet demand from
-akistan and other importing countries in the region.
7
!t the moment, the government permits exports by mills which had imported raw
sugar duty free in the last two years with an obligation to sell it overseas with in a stipulated
time:period. "ut the industry has been urging the government to permit all mills to sell
overseas to take advantage of strong global prices, a booming export market and high
domestic production.
'ndia2s sugar production during crop year ending in )eptember is expected to be
around 8>.5 million tonnes, up from 83 million tonnes last year. !n industry official has
forecast production would rise to 44 million tonnes in 4779:7?. The country annually
consumes about 8> million tonnes of sugar. The industry confident of boosting white.
MAR%ET REVIE&
MARKET REVIEW FOR THE MONTH OF NOVEMBER ,2006
&eclining trend continued in various whole sale sugar markets of the country during
(arch,477?.prices eased by #s.67/:to #s.97/: a *uintal on increased supply and lack of
demand. <e Dovernment of 'ndia released a free sale *uantity of 84 lakh tonnes for the
month of &ecember as against 88 lakh tonnes during the corresponding period last year.
Dur prices also declined in the wake of new arrivals in the market. /eekend wholesale prices
of )ugar F Dur are given here under.
8
PRICES OF SUGAR AND GUR FOR THE MONTH OF MRC'()*)
Mar+t, -*
,t
.
t/
*0
t/
((
#d
-)
t/

S12ar O!t N"3 N"3 N"3 N"3
&elhi 8>77 8>45 8>77 8>77 8>77
8A57 8A57 8A35 8>>7 8>35
(umbai 8?66 8?55 8?4A 8?88 8?77
8??5 8?>4 8?>4 8?94 8?58
;olkata 8A87 8>>7 8A77 8>>7 8>?7
8A37 8A37 8A57 8A47 8>A7
.hennai 89?7 89A5 89>7 8995 8935
89A7 8?85 89>5 89?7 8965
9
&ORLD SUGAR OUTLOO%
&ORLD SUGAR BALANCE
!ccording to F.. %icht2s first estimate of world sugar balance in 477A:87, world sugar
production in 477A:87 is expected at 897.78 million metric tons raw value, Emrtv) or >.35
million mrtv higher than in 477>:7A. /orld sugar consumption in 477A:87 is expected to rise
by 4.>> million mrtv to 86>.49 million mrtvs. 'mports in 477>:7Aare estimated at about 6>.7A
million mrtv, 3.>> million mrtv lower than in thew last year while exports are estimated at
58.39 million mrtv, 4.34 million mrtv lower than in the last season. The current season is
expected to close with a stock of ?4.96 million mrtv or >.65 million mrtv higher than the
closing stock last year. The stocks amount to 6>.AA= of the estimated consumption, while
last year it was 66.86=.
U4S SUGAR BALANCE
!ccording to the last estimate of @)&!, )ugar production in the @.). in 477A:87 is
expected at >.54 million short tons raw value, or 8.84 million strv higher than ?.67 million
strv produced in 477>:7A. 'ncluding opening stock of 8.?9 million strv and imports of 4.48
million strv, the total supply is expected at 84.6A million strv, as against 84.8? million strv in
477>:7A. Total use Eincluding export) in 477A:87 is estimated at 87.94 million strv as against
87.68 million strv in 477>:7A.
10
SUGAR 5 HEALTH
S&EET REMINDER:
The current festive season always induces a certain degree of anxiety in me. ' must
confess that this anxiety is caused on account of my sweet tooth. (uch as ' would like to
think of myself as someone who has in general a very GresponsibleH attitude towards the
consumption of sweets, this is the one time of the year when ' do tend to over indulge.
!nyway what lingers now is the post feasting guilt my only consolation, if it can be called
that is the fact most of us are guilty of the same misdemeanor to which ' have +ust confessed.
&HY SHOULD ONE FEE GUILTY AND ALSO &ORRY ABOUT CONSUMING
SUGAR 6
!ctually it is the excessive consumption of sugar that is not desirable. )mall amounts
of sugar can be consumed without too much fuss. The /< recommends that we limit our
intake of refined sugar to 5 to 87 per cent of our daily calorie re*uirements. This means that
on a 4,777:calorie diet Iwhich the average recommended dietary allowance: we can consume
about 477 calories of sugar E87 tea spoons).
#emember the following simple rule about many things in life also applies over here$
most things in excess are harmful or not desirable. 'n the case of our diet, excessive
consumption of calories, beyond the 4,777 limit, is not good whether they come from fat,
proteins or from sugar. !ll excessive intakes get stored as fat in the body.
!ccording to a recent issue of the 1ew ,ngland +ournal of medicine, regular
weighing is the single most important tool to keep your weight under check. 't is always
better to catch the small increases in weight before they snowball into something big.
11
#egular weighing can guide you towards making minor but daily ad+ustments in your diet so
the situation does not never get really out of your control.
CO7PRODUCTS
REEP : EASING THE &AY FOR FINANCING OF RENE&ABLES
The #enewable ,nergy and ,nergy ,fficiency -artnership E#,,,-), has launched the
G#enewable ,nergy ,xchange E!sia) -rivate %td.2 'n )ingapore with the Jsupport of the
development finance arm of the Derman government, &,D. #,,,- is an active, global
public:-rivate partner ship that structures policy and regulatory initiatives for clean energy,
and facilitates financing for energy pro+ects.
't has often been observed that while pro+ect developers and investors find it difficult
to identify sources of finance, bankers find it difficult to identify bankable pro+ects. !ll this
will now be passe, with the introduction of #,,,-2s new ,xchange programme.
The #enewable energy ,xchange would act as a central point of contact through
which a professionally prepared and monitored pro+ect portfolio would be provided to an
active group of investors.
DRAMATIC CHANGE OF FORTUNES
&espite being a large segment of the country2s burgeoning food processing industry,
the sugar sector is still sub+ect to controls and restrictions.
The '1&'!1 sugar industry is witnessing a dramatic turn of fortunes. #ising
production for four successive years since 8AAA:4777 burgeoning stocks with mills, falling
prices and s*ueezed margins have become a thing of the past in a short span of one year.
.ritically, 'ndia has transformed itself from being an exporter of sugar to an importer of the
sweetener.
