INDEX

Serial Particulars Page number

number

1 Introduction 3-6

2 Company profile 7-30

Evaluating Financial position by using ratio

3 31-41
analysis

4 Financial ratio analysis the tool kit 42-45

5 Types of ratios 46-68

6 Application of ratio 69-74

7 Conclusion 75-78

1
 A PROJECT REPORT ON

RATIO ANALYSIS

FOR
RAJASTHAN SPINNING AND WEAVING MILLS Ltd.
(MAYUR SUITINGS)

BY
TARUN TRIVEDI

In the partial fulfillment of

The requirement of Masters of Business Administration

AT
VISHWAKARMA INSTITUTE OF MANAGEMENT
(VIM)
PUNE
*2004 2006*

2
 ACKNOWLEDGEMENT

It extends my heart-felt gratitude to Mr. Sharad Joshi [Director] and Prof.

Mahesh Halale of VIM form their timely assistance.

I would also like to thank Mr.N.K. Srivastav & all staff of RAJASTHAN
SPINNING AND WEAVING MILLS Ltd.(MAYUR)
.

I would also like to thank Mr. Yuvraj Lahoti and Mahesh Halale [project
guide] & Keskar sir [placement coordinator] for their great assistance.

I will always be obliged to them.

TARUN TRIVEDI

3
 INTRODUCTION
In the current economic situation it is very difficult to survive and only financially sound
mills can survive. There are only two ways to survive in the market, one is low margin,
high volume and the second one is innovation i.e. launching of new products in the market
and for that we have to give continuous attention on research and development

In the last 3-4 months there is a good demand in the export markets and almost all the
spinning units are completely booked for export of yarns. It has reduced spinning plants
dependence on local markets, hence weavers who were used to take handsome amount for
job work was forced to decrease the textile industry is as old as human civilization. Textiles
are one of the basic needs of human. There may be ups and downs in the economy, but
textile will remain in existence; because it is one of the basic needs. In past few years, it
has been said that there is a slump in the textile industry and many textile units were closed
down during this phase. All these units, which are mainly sick units and was not due to
sluggish market conditions, but poor management, because if we see per capita
consumption not only in India, but also in the world, is increased substantially in the past
few years. It shows that there is continuously increasing trend in the textile industry. The
overall production of fiber, yarn, fabric, garments etc is continuously increasing.

The fashion trend is now changing from fabric to garment and in India also we can see
that the major person are wearing the readymade shirting, because trend of fashion are
changing to readymade garment. Yarn and the fabric, which is the ultimate product of
textile, is the only raw material for manufacture of garment, furnishing fabric of any other
use etc consumption of yarn/ fabric will remain in existence.Their job charges; but spinning
plants are getting increased rates from the market.

Textile industry s growth is significant looking into the growth of population and growth
of economy. Indian economy, which is growing up @ 5% annually and India is the second

4
largest country by population in the world have a very good market for textile products
in long run.

In phased manner from 2002 As per the WTO, global markets are opening up. In the
globalize market scenario one can get good price and volume provided if they delivery of
quality products are well in time. Similarly Indian textile market is also opened for other
countries, because custom duty has been reduced for textile products and therefore one
must have good quality and lower prices .the removal of quota after 2004 in US shall
results in to plus point for Indian textile industry, the textile industry had faced very tuff
period up to June 02 and thereafter the margin slightly improved in last one year.

The future of textile industry in India will be amazing if we continuously improve our
quality and give proper attention towards research and development and we can take lead
of the world textile market. We have to accept the fact that no organization is too large or
too powerful to be unsinkable . In a rapidly changing business environment companies
which do not change disappear without a trace. In the world of today change is a norm
rather than the exception and companies need more than just incremental change to
survive they need revolutionary changes to redefine their business and markets, past
success must be continuously questioned as the rules of the game in business environment
change.

Change and adaptation is must for growth and prosperity. The business realities have
grown harsher everyday. The slowdown in the market itself has resulted in reduced
production volume. The fierce competition in the market only grows everyday-therefore
the market reality dictate: PPeerrffoorrm
m oorr PPeerriisshh..

Thus, realizing the need of the hour various groups and individuals shifted their focus of
business rather than continuing in the same manner. One amongst them was Shri Laxmi
Niwas Jhunjhunwala the founder of LNJ Bhilwara Group.

5
 1.1 About the Group

The LNJ Bhilwara Group is committed to satisfy its customers, Stakeholders, partners,
suppliers alike, by adopting world-class practices in all facets of its businesses.

To achieve its objectives, the Group has leveraged its collective resources and
capabilities of product designing, creativity, innovation and work practices.

The Group s goal of achieving Global Standards of productivity, efficiency, quality,

customer satisfaction, empowering and involving of people at all levels, have together
guided its conduct and action both with internal and external interfaces,

1.2 Group s salient Features

At the age of 19, Shri LNJ started business by setting up a jute export company and
within three years it had become one of the India s top ten concerns. Diversifying into iron
and steel, scrap and manganese and iron-ore, the next few years saw 3rd largest iron
exporter.

The RS.1727 crore LNJ Bhilwara Group is a diverse, multi-location and multi-product
conglomerate established in1961, having business interests in TTeexxttiilleess,, G
Grraapphhiittee
EElleeccttrrooddeess,, PPoowweerr G
Geenneerraattiioonn,, SSppoonnggee IIrroonn,, IInnffoorrm
maattiioonn TTeecchhnnoollooggyy aanndd IITT EEnnaabblleedd
SSeerrvviicceess.. Headquartered at Noida (near New Delhi), the Group employees 20,000 people
and has 18 production units spread across the country, the fact that export earnings
comprise as much as 46% of the group s turnover of Rs. 1682 crores during 2001-02
underlines its high quality standards. The graphite exports constitute about 80% of total
sales volume of graphite division.

6
 The Group manufactures a complete range of yarns, fabrics, knitted fabrics and
knitwear s. In the recent past, the group has also launched new range of fabrics: flame-
retardant, Lycra, Polynosic and tencel.

The Group has also ventured into international quality SSppeecciiaalliizzeedd AAuuttoom
maattiicc ffaabbrriiccss and
currently supplying to the major automobile companies in India. The group has been
servicing world-class customers and leading several global brands for there knitted
garments. The domestic brands, M
Maayyuurr SSuuiittiinnggss ,, BBSSLL SSuuiittiinngg ,, LLaa IIttaalliiaa TTrroouusseerrss
AAnndd SShhiirrttss aanndd BBuuddddyy D
Daavviiss Leisurewear s are well respected by the customers.

In its four-decade long existence, the group has come to be identified with quality and
world-class technologies. Seven Group Companies has been awarded ISO 9001:2000
certification for their exemplary quality services. The Group s plants are all state-of-the-art
and having the latest technology from the world leaders.
1.3 Pride & Glory of group

The group is India s largest producer and exporter of polyester/viscose yarns. HEG has
the largest Graphite Electrodes manufacturing plant in South Asia. RSWM and Maral are
India s first composite textile and knitted units to be ISO 9001:2000 certified. HEG, BSL,
Bhilwara Spinners and Bhilwara Processors have also been awarded this certification.

Maral is fully integrated 100% EOU cotton knitwear unit, and winner of TEXPROCIL
silver trophy in the 100% EOU/EPZ category. RSWM has won SRTEPC, Highest Export
Award for polyester/viscose yarn exports, for 9 consecutive years. Maral has received the
Rajiv Gandhi National Quality Award for 1998 HEG has won CAPEXIL, the highest
export award for Graphite Electrodes, for 13 consecutive years. Raj Spin has bagged
Rajasthan s prestigious export excellence award for the year 1994-95.

HEG Oil Division has won the International Safety Award for being amongst the three
safest operators in the world from International association of Drilling Contractors; U.S.A.
HEG-Graphite Division bagged the National Export Award for 1997-98. HEG-Rishabhdev

7
bagged the National export Award. BSL received the National Certificate of Merit for
an outstanding export performance. RSWM has been accorded Golden Trading house
status. Maral and HEG have been accorded Golden Trading House status. Bhilwara
Spinners has been accorded Export House Status.

1.4 Company Profile

Rajasthan Spinning & Weaving Mills Ltd. (RSWM) incorporated in 1961 is the Flagship
Company of LNJ Bhilwara Group headed by Shri L.N. Jhunjhunwala Chairman Emeritus.
RSWM is one of the largest textile units in the state of Rajasthan and emerged as one of the
big players in the textile industry in the country. The activities of the company now
comprise manufacturing of synthetic yarn, cotton mélange yarn, suiting, and shirting s and
dress materials. The company has set up its first plant at Bhilwara and subsequently set up
another textile plant at Kharigram (Bhilwara) in 1973. The original Bhilwara mill was later
spun off as independent company in the name of Bhilwara Spinners Ltd. The company had
further established weaving facility at Kharigram in the year 1982 in the name of M
Maayyuurr
SSuuiittiinnggss ..
The company set up another spinning unit at Banswara in the year 1989-90. With the
objective of manufacturing export quality Grey yarn and started export of PV yarn in a big
way. The company has also set up a cotton melange yarn project at Bhilwara, which started
commercial production in 1994. The company has also undertaken various expansion and
modernization programs in the above plants time to time and presently the plant and
machinery are of state of the art and technology and modernized. The company is also
having ISO 9001:2000 certifications for all its units.

