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1
A
Summer Training Report
“FINANCIAL RATIOS ANALYSIS”
AT
ALOK INDUSTRIES LIMITED VAPI
(FROM 16TH
MAY 2011 TO 16TH
JULY 2011)
FOR THE PARTIAL FULFILLMENT TO DEGREE OF
POST-GRADUATE DIPLOMA IN MANAGEMENT
Batch: 2010-2012
Submitted to:
Amish Soni sir
(MENTOR & FACULTY MEMBER)
Submitted by:
Ashish Navagamiya
N. R. INSTITUTE OF BUSINESS MANAGEMENT
AHMEDABAD
2
Preface
In this development and changing world, I feel proud for being a student of PGDM full
time course offered by N R INSTITUTE OF BUSINESS MANAGEMENT
This report states about the all the departments and their workings policies at the ALOK
INDUSTRIES LTD, PROCESSING PLANT BALITHA, TALUKA PARDI, VALSAD
Finance and Function of Finance are the part of Economic activities. As this report also
include the Financial Ratio Analysis which checks upon the efficiency of the firm. Ratios
indicate the trend or progress or downfall of the firm and are aid to measure financial
solvency.
This project start with industry analysis, introduction of the company and organization,
four major departments of the firm they are finance, marketing, production and human
resource. Which are included in general training part and specific research includes concept
definition, literature review, objective of the research, research methodology, limitation of
research, and the ratio analysis of various ratios, and suggestion.
I am sure that this project report would give us enough food for covering different
departments of the firm and also the various ratios.
I have collected all the needed information for the project report at my best level and the
information provided are true and authentic.
ASHISH NAVAGAMIYA
PGDM,SEM II,
NRIBM, GLS
3
STUDENT’S DECLARATION
Study of Various Departments
And
Financial Ratio Analysis
This Summer Project report entitled, “Financial Ratio Analysis of ALOK INDUSTRIES
LTD” has been submitted to N R INSTITUTE OF BUSINESS MANAGEMENT at Gujarat
Law Society, Ahmedabad in partially fulfillment of P.G.D.M. Degree.
Hereby I undersign that this Project Report has been completed by me under the guidance
of Mr. Amish Soni (Faculty Member, NRIBM, Ahmedabad)
Study of this Project Report is entirely result of my own efforts and research and is original
in nature. All the information provided is true and authentic and is not provided artificially.
This project report is not submitted either in part or whole to any other institute or
university of any degree.
PLACE: AHMEDABAD
ASHISH NAVAGAMIYA
PGDM, SEM II,
NRIBM
DATE:
4
ACKNOWLEDGEMENT
To improve a little we need to make efforts. Not one or two but till the results. And to learn
and act we need guidance. No study however big or small can be undertaken by our own self
behind every act there are unforgettable memories, efforts, guidance and blessings if those
persons without whom this training would not have gone even a small distance.
To be successful in any field practical knowledge is most important and PGDM is
incomplete without having a practical knowledge in this era of professionalism.
First of all I thank our N. R. INSTITUTE OF BUSINESS MANAGEMENT of PGDM for
giving me an opportunity to practically learn about the real happenings in this field and
even the faculty member who spent valuable time in helping me to reach the best possible
extent.
I the trainee am grateful to ALOK INDUSTRIES LTD. for giving me an opportunity in
completing the summer training session and report.
In particular, I would like to greatly thank to:-
Mr. H.H. Vasvani (HR Executive & Vice President) at ALOK INDUSTRIES LTD
Mr. Bhuvanesh Gupta (Finance Manager) who was my guide during the training session
and he guided me in the field of marketing, finance and human resource.
Mr. Vivek Tripathi & Mr. Manish Sharma of Human Resource Department who helped us
for providing us time-to-time guidance in our training
Dr Hitesh Ruparel (Director, NRIBM, Ahmedabad)
Mr. Amish Soni (Mentor and Faculty Member at NRIBM, Ahmedabad).
They guided and motivated me whenever required. In spite of their busy schedule they
spend their precious time with me and also gave all practical knowledge of real world which
has to be faced by us and experience sharing moments which will be helpful in future life.
Thanking You.
ASHISH NAVAGAMIYA
PGDM,SEMII,
NRIBM
5
EXECUTIVE SUMMARY
As a partial fulfillment of my MBA curriculum I have undergone six
weeks summer training at “ALOK INDUSTRIES.” I have done my summer
training project at VAPI branch.