/hat led to this sudden change of fortune form a high of 4A? million tonnes in 4776:
4775 and 4>4 million tonnes in 4775:37:73, sugarcane output faced a sharp decline to 439
12
million tonnes in 4773:76. (oisture I stress conditions in some of the important cane
growing regions including (aharastra, Tamilnadu, ;arnataka, Du+arat and @tter -radesh
resulted in lower crops. -est infestation Ewoolly aphid) too affected yields in some states. The
belief that 'ndia2s sugarcane had successfully broken the cyclical nature of production since
8AAA:4777 was shaken.
!s a result of lower cane output, production that registered a record 478.34 lakh
tonnes the following season. 'n addition, as it always happens, lower output encouraged
larger diversion of cane for alternative sweeteners such as GgurH which en+oyed strong prices.
The decline of 97 lakh tonnes or 37 percent in sugar production resulted in a sharp
draw down of stocks during 4773:76. ! period characterized by A percent growth in overall
agricultural production, rustling in higher rural incomes and expansion of demand.
AREA AND PRODUCTION OF SUGARCANE
Ara:
Ma8"r ,tat, ())97). ()).7): ()):7); ());7*)
@ttar -radesh 47.6 8>.5 47.3 44.5
Tamil nadu 5.> 9.> 5.3 9.5
;arnataka 6.4 3.> 4.A 3.7
!ndhra pradesh 3.4 3.3 3.7 3.7
Du+arat 4.> 3.7 4.7. 4.>
thers ?.? >.4 9.5 ?.7
T"ta< ==4* =-49 =)4) ==4:
Ara i# <a+/ /!tar,
Pr"d1!ti"#:
Ma8"r ,tat, ())97). ()).7): ()):7); ());7()*)
13
@ttar -radesh 88>.7 889.3 883.7 88>.8
Tamil nadu 65.8 3?.7 4?.7 66.5
;arnataka 34.9 37.7 8A.? 34.3
!ndhra -radesh 8>.8 85.6 86.9 8A.8
Du+arat 84.5 86.8 87.> 83.>
thers 3?.A 39.7 35.3 3?.5
T"ta< (;.4( (:*49 (-94( (904-
NE& DIMENSIONS OF SUGAR GRO&TH
)ugar is the second largest agro based industry in 'ndia located in rural areas. !bout
57 million farmers, their dependants and a large number of agricultural laborers are involved
in sugarcane cultivation, harvesting and ancillary activities, constituting ?.5 percent of the
rural population. "esides the industry provides employment to about 4 million skilled and
semi skilled workers, and others employed in ancillary activities mostly from rural areas. The
industry not only generates power from by product bagasse for its own re*uirement but
surplus power for supply to the grid. 't also produces ethanol, an eco:friendly and renewable
energy for blending with petrol. /ith 653 operating sugar mills in different parts of the
country, the industry has been a focal point for socio:economic development of rural areas.
I#dia i, am"#2 t/ >? !"1#tri, i# t/ ?"r<d ?/r t/ ,12ar i#d1,try /a, di3r,i>id
i# t" !"2#rati"# "> @"?r a#d @r"d1!ti"# "> >1< t/a#"<4
The @nion Dovernment licensed new units with an initial capacity of 8,457 tonnes a
day till the 8A>7s which was subse*uently increased to 4,577tcd.
PROFILE OF INDIAN SUGAR INDUSTRY ()*):
14
N1mAr "> >a!t"ri, : =0-
.ane price per tonne $ #s. 8>,777 crores
1o. of cane farmers $ 57 million
)ugar production $ 44 million tonns Eraw value)
Kalue of sugar output $ #s.4?777 crores per annum
!nnual tax contribution
to exche*uer $ #s. 4,?77 crores
,mployment including
ancillary activities $ 4 million people
Fuel ,thnol of 5 percent
blend Evalue) $ #s. 977 crores per annum
.urrent export of
.ogenerated powerEvalue) $ #s. ?57 cores per annum
GRO&TH OF SUGAR INDUSTRY:
YEAR NO4OF UNITS AVERAGE CAPCITY
8A>7 4AA 8957 tonnes
8AA7 3?? 4737 G
4777 643 3777 G
4775 653 3477 G
4787 6?3 3657 G
PIONEERING EFFORT IMPROVES SUGAR BUALITY
,ven as the sugar industry is going through a crisis, there is some good news on the
*uality front. The ;issan Keer )atara .ooperative )ugar Factory, "huin+, in (aharastra2s
15
)atara district initiated an experiment two months ago to improve sugar *uality, using a
technology developed by (r.K.(. ;ulkarni, founder:director of K.( "iotech.
Sa3i#2 i# Ba2a,,
The results show that apart from better sugar, there was a saving in bagasse and improvement
in steam consumption, crushing and production of bold grain sugar.
1o additions or changes in machinery are needed for these experiments, which are
based on the concept of using proper chemicals in the right doses at the right stage.
,ssentially , the experiments worked on balancing chemistry and this improved the overall
efficiency of the factory.
PROBLEMS OF SUGAR INDUSTRIES
-roblems of mounting losses.
Fixation of high sugarcane prices by the state govt.
The *uestion of minimum economic size.
ld machinery.
%ow sugar recovery.
Failure to follow a consistent policy.
.ompletion from cheaper import.
SUGAR LICENSING POLICY:
16
The govt. of 'ndia issues periodically guidelines for licensing new sugar factories and for
expansion of existing sugar factories. The guidelines Eannounced in 0uly 8AA7) where
designed to give a boost to the sugar industry.
8. %icenses for new factories would be issued sub+ect to the provision that there is no
sugar factory with in a radius of 85 km.
4. The new sugar factories would be licensed for a minimum crushing capacity of 4577
tonnes per day.
3. 1ew licensed would be issued on the condition that cane prices would be payable on
the basis of sucrose content of the sugarcane.
6. -reference in licensing is to given to proposals from the co:operative and the public
sector rather than from the private sector.
5. %icenses are to be given liberally for the manufacture of the industrial alcohol through
the conversion of molasses, this is to boost production and export of industrial
alcohol.
SUGAR DEVELOPMENT FUND
17
The sugar development fund was setup in 8A>4. @nder the sugar less act and is funded
by transfer of proceeds of sugar was imposed at the rate of #s. 86 per *uintal on sugar
produced by all sugar factories. The fund is utilized for advancing loans on short terms for
the revalidation and modernization of sugar industry and for development of sugar cane in the
sugar factory area. The sugar development fund makes grants for undertaking research
pro+ects for developments of sugar industry.
