Professional Documents
Culture Documents
Coal can be broadly classified into two categories like coking and non-coking coal.
Coking coal is the coal which has coking property and which is used in metallurgical
industries depending on the quality of coke produced by them. Coking coal is sub-divided
into prime coking coal, medium coking coal and semi coking coal. Similarly, non-coking
coal is also categorized in seven grades (Grade A to G) depending on its caloric values.
1
Commercial coal mining in India with Coal as an article of trade started in 1874 at the
instance of Warren Hastings for the benefit of East India Co. for the manufacture of arms
and ammunitions. Coal is the only prime source of energy. Coal mining started in the last
quarter of 18th century in Raniganj field. Britishers took the lead to exploit the coal
reserves to meet their industrial requirements (arms and ammunitions) especially during
the Second World War. This was in the Raniganj Coalfields area along the western banks
of river Damodar over a track of land from Dissergarh to Raniganj town and coal mining
commenced here in surface mines, quarries or small opencast mines. In the year 1815 -20,
the first shaft mine near Raniganj town was opened. In 1835, Raniganj coal mining with
all the land and buildings passed into the hands of Prince Dwarika Nath Tagore,
grandfather of poet Rabindra Nath Tagore and Carr-Tagore & Co. was formed in 1843.
M/S Carr-Tagore & Co. and another coal company M/S Gilmore Homfray & Co. were
amalgamated into Bengal Coal Co. Ltd., the first joint stock coal company in India. Since
then industrial operations continued on a low key principally as a result of neglect of coal
mining in India. Organized mining of coal started in the Raniganj coal field in the early
19th century. Transportation of coal from Raniganj to Calcutta was done through river
navigation along Bhagirathi opening of railway lines from Howrah and Raniganj and
introduction of Steam locomotives paved the way for expansion of coal production.
In the beginning of the 20th century our country had attained the capacity of producing
approximately 6 million tones of coal per annum during the First World War. In the
Second World War the demand of coal was increased. The Govt. as well as the business
community gave greater emphasis on increasing coal production. Coal recruiting
organization was set up to provide manpower and give a boost to the production drive.
CHAPTER – 2
2
With the dawn of independence a greater need for efficient coal production was felt in the
first five-year plan. Coal being the most crucial energy resource, was considered necessary
to expedite development of modernization of the coal industry. Thus, by the end of 1955-
56 our country produced 38.4 million tones. During the second five-year plan too the coal
production was stepped up further to 60 million tones per annum. In 1956, National Coal
Development Corporation (NCDC) was formed with 11 collieries belonging to railways as
its nucleus. NCDC was given the task of exploring new coal fields and expediting
development of new coal mines in the out laying coal fields. Subsequently, in the context
of conservation, safety, scientific development of coal reserves, systematic and proper
mining of coking coal and increasing demands from iron and steel industries the Govt. of
India took over all the coking coal mines on 16th of October 1971 and nationalized them
on 1st of May 1972. A company known as Bharat Coking Coal Ltd. was formed to manage
the coking coal mines.
With the takeover of coking coal mines by the Govt. as mentioned above, the private coal
mine owners stopped capital investment for renewal of machineries/equipments as well as
for the development of new mines. The living conditions of the miners remained sub-
standard. The private mine owners indulged in unhealthy mining practices including
slaughter mining with the sheer objective of maximizing their short-term gains. The
private miners defaulted in payment of royalty and other dues to the state group,
deposition of CMPF contribution amount, under payment of wages to the workers; they
also adopted malpractices in sales and other corrupt practices and also violated safety
3
laws. Approximately 3.5 lakh workmen engaged in non-coking coal became restive on
account of wide variation in the terms and conditions of employment. At this junction the
company was in the urgent need of increasing coal production for meeting the increasing
demands of the growing industries. Keeping all these factors in view, the Govt. took over
the non-coking coal mines on 30th January 1973 and subsequently nationalized them on 1st
May 1973.
For nearly seven to ten years, the non –coking mines were owned by the Coal Mines
Authority Ltd. and were managed through three divisions viz. Eastern, Western and
Central Divisions. On 1st Nov 1975, Coal India Ltd was formed as a Holding Company
with its registered office at 10, Netaji Subhash Road Calcutta. 700001. BCCL and NCDC
were transferred to CIL. Coal India Ltd has seven coal producing Subsidiary Companies
and one Subsidiary for planning, designing and research. Two units viz. North Eastern
Coal-fields in Margarita and Assam are under the charge of Directors-in-charge of Coal
India Ltd. and Dankuni Coal Complex at Dankuni West Bengal is directly under CIL. At
present Dankuni Coal Complex is under South Eastern Coalfields Ltd.