8
 Work/Unit Location:

The company has four work locations, which are as follows:

a). Kharigram, P.O. Gulabpura-311021

Distt. Bhilwara, Rajasthan.
b). Lodha, P.O. Banswara-327001
Rajasthan.
c). Mandpam, Bhilwara-311001
Rajasthan.
d). Rishabhdev 313802
Distt. Udaipur, Rajasthan
In addition to above company are also in the process of accumulating of the Rishabhdev
textile mills belonging to HEG ltd. And the completion of acquisition formalities this will
have four units.

9
 1.5 Management
BOARD OF DIRECTORS QUALIFICATION
Shri L.N.Jhunjhunwala, Chairman Emeritus
Shri Ravi Jhunjhunwala, Chairman
Shri Shekhar Agarwal, Vice Chairman & Managing Director B.Tech (M.E.), MSc.
(Chicago)
Shri Riju Jhunjhunwala, Joint Managing Director
Shri A.K. Churiwal, Director
Shri J.C.Laddha, Executive Director B.Com, F.C.A.
Shri Kamal Gupta, Director
Shri A.R.Garde, Director
Shri S.K.Srivastav, Director (Nominee LIC)
Shri Ritesh Kumar, Director (Nominee ICICI Bank Ltd.)
KEY EXECUTIVES
Corporate Office
Shri D.P.Mangal, Executive Director C.A.
Maj.Gen.V.Badhwar (Retd.), Advisor
Shri R.S.Dugar, President (Corporate Textiles) B.E.(MET), PGDBA
Shri Vijay Bakshi, Chief Executive (Fabrics & Garments)
Shri P.S.Puri, Sr. Vice President (Corporate Finance) F.C.A.
Shri Umesh Sharma, Vice President (Corporate HRD) Ph.D., DP&IR, DPM
Shri Y. P. Thakur, Vice President (Development)
Shri V.P. Bagri, Vice President (Finance)
Shri S.K. Srivastava, Vice President (Technical)
Shri V.S. Mehta, Vice President (Fabric Domestic)
Plants
Shri J. C. Laddha, Chief Executive (Dyed Yarn Business)
Shri Prakash Maheshwari, Chief Executive (Grey Yarn
Business)

10
 Shri S.C.Garg, President, Mandpam
Shri Rajiv Gupta Chief Operating Officer, Kharigram
Shri R.K. Khendelwal, President, Banswara
Shri M.L.Jhunjhunuwala, Vice President, Mumbai Bcom, ICWA
Shri R.N.Maloo, Vice President Corp. Finance Kharigram C.A
Shri Atul Rastogi, Vice President, Kharigram
Shri V. B Arora, Vice President, Kharigram Bcom, M.B.A
Shri S.N.Kacholia, Vice President, Kharigram
Shri V.K.Gupta, Vice President (HRD), Banswara
Shri Sanjay Sharma, Vice President, Banswara

1.6 Socio Economic Development

The vision of the group pioneer, apart from the Industrial Growth of the various units, is
to ensure that the society in general and the masses in the vicinity of the particular industry
also share the economic prosperity of the concerned industry.

The management of the Rajspin Ltd. has Eco friendly perceptions. Employees welfare
with infrastructure having good houses for staff and officers along with basic amenities is
provided to develop a sense of belonging and also to create a committed work force for the
overall development of industry and general area.

RSWM Ltd. Units had been the unique flag bearer in this direction. Ever since it s
inception, the vision was to ensure a steady economic and social growth of the people
around here.

Needless to mention the economic development and the name of Bhilwara to reckon with
in the industrial maps of India/abroad had been chastened by the unit at Gulabpura. Syt

11
LNJ was given the first honorarium as the Bhilwara Ratan to commemorate his
contribution for the developments of the industries in and around Bhilwara.

RSWM is providing employment to 6000 personnel s and contributing to National and

state exchequers of Rs. 60 crores. Besides above, RSWM Ltd. is contributing for the social
and economic developments.

The Rajspin Shramic Kalyan Kosh also caters to the in house welfare of the workers by
providing over and above the recruitment to the deserving members but by a small
contribution by the workers the Kosh thus created helps for the following:

Sickness benefit
Talent scholarship to the deserving wards of the workers
Help on accidental death
On the marriage of the wards of workers

Medical camps / check up / eye camps and provision of employment s to widows etc are
also done by the Rajspin from time to time. The different units have dispensary /
homeopathic running facilities / doctor on regular basis are carrying to cater to the various
medical requirements of the workforce. The company is also contributing to other
charitable institutions working in the area of medical help, public welfare, sports
development as well as rural developments.

For the society in large, an ambulance service has been pressed into service for the
accident victims partly as a trauma service also in the vicinity of the unit.

RSWM Limited contributions, for the National/ State calamities with full involvement of
the employees as well as by the units. Cases of donations for Earthquake victims / Prime
Minister relief funds can be cited where apart from financial contributions, units employees
offered services and clothing s to the needy.

12
 The Vivekanand Kendra School, Hurda being run by the RSWM Limited has acquired a
State / National prominence and has been producing talented students in the merit of Delhi
Board. The school is owned by Ramarpan Education Society, New Delhi and funded by
RSWM Limited. A number of students are selected in the prestigious institutes, Indian
Institute of Technology, Medical streams, state Engineering Institutes in Computer,
Electrical and other leading branches.

The company as well as the group has taken initiation for executing MLVT (Textile
Institute) at Bhilwara and is running perfectly well for providing professionals as well as
upgrading of the knowledge.

In nutshell, fuelled by the vision of the Group Chairman (Emirates), the management of
the Rajspin Ltd. leaves no stone unturned to ensure economic and social upliftment of the
area. The lush green environment in 30 years back deserted area speaks volumes about the
vision and the attitude of the management.

Motto of the unit is to provide social upliftment of the down trodden and let them have
the taste of the prosperity of the industrial growth by employment, by catering to their basic
needs of food, shelter and pollution free water and air.

13
 1.7 SWOT Analysis

SSttrreennggtthh::
RSWM is pioneer Co. of LNJ Bhilwara Group which is the largest exporter of
polyester / viscose yarn.
It has won SRTEPC, highest export award for polyester / viscose yarn exports in year
2001-02.
RSWM has been accorded Golden Trading House since 1998.
It s products known as quality product and bagged the premier in comparison of
competitors product.
RSWM accorded with certificate of IS/ISO 9001:2000 and weighted for quality
commitment and consistence.
Its fabric is marketed with the well-known brand name of M
MAAYYU
URR..
RSWM having high-speed looms for fabric production and more then 90%
autocorners for yarn 100% Captive & Standby power generation.
Trend setter in the industry for new Plant/Machinery and products.
Continuous in house Research and Development cell and also Group R&D centre.
Textiles future better after opening of quotas.

W
Weeaakknneessss::
Competition with the local process houses/independent loom units in piece dyed
suiting qualities in view of their lower administering and other costs Continuous product
development will enable to compete with them.
Proportionate lower percentage in the export looking to the over all production
although the exports increase compared to the last year.
RSWM is not able compete with local Bhilwara market with the reference of trading
channel.

14
 O
Oppppoorrttuunniittyy::
RSWM has well-established marketing arrangement to sell its yarn all over India and
worldwide.
RSWM marketed its fabric to dealer s network spread throughout the India.
RSWM introducing the flame-retardant fabric, and yarn and in the leading position.
Introduced Lycra yarn and fabric in PV yarn.
Having vision to penetrate in the readymade market
RSWM capable to enter into the high profile contract furnishing and decorative fabric
and other value added fabric.
Entering into the highly demanding power sector promoted Malana Power and Allan
Duhangen hydro electric power project.
Export to USA.

TThhrreeaatt::
Opening of the import and duty reduction.
Competition with the textured yarn being lower production cost and high durability.
Increase trend of the readymade garment and fashion fabrics viz. cotton fabric as
against individually stitching change.

1.8 ISO
Introduction:
The ISO is an organization, which takes care of standardization of various systems all
over the world. It basically came into existence because the Europeans were the most
Quality conscious class and demanded that the imports from the Third World Countries
must have consistent quality. So to lay the stress on the quality assurance i.e. to assure the
quality product to the customers and consumers, the nerve was held down the production
line and there came into existence the Quality Assurance Mode.
aa)).. IISSO
O 99000011::
Quality Assurance in design, development, production, installation and servicing. This
model is stringent in the product design and after sales service and cannot deviate from the
patterns.

15
 bb)).. IISSO
O 99000022::
Quality Assurance in production, installation and servicing. This model has an imbibed
flexibility in it, which assures that the producers can be lithe in making their designs. The
inspections so provided are at the elementary shop-floor level.
cc)).. IISSO
O 99000033::
Quality Assurance in the final inspection and test.

Rajasthan Spinning & Weaving Mills Ltd. (Mayur Suitings) is the first integrated mill
which is the recipient of ISO 9001:2000 in Rajasthan.

1.9 Quality Policy

We shall produce yarns and fabrics confirming to internationally acceptable quality
standards with consistency, to the full satisfaction of our customers, as per their needs. In
order to achieve this we shall:

IInnvvoollvvee::
All our suppliers of fibers, yarns and components to obtain incoming material of standard
quality. All the staff members and workers to attain high quality consciousness,
productivity and improve their working skills.