The fund is also defray expenditure for the purpose of building have and maintenance
of buffer stocks of sugar with a view to stabilizing its price. The total allocation created to the
fund till 8AA9 amount to #s 8,997/:crores. The fund has so far sanctioned loans amounting to
#s.A97/: crores for sugarcane development and from modernization / rehabilitation of sugar
factories.
Dovernment sugar industry to study the development and growth of sugar industry in
'ndia vis:L:vis other sugar producing countries and suggest modifications amendments or
repeal of any existing laws and controls in order to increase production and efficiency, the
govt. of 'ndia had constituted a high I powered committee under the chairmanship of G
".".(aha+anH. The G(aha+an committeeH submitted its report in !pril 8AA>.
MAJOR RECOMMENDATIONS OF THE COMMITTEE ARE:
18
8. .omplete controls of sugar in order to provide level paying field to the domestic
industry vis:L:vis imported sugar
4. &iscontinuation of supply of sugar through the public distribution system E-&)) for
plugging the leakages on account of -&) sugar finding way to open market.
3. )etting of a sugarcane pricing board to determine every )eptember the advance price
E)(-) for the ensuring crushing season.
6. (inimum distance of 85 km. "etween an existing sugar mill and a new sugar mill for
which license is to be issued in order to ensure viability of both the mills.
5. .ontinue of import of sugar under open general license ED%) in order to product the
consumers against any unusual rise in prices.
The sugar industry is essential an !gro 'ndustry and therefore it should be centrally
located within the vast area of cane cultivation2s otherwise it will increase the cost of
transport. 't should be established at a place where !gronomic conditions favored to the
development of sugarcane plantation and where climatic conditions rainfall, land fertility and
irrigation facilities as such as to ensure burnt supply of sugar cane with high yield. !s per the
norms of the govt. the industry should have basic infrastructure facilities.
S12ar I#d1,try i# I#dia
19
AA"1t S12ar I#d1,try i# I#dia
)ugar consumption rate is highest in 'ndia as shown in the statistics received from @)&!
Foreign !gricultural )ervice. <owever, as per production is concerned, 'ndia has notched up
4nd position following "razil, the largest sugar producer in the world.
The 'ndian sugar industry uses sugarcane in the production of sugar and hence
maximum number of the companies is likely to be found in the sugarcane growing states of
'ndia including @ttar -radesh, (aharashtra, Du+arat, Tamil 1adu, ;arnataka, and !ndhra
-radesh. @ttar -radesh alone accounts for 46= of the overall sugar production in the nation
and (aharashtraMs contribution can be totaled to 47=.
There are 653 sugar mills in 'ndia. .o:operative sector has 454 mills and private
sector has 836 mills. -ublic sector boasts of around 9? mills.
S12ar I#d1,try ,t 1@ a!r",, I#dia
N !ndhra -radesh )ugar 'ndustry
N "ihar )ugar 'ndustry
N Du+arat )ugar 'ndustry
N <aryana )ugar 'ndustry
N <imachal -radesh )ugar 'ndustry
N ;arnataka )ugar 'ndustry
N (adhya -radesh )ugar 'ndustry
N (aharashtra )ugar 'ndustry
N .hhattisgarh )ugar 'ndustry
N (anipur )ugar 'ndustry
N rissa )ugar 'ndustry
N -un+ab )ugar 'ndustry
20
N Tamilnadu )ugar 'ndustry
N @ttaranchal )ugar 'ndustry
N @ttar -radesh )ugar 'ndustry
N /est "engal )ugar 'ndustry
B2i##i#2 "> S12ar I#d1,try i# I#dia
)ugar is made from sugarcane, which was arguably discovered thousands of years ago in
1ew Duinea. From there, the route was traced to 'ndia and )outheast !sia. 't was 'ndia which
began producing sugar following the process of pressing sugarcane to extract +uice and boil it
to get crystals.
't was in 8A57:58 the government of 'ndia made serious industrial development plans and set
the targets for production and consumption of sugar. 't pro+ected the license and installment
capacity for the sugar industry in its Five Oear -lans.
Types of )ugar 'ndustry in 'ndia
The sugar industry can be divided into two sectors including organized and unorganized
sector. )ugar factories belong to the organized sector and those who produce traditional
sweeteners fall into unorganized sector. Dur and khandsari are the traditional forms of
sweeteners.
(anufacturing -rocess followed in )ugar 'ndustry in 'ndia
)everal steps are usually followed to produce sugar. These steps can be mentioned as below$
N ,xtracting +uice by pressing sugarcane
21
N "oiling the +uice to obtain crystals
N .reating raw sugar by spinning crystals in extractors
N Taking raw sugar to a refinery for the process of filtering and washing to discard remaining
non:sugar elements and hue
N .rystallizing and drying sugar
N -ackaging the ready sugar
Ma!/i#ry S1@@<ir, >"r S12ar I#d1,try i# I#dia
)ome of the suppliers that offer cutting:edge machines to the companies involved in sugar
industry of 'ndia are$
N )akthi )ugars %td
N )ri )u+ay ,ngineering -roducts
N )ri Ki+ayalakshmi 'ndustries
N (urthy 'ndustries
N -arveen -erforaters F !llied 'ndustries
N !eromen ,ngg co.
N ;amla Foundry F /orkshop
COMPANY PROFILE
22
MADHUCON SUGAR AND PO&ER INDUSTRY LIMITED:
&uring the year 4778:74 (adhucon )ugars %imited was incorporated to purchase and
take over the sick sugar mill namely THE PALAIR CO7OPERATIVE SUGARS
LIMITED ,stablished in 8A>4. !t the time of taking over, the company is suffering with
losses. !fter taken over by (adhucon )ugars %imited the company has earned net profit in
the first year of operations itself.
%ater the company2s name was changed as CMADHUCON SUGAR AND PO&ER
INDUSTRIES LIMITEDD4 These company is one of the company in group companies of
(adhucon -ro+ects %imited which is having diversified activities of construction of
infrastructure pro+ects like #oads, "ridges, .anals, "uildings, Flyovers, Dranites, )ugar and
allied products.
MADHUCON GROUP is working on pro+ects in various core sectors of nation
importance like highways. 'rrigation, producing the construction materials, power houses, all
of which, no need to say are so essential now for the all round infrastructure development of
the nation.