OBJECTIVES
4
2) To critically analyse the financial performance of S.E.C.L with the
help of ratios.
3) To analyse the profitability and solvency of the company for the
past 3 years.
4) To evaluate the financial statements of the past 3 years.
5) To highlight the shortcoming in the area of finance with the help of
trend analysis and common size balance sheet analysis and put for
the recommendation with the view to increase efficiency of S.E.C.L
5
COAL INDIA LIMITED
E.C.L.
(1975)
B.C.C.L.
(1973)
C.C.L.
(1975)
N.C.L.
(1986)
W.C.L.
(1975)
6
S.E.C.L.
(1986)
M.C.L.
(1992)
C.M.P.D.I.L.
(1975)
The Head Quarters of Coal India Ltd and its subsidiary companies are as
below:
7
9. Coal Mines Planning And Designing Ranchi (Jharkhand)
Institute
CHAPTER - 3
SECL is the largest coal producing company in the country. It is one of the eight
subsidiaries of CIL (A Govt. undertaking under Ministry of Coal). SECL, Coal India’s
premier coal company is operating its coal mines in the state of Madhya Pradesh and
Chhatisgarh state which is also geographically located at the heart of the country.
Chhatisgarh and Madhya Pradesh inhabited by simple minded and hard working tribes
with a rich cultural heritage. Chhattisgarh is not only the rice bowl if India but also rich in
mineral resources with coal being the prime mineral resource that is being exploited
commercially for about a century.
Ever since its formation in 1986-87, SECL has always exceeded its physical and economic
targets. In the year 1992-93 SECL has been bifurcated and three areas located in Orissa
have been transferred to Mahanadi Coalfields Ltd. Even after bifurcation, SECL is
marching ahead to exceed its physical and economic targets. After bifurcation the present
SECL comprises 12 areas located in three districts of Madhya Pradesh named Shahdol,
Umariya and Anuppur and five districts of Chhatisgarh named Sarguja, Korea, Korba,
Bilaspur and Raigarh. The Areas Johila, Jamuna & Kotma, Sohagpur and part of Hasdeo
are located in Madhya Pradesh and Chirimiri, Baikunthpur, Bisrampur, Korba, Kusmunda,
Gevra, Raigarh, Bhatgaon and part of Hasdeo are located in Chhatisgarh. Dankuni Coal
Complex in West Bengal is also a part of SECL.
8
The different Coal Producing Area of SECL as on 31st March 06 are as below: -
A new area known as Dipka Area has been separated from Gevra Area w.e.f. 1st of April
2006.
The SECL family consists of 87590 employees as on 31st March 2005 who are
predominantly locals. The success of the company is largely due to the discipline and hard
work of these employees, excellent cooperation of trade unions, the State Govt. and the
9
local people. SECL operates through 90 mines spread over eight districts (three of
Madhya Pradesh and five of Chhatisgarh). The Statewise, type wise composition of those
90 mines is given in Table below:
10
RATIO ANALYSIS
Introduction of Ratio Analysis
Alexander Wall made the presentation of an elaborate system of ratio analysis in 1919. He
criticized the bankers for their lopsided development owing to their decisions regarding
the grant of credit on current ratio alone. Alexander Wall, one of the foremost proponents
of ratio analysis, pointed out that in order to get a complete picture, it is necessary to
consider the other relationship in the financial statement than current ratio. Since then,
more & more types of ratios have been developed and are used for analysis and
interpretation point of view.
Ratio Analysis, therefore, means the process of computing, determining and presenting the
relationship of related items and group of items of the financial statement.
11
a very useful analytical technique to raise pertinent question on a number of managerial
issues. It provides bases or clues to investigate such issues in detail”.
Ratio analysis is the one of the powerful tools of the financial analysis. “A ratio
can be defined as the indicated quotient of mathematical expression” and as “the
relationship between two or more things”.
i. A pure ratio, say ratio of current assets to current liabilities is 2:1 or,
ii. A ratio, say current assets are two times of current liabilities or
iii. A percentage, say current assets are 200% of current liabilities.
Each method of expression has a distinct advantage over the other. The analyst will select
that method which will best suit his convenience and purpose.
12
Importance (or Advantage) of Ratio Analysis:-
Ratio analysis is the process of determining and presenting the relationship of items and
group of items in the financial statements. It is an important technique of financial stability
and health of a concern can be judged. The following are the main points of importance or
advantages of ratio analysis:
1. Useful in financial position analysis: - Accounting ratios reveal the
financial position of the concern. This helps the banks, insurance companies and other
financial institutions in leading and making investment decisions.