U
Uppggrraaddee::
Technology and work practices to reach highest quality levels in the country and
establish leadership.

IIm
mpplleem
meenntt IISS// IISSO
O 99000011::22000000::
This is the commitment of the company to quality.

1.10 Insight into Departments

Spinning
Spinning is the process, which convert the fiber into yarn. Fiber is the raw material for
yarns. There are various types of fibers like Polyester, Acrylic, Viscose, Nylon etc. These

16
are purchased from various places like as viscose is purchased from Grasim Company
which is in Nagda. It gives dyed fiber. Polyester is purchased from Reliance (Hazirapatal)
Hndoroma (Nagpur). Acrylic is purchased from Pashupati (Muradabad). Fibers are
received in Grey form. These are dyed by dye house.

Yarn is produced by twisting the fibers in Co-axial way. Spinning department produce
only yarn. It takes some steps that are as follows:

Mixing Blender

Blow Room

Carding

Draw Frame

Simplex Frame

Ring Frame

Winding

Packing

17
 Production capacity of spinning department is 35 tonnes per day. It exports 40% of
production in various country.

Dye House
It is an integral part of the production department. In this department mainly Polyester
and Acrylic fibre is dyed.
Sample preparation is done on breaker dyeing machine, then yarn is prepared and
matched with actual sample visually. After the sample is checked, the mixing production is
sent to the development department here with the help of miniature spinning plant, yarn is
prepared and checked on computer. Approved by the sr. officer it is sent to the particular
customer.
Computer performs following three functions in this department: -
Colour Matching.
Keeping stock position of colours and chemicals.
Preparation of production slips.

Weaving Department
Weaving is the process, which convert yarn into fabric. This department produces fabric
according to design & development department. Its production capacity is 9000000 mtrs
per month. Three types of looms are available in this department- Ruti C Loom (80),
Toyoda Loom (32), Sulzer Loom (61) The steps are: -

18
 Warping

Sizing

Drawing

Gaiting / Knotting

Fabric Production

Mending

Folding / Roll

Dispatch

D
Deessiiggnniinngg
The most imperative of all the departments is the designing dept. The current colour,
material, look, finish, weave and cloth are the things that fluctuate the production the most.

19
The production is market sensitive and so as to subsists in today s skyrocketing market
one has to change according to the consumer sensitive market. The main product attribute
is poly- viscose, the price is too low and basically focuses on lower market segment hence
innovations are not all that frequent. Considering the market situation the production has to
take a U-turn and they ultimately have to resurrect to the production of premium range and
job production for RMG.

Though the work of the designing dept is to innovate new designs to make the product
not just saleable but to invoke in people the tempo to purchase the product, for that the
market demand has to be considered. The designer s survey the market and even the
feedback from the marketing people is received. At times the designs are also inspired from
the foreign magazines and when the job production for exports is undertaken then they also
suggest the design and the weave of the fabric.

The design once passed is experimental in the Blankets then out of these the cards are
prepared. Then the meeting is held with the marketing personnel who have placed the
order. At times these cards are sent to the customers outside India who places the orders for
job production for the ultimate approval.

Finance
The finance department is the pillar of any organization; same is true over here also. The
overall performance of the company during the year under review 2004-05 came with
satisfactory repercussions (the details are already provided).

Though the company is a profit-making firm, the company is under debt of loan funds
that are both of the kinds secured and TL+W/C. The lead bank for working capital is
SBBJ and the other member banks are BOB, PNB, UBI, BOR, EXIM BANK, UTI, ICICI,
and SBI, are the ones that have provided the long-term loans. The loans taken from these
banks are secured by the way of joint equitable mortgage of all the present and future
immovable properties of the company and hypothecation of movable assets (except debt

20
books), first exclusive change by the way of hypothecation of all the equipment s
acquired/to be acquired with finance out of the said loans in favour of these banks.

In bank transactions there are two important documents.

a) D.A. (Document Against Acceptance): - The decision of this document varies

from 45 days to 180 days. Minimum duration may be 30 days. First the party accepts the
documents and on that basis the nest document is lodged (M.D.P.)

b) D.P. (Demand Purchase): - This is directly lodged through bank. Suppose the
bank has provided the company a limit of 5Cr. against D.P. in this a bill is lodged in the
bank and immediate payment is obtained.

If the limit is saturated then the bill is sent for collection. Here the company receives
payment only after the party has realized the order and has made payment to the Bank.

The company then receives the payment. Finally a record known 90 days report is
prepared.

Bank Operations
Bank operations form an important domain of the finance department. Funds are needed
to finance the working capital and other related purpose.
The bankers of R.S.W.M. Ltd. are: -
State Bank of Bikaner & Jaipur
Bank of Baroda
Punjab National Bank
Union Bank of India
Bank of Rajasthan
EXIM BANK
United Trust of India
ICICI

21
 State Bank of India
IDBI
The company submits a CMA (credit monitoring administration) data to the bank for
assessment of its requirements by the bank. After the CMA data is submitted. The banks
analyse the requirements and sanction limits. Once the limits are sanctioned the branch is
authorized to operate and disperse the funds and all other facilities within the sanction.
At present the bank limits of the company are as follows.
RAJASTHAN SPINING & WEAVING MILLS LIMITED
ALLOCATION & STYLE OF WORKING CAPITAL LIMIT FOR 2004-05 (w.e.f
13/13 with earlier limits)
EXISTING PROPOSED With Stand by
NATURE OF LIMIT ALLOCATION ALLOCATION limits
2003-04 2004-05
(A) FUND BASED LIMIT
(l) ALLOCATION
DOMESTIC LIMIT
Cash Credit limit 1175 1100 1320
(Overdraft ag cheques) 100 100 120
WCDL/FCNRB/BILLS 5500 4400 5280
Total Domestic Limit 6675 5500 6600
EXPORT LIMIT
Packing Limit/PCFC 5300 6000 7200
FBP/FBD 1525 2000 2400
Total Export Limit 6825 8000 9600

TOTAL FUND BASED 13500 13500 16200

STANDBY LIMITS - 2700 2700
WITH STANDBY LIMITS 13500 16200 16200
FB LIMITS EARLIER 13500 13500 13500
(B) NON FUND BASED LIMIT
(ll) ALLOCATION & MAXIMUM UTILISATION OF
RESPECTIVE BANKS
Letter of Credit 2250 2250 2250
Bank Guarantee 1550 1550 1550
NFB AFTER 13/12 3800 3800 3800
NFB EARLIER 3800 3800 3800

(C)TOTAL EXPOSURE 3800 17300 3800

WITH STAND BY LIMITS 3800 20000 20000
EARLIER LIMITS FB & 3800 17300 17300
NFB

22
 A-
INTERCHANGEABLITY
I from EPC to CC/WCDL 1765 2000 2400
Ll from CC/WCDL to EPC 200 1000 1200
lll Two-way between 600 1000 1200
EPC & FBP/FBD
lV Maximum EPC 5900 7000 8400
V from BG to LC 500 600
B- SUB LIMITS
l. inland bills limit 600 600 720
ll. OD against Export bills 1200 1200 1440
in collection WW/FBD
lll. Advance against Export 600 600 720
incentive WW/export limits

The legal documents as prescribed by the bank are to be executed. After board meeting a
resolution for availment of the limits is passed. After execution of the documents the
company is required to file charge with ROC (register of companies) after completing these
formalities the funds for day-to-day requirements are drawn from the bank by way of
operations in cash credit account and export packing credit account. Other facilities like
negotiations of bills for domestic suppliers are availed by way of bills discounting facilities
with the bank.

On this facility bank charges commission and interest for the period. Likewise export
bills are negotiated under foreign bills discounting facility.

The bank charges their commission as prescribed under FEDAI rules (foreign exchange
dealers association of India) the non letter or credit are also provided by the banks as per
agreed and prescribed by the banks.

To regulate the operations within sanction borrower is required to submit various

statements namely.

1. Stock hypothecation statement.

2. Monthly operational data

23
 3. Q.T.S. (Quarterly information system) Form1, Form 2, Form 3.

These statements keep the bank informed of current activities of the unit and fix up the
borrowing limits within overall sanction.

In the reference if term Loan Company is taking keenly interest in commercial paper,
ECB, NCD, to execute in next financial year. Which is fully analyzed in this report
Working Capital loans from bankers are secured by the way of hypothecation of stock-in-
trade stores (excluding machinery spares) and book-debts as well as second charge on fixed
assets of the company. The company has also taken long-term loan from ICICI Bank &
PNB for modernization and up gradation for a term of 5 years.

Law / Audit
LLaaw
w::
Mr. L.N. Jhunjhunwala set up the company under the purview of Company Act, 1956. If
there is any breach of the act or there is any misconduct in the transportation then the cases
so encountered fall under the jurisdiction of Company Act, 1956. The case dealing with
revenue and recovery are dealt in the Civil Procedure Court. The cases dealing with the
workmen are held under the judicature of Workmen s Compensation Act, 1923. The cases
of occupational disease, personal injuries, accident, arising out of employment and in the
course of employment, all falls under the jurisdiction of workmen s compensation act
1923.

The Government itself has developed the Industrial area. It extends upto 400 acres and
has almost 173 rooms in the whole unit. Hence the Government provide rebates to carry
out the business and in exports as well, in fact the subvention is provided to the company.
The company, although established under the licence capacity but is responsible and
accountable under the installed capacity.