MADHUCON GROUP CONSISTS FOLLO&ING COMPANIES
23
8. (!&<@.1 -#0,.T) %T&
4. (!&<@.1 D#!1'T,) %T&
3. (!&<@.1 ,1D'1,,#) %T&
6. (!&<@.1 "'1!-@#' 0K
5. ("1 !1.<#,& ,!#T< %T&
9. K!#!%!;)<(' D#!1'T,) -KT %T&
?. (!&<@.1 )@D!# !1& -/,# '1&@)T#',) %T&
ABOUT MADHUCON SUGAR AND PO&ER AND PO&ER INDUSTRIES
LIMITED
(adhucon )ugar and -ower 'ndustries %imited was #egistered on 5
th
1ov.4774 which
was purchased under privatization scheme with a capacity of 8457 tonnes per day. The
factory was located at #a+eswarapuram village in ;hammam &istrict. The factory consist of
(). 3i<<a2, situated in radius of 35 kms. !nd the company has 00.. !a# >armr,4
(adhucon )ugar and -ower 'ndustries is one of the group companies of (adhucon
-ro+ects %imited which is having diversified activities of construction of infrastructure
pro+ects like #oads, "ridges, .anals, "uildings, Flyovers, Dranites, )ugar and allied
products.
The group turnover is around 977 .rores and earning reasonable profits. The present market
price of (adhucon -ro+ects %imited share of #s.4.77 each is *uoting around #s.377.77.
THE FOLLO&ING IS BOARD OF DIRECTORS OF THE COMPANY
NAME DESIGNATION DIN
24
)ri 1.)eethaiah .hairman 77744>3A
)ri 1.;rishnaiah ,xecutive &irector 77744??>
)ri T.Kenugopal #ao &irector 777?79>>
)ri ;. )rinivasa #ao &irector 7774455>
LIST OF SHARE HOLDERS 5 THEIR SHARE HOLDINGS:
NAME N"4"> EE1ity
,/ar, "> R,4*)F7
a!/
Va<1 R,4 G
1!(! 1!D,)/!#! #! 47689> 47689>7 ?
1!(! ),,T<!'!< 58764 587647 4
1!(, ;#')<1!'!< 58764 587647 4
1!(! .<'11!((! 58764 587647 4
T.K,1@D-!% #! 58764 587647 4
;!((! )#'1'K!) ?9593 ?95937 3
(.),,T<!#!(!'!< ?9593 ?95937 3
;.%!;)<(!1!( ?9593 ?95937 3
(!&<@.1 -#0,.T) %T& 87>8577 87>85777 67
(!&<@.1 D#!1'T,) %T& AA8996 AA89967 39
TT!% 4?888>A 4?888>A7 877
T/ @r>"rma#! i#di!at"r, "> Mad/1!"# S12ar a#d P"?r I#d1,tri, <imitd
ar a, >"<<"?,4
D,!ri@ti"# ())07)9 ())97). ()).7): ()):7); ());7*)
)ales A8.A> 83A8.76 8543.?5 3456.A> 3659.?5
1et profit 7.99 36.67 ??.6A 467.?? 347.57
#eserves and surplus 7.99 3?.44 888.98 369.37 397.48
Dross "lock AA9.A4 8756.5A 8343.47 8979.?8 8?7>.3>
1et "lock A6?.5A >A5.64 8757.74 88?>.66 843>.83
)hare capital 4?8.84 4?8.84 4?8.84 4?8.84 48?.84
25
'n view of the good demand for the sugar and its allied products like #ectified )pirit,
,1!, ,thanol etc., the management has decided to undertake modernization /expansion of
the existing e*uipment to enhance the crushing season 477A:87 and further expansion from
4777 T.& to 3577 T.& for the season 477>:7A.The company also proposes to setup a new
pro+ect for the production of !lcohol/,thanol from (olasses and cereal gains with installed
capacity of 95 ;%-&.
The proposed distillery will mainly manufacture #), ,1! and 'mpure )pirit using the
available molasses from )ugar cane crushing during the seasonal operations. @se of own /
procured (oasses as re*uired and use of cereal grains will be made during the off:season
operations. Thus the design of distillery ensures optimum utilization of the manufacturing
facilities.
The company also proposes to setup another new pro+ect for the production of power
by setting of .o : gen plant with the installed capacity of 47 (/ using the "egasse available
from the sugar plant.
THE ESIMATED COSTS OF THE PROJECTS ARE AS FOLLO&S:
&,).#'-T'1 )@D!# &')T%# .:D,1 TT!%
)ite development 6>.77 45.77 P ?3.77
.ivil works F "uildings >7?.77 9?5.77 ?37.77 4484.38
-lant and machinery 4>86.77 39A3.77 ?939.77 86863.77
(iscellaneous Fixed
assets
435.77 377.77 837.77 995.77
-reliminary, pre:
operative
!nd startup expenses
677.77 8>>.77 456.77 >64.77
-rovision for contingency 84>.77 834.77 3>A.77 96A.99
(argin for working
capital
887A.77 458.77 57.77 8687.77
26
'nterest during
construction
P P P P
Gra#d t"ta< 00=*4)) 0(9=4)) ;*;)4)) *;;;04))
(eans of finance )@D!# &')T%# .:D,1 TT!%
Term loan 3346.77 385A.77 5586.77 88AA?.77
Quasi e*uity from )&F 8994.37 85?A.77 4?5?.77 5AA>.77
,*uity share capital form
()%
556.87 549.77 A8A.77 8AAA.77
GRAND TOTALS 00=*4)) 0(9=4)) ;*;)4)) *;;;04))
The company has appointed renowned consultants (/s. (itcon .onstancy services
%imited, -une for expansion and installation of sugar and &istillery and (/s. !vant:Drade
,ngineers and consultants -vt. %td., .hennai for .o:gen. plant.
The above pro+ect cost has been estimated by them, keeping in view of the prevailing
market rates. The above pro+ects are expected to be commissioned by ct.4787.
The company has already finalized the &-#s and is in the process of finalization of
detailed drawings for the e*uipment and placement of orders. The company has already
placed orders for "oiler and steam Turbines for .o:gen. plant.
To part finance the above pro+ects the company is proposing to apply for term loans from the
banks and the financial institutions.