2. Useful in simplifying accounting figure: - Accounting ratios simplify,
summaries and systematize the accounting figures in order to make them more
understandable and in lucid form. They highlight the inter-relationship, which exists
between various segments of the business as expressed by accounting statements.
3. Useful in assessing the operational efficiency: - Accounting ratios help to
have an idea of a concern. The efficiency of the enterprise becomes evident when analysis
is based on accounting ratios. They diagnose the financial health by evaluating liquidity,
solvency, profitability etc. This helps the management to assess financial requirements and
the capabilities of various business units.
4. Useful in forecasting purpose: - If accounting ratios are calculated for a
number of years, than a trend is established. This trend helps in setting up future plans and
forecasting. For example, expenses as a percentage of sales can be easily forecasted on the
basis of sales and expenses of the past years.
5. Useful in locating the weak spots of the business: - Accounting ratios are
of a great assistance in locating the weak spots in the business even through the overall
performance may be efficient. Weakness in financial structure due to incorrect policies in
the past or present are revealed through accounting ratio.
6. Useful in comparison of performance: - Through accounting ratios
comparison can be made between one department of an enterprise with another of the
same enterprise in order to evaluate the performance of various departments in the
enterprise. Managers are naturally interested in such comparison in order to know the
13
proper and smooth functioning of such departments. Ratios also help them to make any
change in the organization structure.
1. False results: - Ratios are based upon the financial statement. In case,
financial statements are incorrect or the data upon which ratios are based is incorrect,
ratios calculated will also be false and defective. The accounting system itself suffers from
many inherent weaknesses, so the ratios based upon it cannot be said to be always reliable.
For instance, if inventory value is inflated, not only will one have an exaggerated
view of profitability of the concern, but also of it financial position. Also the ratios worked
out on its basis are to be relied upon.
2. Variation in accounting policies: - Financial results of two enterprises
are comparable with the help of accounting ratios only if they follow the same accounting
policy or bases, comparison will become difficult if they two concerns follow different
policies for providing depreciation, valuation of stock etc. Similarly, if the enterprises are
following different standards and methods, an analysis by reference to the ratio would be
misleading. The ratio of the one firm cannot always be compared with the performance of
other firm, if they do not adopt uniform accounting policies.
3. Price level changes affect ratios: - The third major limitation of the ratio
analysis, as a tool of financial analysis is associated with price level change. This, in fact,
is a weakness of the Traditional Financial Statements, which are based on Historical cost.
As a result, ratio analysis will not yield strictly comparable and, therefore, dependable
results.
To illustrate, there are two firms, which have identical rates of return on
Investment, say, 15%. But one of these had acquired its Fixed Assets when prices were
relatively low while the other one had purchased them when prices were high. The result
14
will be that the book value of fixed assets of the former firm would be lower, while that of
the later will be high. From the point of profitability the Return on Investment of the firm
with lower book value are over-stated.
4. Absence of standard universally accepted terminology: - Different
meanings are given to particular term, such as some firms take profit before interest and
after tax, other may take profit before interest and tax. Bank overdraft is taken as current
liability but some firms may take it is as non-current. The ratios can be comparable only
when both the firms adopt uniform terminology.
5. Ignoring qualitative factors: - Ratio analysis is the quantitative
measurement of the performance of the business. It ignores the qualitative aspect of the
firm, how so ever important it may be. It shows that ratio is only one-sided approach to
measure the efficiency of the business.
6. No single standard ratio: - There in not a single standard ratio, which
can indicate the true performance of the business at all time, and in all circumstances.
Every firm has to work in different situations and circumstances, so a particular ratio
cannot be supposed to be standard for every one. Strikes, lockouts, floods, wars, etc.
materially affect the performance, so it cannot be matched with the circumstances in
normal days.
7. Misleading results in the absence of absolute data: - In the absence of
actual data, the size of the business cannot be known. If Gross Profit Ratio of two firms is
25% it may be just possible that the gross profit of one is 2,500 and sales Rs. 10,000,
whereas the gross profit and sales of the other firm is Rs. 5,00,000 and sales 20,00,000.
Profitability of the two firms is the same but the magnitude of their business is quite
different.
8. Window dressing: -Many companies, in order to depict rosy picture of
their business indulge in manipulation. They conceal the material facts and exhibit false
position. It makes the Financial Statements and Ratio Analysis based upon these
statements defective. The process of manipulation includes under statement of Current
Liability, over statement of Current Assets, recording the transaction in the next financial
year, showing the purchases of raw material as purchases of assets etc. Window dress
restricts the utility of ratio analysis.