EExxcciissee::

24
 Excise is the tax on production that is charged by the Central Government. The
Central Government taxation changes every year. As the company is established in the
Government promoted industrial area, the govt. provides subsidies to sell the product. The
basic excise duty on yarn is 8%, there is an additional excise duty which is 15% of basic
duty. Thus the effective rate is 9.2%. On fabric the basic duty is 8%, additional duty is
1.5%. Thus the effective rate is 9.2%.

A
Auuddiitt::

This department is to ensure that accounts are prepared according to specified principles.
In RSWM they have 3 types of auditing:
Statutory Auditing (once in year)
ISO Auditing (twice in a year)
Internal Auditing (everyday)
Some other functions performed by this department are:

PPhhyyssiiccaall V
Veerriiffiiccaattiioonn
Diesel stock / f.o. stock
Copper godown fabric stock
Mandi godown fabric stock

TTiim
mee O
Offffiiccee
Salary checking
Daily attendance report checking

C
Ciivviill
M.B. checking of various civil construction works
Civil wages & good work checking

SSttoorreess &
& PPuurrcchhaassee
L.P.G. gas records checking

25
 Packing material consumption records checking

FFaabbrriicc
Shrinkage statement checking
Fabric weaving job work records checking
Defective garments records checking
Publicity material records checking

O
Otthheerrss
Statutory returns records
Checking of gate passes at main gate
Bill checking of various contractors

C
Coom
mmmeerrcciiaall//SSttoorreess

As and when the demand for any item is experimented, the requisition is sent to the
domestic head office and this office in turns delivers the order to the main company that
in turn directly contacts the company and sends the material invoice. Then the
comparative statements are prepared and negotiations are held and the bid with the least
of the price, better quality and good service is unanimously accepted. The 60% of the
procurement is directly through the proprietors and the rest 40% is through anywhere.
Except the raw material, all the items are purchased here but the capital equipment s are
not purchased until Executive Director or the Vice President permits to do so.

Marketing
D
Doom
meessttiicc
Looking to the present market situation when the market is under recession, the
market has extensively declined for poly-viscose so to carve a niche in the market for a
major producer of the poly-viscose is really a tough going. So the unit is going for all
types of production viz. job, batch and mass production. But the problem lies somewhere

26
in the cyclical phase of the market as the impulsive purchases are taste bound rather.
Many of the leading companies favour high prices for almost the same product range to
skim the market like Grasim, Raymond s etc.

In order to retain itself in the market the company has started manufacturing poly-
cotton, tencel, polynosic and fabric for RMG. They are catering to all the leading brands;
they do job production for these selective companies. They are catering to the premium
segment of the society by indirect supply of tencel and polynosic, which in fact imbibed
by the readymade garment manufacturer, which needs high precision stitching. The RMG
customers for Mayur Fabric are Provogue, Madura, Arvind and Mohan RMG Maral .
They have also started manufacturing fire retardant fabric supplying it to Shriford,
Vigyan Bhawan Mumbai , NSC Mumbai , Indian Airlines, MUL and Treviera.

The RSWM has wide network of agents and wholesalers catering to the regions
with extreme diversified tastes. All the meetings held with the agents and the
wholesaler s fall under this section to invite their choices of preferences and market s
current hot cake. Although the head office is located in New Delhi, the marketing of the
RSWM product under the banner of Mayur is solely done from the RSWM floors only.

As for the media-mix, the company has promulgation plan. Earlier Shah Rukh
Khan was associated with Mayur . The hiring of SRK gave impetus and tempo to the
product sale, which augmented up to 70-80% in 1992-93 because of the celebrity tag,
attached to it.

Mayur s advertising media are:

Press media
Television
Films
Posters
Hoarding

27
 Electrical Sign Boards
Booklets and Catalogues
Gift Novelties
Brochures & Folders
Window display
Interior display
Fabric shows etc.

EExxppoorrttss
To take care of Yarn Exports, the company has its Central Exports Dept. at
Mumbai. Export marketing is generally looked after with the help of overseas agents.
Marketing teams also frequently visit the foreign buyers to various Countries
predominantly Italy, UK, Spain, Belgium, Egypt, South Africa, Switzerland, Japan,
Brazil, etc. The company expects to increase the export turnover in next years.

The Fabric exports are being controlled from plant. RSWM major markets are
European and Middle East countries, Italy, UK, Syria, Dubai, Indonesia, Peru, Jordan,

As the fashion trend across the world is shifting from polyester viscose to high
value added product such as Tensile, Polynosic, and Lycra. RSWM is also following the
same trend in order to establish leadership in global market, The company has also
developed fabric from Lycra, Tencel, polynosic Fibers and polyester cotton yarn that has
been well received in domestic as well as export market.

The company has also pushed its products to readymade garment manufacturers,
such as Arvind Garments, Madura Coats, and Orient Crafts etc. Company has exclusive
arrangement with Tencel U.K for manufacturing and marketing of Tencel blended yarn
and fabrics in India and abroad. Similarly it has also introduced Fire Retardant fabrics
first time in India and having exclusive arrangement with Hoechest, Germany.

28
 In order to sharpen our competitive edge enabling us to face the stiff
competition in the quota free global economy they are also taking initiative to strengthen
our export operations by establishing strategic alliances with overseas customers, design
& marketing consultants.

Having obtained IS/ISO9001: 2000 certification, RSWM has also been able to
make headway in the European and other markets.

The Company has also developed a network of agents for the purpose of exports.
The exports of the Company are to countries like U.K., Canada, Malasiya, Germany,
Spain, Australia, Switzerland, Turkey, Morocco, South Africa, UAE, Chile, Korea,
Egypt, Portugal, Italy, Greece, Belgium, Netherlands, Philippines, Colombia, Uruguay,
Oman, Africa and all other Middle and South East countries.

Personnel & Human Resource Department

Personnel department has whole information about every employee. In this
company there are 480 staff member and 3000 workers. In ERP RAMCO package is
related to this deptt. This package has whole information of every employee like name,
age, sex, salary, qualification, address etc. This department has ARS (attendance record
system). Some functions performed by this department are:

Recruitment & Selection:

Persons who have passed at least 8th standard are recruited as workers. Rajspin
has got its own recruitment, selection and training system. A person in the age group of
18-22 years is inducted and imparted training for various specialized fields. The
recruitment and selection of technical personnel and managers is made through placing
advertisements in leading newspapers, journal. When person is selected then this
department carries on orientation programme.

Rajspin has a staff colony with around 110 quarters with all facilities. Employees
are provided with HRA to facilitate their requirement.

29
To have a feeling of equality, uniform has been adopted by the company for the workers
as well as members.

E
ERRPP
The company has implemented ERP at various levels of production as well as
management and administration. The ERP system consists comprises of TIM, BPCS and
RAMCO Marshall. An Israeli company in collaboration with IBM, USA has given TIM,
which is focused on the Textile Integrated Manufacturing. But it lacked financial up
gradation. So the financial counter part came from IBM, USA.

BPCS looks to the financial and business process of the unit. Juxtaposing these
systems there is another counterpart RAMCO looking over the human resource
management and the payroll system of the unit as a whole.
Implementation of ERP has resulted into:

CCoosstt rreedduuccttiioonn
FFaasstt ddeelliivveerryy
CChheecckk eerrrroorrss oonn ttiim
mee
IInnvveennttoorryy ccoonnttrrooll
Q
Quuaalliittyy pprroodduuccttiioonn
FFiinnaanncciiaall eeffffiiccaaccyy

Finish folding / Warehouse

Both the departments are computerized. Process of folding department is:
Grading detection of faults & grading according to
the severity of faults.
Than Folding folding of clothes on hard paperboards.
Tagging tagging the plastic cover for writing specifications.
Screening screening them than by white paints
Stamping stamping the particulars like meter, quality

30
 No., grade, shade etc.
Banding paper band is used for fabric.

CENTERLISED PRODUCTION,
PLANNING & CONTROL
CPPC is a new department in RSWM, which was, establish dated on 1/06/02. This
department is bridge between marketing department & production department. Before
the implementation of this department every department was doing their planning
at individual level, which was creating problems & consuming time. So to come up
from these problems the CPPC department was implemented. For the better
planning representative of every department who were doing planning in their
department, were called under one roof named CPPC. CPPC follow up the execution
of planning, which is executed by the production department. In this process production
planning will be at macro level means monthly & production order will be at micro level
means daily & weekly.
Work processing of this department is as follows.

M CPPC PROD.
KTG

SALES
ORDER

SALES PR PR
PLANN. OD. OD.
PLANN. ORDER

PROD.
DEPTT.

CPPC EXECTION
FOLLOW-UP
31
Evaluating Financial Position
By
Using Ratio Analysis

32
 Introduction
Introduction

1.1 Importance of financial statement analysis in an organization.

In our money-oriented economy, Finance may be defined as provision of money at the

time it is needed. To every one responsible for provision of funds, it is problem of
securing importance to so adjust his resources as to provide for a regular outflow of
expenditure in face of an irregular inflow of income.

1. The profit and loss account (Income Statement).

2. The balance sheet

In companies, these are the two statements that have been prescribed and there contents
have been also been laid down by law in most countries including India.