The entire report is an unforgettable journey of support, knowledge,
experience, dedication, perfection, and patience.
Company details and its progress and its interpretation base for analysis,
conclusion, findings, which helped a lot in company analysis. Accounting, ratio
analysis, cash flow analysis, leverage. and necessary information for generating
base for conclusion.
In short all efforts which was made to make this report explains
“WORK IS WORSHIP”
6
TABLE OF CONTENT
Chapter No. CONTENT Page No.
1. Research Methodology 9
2. Industry Profile 13
3. Company Profile 17
4. Key Departments
-Production Department 30
-Human Resource department Department 35
-Marketing Department 41
-Finance Department 48
5. Research Report On Financial Management
-Ratio analysis 54
-Working Capital Management 92
-Financial Leverage 96
-Cash Flow Statement Analysis 102
6. Findings from the Project 108
7. Suggestion and conclusion 110
8. Bibliography 111
9. Annexure 112
7
List of table
Chapter no. content Page no.
5.1 Current ratio 59
5.2 Quick ratio 63
5.3 Debt equity ratio 66
5.4 Interest coverage ratio 68
5.5 Stock turnover ratio 71
5.6 No. of days inventory 73
5.7 Debtors turnover ratio 75
5.8 Assets turnover ratio 77
5.9 Working capital turn over ratio 79
5.10 Gross ratio profit margin 82
5.11 Net profit margin 84
5.12 Rate of return on investment 86
5.13 Return on shareholder equity 88
5.14 Earning per share 90
5.15 EBIT ratio 91
8
List of chart
Chapter no. content Page no.
5.1 Current ratio 60
5.2 Quick ratio 63
5.3 Debt equity ratio 66
5.4 Interest coverage ratio 69
5.5 Stock turnover ratio 72
5.6 No. of days inventory 74
5.7 Debtors turnover ratio 75
5.8 Assets turnover ratio 78
5.9 Working capital turn over ratio 80
5.10 Gross ratio profit margin 83
5.11 Net profit margin 85
5.12 Rate of return on investment 87
5.13 Return on shareholder equity 89
5.14 Earning per share 90
5.15 EBIT ratio 91
9
Chapter 1
Research Methodology
OBJECTIVES OF RATIO ANALYSIS:
The main objective of ratio analysis is to show the firms relative strengths and weakness. The objectives of ratio
analysis are as follows:
It determines the financial condition and financial performance of the firm.
It involves comparison for a useful interpretation of the financial statements.
It helps in finding solutions to unfavorable financial statements.
It helps to take suitable corrective measures when the financial conditions and performance are
unfavorable to the firm, in comparison to other firms in the same industry.
With the help of this analysis, an analyst can determine the
The ability of the firm to meet its obligations.
The efficiency with which the firm is utilizing its various assets ingenerating sales.
The overall operating efficiency and performance of the firm.
NATURE OF RATIO ANALYSIS:
Ratio analysis is a technique of analysis and interpreting of financial statements. It is the process of establishing and
interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an
end in It self. It is only a means of better understanding of financial strengths and weakness of any institution.
The following are the steps involved in ratio
analysis:1. Selection of relevant data from the statements depending upon the objective of the
analysis.2. Calculation of appropriate ratios from the above data.3. Comparison of the calculated ratios with the past
ratios of the same institute, or with the ratios
NEED FOR THE STUDY:
The financial parameters are the ultimate performance indicator of any company. This is because invariability all
costs and efficiency activities and solvency position of the company will reflect the financial status of the company.
The following are stated to be in the need for the study:
To know the financial performance of Alok industries.
To know the operating efficiency of the company.
To know liquidity position of the company.
10
To understand the movements of profits over a period of time. To know the reasons for the variation of profits. In
short, this study is conducted so that the financial performance evaluation will serve as an eye opener to the
company.
RESERCH DESIGN
We have selected both the design exploratory and mostly descriptive for research.
DATA COLLECTION:
Since the study is restricted only to financial statements of “ALOK INDUSTRIES there is no scope for the primary
collection of data. The data collection is done through Secondary data which is collected by referring annual reports
i.e. balance sheets, profit and loss account etc, of “ALOK INDUSTRIES
LIMITATIONS OF THE STUDY:
This study is limited to “ALOK INDUSTRIES Vapi
Since, the company is one among the corporate sector so it was a bit tough for me to approach the company at
regular intervals.