The loans are proposed to repay with in > years with a moratorium period for 4.5
years from the date of 8
st
disbursement of the loan.
27
The company is in existence for the last 6 years and earned reasonable profits from
the date of its inception of taking over from The -alair .o:operative )ugars %td.
PRODUCTION SCENARIO
-roduct $ )ugar
"i:-roducts $ "eggese
$ (olasses
$ Filter cake
"aggese is used as fire wood to run "oilers
(olasses is used in the manufacturing of &istillers like
alcohol and spirits, ,thanol etc,.
Filter cake is used as manure for the agriculture.
SUGAR PRODUCTION DETAILS OF:
PERTICULARS ())07)9 ())97). ()).7): ()):7); ());7*)
.!1, .#@)<,&
E(.T)
8,67,688 95,639.9A9 858,>59.59 8?A,A59.A6 8A5,35>.94
)@D!#
-#&@.,&
EQT%))
8,38,463 97,337 8,66,645 8,59,?3? 898,?63
28
)@D!# )%&
EQT%))
6,368 8,86,938 >>,?6A 8,>3,8?8 8A4,?>6
)T.; F
)@D!# EQT%))
8,49,A74 ?4,978 838,647.36 8,78,656 838,>49
MADHUCON SUGARS AND PO&R PROJECTS INDUSTRIES LTD:
OBJECTIVES OF THE COMPANY
(anufacturing of white crystal sugar
To promote the agriculturists in that particular area
To utilize the harvest of sugar cane in that area
'mproving the cultivation methods through giving better support to the formers
'ssuing loans to members for productive and other similes purposes
To encourage self help, thrift and co:operations among members
To undertake such other activities as are incidental and conductive to the
development of sugar cane, sugar and allied 'ndustries.
&ELFARE MEASURES TO THE EMPLOYES:
The following welfare measures are be provided by (adhucon )ugars for the employees.
-roviding *uarters Eas per their category)
)hoes for the purpose of safety measures
ne pair of uniform for every year for every employee
29
'f any employees met with the accident the management immediately give the first aid
and take the patient to khammam Dovt. <ead Quarters hospitals F provide two
persons to assist them for during the hospitalization.
!s per the order of the labor department i.e. assists commissioner of labor F deputy
commissioner F deputy commissioner we have to pay the compensation to the person
who met the accident
The factory management has been sanctioned towers the future expenses an amount
of 577/: to the person who died artificially or accidentally
Their cases have been recommended to the labor department for the compensation as
per the factory act
The management every year has been sanction productivity linked incentive Ebonus)
to employee for every year depending upon the percentage of the recovery.
PRODCUCTION PROCESS
'n the beginning of production process sugar canes are loaded into a container, cane
carrier carries them into cane kicker. 't helps to maintain a uniform level of sugar canes, cane
cutters cut the whole cane in to small pieces and even cut the layer of the cut cane
Those small pieces are send into crusher by crushing that small pieces of sugar cane more
+uice.
/ill be extract the mill entract the more +uice which goes to process of manufacturing
of sugar. There will be 6 mills in each mill there are three values. The prepared cane to 8
st
mill and there it will be crushed. The product comes form discharge rollers of 8
st
mill is called
primary +uice, like wise the primary baggage passes through remaining 3 mills either hot
30
water or cold water both are used as maceration water which is used at the 6
th
mill for
extraction of more +uice.
Kaccum pans
.ondensation plant
/ater cooling system
.ooling, curing and drying
)ugar dryers
Dardens
(olasses weighment
)tream power plantE"oilers)
.himney
(iscellaneous items
)ugar muter
)ugar elevators
&iesel generation
Final molasses
)torage tank
Furnace of oil storage tank
"aggage elevator
CONTENTS HOR) RA& MATERIALS OF SUGAR
)ugar cane and
.hemical
31
LIST OF CHEMICALS &HICH INVOLVES IN THE PRODUCTION PROCESS4
"urnt lime
)ulfur Eso4)
)odium exhamata phosphate
Kiscosity reducer
!nti scalant
&escalant
<ydrogen peroxide
LIST OF MECHINERY &HICH INVOLVES IN THE PRODUCTION PROCESS
.ane carrier
.ane kicker
.ane levelers
.ane cutter
.rusher
(ills
0uice wiggling scale
0uice heaters
0uice sulphitation tanks
)ulfur burner
Filter presser
.arbonation plant
,vaporation plant
32
)yrup treatment plant
A CONCEPTUAL FRAME WORK
Financial statements are prepared primarily for decision making. They play a dominant
role in setting the frame work of managerial decisions. Financial analysis is the process
of the firm by properly establishing relationship between the items of the balance sheet
and profit and loss account.
There is various method or techni*ues used in analyzing financial statements such as
.omparative statement.
.ommon size statement.
Trend analysis.
#atio analysis.
CONCEPT OF FINANCIAL ANALYSIS:
The term financial analysis also know as analysis and interpretation of financial
statements refers to the process of the bettering financial string the weaknesses of the
firm by establishing strategic relationship between the items of the balance sheet and
profit and loss account and other operative data.
33
The term Gfinancial statement analysisH includes both Janalysis and Jinterpretation2. 't
distinction should therefore, is used to mean the simplification of data by methodical
classification the meaning and significance of the data so simplified. <owever, both
Janalysis2 and Jinterpretation2 are interlinked and complimentary to each other analysis
is useless without interpretation analysis is difficult or even impossible .financial
statement analysis or simply Jfinancial analysis2 to cover the meaning of both analysis
and interpretation.
!ccording to G(etcalf and titardH analyzing financial statements is a process of
evaluating the relationship between components part of a financial statement to obtain
a better understanding of a firm2s position and performances.

TYPES OF FINANCIAL ANALYSIS
/e can classify various types of financial analysis into different categories depending
upon
i. (aterial used
ii. (odus operandi.
Types of fnancial analysis
n the basis of on the basis of
(aterial used modus operandi.
34



ON THE BASIS OF MATERIAL USED:
According to material used fnancial analysis can be of
two tyes!"