15
Even when the ratios are worked out correctly, it should be remembered that they can at
best be used like a Doctor uses symptoms – indication that something is wrong
somewhere. Just as the Doctor will try to get to the real reason, in the same manner the
analyst should try to identify the real factor leading to the present state of affairs. Suppose
the ratio of Gross Profit to Sale is low. The reason may be poor sales, bad purchasing,
defective pricing policy, wastage and losses etc. Ratio thus point out the area that needs
investigation –this is only a tool in the hand of the person trying to get at the truth.
Ratios may be classified in a number of ways keeping in view the particular purpose.
Ratios indicating profitability are calculated on the basis of the Profit and Loss Account,
those indicating financial position are computed on the basis of the Balance Sheet and
those which show operating efficiency or productivity or effective use of resources are
calculated on the basis of figures in the Profit and Loss Account and the profitability and
financial position of the business/company. To achieve this purpose effectively, ratios may
be classified into the following four important categories:
A. Liquidity Ratio,
D. Profitability Ratio.
16
Liquidity Ratios
To study the liquidity position of the concern in order to highlight the relative strength of
the concern in meeting their current obligation liquidity ratios are calculated. These ratios
are used to measure the enterprise’s ability to meet short-term obligations. These ratios
compare short-term obligation to short-term (or current) resources available to meet these
obligations. From these ratios, much insight can be obtained about the present cash
solvency of the enterprise and the enterprises ability to remain solvent in the event of
adversity. A proper balance between the two contradictory requirements, i.e. Liquidity and
Profitability is required for efficient financial management. The important liquidity ratios
are: -
1. Current Ratio: - This is the most widely used ratio. It is the ratio of Current Assets
to Current Liabilities. It shows an enterprise ability to cover its current liabilities with its
current assets. It is expressed as follows: -
Current Assets
Current Ratio =
Current Liabilities
Generally, Current Ratio of 2:1 is considered ideal for any concern i.e. current assets
should be twice the amount of current liabilities. If the current assets are two times the
current liabilities, there will be no adverse effect on business operations when current
liabilities are paid off. If the ratio is less than 2 difficulties may be experienced in the
payment of current liabilities and day-to-day operations of the business may suffer. If the
ratio is higher than 2, it is very comfortable for the creditors but, for the concern, it
indicates accumulation of idle funds and a lack of enthusiasm for work. However this
standard of 2:1 is only quantitative and may differ from industry to industry.
2. Liquid or Acid Test or Quick Ratio: - This is the Ratio of Liquid Assets to
Liquid Liabilities. It shows an enterprises ability to meet current liabilities with its most
liquid (quick assets). It is expressed as follows: -
17
Quick Assets
Liquid Ratio =
Current Liabilities
(Quick Assets = Current Assets – Inventory or Stock)
The quick ratio of 1:1 ratio is considered ideal ratio for a concern because it is wise to
keep the liquid assets at least equal to the liquid liabilities at all time. Liquid assets are
those assets, which can be readily converted into cash and will include cash balance, bills
receivable, sundry debtors, and short-term investments. Inventories and prepaid expenses
are not included in liquid assets because the emphasis is on the ready availability of cash
in case of liquid assets. Liquid liabilities include all items of current liabilities except bank
overdraft. This ratio is the “acid test” of a concerns financial soundness.
The desirable norm for this ratio is 1:2, i.e., Rs. 1 worth of absolute liquid assets are
sufficient for Rs 2 worth of current liabilities. Even though the ratio gives a more
meaningful measure of liquidity, it is not in much use because the idea of keeping large
18
cash balance or near cash items has long since been disapproved. Cash balance yields no
return and as such is barren.
4. Cash Ratio: - Since cash is the most liquid assets, a financial analyst may examine
cash ratio and its equivalent to current liabilities. Trade investment or marketable
securities are equivalent of cash; therefore, they may be included in the computation of
cash ratio:
19
Leverage Ratio / Solvency Ratio
Long term creditors like debenture holders, financial institution etc., are more concerned
with long-term financial strength of an enterprise. The leverage/ capital structure ratios are
very helpful in judging the long-term solvency position of an enterprise. Leverage ratio
may be calculated from the Balance Sheet items to determine the proportion of debt in
total financing. Many variations of these ratios exist; all these ratios indicate the same
thing i.e., the extent to which the enterprise has relied on debt in financing assets.