Since the study is an academic effort, availability time was the constraint.
11
LITERATURE REVIEW
By Rosemary Peavler
Rosemary Carlson Peavler is a retired college professor of Business Finance. She has been
granted the status of Professor Emeritus from Morehead State University at which she taught for
27 years. She has been a freelance writer in finance and a small business consultant for 15 years.
Financial ratio analysis is one tool of investigating and comparing relationships between different
pieces of financial information. You use information from the income statement and balance sheet
to calculate financial ratios in order to determine information about your small business firm.
There are any number of ratios you could calculate. To solve that problem, there are some
standard ratios that most business firms use.
The problem with ratios is that they are useless unless they are compared to something. For
example, if you calculate your firm's debt ratio for one time period (let's say a year) and it's 50%.
What does that really mean? All you can take from that is that, since the debt ratio is Total
Liabilities/Total Assets, 50% of your firm's assets are financed by debt. You you have something
to compare that 50% to.
2) (Jen Smith 2007). Financial Statements serve a major purpose in any business or organization.
The main purpose of Financial Statements, according to HBS Management(Singer,2007), is for a
business to determine how well they are doing as a company. Financial Statements also tell the
organizations stockholders and investors how profitable the company is. Lenders use financial
statements to see if a company can afford to pay their bills on when they are due. Financial
Statements provise lots of information for all the people involved in a company. If these
differences are not recognized, both the financial analyst and those who use the analysis can
severely misunderstand.
3) Caffe Nero(2006). Ratio Analysis. A tool used to conduct a quantitative analysis of
information in a companys financial statements. Ratios are calculated from current year numbers
and are than compared to previous years, other companies, the industry to judge the performance
of the company. Financial performance based on may 2006 interim report. It had another year of
solid progress, again achieving revenue and profit growth.
4)William F slater,IIIJuly(2003), this research paper will evaluate Sample Company using
review standara financial ratio analysis techniques and assess its potential as a good investment.
Iy focuses on for sound financial advice with regards to whether of not buying stock in sample
company is a sound investment.
12
Trend and Industry Analysis
That's where trend (time-series) and industry (cross-sectional) analysis come in. You can compare
your firm's ratios to trend data, which is data from other time periods for your firm, to see how
your firm is doing over a series of time periods.
You can also compare your firm's ratios to industry data. You can gather data from similar firms
in the same industry, calculate their financial ratios, and see how your firm is doing compared to
the industry at large. Ideally, to get a good picture of the financial picture of your firm, you should
do both.
13
Chapter 2
Industry Profile:
Textile Industry in India
Textile Industry in India is the second largest employment generator after agriculture. It
holds significant status in India as it provides one of the most fundamental necessities of the
people. Textile industry was one of the earliest industries to come into existence in India and it
accounts for more than 30% of the total exports. In fact Indian textile industry is the second
largest in the world, second only to China
Textile Industry is unique in the terms that it is an independent industry, from the basic
requirement of raw materials to the final products, with huge value-addition at every stage of
processing. Textile industry in India has vast potential for creation of employment opportunities
in the agricultural, industrial, organized and decentralized sectors & rural and urban areas,
particularly for women and the disadvantaged. Indian textile industry is constituted of the
following segments: Readymade Garments, Cotton Textiles including Handlooms, Man-made
Textiles, Silk Textiles, Woolen Textiles, Handicrafts, Coir, and Jute.
Till the year 1985, development of textile sector in India took place in terms of general
policies. In 1985, for the first time the importance of textile sector was recognized and a separate
policy statement was announced with regard to development of textile sector. In the year 2000,
National Textile Policy was announced. Its main objective was: to provide cloth of acceptable
quality at reasonable prices for the vast majority of the population of the country, to increasingly
contribute to the provision of sustainable employment and the economic growth of the nation; and
to compete with confidence for an increasing share of the global market. The policy also aimed at
achieving the target of textile and apparel exports of US $ 50 billion by 2010 of which the share
of garments will be US $ 25 billion. The textile industry is anticipated to generate 12mn new jobs
in various sectors.
14
Strengths of Indian textile Industry
India has rich resources of raw materials of textile industry. It is one of the largest
producers of cotton in the world and is also rich in resources of fibers like polyester, silk, viscose
etc.
