Professional Documents
Culture Documents
Submitted to
L.J. Institute of Computer Application
Submitted on:
21th July 2011
Submitted by:
Chandresh Chavada N. Enrolment No. : 107300592038 Batch No. : 2010 - 2012
RATIO ANALYTSIS
CERTIFICATE
It is hereby certified that the work incorporated in the thesis submitted entitled RATIO ANALYSIS submitted by Mr. CHAVADA CHANDRESH comprises the result of independent and original investigation carried out me. The material which obtained (and used) from other sources has been duly acknowledged in the thesis.
Date: Place:
Signature of student
It is certified that the work mentioned above is carried out under my guidance. Date: Place:
RATIO ANALYTSIS
PREFACE
This project report is containing in accordance with the Master of Business Administration (M.B.A.) program, prescribed by Gujarat Technological University. Thus, it is our morale and obligatory duty to take this part of our studies with great enthusiasms and seriousness and give it the more importance. The main objective of the project work training is to develop among the student a feel that about industrial environment & business practice in order to develop a practical basis in them as a supplement to theoretical study of the management. The report is based on my elective subject of A STUDY ON RATIO ANALYSIS. As a part of my project work, I had been departed to The Austin Engineering Company Ltd. I have mentioned all the information which is true and useful in some time in business.
Chavada Chandresh N.
II
RATIO ANALYTSIS
ACKNOWLEDGEMENT
I am pleased to present this report on industrial training undergone at Austin engineering company ltd. I would like to thank Prof. Abhijeet Singh who has guided me in each and every aspect of preparing this report. I also express my gratitude to staff members of Austin Engineering company limited for their valuable cooperation and guidance and sincere thanks to Mr. Amit Joshi, an ISO coordinator for sharing his wonderful experience and give his kind guidelines during my training. A big thanks to my family members and my friends, without whose support this project would have been a distant dream.
III
RATIO ANALYTSIS
TABLE OF CONTENT
Ch. No. 1 2 3 4 5 6
Chapter name
Executive summary Literature review 3.1.) Bearing industry profile 3.2.) Company information Objective of the study Research methodology Ratio Analysis 6.1) Types of Ratio 6.2) What does ratio analysis tell us? 6.3) Which Ratio for whom 6.4) Advantages of Ratio Analysis 6.5) Limitations of Ratio Analysis Data analysis and interpretation Finding Conclusions and Recommendations Limitations of study Notes and References Annexure
7 8 9 10 11 12
Page no. 1 2 3 5 16 17 19 20 22 23 25 26 27 43 44 45 46 47
IV
RATIO ANALYTSIS
The training at Austin involved the day to day working at corporate accounts departments with the senior & junior managers and research department in the company. This project helped me to get the deeper understanding of the process of Financial Statement Analysis The topic of my project is RATIO ANALYSIS. It explains financial position of the company and also helps assist management in its basic functions of forecasting, planning, and control. Company will get success when it financially perform well, ratio analyses helps to measure the financial statement and profitability of the company as well as its credit police, reason behind Ratio analysis is to determine strength and weakness of company. The object of this project is to know the company is going on profit or loss, what is situation of the company in present with past years comparison, what changes occurred, Estimate about the trend of the business. Here my objective is to helpful to the company to minimize the financial risk by taking effecting decision, Controlling the companys performance like credit granting, investment decision, making of polices, Main objective in undertaking this project is to supplement academic knowledge with absolute practical exposure to day to day functions of the sector, this project refers to an assessment of the viability, stability and profitability of a business. This report is made with using the information taken from financial statements of the company, for this study five yearscomparative Income Statement & Balance Sheet have been considered. Methodology of the research is secondary data collection. Data was collected through balance sheet of the company which is collected from finance manager in company and other data are collected from Companys site. I was influenced to allocate the aim of this project to study the details about these ratios and their possible effects on the decisions made by not only people inside the company but also the outsiders such as investors.