Leverage ratios are also computed from the income statement items by determining the
extent to which operating profits are sufficient to cover the fixed charges. The important
long-term solvency/leverage/capital structure ratios are as follows:
1. Debt-Equity Ratio: - This ratio relates debts to equity or owners funds. Here,
Equity is used in a broader sense as net worth (i.e., capital + retained earnings) while debt
normally means long-term interest bearing loans.
Debt (Long-term) Total Debt Outsider fund
Debt-Equity Ratio = Or Or
Equity Net Worth Shareholder fund
External equities are outsiders fund while internal equities represent shareholders funds.
Outsiders’ fund includes Long-term debt / liabilities. Shareholders funds or equity consists
of preference share capital, equity share capital, profit & loss a/c (Cr. Balance), Capital
reserves, revenue reserves and reserves representing marked surplus, like reserves for
contingencies, sinking funds for renewal of fixed assets or redemption of debentures etc.,
less fictitious assets. In other words, shareholders funds or equity is equal to Equity share
capital + preference share capital + reserves & surplus etc.
This ratio is very useful for analysis for long-term financial condition.
This ratio signifies the excess of proprietor’s funds over outsiders’ funds and thereby
indicates the soundness of the financial / capital structure of the business enterprise.
20
2. Proprietary Ratio: -This ratio indicates the relationship between proprietary fund
and total assets. The Proprietary funds include Equity Share Capital, Preference Share
Capital, Revenue, Capital Reserves and accumulated surplus. Total Assets include Fixed,
Current and Fictitious assets.
This ratio is very important for the creditors, because they know the share of
Proprietors Funds in the total assets and satisfy how far their loan is secured. The higher
the ratio, the more safety will be to the creditor. The ratio also shows the general financial
position of the company also. 50% is supposed to be the satisfactory Proprietary Ratio for
the creditors. Less than 50% is the sign of risk for creditors. The following formula is used
to calculate Proprietary Ratio: -
Total Debt
Debt Ratio =
Total Debt + Net Worth
4. Capital Employed to Net Worth Ratio: - There is yet another alternative way
of expressing the basic relationship between debt and equity. One may want to know, how
much funds are being contributed together by lenders and owners for each rupee of the
21
owners contribution. This can be found out by calculating the ratio of capital employed or
net assets or net worth.
Capital Employed
Capital Employed to Net Worth Ratio =
Net Worth
(Capital Employed = Shareholders fund + Long-term liabilities)
22
Activity or Turnover 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
assets. The greater the ratio more will be efficiency of assets usage. The lower ratio will
reflect underutilization of the resources available at the command of concern. The concern
must always plan for efficient use of the assets to increase the overall efficiency. The
following are the important activity or turnover ratios usually calculated by a concern:
1. 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 ratio ascertained as follows:
Sales
Sales to capital Employed Ratio =
Capital Employed
(Shareholders Fund +Long-term Liabilities)
The higher the ratio, the greater are the profits. A low capital turnover ratio would mean
that sufficient sales are not being made and profits are lower.
2. Sales to Fixed Assets (or Fixed Assets turnover) Ratio: - This ratio
measures the efficiency of the assets use. The efficient use of assets will generate greater
sales per rupee invested in all the assets of a concern. The inefficient use of the assets will
result in low sales volume coupled with higher overhead changes and under utilization of
the available capacity. Hence the management must strive for using total resources at
optimum level, to achieve higher ratio. This ratio expresses the number of times fixed
assets are being turned over in a stated period. It is calculated as under:
23
Sales
Sales to Fixed Assets =
Net Fixed Assets
(Net Fixed Assets = Fixed Assets Less Depreciation)
This ratio shows how well the fixed assets are being used in the business. The ratio is
important in case of manufacturing concern because sales are produced not only use of
current assets but also by amount invested in fixed assets. The higher in the ratio, the
better is the performance. On the other hand, a low ratio indicates that fixed assets are not
being efficiently utilized.
3. Sales to working capital (or Working Capital Turnover) Ratio: - This
ratio is shows the number of times working capital is turnover in a stated period. It is
calculated as below: -
Sales
Sales to working capital Ratio =
Net Working Capital
(Net Working Capital = Current Assets – Current Liabilities)
The 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
which may put the concern into financial difficulties. On the other hand, a low working
capital turnover ratio indicates that working capital is not efficiently utilized.
4. Total Assets Turnover Ratio: - This ratio is calculated by dividing the net sales
by the value of total assets.
Net Sales
Total Assets Turnover Ratio =
Total Assets
(Total Assets = Net Fixed Assets + Investments + Current Assets)
A high ratio is an indicator of overtrading of total assets while a low ratio reveals idle
capacity. The traditional standard for this ratio is two times.