India is rich in highly trained manpower. The country has a huge advantage due to lower
wage rates. Because of low labor rates the manufacturing cost in textile automatically comes
down to very reasonable rates.
India is highly competitive in spinning sector and has presence in almost all processes of
the value chain.
Indian garment industry is very diverse in size, manufacturing facility, type of apparel
produced, quantity and quality of output, cost, requirement for fabric etc. It comprises suppliers of
ready-made garments for both, domestic or export markets.
Weaknesses of Indian textile Industry
Indian textile industry is highly fragmented in industry structure, and is led by small scale
companies. The reservation of production for very small companies that was imposed with the
intention to help out small scale companies across the country, led substantial fragmentation that
distorted the competitiveness of industry. Smaller companies do not have the fiscal resources to
enhance technology or invest in the high-end engineering of processes. Hence they lose in
productivity.
Indian labor laws are relatively unfavorable to the trades and there is an urgent need for
labor reforms in India.
India seriously lacks in trade pact memberships, which leads to restricted access to the
other major markets.
15
Overview of Indian Textile Industries:
Indian Textile Industry on track for success
The US imports of textile and apparel from the world shows a rising trend on an annual
basis. The imports in Feb ‟11 have jumped by 12% to reach US$ 7.42 billon as compared to Feb
2010. On a quarter on quarter basis also, the imports jumped by 17% to US$ 24 billion for quarter
ending Dec‟10 as compared to same quarter previous year. Total textile & apparel imports of EU
from the world rose by 27% in Jan 2011 to touch US$ 12 billion as compared to Jan ‟10. Even
last year, the total EU imports of textile and apparel goods increased by 12% to reach US$ 122
billion, for Jan – Dec 2010 as compared to same period previous year.
Indian Textile Update
The Indian exports of textiles and apparel category to EU has also shown a positive
growth. The exports have grown by 17% for the ten months ending Jan 2011 as compared to same
period last year. Indian Textiles and Apparel market, both domestic and exports, continues to
grow. In 2010, the total „Indian T&A market‟ was estimated to be around Rs 3, 68,000 crores
(US$ 78 billion) and is estimated to grow @ 11% CAGR to reach Rs 10, 32,000 crores (US$ 220
billion) by 2020. Start of 2011, has witnessed a further strengthening of yarn prices. Due to
demand side pressures, there is a continuous rise in raw material prices. The average prices of
cotton yarn rose by 45 % in Mar ‟11 to reach Rs. 207/Kg while PV yarn and PC yarn has shown
35%increase each for the same period and stands at Rs. 233/kg and Rs. 221/kg respectively.
Recent Government Initiatives:
There have been various steps taken by the Government to continually support the Textile and
Clothing Sector:
16
RAPID EXPANSION SINCE INCORPORATION IN 1986
Alok Industries Ltd. is representative of this development in the Indian textile industry.
The company was incorporated as a private limited company in the State of Maharashtra in 1986
and has been a public limited company since 1993. The company started operations in the field of
texturing polyester filament yarns. In the 20 years of its brief history Alok Industries Ltd. has
undergone an amazing process of diversification and expansion.
The company has expanded its business activities step by step into the fields of weaving,
embroidery, knitting, finishing and the manufacture of home textiles and garments. It occupies a
leading position in each of these product segments. In order to round off the process chain, Alok
Industries Ltd. took the logical step of investing in its own short staple spinning mill in 2007. Its
choice of Reiter as systems supplier in this instance was an obvious move in light of the
company‟s own strategic focus.
17
Chapter 3
Company Profile:
History of company:-
Established in 1986 as a private limited company, Alok began with texturizing of yarn and
steadily expanded into weaving, knitting,
processing, home textiles and readymade
garments. And to ensure quality and cost
efficiencies Alok have integrated backward
into cotton spinning and manufacturing
partially oriented yarn through the
continuous polymerization route. Alok also
controls an extensive embroidery operation
through its sister concern, Grabble Alok
Impex Ltd.
In 1993, Alok became a public
limited company. Since then it have continued to increase the scale of its operation and the range
of its activities. Today, Alok is amongst the “A Group listed companies” on India‟s leading stock
exchanges.