RATIO ANALYTSIS
RATIO ANALYTSIS
RATIO ANALYTSIS
The organized sector primarily caters to the OEM (original equipment market) segment, which is predominantly automotive, railways and other industrial users, the replacement, market is dominated by unorganized sector, the organized sector comprises of 12 leading manufacturers who contribute to over 55% of the total turnover, and unorganized sector includes the small-scale manufacturers and manufacturers of spurious bearings. The unorganized sector contributes to almost 15% of total industry, 30% of total demand for bearing industry is met by imports, duty rates have come down over the last few years, a few countries like China, Russia, Eastern Europe dump their excess production at a very low rate, This leads to a huge price differential between domestic and imported bearings (almost 40-50%), encouraging imports turnover. Most of the big players are having either technical or financial collaboration with leading auto manufacturers. International collaboration gives access to best technology in the world. Indian players are already sensing the opportunity and have initiated the process of manufacturing a range of bearings for meeting the requirements of global customers Threats for bearing industry is import threat, increase in price of raw material, spurious products spurious bearings are of poor quality and are relatively unsafe and unreliable. They use material, which are of inferior quality and the workmanship is also poor
RATIO ANALYTSIS
RATIO ANALYTSIS
RATIO ANALYTSIS
:-
1973
::-
Large Scale Austin Engineering Co. Ltd. Dist: Junagadh Tal. : Bhesan Post: Hadmatiya Patala 362 030
:-
101, G.I.D.C. Estate, Vadal Road, Junagadh 362 003. (91-285) 2660144, 2660069 (91-285) 2661505 info@aecbearings.com Dhirubhai Dand & Co. Chartered Accountants Gokul Chamber, Junagadh 362 001. Bank of Baroda, Junagadh.
::::-
:-
:-
Sharepro Services, Satam Estate, 3rd floor, Above Bank of Baroda, Cardinal Gracious Road, Andheri (E), Mumbai 400 099
RATIO ANALYTSIS
Mr. R.N.Bambhania : Mr. J.R.Bhogayta Mr. S.V.Vaishnav Mr. B.R.Sureja Mr. K.J.Mehta Mr. D.B.Nakum : : : : :
RATIO ANALYTSIS
RATIO ANALYTSIS
10
RATIO ANALYTSIS
11
RATIO ANALYTSIS
3.2.8. SWOT ANALYSIS SWOT is a good tool for a manager, The SWOT analysis for AEC Limited is:
STRENGTH: It enables to put your best foot forward. Good brand image. Flexible manufacturing system. Fast development Consumer satisfaction. Single source of all types of bearings.
WEAKNESS: Who doesnt have them? Only when you recognize them can you do something to correct them. Interference of the government. Transportation cost. Heavy import of raw-material. Raw material prices. The company is over capitalized it means it is not utilizing its resources accurately Its performance is not so good at social responsibility
OPPORTUNITIES: Opportunity for the company Advertising to increase sales. It has great opportunity to expand the business by taking benefits of its largest product range in Asia,
12
RATIO ANALYTSIS
THREATS: Threat are like tickling time bongs, defuse them by anticipating and taking preventive actions. Increase price of raw material in international market, causes variation in Competition from the multinational companies. Fixed financial charges It is not taking the advantage of borrowed capital as much as he can, domestic market.
13
RATIO ANALYTSIS
3.2.9. ACHIVEMENTS
ISO/TS certification for quality management. Flexible roller bearings. Multi-row cylindrical roller bearings and four row tapered roller bearings for roll neck applications in rolling mills. Flush ground single row angular contact ball bearings. Precision class cylindrical roller bearings for machine tool spindle applications. Thin section series ball bearings: 618.. and 619 series. Engine crank and other application bearing for battle tanks and armored vehicles.
14
RATIO ANALYTSIS
15
RATIO ANALYTSIS
16
RATIO ANALYTSIS
RATIO ANALYTSIS
Pay Section
5.1.2 SECONDARY DATA: Apart from the primary data certain secondary data were required for this project. Following are the sources of secondary data: Annual Reports Cost & Budget Reports Debtors Reports Cash Report Sales Reports The project report titled Ratio Analysis in Austin Engineering required a Comparative analysis of ratio analysis in the organization. The study will assist to evaluate the efficiency of the firm.