24
5. Inventory or Stock Turnover Ratio: - This ratio indicates the number of times
inventory is rotated during the year. It is calculated as follows:
Cost of good sold
Inventory or Stock Turnover Ratio =
Average Inventory
If only closing inventory data is given and opening inventory data is not available then the
formula will be as follows:
Cost of Good Sold
Inventory Turnover =
Closing Inventory
However, this formula should be applied only when the opening inventory figures are not
available.
The inventory turnover ratio measures how quickly stock is sold. It is really a test of stock
(inventory) management. In general high inventory turnover ratio is good. Yet a very high
inventory turnover ratio requires careful analysis. Because very high ratio will lower
investment in inventory, and lower investment in inventory is considered to be very
dangerous. Similarly, very low inventory turnover is also dangerous as there will be very
heavy amount invested in inventory.
Credit Sales
25
Debtor Turnover Ratio =
Average Debtors + Average Bills Receivable
If some information, i.e. figures for Credit sales, opening figures of debtors or bills
receivable etc., is not available them the following formula can be used:
Total Sales
Debtor Turnover Ratio =
Debtors + Bills Receivable
It should be noted that the first formula is superior to second formula as the question of
speed of conversion of sales into cash arises only in case of credit sales.
7. Creditors Turnover (or Accounts Payable) Ratio: - This ratio gives the
average credit period enjoyed from the creditors and is calculated as under:
Credit Purchases
Creditors Turnover Ratio =
Average Account payable
(Average Account Payable = (Average Creditors + Average Bills Payable)
A low ratio indicates that the creditors are not paid in time while a high ratio gives an idea
that the business in not taking full advantages of credit period allowed.
26
Profitability Ratio
Profitability is the overall measures of the companies with regard to efficient and effective
utilization of resources at their command. It indicates in a nutshell the effectiveness of the
decision taking by the management from time to time. Profitability ratios are of at most
importance for a concern. These ratios are calculated to enlighten the end result of
business activities, which is the sole criterion of the overall efficiency of a business
concern. The following are the important profitability ratios:
1. Gross Profit Ratio: - This ratio tells gross profit on trading and is calculated as
under:
Gross Profit
Gross Profit Ratio =
Net Sales
(Gross Profit = Net Profit + Interest + Prior Period Item + Extra Ordinary Expense –
Extra Ordinary Income)
Higher the ratio the better it is, a lower ratio indicates unfavorable trends in the form of
reduction in selling prices not accompanied by proportionate decrease in cost of goods or
increase in cost of production.
A high gross profit margin ratio is a good sign to management or owners. This high ratio
can be due to:
(i) High sales price, cost of good sold remaining constant,
(ii) Lower cost of good sold, sales prices remaining constant,
(iii) An increase in the proportionate volume of higher margin items.
(iv) A combination of variations in sales prices and costs, the margin widening.
A low gross profit margin ratio may be due to:
(i) Higher cost of goods sold as the enterprise is not getting the raw materials at lower
prices.
(ii) Inefficient utilization of production capacity.
(iii) Over-investment in plant and machinery.
27
2. Gross Margin Ratio: - This is also known as gross margin. It is calculated by
diving gross margin by net sales. Thus
Gross Margin
Gross Margin Ratio = × 100
Net Sales
(Gross Margin = Gross Profit + Depreciation of P/L + Depreciation of Sch 10(SOH) +
Extra Ordinary expenses – Extra Ordinary Income)
3. Net Profit Ratio: - This ratio explains per rupee profit generating Capacity of sales.
If the cost of sales is lower, then the net profit will be higher and then we divide it with the
net sales, the result is the sales efficiency. The concern must try for achieving greater sales
efficiency for maximizing the Ratio. This ratio is very useful to the proprietors and
prospective investors because it reveals the over all profitability of the concern. This is the
ratio of net profit after taxes to net sales and is calculated as follows:
28
A higher operating expenses ratio is not favorable, as it will leave a very small amount of
operating income to meet interest and dividend etc.
Expenses
5. Expenses Ratio = × 100
Sales
This ratio considered being 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 favored.
6. Return on Investment (ROI): - The term investment may refer to total assets or
net assets. The funds employed in net assets are known as capital employed.
Net Assets = Net Fixed Assets + Current Assets – Current Liabilities (excluding Bank
loans)
Or
Capital Employed – Net Work + Debt.