There has been increasing emphasis on

(a) Giving information to the shareholder in such a manner as to enable them to

grasp it easily.

(b) Giving much more information e.g. funds flow statement, again with a view to
facilitating easy understanding and to place a year results in perspective through
comparison with post year results.

(c) The directors report being quite comprehensive to cover the factors that have
been operating and are likely to operate in the near future as regards to the
various functions of production, marketing, finance, labour, government policies,
environment in general.

33
 Financial statements are being made use of increasingly by parties like Bank,
Governments, Institutions, and Financial Analysis etc.

The statement should be sufficiently informative so as to serve as wide a curia as

possible.

The financial statement is prepared by accounts based on the activities that take place
in production and non-production wings in a factory. The accounts convert activities
in monetary terms to the help know the position.

1.2 Uses of Financial Statement Analysis.

The main uses of accounting statements for; -

Executives : - To formulate policies.

Bankers : - To establish basis for Granting Loans.

Institutions \ Auditors : - To extend Credit facility to business.

Investors : - To assess the prospects of the business and to know

whether they can get a good return on their investment.
Accountants : - To study the statement for comparative purposes.

Government Agencies: - To study from an angle of tax collection duty levee etc.

34
1.3 Principles of Accounting.

Accounting is the language of business. A business communicates with the outside

world. Interested in its affairs through the medium of financial statements. The
accounts all over the world have developed certain rules, principals. Procedures,
conventions that are generally referred to as generally referred to as Generally
Accepted Accounting Principles

A: - accounting concepts.
B: - accounting conventions.

1.4 Accounting concepts

Accounting concepts may be considered as basic assumptions or conditions on

which the science of accounting is based. The following concepts have received general
support.

I). Business Entity Concept; -

For accounting purpose the business firm is regarded as a separate entity.
Accounts are maintained for the entity as distinct from the person who is connected with
it.

The accounting records transactions as they effect this entity and regards owners
creditors, suppliers, employees, customers and government as parties transacting with
this entity s

35
 Money Measurement Concept; -

Accounting is concerned only with those facts, which are expressible in monetary
terms. The use of monetary yardstick provides a means by which heterogeneous
elements such as land. Plant & equipment, Inventories. Securities and goodwill may be
expressed in numbers, which can be meaningful compared.

Going concern concept: -

Accounting is generally based on a premise that the business entity will remain a
going concern for an indefinitely long period and not a concern, which is going to be
wound up in near future. This has an important implication for future evaluation of assets
and liabilities. Assets are normally carried in the books at their cast, less depreciation
reflects better value of an assets to a business which will remain a going concern.
Liabilities are carried at value the reflect what business owes and not at values which the
creditor would settle for in case of liquidation.

Cost Concept: -

This principle mis related to stable monetary value principle and suffers from its
weaknesses Assets acquired by a business are generally recorded at there cost, the price
paid up for acquisition. This cost is used for all subsequent accounting purpose for e.g.
depreciation is charged on original cost.

36
 V) Dual Aspect Concept: -

This may be regarded as the most distinctive and fundamental concept of

accounting. It provides the conceptual basis for accounting mechanics and there is a
universal agreement among accounts over this concept.

vi) Accounting Period Concept: -

In order to know the results of business operations and financial positions

of the firm periodically, time is divided into segments referred to as
accounting periods. income is measured for these periods and the financial
position is assessed at the end of an accounting.

vii) Realization Concept: -

According to the realization concept, revenue is deemed to be earned only

when it is realized and we normally consider revenue as relished when
goods are shipped or delivered to the costomer5 and not when a sales
order is received or a contract is signed or goods manufactured.

1.5 Accounting Conventions

Important conventions in accounting practice are :-

Consistency

Full Disclosure & Relevance.

Objectivity.

Reliability

37
 The Balance Sheet
The Balance sheet

28.11 The Balance Sheet

The Balance sheet shows the financial status of a business. The registered
companies are to follow part 1 of schedule VI of companies \ act 1956 for
recording Assets and Liabilities in the Balance Sheet.

Format of Balance Sheet as prescribed by companies Act.

Liabilities Assets

Share Capital Fixed Assets

Reserve &Surplus Investments
Secured loans Current Assets, Loan
Unsecured Loans Advances
Current Liabilities & provision Misc. Expenditures & Losses

Liabilities: -

Liabilities defined very broadly represent what the business entity owes to
other.

38
 Share capital: -

There are two type of share capital: -

Equity Capital
Preference Capital

Equity Capital represents the contribution of the owners of the firm. Preference capital
represents the contribution of preference shareholders and the dividend rate payable on it
is fixed.

Reserve & Surplus: -

Reserve & Surplus are profits, which have been retained by the firm reserves, are two
types, revenue Reserve and Capital Reserve.

Revenue Reserve represents accumulated retained earnings from the profits of normal
business operations. Capital reserve arises out of gains, which are not related to normal
business operations.

Surplus is the balance in the profit and loss account, which has not been appropriated to
any particular reserve account. Reserve and surplus along with equity capital represent
owner s equity.

Secured Loans: -

These denote borrowings of the firm against which specific securities have been
provided. The important components of secured loans are debentures, loans from
financial institutions, and loans from commercial banks.

Unsecured Loans: -

These are borrowing of the firm against which no specific security has been provided.
The major components of unsecured loans are fixed deposits, loans and advances from
promoters, Inter-Corporate borrowings and unsecured loans from Banks.

39
Current Liabilities and Provision: -

Current Liabilities and Provision as per the classification under the companies Act,
Consists of the Following amounts due to the suppliers of goods and services brought on
credit, Advance payments received, accrued expenses. Unclaimed dividends, Provisions
for taxed, Dividends, Gratuity, Pension etc.

Assets: -

Assets have been acquired at a specific monetary cost by the firm for the conduct of its
operation.

Fixed Assets: -

These assets have two characteristics. They are acquired for use over relatively long
period for carrying on the operations of the firm and they are ordinarily not meant for
resale.

Examples for fixed assets are land, building, plant, Machinery, patent & Copyrights.

Investments: -

These are financial securities owned by the firm. Some investments represent long-term
commitments of funds. Usually those are the equity shares of other firms held for income
and control purpose. Other investments are short term in nature and are rightly classified
under current assets for managerial purpose.

40
Current Assets, Loans and Advances: -

This category consists of cash and other resources, which get converted into cash during
the operating cycle of the firm current assets, are held for a short period of time as against
fixed assets, which are held for relatively longer periods. The major component of current
assets is: cash, debtors, inventories, loans and advances and pre-paid expenses.

Miscellaneous expenditure and losses: -

The consist of two items miscellaneous expenditure and losses miscellaneous expenditure
represent outlays such as preliminary expenses and pre-operative expenses, which outlays
such as preliminary expenses which have not written off loss is shown on the right hand
side (Assets side) of the balance sheet.

41
 YEAR ENDED Rs.in Lacs

RAJASTHAN SPINNING AND WEAVING MILLS LIMITED

BALANCE SHEET AS AT 31st MARCH, 2005
Rs.in Lacs
SCHEDULE AS AT AS AT
31.3.2005 31.3.2004
SOURCES OF FUNDS
Shareholders' Funds
Share Capital 1 2,192.00 2,238.40
Reserves and surplus 2 17,765.00 15,761.25
19,957.00 17,999.65
Mibority Interest 362.58
Loan Funds 3
Secured Loans 39,605.39 22,388.21
Unsecured Loans 1,025.00 -
40,630.39 22,388.21
Deferred Tax Liability 4 2,706.39 2,470.40
Total 63,656.36 42,858.26
APPLICATION OF FUNDS
Fixed Assets 5
Gross Block 66,773.69 55,565.13
Less : Depreciation and Amortisation 37,749.36 32,480.45
Net Block 29,024.33 23,084.68
Capital Work in Progress 7,967.50 1,022.59
36,991.83 24,107.27
Investments 6 2,627.12 2,623.44
Current Assets Loans & Advances 7
Inventories 13,455.56 9,642.44
Sundry Debtors 6,670.18 5,078.96
Cash and Bank Balances 708.47 110.04
Other Current Assets 5,005.48 2,787.26
Loans and Advances 3,852.57 2,580.37
29,692.26 20,199.07
Less: Current Liabilities and Provisions 8
Liabilities 4,811.15 3,382.55
Provisions 984.88 921.48
5,796.03 4,304.03
Net Current Assets 23,896.23 15,895.04
Miscellaneous Expenditure 9 141.18 245.45
(To the extent not written off or adjusted)
Total 63,656.36 42,871.20
Accounting Policies and Notes on Accounts 16 0 12.94
As per our report of even date

FOR S. BHARGAVA ASSOCIATES FOR A.L.CHECHANI & CO.

Chairman
Chartered Accountants Chartered Accountants

42
Financial Ratio Analysis
The Tool Kit

43
Financial Ration Analysis The Tool Kit

3.1 Ration Analysis: -

Ration Analysis is the process of determining and interpreting numerical relationship

based on financial statement. It is defined as the systematic use of ratio to interpret the
financial statement so that the strength and weakness of a firm as well as its historical
performance and current financial conditions can be determined.

A ratio is a statically yard stick that provides a measure of the relationship between
variables and figures.

The relationship between variables or figures can be expressed in fractions.

For Ex. Quotient of current assets by current Liabilities.