1# $%ternal analysis#
2# &nternal analysis#
EITERNAL ANALYSIS: -
'(is analysis is done by out sides w(o do not (a)e access to t(e
detailed internal accounting records of t(e business frm# '(ese
outsiders include in)estors* otential in)estors* creditors*
otential creditors* go)ernment agencies* credit agencies and
t(e general ublic
INTERNAL ANALYSIS:7
The analysis conducted by persons who have access to the internal accounting
records of a business firm is known as internal analysis can, therefore, be
performed by executives and employees of the organization as well as government
agencies which have statutory powers invested in them.
35
$+'$,-A. A-A./0&0
&-'$,-A. A-A./0&0

&-'$,-A. A-A./0&0
ON THE BASIS OF MODUS OPERANDI:7
!ccording to the method of operation can also be of two types.
HORIZONRAL ANALYSIS:-
<orizontal analysis refers to the comparison of financial data of a company for
several years. The figures for this type of analysis are presented horizontally over a
number of columns. The figures of the various years are compared with standard
Eor) base year. This type of analysis is also called G&ynamic analysisH as it is based
on the data from year to year rather than on data of any one year.

VERTICAL ANALYSIS:7 Kertical analysis refers to the study of relationship if the various
items in the financial statements of one accounting period. 'n these types of analysis is the
figures from financial statement of the year are compared with a base selected from the same
years statements. ' am known as Gstrategic analysis.H
PROCEDRE OF FINANCIAL STATE!ENT ANALYSIS
"roadly specking there are three steps involved in the analysis of financial statement. These
are$:
i. )election
ii. .lassification
iii. 'nterpretation.
The First step involves selection of information Edata). The second step involved is the
methodical classification of the data. The third step includes drawing of interpretation and
conclusions.
The following procedure is adopted for the analysis and interpretation of financial statements.
The analyst should ac*uaint himself with the principles and postulates of accounting.
The extent of analysis should be determined so that sphere of work may be decided.
36
The financial data given in the statements should be recognized and rearranged.
! relationship is established among financial statements with the help of tools and
techni*ues of analysis such as ratios, trends, common size, funds flow etc.
The information is interpreted in a simple and understandable way. The significance
and utility of financial data is explained for helping decision:making.
The conclusions drawn from interpretation are presented to the management in the
form of reports.

!ETHODS "OR# DE$ICES OF FINANCIAL ANALYSIS:
The analysis and interpretation of financial statements is used to determine the financial
position and results of operation as well. ! number of methods Eor) &evices are used to study
the relationship between different statements.
The following methods of analysis are generally used$
%& CO!PARATI$E STATE!ENTS: The comparative financial statements are
statements of the financial position at different periods of time. The elements of financial
position are shown in a comparative form so as to give an idea of financial position at two
Eor) more periods.
'& TREND ANALYSIS: The financial statements may be analyzed by computing
trends of series of information. This method determines the direction upwards Eor) down
wards and involves the computation of percentage relationship that each statement item
bears to the same item in base year. The information for a number of years is taken up and
one year, generally the first year, is taken as a base year.
37
(& CO!!ON ) SIZE STATE!ENTS: The common : size statements, balance
sheet and income statement are shown in analytical percentages. The figures are shown as
percentages of total assets, total liabilities and total sales. The total assets are taken as 877
and different assets are expressed as a percentage of the total. )imilarly, various liabilities
are taken as a part of total liabilities.
*& FNDS FLO+ ANALYSIS: Funds flow means transfer of economic values
from one asset of e*uity to another. Flow of funds is said to have taken place when any
transaction makes changes in the amount of funds available before happening of the
transaction. 't is called a Gsource of fundsH and if it results in the decrease of funds it is
known as an Gapplication of fundsH.
,& RATIO ANALYSIS: ! ratio is a simple arithmetical expression of the relationship
of one number to another number may be defined as the indicated *uotient of two
mathematical expressions.

-& CASH FLO+ ANALYSIS:- .ash flow statement is a statement which describes
the inflows Esources) and outflows Euses) of cash and cash e*uivalents in an enterprise
during a specified period of time. )uch a statement enumerates net effects of the various
business transactions on cash and its e*uivalents and takes into account receipts and
disbursements of cash. ! cash flow statement summarizes the causes of changes in cash
position of a business enterprise between dates of two balance sheets.
.& $OL!E-COST-PROFIT ANALYSIS: Kolume I cost Iprofit analysis shows
the relationship among the various ingredients of the profit planning, namely, unit sale
price, variable cost, sales volume, sales mix and fixed cost.
O/0ec1i2es of fnancial s1a1e3en1s:
The financial statements are the source of information on the basis of which conclusions are
drawn the course of information on the basis of which conclusions are drawn about the
profitability and position of a concern. They are ma+or means employed by firms to present to
their financial position of owners, creditors and the general public. The primary ob+ective of
principles board of !merica states the fallowing ob+ectives of the financial statements.
38
To provide financial position about economic resources and obligation of business
firm.
To provide reliable information about change such economic resources and
obligation.
To provide financial information that assists in estimating the earning potentials of
business.
To disclose to the extent possible other information related to the financial statement
that is relevant to the users of these statements.
To provide reliable information about changes in net resources arising out of business
activities.
I!PORTENCE OF FINANCIAL ANALYSIS:
The financial statements are mirrors, which reflect the financial position operating
strength of weakness of the concern. These statements are useful to management investors,
creditors, bankers, workers, government and public at large. Deorge o. may points out the
following ma+or uses of financial statements.
*4 !s a report of steward ship.
(4 !s a basis of fiscal policy.
-4 To determine the legally of dividends.
=4 !s guide to advice dividends.
04 !s a basis for the granting of credit.
94 !s a information for prospect on investment in enterprise.
.4 !s a guide to the value of investment already.
:4 !s a aid to government supervision.
;4 !s a basis for price or rate regulation.
*)4 !s a basis for taxation.
LI!ITATIONS OF FINANCIAL STATE!ENT ANALYSIS:
Financial analysis is a powerful mechanism of determining financial strengths and
weakness of a firm. "ut the analysis is based on the information available in the financial
statements. Thus the financial analysis suffers from serious inherent at limitations of the
financial statements.
39
LI!ITATIONS:
't is only a study of interim reports.
Financial analysis is based upon only monetary information and non:monetary
factors are ignored.
&ifferent people may interpret the same analysis in different ways.
't does not consider the .hanges in prices level.
.hanges in accounting procedure by firm may often make financial analysis
misleading.