29
Earning Before Interest and Tax (EBIT)
I. Return on Investment =
Net Assets or Capital Employed
EBIT (1-T )
II. ROI =
Net Assets or Capital Employed
30
INTERPRETATION AND ANALYSIS
Some ratios and their comment based on the Annual Accounts of South Eastern
Coalfields Ltd. are computed below. There data is Rs. in Crore)
Liquidity Ratio
Current Assets
Current Ratio =
Current Liabilities
Comment: -
From the above figures it is evident that Current Ratio has increased from 1.03 to
1.20. The increase has been on account of increase in Cash and Bank
balances and Advances. Ideal Current Ratio is taken as 2:1 however it is
quantitative rather than qualitative thus despite the Current Ratio being less
than 2 the company’s liquidity position is sound.
31
(2) Liquid Ratio (LR) / Quick Ratio / Acid Test Ratio: -
Liquid Assets
Liquid Ratio =
Current Liabilities
Comment: -
Generally Quick Ratio / Liquid Ratio of 1:1 is considered satisfactorily. As we can
see the company’s Quick / Liquid Ratio has increased from 0.86 to 1.06. This
increases is mainly on account of increase in Cash and Bank balance and Loan and
Advances
This shows sound liquidity position of the company.
32
Comment: -
Increase in Cash Ratio is an indicator of strong liquidity position of the company. This
shows that the company has a good paying capacity and the Creditors / lenders can safely
rely on the company for the credit provided to the company by them.
Comment: -
Generally the Inventory to Working Capital Ratio less than 1 is considered satisfactorily.
We can see this Ratio was 5.76 in 2003-04 the reason being very less working capital,
which is not a sound position. However 2004-05 Working Capital is has increased and has
resulted in decrease in this ratio in 04-05 to 0.72, which shows sound working capital
position of the company.
33
Leverage Ratio
Total Debt
Debt-Equity Ratio =
Net Worth
= 0.21 = 0.16
Comment: -
This ratio reflects share of debt in the Net Worth. The company’s Ratio of 0.16 indicates a
moderate level of debt in the company. Reduction of Debt – Equity Ratio shows that the
company has liquidated its debt in time. The Debt-Equity of 0.16 also shows that the
company is mainly relying on shareholders fund for doing the business.
Comment: -
Creditors loan is safe because Proprietary Ratio is 0.43 as against the satisfactory ratio of
0.5 times.
34
(3) Debt Ratio: -
Total Debt
Debt Ratio =
Total Debt + Net Worth
Comment: -
This ratio reflects share of debt in the Capital Employed. The company’s ratio of 0.14 in
04-05 indicates a low level of Debt in the company. Reduction of Debt Ratio from 0.17 in
03-04 to 0.14 in 04-05 shows that the company is continuously relying on own funds.
Capital Employed
Capital Employed to Net Worth =
Net Worth
= 1.21 = 1.16
Comment: -
This shows that as on 31st March 2004 for every rupee of owner’s contribution. Rs. 1.21 is
contributed together by Lenders and Owners. This reflects that the company is not
dependent on borrowed capital.
35
Activity Ratio
Net Sales
Sales to Capital Employed Ratio =
Capital Employed
Comment: -
This Ratio ensures whether the capital employed has been effectively used or not. The
increase in the ratio to 1.61 in 04-05 from 1.52 in 03-04 shows better utilization of
resources in the year 04-05.
Sales
Sales to Fixed Assets Ratio =
Net Fixed Assets
Comment: -
As we know in case of Sales to Fixed Assets Ratio that the higher the ratio the better in the
performance. From the above data there is increase in ratio from 2.17 to 2.78. This means
that the utilization of fixed assets is very effective. It indicates better performance.
36
3. Sales to Working Capital Ratio: -
Sales
Sales to Working Capital Ratio =
Working Capital
Comment: -
This shows that the company could manage to achieve better result in 03-04 with less
Working Capital. This above ratio also shows that during the year 04-05 the company
could not utilized its resources in the way it utilized in 03-04.
37
Comment: -
The decrease in ratio in the year 2004-05 shows better realization position of the company
against its sales.
Comment: -
The reduction in the ratio in 04-05 shows better utilization of fund and better inventory
management of the company. It also shows that the company has avoided unnecessary
locking of its funds in inventory.
38
Year 03-04 04-05
Comment: -
The increase in the ratio in 04-05 shows better utilization of its resources.
Profitability Ratio
Comment: -
The increase in the ratio shows the better performance of the company in the year 04-05 as
compared to 03-04.
39
Net Sales
Comment: -
The increase in the ratio shows the better performance of the company in the year 04-05 as
compared to 03-04.
= 20.40 = 28.77
Comment: -
40
The increase in the ratio shows the better performance of the company in the year 04-05 as
compared to 03-04.