18
RATIO ANALYTSIS
Steps in Ratio Analysis Step1: Collection of information, which are relevant from the financial statements and then to calculate different ratios accordingly. Step2: Comparison of computed ratios of the same organization or with the industry ratios. Step3: Interpretation, drawing of inference and report writing.
19
RATIO ANALYTSIS
RATIO ANALYTSIS
term financing, lower the gearing ratio, the higher the dependence on equity financing. Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increase volatility of profits. It should be noted that the term Leverage is used in some texts. Debt equity Ratio
5) Turn over Ratios or activity group ratios Turn over Ratios or activity group ratios indicate efficiency of organization to various kinds of assets by converting them to the form of sales. Fixed assets turnover ratio Current assets turnover ratio
21
RATIO ANALYTSIS
6.2 WHAT DOES RATIO ANALYSIS TELL US After such a discussion and mentioning that these ratios are one of the most important tools that is used in finance and that almost every business does and calculate these ratios, it is logical to express that how come these calculations are so importance. What are the points that those ratios put light on them? And how can these numbers help us in performing the task of management? The answer to these questions is: We can use ratio analysis to tell us whether the business is profitable has enough money to pay its bills and debts could be paying its employees higher wages, remuneration or so on is able to pay its taxes is using its assets efficiently or not has a gearing problem or everything is fine is a candidate for being bought by another company or investor
22
RATIO ANALYTSIS
23
RATIO ANALYTSIS
Customers: Are interested to know the Profitability Ratio of the business with which they are going to have a long term involvement and are dependent on the continuance of presence of that.
Employees: The employees are always concerned about the ability of the business to provide remuneration, retirement benefits and employment opportunities for them, therefore this information must be find out from the stability and profitability of their employers who are responsible to provide the employees their need. Return on Capital Employed Ratio is the measurement that can help them. Governments and their agencies: Government and agencies are concerned with the allocation of resources and, the activities of businesses. To regulate the activities of them, determine taxation policies and as the basis for national income and similar statistics, they calculate the Profitability Ratio of businesses. Local community: Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area so they are interested in lots of ratios. Financial analysts: They need to know various matters, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on. Therefore they are interested in possibly all the ratios. Researchers: researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements depending on their nature of research. Suppliers and other trade creditors: 24
SUMMER INTERNSHIP PROJECT - LJMBA
RATIO ANALYTSIS
Businesses supplying goods and materials to other businesses will definitely read their accounts to see that they don't have problems, after all, any supplier wants to know if his customers are going to pay them back and they will study the Liquidity Ratio of the companies.
6.4 ADVANTAGES OF RATIO SMALYSIS Ratio analysis is a very important and useful tool for financial analysis. It serves much purpose and is helpful not only for internal management but also for prospective investors, creditors and other outsiders. The following are the important uses (advantages) of ratio analysis. It is important and useful tool to check upon the efficiency with which the working capital is being used (managed) in a business enterprise. Efficient management of working capital. It helps the management of business concern in evaluating its financial position and efficiency of performance. It serves as a sort of health test of a business firm, because with the help of this analysis financial managers can determine whether the firm is financially healthy or not. It helps in making financial estimates for the future (i.e. in financial forecasting). It helps the task of managerial control to great extent
25
RATIO ANALYTSIS
26
RATIO ANALYTSIS
Current Assets include Inventory, Debtors, Bills payable, Marketable securities, Cash and Bank balance, Current Liabilities include Creditors, Bills payable, unpaid expanses, Provisions for tax, proposed dividend and bank over draft
27
RATIO ANALYTSIS
Interpretation: An ideal current ratio is 2:1 considered as a safe margin of solvency, From the above graph we can see that current ratio of company is always higher than 2, it means company would be capable for paying its obligation,which is good, Short term creditors prefer a high current ratio to reduce their risk, Here companys current ratio is in increase stage,
28
RATIO ANALYTSIS
7.1.2 QUICK RATIO: Quick ratio is Indicator of a company's financial strength or weakness, Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity and ability to meet its obligations. This ratio also called the Acid test ratio.