!ETHODS OR DE$ISES OF FINANCIAL ANALYSIS $ &etermine the financial
position and result of operations as well. ! number of methods or devises are used to study
the relationship between different statements. !n effort is made to use those devises which
clearly analyze the position of the enterprise. The following methods of analysis are generally
used.
.omparative statements.
.ommon size statements.
#atio analysis.
Trend analysis.
Funds flow analysis.
.ash flow analysis.
.ost Ivolume analysis.
The main aim of the pro+ect is to analyses the financial position, through comparative
sheet. The comparative financial statements are statements of financial position at
different periods. The elements of financial position at 4 or more periods. !ny
statement prepared in comparative from will be covered in comparative statements.
Denerally, 4 financial statements Ebalance sheet and income statement) are prepared in
comparative form for financial analysis purpose.
THE COMPARATIVE STATEMENT MAY SHO&:
40
!bsolute figures.
.hanges in absolute figures i.e.,
!bsolute data in terms of percentages.
'ncrease or decrease in terms of percentages.
The analysis is draw useful conclusion when figures are given in a comparative
position. The figures of sales for a *uarter, half year or one year may tell only the
present position of sales efforts. /hen sales figures of previous years are given along
with figures of current years. Then the analyst will be able to study the trends of sales
over different years. )imilarly, comparative figures will be able to study the trends of
sales over different periods. )imilarly, comparative figures will indicate the trend and
direction of financial of financial position and operating results.

The financial data will be comparative only when same accounting principle used in
preparing these statements. 'n case of any deviation in the use of accounting, principles
are used in preparing these statements and the analyst should be care full in using these
statements.
The 4comparative statements are$
8) "alance sheet or position statement.
4) -rofit loss account or income statement.
D@'&,%'1,) F# '1T,#-#,T!T'1 F .(-!#!T'K, "!%!1., )<,,T$
/hile interpreting comparative balance sheet the interpreter is
expected, study the following aspects.
8) .urrent financial position and li*uidation.
4) %ong:term financial position.
3) -rofitability of the concern.
*) CURRENT FINANCIAL POSITION AND LIBUIDATION:
8. For studying the current financial position or short term financial
position of a concern, one should see the working capital in both
years.
4. The excess of current assets over current liabilities will give the
figures of working capital.
41
3. The increase in working capital will mean improvement in the current
financial position of the business.
6. !n increase in current assets accompanied by the increase in current
liabilities of the same amount will not show any improvement in the
short term financial position.
5. ! student should study the increase or decrease in current assets and
current liabilities and this will enable him to analyses the current
financial position.

9. The second aspect, which should be studied in current financial
position are the li*uidity position of the concern. 'f li*uid assets like
cashinhand, cashatbank, bills receivables, debtors etcR
?. The increase in investors can be an account of accumulation of stock
for all customers. &ecrease in demand or inade*uate sales promotion
efforts.
>. !n increase in inventory may increase working capital of the
businessbut it will not be good for the business.
() LONG7TERM FINANCIAL POSITION:
The long term financial position of the concern can be analyses by studying the
changes in fixed assets, long term liabilities and capital.
8. The proper finance fixed assets by the either issue of long:term
securities such as debentures, bonds, loan financial institution or issue
of fresh share capital.
4. !n increase in fixed assets should be compared to the increase in
long:term securities then part of fixed assets has been financed from
the working capital on the other hand, if the increase in long term
securities in more than the increase in fixed assets have not only been
financed from long term sources but part of working capital has been
financed from long term sources. ! wise policy will be to finance fixed
assets by rising term funds.
3. The nature of assets, which have
increase or decrease, should also be studied to from an option about the
future production possibilities.
6. The increase in plant and machinery will increase production
capacity of the concern.
42
5. n the liabilities side of the balance sheet, the increase in loaned
funds will mean an increase any liability for passing interest. !n
option about the long term financial position should be formed after
taking into consideration above mentioned aspects.

-) PROFITABILITY OF THE CONCERN:
8. The next aspect to be studied in a comparative balance sheet
*uestion is profitability of the concern. The study of increase or
decrease in retained earnings, various resources and surplus etcR
will enable the interpreter to see the whether the profitability has
improved or not .
4. !n increase in in the balances of the profit and loss account and
other resources created from profit will mean an increase in
profitability to the concern.
3. The decrease in such accounts may issue of dividend, issue of
bonus shares or deterioration in profitability of the concern.
!fter studying various assets and liabilities, an opinion should be
formed about the financial position of the concern. ne cannot say
it short:term financial position is good then long:term financial
position will also be good or vice:versa. ! concluding word about
the overall financial position must be given at the end. The
methods we are using in this study are ratio analysis, which is
suitable to our study. 'f you go too briefly about this method.

43
RATIO ANALYSIS
The ratio analysis is one of the most powerful tools of financial analysis. 't is the
process of establishing and interpreting various ratios. 't is with the help of ratios that the
financial statements can be analyzed more clearly and decisions made from such analysis.
MEANING OF RATIO:7
! #atio is a simple (athematical expression. 't is a number expressed in terms of
another numbers indicated *uotient of two mathematical expressions. G! #atio is an
expression of the *uantitative relationship between two numbersH.
NATURE OF THE RATIO ANALYSIS:
#atio analysis is a techni*ue of analysis and interpretation of financial statements. 't
is the process of establishing and interpreting various ratios for helping in making certain
decisions. <owever, ratio for helping in making certain decisions. <owever ratio analysis is
not an end in itself. 't is only a means of better understanding of financial strengths and
weaknesses of a firm. .alculation of mere ratios does not serve any purpose, unless several
appropriate ratios are analyzed and interpreted.
SIGNIFICANCE OF RATIO ANALYSIS:7
The #atio !nalysis is one of the most powerful tools of financial analysis. 't is used
as a devise to analyze and interpret the financial health of enterprise +ust like a doctor
examines his patient by recording his body temperature, blood pressure etc., before making
his conclusion regarding the illness and before giving his treatment, a fnancial analyst
analysis the financial statements with various tools of analysis before commenting upon the
financial health or weaknesses of an enterprise a ratio is known as a symptom
44
like blood pressure, the pulse rate or the temperature of an individual. 't is with help of
ratios that financial statements can be analyzed more clearly and decision made from such
analysis.
ADVANTAGES OF RATIO ANALYSIS:7
#ation analysis has the following advantages.