Percentages; -

For Rs. Cost of goods sold as percentage of sales.

Proportion of numbers: -

For Ex. Double the Turnover in last one year.

These alternative methods establish a relationship among variables for the purposes of
financial analysis referred to as Ration Analysis.

Ration are simple to calculate and easy to understand, Financial analysis employee these
fools to explain financial statements and performance of a company.

44
3.2 Objectives of Ratio Analysis: -

The main objective of Ration Analysis technique is to reveal the relationship in more
meaningful way so as to enable us to draw conclusion from them. The ration analysis
thus as a quantitative tool helps the Analyst to draw answers to questions such as

Are the Net Profits Adequate

Are the assets being use efficiently is the firm solvent

Can the firm meet its current obligation and so on

Thus the Ratio Analysis help the

Owner or Investors: For estimating earning capacity.

Creditors: Concerned primarily with liquidity and ability to pay interest and
redeem loan within specified period.

Financial Executive: - Interested in evaluating analytical tool that will

measure costs efficiency ,liquidity and profitability, with a view to making
intelligent decisions.

Basis of comparison ;-

Ratio are relative figures reflecting the relationship between variables. This enables the
analysis to draw conclusion regarding financial operations

The use of ratio as a tool of financial analysis involves their comparison, for a single
ratio, like absolute figures, fails to reveal the true position. For ex, P /E ratio (price
/earning ratio for a particular scrip) should be compared over a period of time to get a
true picture of company performance.

45
Thus comparisons with related facts is the basis of ratio analysis s

In ratio analysis, four types of comparisons are involved.

1 Trend Ratio

2 Inter firm comparisons

3 Comparisons of items within a single years financial statement of a firm.

4 Comparisons with standard or plans

Trend ratios :-

Comparison of firm over time i.e. present ratios are compared with past ratios.
Trend ratios indicate the direction of change in performance improvement
deterioration or consistency over the years.

Inter firm comparisons :-

Comparisons of the ratios of a firm with those of other in the same line of business
or with the industry reflects its performances in relations to its competitor.

The other type of comparisons may relate to comparisons of items with in a single
year financial statement of a firm and comparisons with standard or plans.

46
 .

Types of Ratio

47
Types of Ratio

4.1 Types of Ratios: -

1. Liquidity ratios
2. Leverage Ratios
3. Turnover Ratios
4. Profitability Ratios
5 Valuation Ratios.

4.2 Liquidity Ratio: -

Liquidity refers of the ability of a firm to meet its obligation in the short run,
usually one year or when the become duration for payment.

A proper balance between liquidly and profitability is required for efficient

Financial Management.

Liquidity ratios are based on the relationship between current assets the sources
for meeting short-term obligation and current liabilities.

The ratios, which indicate the liquidity of a firm, are: -

1. Current Ratio.
2. Acid test Ratio.
3. Fund-Flow Ratio.
4. Net working capital.

48
Current Ratio

The current Ratio is the ratio of current liabilities it is calculated as: -

Current assets
Current ratio = -- ----------------
Current Liabilities

The current assets include cash and Bank Balance, Marketable securities, Bills,
Receivable, Inventories, Loan sand advances, Advances Payment and prepaid
expenses.

The current liabilities include creditors, bills payable bank overdraft short-term
loans, outstanding expense & income tax payable, unclaimed divided and
proposed dividend.

Te current ratio measures the ability of the firm to meet its current liabilities. The
current assets get converted into cash into the operational cycle of the firm and
provide the fund needed to pay current liabilities. The higher the ratio, to ward
off.

Acid Test Ratio: -

The acid test ratio is the ratio between quick current assets and current liabilities.

It is calculated as

Quick assets
Acid Test Ratio =
Current liabilities

The term quick asset refers to current assets that can be converted into cash
immediately.

49
Quick assets current assets (inventories + prepaid expenses)

It is based on current asset, which are highly liquid. This also called quick ratio.
Generally, an acid test ration of 1:1 considered satisfactory as a firm can easily
meet all current claims

Bank to working capital Gap Ratio: -

This ratio establishes a relationship between short-term bank borrowing and

working capital gap

It is calculated as

Short term bank Borrowing

Bank Finance to working Gap Ratio =
Working capital gap

Working capital equal to current assets less current liabilities other than bank
borrowing.

The tondon committee report suggest the this ratio should not exceed 0.75 even
under most liberal scheme of financing.

Fund flow ratio : -

A dynamic analysis of liquidity call for examination of cash inflow and cash
outflow in addition to the size of the liquid asset balances at a given point of time.

The current ratio and acid test ratio are static in nature.

Quick assets
Internal measure =
Average daily flow of operational
cash expenditure

50
4.3 leverage of capital structure ratios: -

These ratios refer to the use of debt finance long term solvency of the firm
can be examined by using leverage or capital ratios.

The leverage ratio or capital structure ratio can be defined as the financial
ratios which throw light on the long term solvency of a firm reflected in its
ability to assure the long term creditors with regards to.

1. Periodic payment of interest during the period of loan.

2. Repayment of Principe on maturity or in predetermined installments at
due dates.

Leverage ratio help in assessing the risk arising from the use debt capital.
Two type of ration that is commonly use to analyze financial ration are.

1. Structural ratios.
2. Coverage ratios

Structural ratios: -

Structural ratios are based on the proportion of debt and equality in the
financial structure of the firm, two important coverage ratios are interest
converge ratios and fixed charge coverage ratio 5:3:1 Structural ratios

Debt equity ratio

This ratio reflects the relative claims of creditors and share holders against
the assets of the firm, debt equity ratios establishment relation ship
between borrowed funds and owner capital to measure the long term
financial solvency of the firm. The ratio indicates the relative proportions
of debt and equity in financing the assets of the firm.

It is calculated as follows

51
 Debt
Debt equity ratio =
Equity

The debts side consist of all liabilities ( that include short term and long
term liabilities) of the firm. The equity side consists of new worth (plus)
preference capital.

The lower the debt equity ratio the higher in the degree of protection
enjoyed by the creditors.

The debt equity ratio defined by the controller of capital issue, debt is
defined as long term debt plus preference capital which is redeemable
before 12 years and equity is defined as paid up equity capital plus
preference capital which is redeemable after 12 years.

The general norm for this ratio is 2:1. on case of capital intensive
industries as norms of 4:1 is used for fertilizer and cement industry and a
norms of 6:1 is used for shipping units.

Debt asset ratio

The debit asset ratio establishes a relationship between borrowed funds

and the assets of firm.

It is calculated as:

Debt
Debt Asset Ratio = -------------------------------
Asset

Debt includes all liabilities. short term as well as long term and the assets
include the total of all the assets (the balance sheet total )

52
 This ratio is related to the debt equity as follow .

Debt
-----------------------
Equity

Debt asset ratio = -- ------------------------------------------

1+ Debt
----------
Equity

4.3.2 Coverage Ratios.

These ratios are computed from the information available in the profit and
loss account. The coverage ratios measure the relation ship between what
is normally available from operations of the firm and the claims of the
outsider.

The various coverage ratios are

1) Interest coverage ratio

2) Fixed charges average ratio
3) Dividend coverage ratio

Interest coverage Ratio

This ratio is also know as Time interested Earned ratio This ratio
measures the debt servicing of capacity of a firm in so far as fixed interest
on long term loan is concerned. Interest coverage ratio determined by
dividing the operating profits or earning before interest and taxes by fixed
interest charges on loans

It is calculated as

Earning Before Interest &Taxes

(EBIT)
Interestest coverage Ratio = ----------------------------
Debt Interest

53
 The EBIT is used in the numerator of this ratio because the ability of a firm to pay
interest is not affected by tax payment as interest on debt fund in a tax deductible
expenses.

The ratio apparently measure the margin of safety the firm enjoys with the respect
to its interest burden.

A high interest coverage ratio implies that the firm can easily meet its interest
burden even if EBIT decline.

A low interest coverage ratio results in financial embarrassment when EBIT declines.
This ratio is not appropriate measures of interest coverage because the source of interest
payment is cash flow before interest and taxes ,not EBIT.

In this view, we may use the modified interest coverage ratio.

EBIT +depreciation
coverage ratio Modified Interest Coverage Ratio = -----------------------------
Debt Interest

Fixed charges coverage Ratio:

This ratio help in measuring the debt servicing ability adequately because it considers
both interest and the principal repayment obligations.
It is calculated as :

EBIT +depreciation
Fixed charges coverage Ratio : - ---------------------------------------
Repayment of Loan

Debt Interest + ------------------------------------

1 - Tax Ratio

54
If the denominator of this ratio only the repayment of loan is adjusted upwards for the tax
factor because the loan repayment amount un like interest, is not tax deductible.

This ratio may be amplified to include other fixed charges like lease payment and
preference dividend.

Thus,

Earning After Tax (EST)

Dividend Coverage Ratio = -------------------------------------------------

Preference Dividend

This ratio like the interest coverage ratio , reveals the safety margin available to the
preference share holder . The higher the coverage the better it is from their point of view.

4.4 Turnover Ratio

Turnover Ratios are also referred to as Activity ratio or Assets.

Management ratios. This ratio establishes relationship between the level of
activity represented by sales or cost of good sold and levels of various assets.