Interpretation: A quick ratio 1:1 is good in business. In Austin company quick ratio is very lower in 2005-2006 and highest in 2009 -2010, Today Company is in position to pay obligation, all years quick ratio is higher than 1 except 2005-2006, but Today Company have good position and company should try to manage it.
RATIO ANALYTSIS
As the name itself suggests, this ratio is calculated to determine profitability of the firm. The basic objective of almost every business is to earn profit which is essential for survival of the business. A business needs profits not only for its existence but also for its expansion and diversification. The investors want an adequate return on their investments, workers want higher wages, creditors want higher security for interest and loan and the list could continue. It is a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
7.2.1. GROSS PROFIT RATIO: The gross profit margin ratio tells us the profit a business makes on its cost of sales. It is a very simple idea and it tells us how much gross profit our business is earning. Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. So we should have a much higher gross profit margin than net profit margin. High ratios are favorable in this, since it indicates the business is earning a good return on the sale of its merchandise.
30
RATIO ANALYTSIS
Interpretation: This ratio indicates the relation between production cost and sales in 2009-2010 gross profit was high, reason behind this Austin organization was not able to produce or purchase at a relatively lower cost. Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. Here company has achieved very good efficiency in 2009-2010, compared to other financial years.
31
RATIO ANALYTSIS
7.2.2 NET PROFIT RATIO This shows the portion of sales available to owners after all expenses. A high profit ratio is higher profitability of the firm. This ratio shows the earning left for shareholder as percentage of Net sales. Net Margin Ratio measures the overall efficiency of production, Administration selling, financing, pricing and Taste Management.
Interpretation In 2005-20006 net profit ratio was 5.81,it was very lower point, company improve the net profit ratio and set at the high point in 2009-2010,but the previous years ratio was very lower, higher the ratio better for the company. 7.2.3 32 OPERATING PROFIT RATIO
RATIO ANALYTSIS
This ratio establishes the relation between the net sales and the operating net profit. The concept of operating net profit is different from the concept of net profit operating net profit is the profit arising out of business operations only. This is calculated as follows: Operating net profit = Net Profit + Non operating expenses Non operating income. Alternatively, this profit can also be calculated by deducting only operating expenses from the gross profit.
Interpretation: Higher the ratio,better for the company,From the above graph we can see that in 2008-2009 ratio of operatin net profit was at highest point,later than it decreases,in 2009-2010,company should try to recove,
RATIO ANALYTSIS
The ROI is the most important ratio of all. It is the percentage of return on funds invested in the business by its owners. If the ROI is less than the rate of return on an alternative, the owner may be wiser to sell the company, put the money in risk-free investment such as a bank savings account, , and avoid the daily struggles of small business management. These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner to identify trends in a business and to compare its progress with the performance of others through data published by various sources. The owner may thus determine the business's relative strengths and weaknesses 7.3.1. RETURN ON ASSESTS This ratio actually measures the profitability of the investments in the firm. And the related formula is
. Particular NPAT Total Assets Return on Assets 2005-2006 3.20 31.53 10.14 2006-2007 5.45 38.80 14.04 2007-2008 6.51 46.70 13.94 2008-2009 5.14 47.48 10.82 2009-2010 7.06 49.48 14.2
34
RATIO ANALYTSIS
Interpretation: This ratio shows the profitability of investment in the firm so higher the ratio, the better is the return to the owners of the company.Return on assest in 05-06 was 10.14 which increases in 2006-2007 by 14.04 percentage, in 2009-2010 return on asseststs reach at highest point,which is good for the company
7.3.2. RETURN ON CAPITAL EMPLOYED This Ratio is considered to be very important. It indicates the percentage of net profits before interest and tax to total capital employed. It reflects the overall efficiency with which capital is used. The ratio of a particular business should be compared with other business firms in the same industry to find out the exact position of the business.