Comment: -
The increase in the ratio shows the better performance of the company in the year 04-05 as
compared to 03-04.
41
Return on Investment 931.24/2914.74 1600.52/3406.49
= 0.32 = 0.50
Comment: -
The increase in the ratio shows the better performance of the company in the year 04-05 as
compared to 03-04.
LIMITATIONS
1) Time has been a limiting factor and it has been difficult to analyze the various aspects of finance
with the prescribed time.
2) Financial statements are only in terms of reports. They are not final because the exact finanacial
position can be known only when the business is closed.
3) Financial statements are prepared on the basis of certain accounting concepts and conventions. Any
changes in the method or procedure of accounting limits the utility of financial statements.
4) The authenticity of the financial statements has not been checked with the book of accounts of the
company.
42
Working Notes
43
Sl. Terminology Calculation of Amount (Rs Crore) Reference
2003-04 2004-05
No.
1. Current Assets 2534.10 3670.99 Balance Sheet (B/S)
2. Current Liabilities 2869.70-407.61 3520.54-456.54 Current Liabilities Balance
= 2462.09 = 3064.00 Sheet -Gratuity Sch J
3. Liquid Assets 2534.10-414.53 3670.99-437.29 Current Assets (Ref Sl no.
= 2115.57 = 3233.70 1) – Inventory Sch F
4. Cash 477.87 1443.86 Sch H
5. Inventory 414.53 437.29 Sch F
6. Working Capital 2534.10-2462.09 3670.99-3064.00 Refer Sl 1 and 2
= 72.01 = 606.99
7. Total Debt 453.66 + 46.65 420.66 + 39.26 Secured Loans Sch C – I
= 500.31 = 459.92 + Unsecured Loan Sch C-II
8. Net Worth / 359.70 + 2054.73 359.70 + 2586.87 Share Capital Sch A +
Shareholders Fund = 2414.43 = 2946.57 Reserve & Surplus Sch B
9. Net Fixed Assets 2039.82 1974.09 Balance Sheet
10. Total Assets 2039.82+1231.62 1974.09+1231.62 Net Fixed Assets (Ref Sl
+ 2534.10 + 3670.99 no.9) + Investment Sch E +
= 5805.54 = 6876.70 Current Assets (Ref Sl 1)
11. Capital Employed 2414.43 + 500.31 2946.57. + 459.92 Net Worth (Ref Sl 8) +
= 2914.74 = 3406.49 Total Debt (Ref Sl 7)
12. Net Sales 4430.40 5494.85 Profit & Loss a/c
13. Sundry Debtors 430.99 423.14 Sch G
14. Gross Sales 5338.04 6544.52 Sch 1
15. Inventory of Stores 219.70 234.64 Sch F
16. Consumption of 624.20 - 0.55 744.38 - 3.13 Sch 6
Stores (Revenue = 623.65 = 741.25
Mines)
17. Prior Period 7.45 5.81 Sch 15
18. Extra Ordinary (157.03+295.10)- Nil Interest Sch 4 – Provision
Income and 115.03 for Bad Debts Sch 14
Expenditure = 410.13
19. Gross Profit (G.P.) (1314.21+19.71+ 1580.93 + 13.78 + (Net Profit as per P & L a/c
7.45) – (157.03 + 5.81 +Interest Sch 12+Prior
295.10 -115.03) = 1600.52 Period Exp. Sch 15) –
=(1341.37-410.13) Extra Ordinary Item ref. Sl
= 931.24 no. 18
20. Total Depreciation 216.05 + 10.67 213.55 + 11.92 Depreciation Profit & Loss
44
= 226.72 = 225.47 a/c + Depreciation Sch 10
21. Gross Margin (1341.37 + 216.05 1600.52 + 213.55 (G.P. + Total Depreciation
+ 10.67) – 410.13 + 11.92 ref. Sl no 20)– Extra
= 1157.96 = 1827.40 Ordinary Item ref. Sl no. 18
22. Profit after Tax 1314.21 – 410.13 Net Profit as per P/L -
= 904.08 1580.93 Extra Ordinary Item ref. Sl
no. 18
23. Operating Expenses 4430.40 - 5494.85–1580.93 Net Sales ref. Sl no. 11 –
(1314.37-410.13) (Net Profit - Extra
= 3526.32 = 3913.92 Ordinary Item ref. Sl no.
18)
24. EBIT 1341.37 – 410.13 Gross Profit ref. Sl no.19 -
= 931.24 1600.52 Extra Ordinary Item ref. Sl
no. 18
45