The important turnover ratios are: -

Inventory Turnover ratio

Average collection period ratio

Receivable Turnover ratios

Fixed Asset Turnover ratios

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 Debtors Turnover ratios

Creditors Turnover ratios

Inventory Turnover ratio: -

This Ratio is computed by dividing net sales by inventory

Thus,

Net sales
Inventory Turnover ratio = ----------------
Inventory

The numerator of this ratio is the net sales for the year and the
denominator is the Inventory balance at the end of the year.

This ratio is deemed to reflect the efficient the management of inventories

and vice versa.
This statement need not be always true. A low level of inventory may
cause a higher inventory turnover ratio.

It might be argued that the inventory turnover ratio may be

Cost of goods sold

Inventory Turnover ratio = --------------------------------------------
Average Inventory

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Cost of Goods Sold = sales -Gross Profit
Average Inventory = Average of (Opening +Closing Stock)

This ratio also indicates how fast inventory is sold

A high ratio is good from the viewpoint of liquidity and vice versa. Average collection
period.

Receivable
Average collection period. = ------------------------------
Average sales per day

The receivable figure of the ratio generally represents the receivables balance at the end
of the year. When sales the highly seasonal, the average of receivable figure at the and
of each month or each season can be used and when sales growth is high the average of
the beginning and ending receivables balances are to be used . average sales per day in
the denominator is simply the sales of the year divided by 365.

The average collection period should be compared with firm credit terms to judge the
efficiency of receivables management.

As a rule of thumb, the average collection period should be not exceed 1½ times the
credit period.

Receivable Turnover ratios

The Receivable Turnover ratio measure the relationship between credit sales during a
particular accounting period and the average receivables (sundry debtors) outstanding
during the period.

It is expressed in two forms

Net Sales
Receivable Turnover ratios = -----------------
Receivables

57
2 Average collection period after calculating daily sales (sales day )and dividing
accounts receivable by sales per day.

The receivables figures used is the receivables figures at the end of the period. The
receivables turnover ratio and the average collection period are a follows.

360
Average Collection Period = ------------------------------
ReceivablesTturnoverRratio

The shorter the average collection period the higher the receivables turnover ratio.

Net Sales
Fixed Assets Turnover Ratio = ----------------------
Fixed Assets

The net sales indicate the net sales for the period and fixed assets is the balance in the
net fixed assets account at the end of the year.

This ratio measures the efficiency with which fixed assets are employed. If the fixed
assets turnover ratio is high it indicates the there is a high degree of efficiency in assets
utilization.

Similarly if the ratio is low if reflects in efficient use of assets.

It is important to note that when the fixed assets of the firm are old and substantially
depreciated, the fixed turnover ratio tens to be high because the denominator ratio is
very low.

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Total assets turnover ratio.

The main objectives of the total assets turnover ratio are to measure how efficiency
assets are employed. It is a kind to the out capital ratio in economic analysis.

Net Sales
Fixed Assets Turnover Ratio = ----------------------
Fixed Assets

Total assets simply the balance sheet total at the end of year.

If the total assets turnover ratio is high it implies that there is high degree of efficiency
in assets utilization and vice-versa.

Debtor s turnover ratio: -

The debtor s turnover ratio is determined by dividing the net credit sales by average
debtors outstanding during the year.

Therefore

Debtors turnover ratio = Net credit sales

Average debtors

Here net sales consist of gross credit less returns. Average debtors are simply average
of debtors at the beginning and at end of the year.

The main function of this ratio is to measure how rapidly debts are collected.

A high ratio is indicative of shorter time lag between credit sales and cash collection/

A low ratio indicates that debts are not being collected rapidly.

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 Creditors turnover ratio

creditors turnover ratio is a rate between net purchase and average amount of creditor
out standing during the year.

Creditors turnover ratio = net credit purchases

Average of creditors

Net credit purchase = gross credit

Purchase less returns to supplier

Average creditors = Average of creditors outstanding at the

Beginning and at the end of the year.

A low turnover ratio reflects liberal terms granted by suppliers, while a high turnover
ratio shown that accounts are settled rapidly.

The creditors turnover ratio is an important tool as a firm can reduce its requirement of
current assets by relying on suppliers creditors.

The intent to which trade creditors are willing to wait for payment can be approximated
by the creditors turnover ratio.

4.5 Profitability Ratio

Profitability is measured of efficiency and the search for its provides an incentive to
achieve efficiency.

Profitability the final results of business operations mainly the owners and management
are in the financial soundness of the firm.

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The management of the firm, is eager to measure its acting efficient. Similarly the owners
invest their funds with the expectation of reasonable return. Thus it all depends on the
profit for the ensure operating efficiency to the management and ensure reasonable return
to the owners.

1. Profit margin ratio (gross and net)

2. Expenses ration or operating ratio profitability ratios in relation to investment are.

3. Return on investment

4. Return on assets

5. Return on equity

6. Return on capital employed.

7. Net income to total assets ratio.

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4.5.1 Profit margin ration

Profit margin ratio measures the relationship between profit and sales, there are two profit
margin ratios

1. Gross margin ratio

2. Net margin ratio

Gross profit margin ratio: -

Gross profit can be defined as the difference between net sales and cost of goods sold.
Gross margin profit ratio is also known as gross margin gross profit margin ratio is
calculated by dividing gross profit by sales.

Gross profit margin ratio = gross profit

Net sales

Net sales-cost of goods sold.

The gross profit margin ration shows the margin left after meeting manufacturing
cost. The ratio also measures.

The efficiency of production as well as pricing. The Gross profit to sales is a sign of
good management s as it implies that the cost of production of the firm is relatively
low. A high ratio may also imply of a higher sales rise without a corresponding
increase in the cost of goods sold.

Whereas a low gross profit margin in a danger signals, warranting a careful and
detailed analysis of the factors responsible for the same.

62
The main contributing factors responsible for low ratio maybe high cost of production as
will as inefficient utilization of fixed as well as current assets a low selling price resulting
from severe competition, inferior quality. Lock of demand etc .

Net Profit Margin Ratio:

The Net Profit Margin Ration determines the between Net profit and sales of business
firm. This relationship is also known as net margin. This ratio shows the earning left for
shareholder (both equity and preference) as percentage of Net sales.

Net Margin Ratio measures the over all efficiency of production, Administration selling,
Financing, pricing and Tase Management.

Thus,

Net Profit

Net profit Margin Ratio: - -------------------

Net Sales

A high Net profit Margin indicates adequate return to the owners as will as enable a firm
to withstand adverse economic conditions when selling price is decanting, cost of
production is rising and demand for product is falling.

A low Net Profit Margin has opposite implications. A firm with low net profit margin can
earn a high rate of return on investment it has a higher inventory turnover.

Jointly considering gross and net profit margin provides a valuable understanding of the
cost and profit structure of the firm and enables the analyst to identity the source of
business efficiency of inefficiency.

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4.5.2 Profitable Ratios in regard to Investment

The profitable ratios can also be computed by relating the profits of a firm to its
investments. These ratios are popularly termed return on investment (ROI).

There are three different concept of investment in vogue assets. Capital employed and
Shareholders Equity.

Based on each of the above there are three board categories of ROI s

They are

Return on Assets

Return on Capital Employed

Return on Shareholders Equity.

Return on Assets: -

Return on Assets ration measure the profitability ratio in terms of relationship

between Net Profit and Assets. There are various approaches possible to define
net profit and Assets.

The concept of Net profit may be

Net Profit after Taxes.

Net Profit after Taxes plus Interest

Net Profit after Taxes plus Interest minus Tax Saving.

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Assets may be variants of return on assets are

Net Profit after Taxes

Return on Assets = ---------------------------------
Average Total Assets

The Return on Assets based ration would be an under estimate as the interest paid to the
creditor is excluded from the Net Profit.

Net Profit after Taxes +Interest

Return on Assets = ---------------------------------
Average Fixed Assets

Net Profit after Taxes +Interest

Return on Assets = ---------------------------------

Average Tangible Assets

The above may not provide correct results for inter firm comparison. As a measure of
operating performance, the above equations should be substituted by the following: -

Net Profit after Taxes +Interest Tax Advantage on Interest

Return on Assets = --------------------------------------------------------------------
Average Total \ Fixed Tangible Assets

This equation correctly reports about the operating efficiency of firms if they all are
equity financed. The main purpose of return on assets is to measure the profitability of
the total funds Investment of a firm.

Return on Capital Employed (ROCE) :-

Return on capital employed is same as return on assets except for the difference that the
profit are related to the capital employed. In this ratio the term capital employed refers to
the long term funds supplied by the creditors and owners of the firms.

65
The return on capital employed can be computed \calculated in two ways firstly it is
equal to non-current liabilities (Long Term Liabilities) plus owners equity. secondly it is
equivalent to net working capital plus fixed assets.

Net profit After Taxes +Interest

ROCE = -----------------------------------------------------
Average Total Capital Employed

Net profit After Taxes +Interest Tax Advantage on Interest

ROCE = -----------------------------------------------------
Average Total Capital Employed

Net profit After Taxes +Interest

ROCE = -----------------------------------------------------
Average Total Capital Employed-Average Intangible Assets

In the ratio is compared with similar firms, with industry average and over time would
provide sufficient insight into how efficiently the long term funds of owners and creditors
are being used.

The higher the ratio, the more efficient in used of the capital employed.