Particular NPBIT 35
2007-2008 10.62
RATIO ANALYTSIS
31.53 18.7
38.22 25.50
46.70 22.74
47.47 23.27
49.50 22.38
Interpretation: Ratio of return on capital employed is continuously decreasing in comparision with is last year,ratio for the year 2006-2007 is the highest,highest the ratio,the better will be the profitability,it generates it measure whether a business generate enough return to pay for ot;s cost of capital. 7.3.3. RETURN ON EQUITY This ratio also known as return on shareholdersfunds or return on proprietorsfunds or return on net worth, indicates the percentage of net profit available for equity shareholders to equity shareholdersfunds and not on total capital employed.here Equity Share Holders Fund = Equity Capital + Reserves and Surplus
RATIO ANALYTSIS
Interpretation: This ratio indicates the productivity of the owned funds employed in the firm. However, in judging the profitability of a firm, it should not be overlooked that during inflationary periods, the ratio may show an upward trend because the numerator of the ratio represents current values whereas denominator represents historical values.
RATIO ANALYTSIS
Lower the debt equity ratio the higher 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 shareholdersfund is defined as paid up equity capital plus preference capital which is redeemable after 12 years plus reserves & surpluses. The general norm for this ratio is 2:1, for every Rs 1 equity, maximum Rs 2 debt fund can be raised.
Interpretation: Debt equity ratio is in decreasing form, from the year 2007- 2008 ratio is continuously decreasing, The lower the debt equity ratio the higher the degree of protection enjoyed by the creditors., 38
SUMMER INTERNSHIP PROJECT - LJMBA
RATIO ANALYTSIS
It shows how the company uses its fixed assets to achieve sales. The formula is as follows:
RATIO ANALYTSIS
Interpretation A High fixed asset turnover ratio indicates the capability of the firm to earn maximum sales with the minimum investing in fixed assets. So it shows that the company cant effectly usein 20092010,,from 2006 to 2009,it was quite stable
40
RATIO ANALYTSIS
7.5.2. CURRENT ASSESTS TURN OVER RATIO It is almost like the fixed asset turnover ratio, it calculates the capability of organization to earn sales with usage of current assets. So it indicates with what ratio current assets are turned over in the form of sales. This ratio is calculated as:
41
RATIO ANALYTSIS
Interpretation A higher current assets turnover ratio is more desirable since it shows the better financial position of company and better usage of these current assets. It can be seen from above figure that the company has shown high ratio in 2005-2006, 2007-2008, and in 2008-2009,in 20092010 current assets turnover ratio is very lower.
CHAPTER 8 FINDING
Liquidity ratios shows that the firm has been facing some problems in 2005-20066 regarding paying short term liabilities for 1 year The usage ratio of the company had followed a comparable pattern. The overall efficiency of the company to use its assets, capital or the working capital had increased from 2005 to 2007. However in the later years, it is declining and falling to a lower level of efficiency, for which we can blame the environmental conditions of the country, and that, involves the economical and political challenges of India and the world. The Company fails to increase its profitability in the last year,
42
RATIO ANALYTSIS
SUGGESTION
For the betterment of valuation ratio the company needs to work on its market share.
43
RATIO ANALYTSIS
Company has healthy position but in order to grow fast the company should take moderate risk by investing in good return proposal. Company should increase working capital and properly and manage its their working capital. Company has good profit but still the expenses are high on which organization need to control in order to maintain their position in the market
RATIO ANALYTSIS
o For applying judgment o For indicators of bad or good management o For decision making etc. Window dressing means manipulation of accounts in a way so as to conceal vital facts and present the statements in away to show better position than what it actually is by doing so, it is possible to cover up bad financial position. Therefore, ratios based on such figures may not be reliable. It should be clearly noted that ratio are only tools and personal judgment of analyst is more important. Ratios are computed on the bias of past result. Past is not indicator of future. Ratios computed from historical data are used for predicting and projecting the likely events in the future. Ratios are only post mortem of what has happened between two balance sheet dates. The position in the interim period is not revealed by ratio analysis. Due to changes in price level of various years, comparison of ratios of such years cannot give correct conclusions.
INTERNET SITE www.aec-bearings.com www.wikipedia.com www.moneycontrol.com Annual report of AUSTIN ENGNEERING LTD Secondary data from Austin 45
SUMMER INTERNSHIP PROJECT - LJMBA
RATIO ANALYTSIS
46
RATIO ANALYTSIS
BALANCESHEET
47
RATIO ANALYTSIS
48
RATIO ANALYTSIS
49