#atio !nalysis helps in decision making
#atio !nalysis simplifies the understanding of financial statements
#atio !nalysis bring out interrelationship among financial figures
#atio !nalysis contributes significantly towards effective planning F forecasting
#atio !nalysis facilitates interfirm, intrafirm comparison.
#atio serve as effective control tools.
LIMITATIONS OF RATIO ANALYSIS:7
#atio !nalysis has the following %imitations$
#atio may not prove to be the ideal tool for interfirm
comparisons. The two firms may adopt different accounting
policies and hence the results might not be compoundable
! study of ratio in isolation, without studying the actual figures may head to
wrong conclusions
#atios can be only as correct as the data on which they are based. 'f the original
data is not reliable, then ratios will be mislead
'n the absence of well accepted standards interpretation of #atios becomes
sub+ective
45
#atios fails to reflect the impact of price levels changes and hence can be
misleading
#atios are only tools of *uantitative analysis they fail to considered *uantitative
aspects
TYPES OF RATIOS
"asically ratios can be divided into four broad groups and they are li*uidity ratio,
leverage ratios, profitability ratios, and activity ratios valuations ratios of capital market
ratios. ,xcept valuation ratios, which is purely based on external market values the four
important ratios are detailed below.
*) LIBUIDITY RATIOS
%i*uidity ratios measure the ability of the firm to meet its current obligations. 'n fact,
analysis of li*uidity needs the preparation of cash budget and cash and fund flow statements
but li*uidity ratios by establishing a relationship between cash and other current assets to
current obligations provide *uick measure of li*uidity. ! firm should ensure that it dies not
suffer from lack of li*uidity and also that it is not too much highly li*uid. The failure of a
company to meet is obligations due to lack of sufficient li*uidity will result in bad credit
image loss of creditors confidence or even in lawsuits resulting in the closure of the company.
! very high degree of li*uidity is also bad. 'dle assets earn nothing. The firmMs funds will be
unnecessarily tied up in current assets. There it is necessary to strike a proper balance
between li*uidity and lack of li*uidity.
The ratio which indicate the li*uidity of a firm are$
8. .urrent ratio
4. !cid test/Quick ratio.
46
() LEVERAGE RATIOS
The short term creditors like bankers and suppliers of raw materials, are more concerned with
the firmMs current debt paying ability on the other hand, long:term creditors, like debenture holders,
financial institutions etc. are more concerned with the firmMs long:term financial strength. 'n fact, a
firm should have a strong short:term as well as long:term financial position. To +udge the long:term
financial position of the firm. Financial leverages of capital structure ratios are calculated.
These ratios indicate mix of funds provided by owners and lenders. !s a general rule, there
should be an appropriate mix of debt and owners e*uity in financing the firmMs assets. The manner in
which assets are financed has a number of implications. &ebt is more risky from the firmMs point of
view and the firm has legal obligations to pay interest to debt holders, irrespective of the profits made
or loss incurred by the firm. ,mployment of debt is advantageous for shareholders in two ways.
a) They can retain control of the firm with a limited stake and
b). Their earnings will be magnified when the firm earns a rate of return on the total capital
employed is higher than the interest rate on the borrowed funds the process of magnifying the
shareholders.
47
-) PROFITABILITY RATIOS
The financial managers should continuously evaluate the efficiency of its company in
terms of points. The profitability ratios are calculated to measure the operating efficiency of
the company. "esides management the company creditors and owners are also interested in
the profitability of the firm. .reditors want to get interest and payment of principal regularly.
wners want to get a reasonable return to their investment. This is possible only when the
company earns enough profits profitability ratios can be determined on the basis of either
sales or investment.
These ratios are based on the premise that a firm should earn sufficient profit on each rupee of
sales. 'f ade*uate profits are not earned on sale, there will be difficulty in meeting the operating
expenses and no returns will be available to the owners. -rofitability ratios related to investment.
-rofitability ratios can also be computed by relating the profits of a firm to its investment.
These ratios are popularly termed as return on investment E#'). There are three different concepts of
investment.
!ssets capital employed and shareholders e*uity based on each of them are three broad categories
of #'Ms . There are
#eturn on assets
#eturn on capital employed
#eturn on shareholders/e*uity holders
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=) ACTIVITY RATIOS
!ctivity ratios are concerned with measuring the efficiency in assets management. )ome
times, these ratios are also called efficiency ratios are assets utilization ratios. The efficiency with
which the assets are converted into sales. The greater the rate of turnover or conversion. The more
efficient the utilization of management other things being e*ual for this reason such ratios are also
designated as turn over ratios. Turnover is the primary mode for measuring the extent of efficient
employment of assets by relating the assets to sales. !n activity ratio may, therefore be defined as a
test of the relationship between sales and the various assets of a firm. &epending upon the various
types of assets.
There are various types of activity ratios$
'nventory Estock) turnover ratio
#eceivable Edebtors) turnover ratios and collection period
!ssets turnover ratio.
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CLASSIFICATION OF RATIOS
VARIOUS ACCOUNTING RATIOS CAN BE CLASSIFIED AS FOLLOWS: -
Traditional classification
Eor)
)tatement ratio.
Financial classification
Eor)
.lassification according
to tests
)ignificance ratio
Eor)
#atios according to
importance.
S S S
8) "alance sheet #atio
r
-osition statement ratios
8) %i*uidity #atios.
4) %everage #atios.
8) -rimarily #atio
4) )econdary #atio
4) -rofit F !ccount ratios
r
#evenue/'ncome )tatement
ratio.
3) !ctivity #atios.
6) -rofitability #atios.
3) .omposite/(ixed #atios
r
'nter statement #atios.

ADVANTAGES OF RATIO ANALYSIS :7
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1) #atio !nalysis simplifies the understanding of financial statements.
2) #atios bring out the inter relationship among various financial figures and bring to
light their financial significance ratio analysis is a device to analysis and interpret the
financial health of enterprise.
3) #atio facilitates inter firm and intra firm comparison. They bring out the strengths,
weaknesses and efficiency of firms and their departments.
4) #atios contribute significantly towards effective planning and forecasting. ! study of
a trend in the past works as a helpful guide for the future.
5) #atios cater to the particular information need of a particular person, depending on his
interest in the business for which ratios are to be calculated. ! creditor may be
interested in li*uidity ratios, while an investor may want to study profitability.
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