Return on Equity :-

The return on equity the profitability of equity funds invested in the firm. Return on
equity is regarded as very important measures because it reflects the productivity of the
ownership (or risk capital employed in the firm)

Thus

Equity Earning

Return on Equity = -------------------

Net Worth

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Equity earning of this ratio is equal to profit after tax less preference divided

Net worth includes all contribution made by equity shareholder ( paid up capital + reserve
& surplus)

This ratio is called as return on net worth.

This ratio is influenced by several factors return on investment, debt equity ratio average
cost of Debt. Funds and tax rate.

Return on investment

The return on investment is a measure of business performance, which is not affected by

interest charges and tax payments.

Thus

Return on investment = EBIT

Total assets

Numerator represent pre-earning belonging to all sources of finance, total assets represent
total financing.

This ratio focuses on operation performance and obstructs away the effect of financial
structure and tax rate. It is eminently suited for inter firm comparisons. This ratio is
internally consistent.

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Net income to total assets ratio: -

The main purpose of net income to total assets ratio is measure how efficiency the capital
is employed.

Net income of total assets ratio = net income profit

Earning per share

The market price per share may be the price prevailing on a certain day or preferably the
average price over a period of time.

The earning per share (EPS) is simply profit after tax divided by number of outstanding
equity shares. The PE ratio is a summary measures & which primarily reflects the
following factors growth, prospects, risk characteristics, share holders, orientation,
corporate image and degree of liquidity.

Yield: -

Yield: - Divided + price change

Initial price

This may be split into two parts

Divided price change

+
Initial yield divided yield Initial price capital gain/loss yield

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Generally companies with low growth prospects after a high divided yield and low
capital gains yield, companies with superior growth prospects after a low divided yield nd
high capital gains yield.

Market value to book value ratio: -

Market value per share

Market value to book value ratio =
Book value per share

This ratio reflects the contribution of a firm to the net wealth of the society. If the market
value to book value ratio is equal to 1. All the three ratios return on equity, earnings per
share (which is inverse to PE ratio) and total yield are equal.

If the ratio is say 2 the firm has created a net wealth of one rupee for every rupees
invested in it.

If the ratio is equal to 1 it implies that the firm has neither contribution nor detracted from
the net wealth of the society.

69
Application of Ratio
Analysis Techniques

70
Application on ratio analysis technique

6.1 Liquidity ratio

1.current ratio = current assets

current liabilities

2. Acid test ratio = quick assets

Current liabilities

Financial year Current ratio Acid test ratio

1994-95 1.68 1.11
1995-96 1.57 1.32
1997-98 1.45 1.22
1998-99 1.13 1.08
1999-00 1.17 1.06
2000-01 1.09 1.03
2001-02 1.22 1.18
2002-03 3.21 2.19
2003-04 4.69 2.39
2004-05 5.12 2.77

6.2 Leverage ratio

1. Debt Equity Ratio = Debt/Equity

2. Debt Asset Ratio = Debt/Assets
3. Total debt to total capital employed

Total Debt
=
Total capital employed

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 EBIT + Depreciation
Interest coverage ratio =
Debt interest

Financial year Debt Equity Ratio Debt Assets Ratio Total Debt to total
capital employed
1995-96 1.21 0.41 0.63
1996.97 1.16 0.43 0.60
1997-98 1.17 0.43 0.60
1998-99 1.15 0.42 0.61
1999-00 1.15 0.43 0.56
2000-01 1.17 0.47 0.61
2001-02 1.25 0.49 0.65
2002-03 1.27 0.41 0.67
2003-04 1.38 0.52 0.68
2004-05 2.12 0.62 0.77

6.3 Turnover Ratio

Net sales
1. Inventory turnover ratio =
Average Inventory

Net Sales
2. Debtors turnover ratio =
Total Debtors

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 Net Sales
3. Fixed assets turnover ratio =
Fixed assets

Net Sales
4 current assets turnover ratio =
Current assets

Net sales
5. Net Capital employed (Avg.) =
Capital Employed

Financial Inventory Debtors Fixed asset Current Net capital

year turnover turnover turnover assets employed
ratio ratio ratio turnover (AVG)
ratio
1995-96 5.88 7.67 1.51 2.42 1.05
1996.97 6.55 7.07 1.57 2.97 1.06
1997-98 7.86 8.55 1.53 3.29 1.03
1998-99 7.50 8.93 1.38 2.71 0.93
1999-00 6.81 9.61 1.36 2.58 1.32
2000-01 5.85 12.06 1.28 3.51 0.97
2001-02 7.31 8.93 1.68 2.71 1.64
2002-03 5.89 11.32 2.33 2.59 1.03
2003-04 6.96 13.22 2.51 3.32 1.56
2004-05 5.76 11.62 1.96 2.61 1.22

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6.4 Profitability Ratio:

Gross profit
1. Gross profit to sales =
Turnover-Excise

Net profit (PAT)

2. Net Profit to sales =
Net sales

Net profit
3. Net profit on Fixed Assets =
Fixed Assets

Financial year Gross profit to Net profit to sales Net profit on fixed
sales assets
1995-96 8.18 1.39 2.19
1996.97 8.54 1.81 2.63
1997-98 11.99 4.88 7.83
1998-99 11.91 2.43 6.279
1999-00 11.63 2.86 3.36
2000-01 10.12 2.81 4.56
2001-02 7.93 1.98 3.29
2002-03 10.23 2.33 6.89
2003-04 9.66 2.74 6.90
2004-05 7.60 2.41 4.70

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6.4 Return on Investments

Net profit (before tax)-Interest

1. Return on total capital employed =
Total capital employed

Net profit after tax

2. Return on net worth =
Net worth

Net Profit (after Tax)

3. Return on Assets =
Total Assets

Financial year Return on total Return on net Return on assets

capital employed worth
1995-96 12.82 3.65 1.23
1996.97 16.61 5.20 1.90
1997-98 17.75 12.08 4.47
1998-99 14.23 5.68 3.56
1999-00 11.29 11.25 2.29
2000-01 9.63 7.56 3.59
2001-02 10.23 9.25 2.98
2002-03 16.29 11.51 6.89
2003-04 14.26 10.25 3.99
2004-05 8.89 9.37 2.69

75
Conclusion

76
Conclusion

The conclusion drawn from the analysis of ratio is the previous chapter is presented in the
following section

6.1 Return on Investment

Rajasthan Spg. & Wvg. Mills ltd return on assets (ROA) return on total capital employed
and return on shareholders equity have increased considerably from 1995-96 to 2004-05.
Return on assets (ROA) return on total capital employed and return on shareholders
equity how increased by about 35% from 1995-96 to 2004-05 indicating an excellent
overall performance by the management.

This ROA is comparable to some highly profitable companies like the Colgate Palmolive
Ltd. Hindustan Lever Ltd who are active in the consumer product business Rajasthan
Spg. Wvg. Mills is into highly specialized industrial products hence their achievement in
return on investment should set up example for other to follow: -

6.2 Turnover Ratios

The turnover ratios show fairly good performance by the company. The inventory
turnover ratio (approx. 4 times) indicates good inventory management. The average
collection period (varies between 50-70 days with an expectation in year 2004-05
indicate a liberal credit contract. It does not border a cash and carry system. The fixed
asset turnover ratio indicates a low profitable deployment of fixed assets (approx. 2
times) the capital employed to turnover ratio indicates fair utilization of capital
employed.

77
The average collection period should to exceed1.5 times the credit period companies like
Colgate Palmolive has a average collection period of 15 days compared to this Rajasthan
Spg. & Wvg. Mills should bring its average collection period. The company should
concentrate on profitable deployment of fixed assets.

6.3 Liquidity Ratio

The current ratio (approx. 1.5) and quick ratio (approx. 1.3) indicates an effective
liquidity management by Rajasthan Spg. &Wvg. A high current and quick ratio indicates
that the company can meets its current obligation liabilities.

The high liquidity ratios reflect a very strong short term financial structure. Rajasthan
Spg. & Wvg. Mills should maintain current assets in the form of receivables and cash
rather than in inventory so as to meet its current obligation efficiency.

6.5 Profitability Ratio

Rajasthan Spg. & Wvg. Mills Gross profit Margin ratio and the net profit margin ratio on
an average of is about 35% and 10% respectively. These figures and during the last three
financial years are truly remarkable. The gross profit margin ratio and the net profit
margin ratio have increased during 1995-96 to 2004-05 in spite to low profit suffered by
the company during 1995-96 which indicates that company heavy capital expenditure for
expansions of spindles and looms by the company.

It may by noted as Net profit Margin has Been around 15%in the last three financial years
reflecting a better earning for the shareholders.

78
6.6 Leverage Ratio

The high Debt equity, debt assets and debt to total capital ratio indicates a moderate
existence of equity and capital employed these ratio indicate that the company has a low
geared capital structure Rajasthan Spg. & Wvg. Mills is able to maintain an average
interest coverage ratio indicating that the firm enjoys the margins of safety with the
respect to this interest burden.

The company maintains a modest interest coverage ratio so that it can easily meet its
interest burden even if EBIT suffers a decline.

Considering the above ratios for a period of time during 1995-96 and 2004-05, it is clear
that Rajasthan Spg. & Wvg. Mills has achieved an overall efficiency in production
Administration Selling, Financing, Pricing and Tax Management.

79
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