That is how they have evolved into a diversified manufacturer of world-class home
textiles, garments, apparel fabrics and polyester yarns, selling directly to manufacturers,
exporters, importers, retailers and to some of the world‟s top brands.
Alok has recently entered the domestic retail segment through a wholly owned
subsidiary, Alok Retail India Limited, with a chain of stores named „H&A‟ that offer garments
and home textiles at attractive price points. With the sales turnover of around Rs. 4311.17 cores
in 2009-10, Alok is amongst the fastest growing vertically integrated textile companies in India.
18
They have also ventured into the realty space through wholly owned subsidiaries with investments
in some prestigious projects in Mumbai.
Latest achievements of company are S.E.Z. (Social Economic Zone) and this plant held in
Surangi. S.E.Z. means no interference of government and police.
The joint adventure of company is making Embroidery Company with Austria company name
Garble Alok Impex Ltd. The company‟s Sulzer division is in Dadara. The company‟s processing
plant in Vapi. Company‟s made-up Division is also in Vapi
19
Company’s Milestone
Years Events
1986 Incorporation of the Company
1993 Becomes a public limited company with a Rs. 4.5 crore IPO
1995 Sets up financial and technical collaboration with Grabal, Albert Grabher GmbH & Co
of Austria to make embroidered products through a joint venture company, Grabal Alok
Impex Ltd
2003 Export Trading House status granted
2004 Turnover surpasses Rs. 1,000 crore
2006 Texprocil silver trophy awarded for second highest export in manufacturer exporter –
made ups category
2007 ISO 9001:2000 certification obtained
60 per cent stake in Mileta a.s.– a Czech Republic-based textile company acquired
Controlling stake in U.K based retail store chain, „qs‟ (now Store Twenty one) acquired
Organic cotton contract farming commenced
Gold Trophy for best export performance to „Focus LAC‟ countries awarded by
Synthetic & Rayon Textile Export Promotion Council
Awarded Silver trophy for highest fabric exports and Bronze trophy for highest made
ups export
2008 Turnover crosses Rs. 2,000 crore
Exports crosses Rs. 1,000 crore
Joint venture with National Textile Corporation (NTC) to develop, revive New City
Mills, Mumbai and Aurangabad Textile Mills, Aurangabad formed
Awards from TEXPROCIL for 2007-2008
Gold Trophy for highest exports of bleached/yarn dyed/ printed fabrics
Silver Trophy for highest export of made ups
Bronze Trophy for highest global exports
Special achievement award for exports in fabrics
Awarded Outstanding Exporter of the Year – Textiles at the International Trade
Awards 2007-08; presented by DHL CNBC TV 18 and powered by ICRA
20
Company’s SWOT analysis:-
SWOT Analysis is done in order to learn about the strength, weaknesses, opportunities & threats
of the company.
STRENTH:-
During the year the Alok textiles export grew around 47.84% to RS.1558.99 crores from
previous year. The total turnover of Alok Industries ltd RS.4311.17 crores had an increase of
44.82% over the previous year‟s turnover. The profit before tax during the years was Rs.1272.48
crores an increase of 54.69% over the previous year. Alok manufacturing facilities comprises
some of the equipments that have met the stringent requirement of global retailers & importers
in terms of quality, pricing environment aspects.
WEAKNESS:-
As to state there are no specific weaknesses for Alok Industries, the only problems they are
facing is the heavy competition with the international market as well as foreign market.
OPPORTUNITIES:-
The Indian textiles Industry has a much more potential to grow in next organization because
major textile payers in U.S.A & Europe are out-location manufacturing company due to the high
cost of manufacturing.
The Govt. is supporting this industry by technology up gradation scheme, gradual reduction of
import duties on Textile Machineries, Rationalization of Indirect taxes. Etc.
The industry can avail opportunities that may come in from strategy-tie-up with textile giants
from the western word for supply of goods, technical know-how, equity participation, etc.
THREATS:-
Textile industry is facing some challenges also, so Alok Industry cannot remain insolent from
this corporation needs to become focused & Flexible.
They will have to define key principals required to achieve operational excellence & develop
strategies to become customer- focused organization.
21
GROUP COMPANY
Alok Apparels Pvt. Ltd.
Alok Apparels Pvt. Ltd., set up in 2007, is a wholly owned subsidiary of Alok Industries and
manufactures woven and knits fashion garments at Silvassa.
Website: www.alokapparels.com
Grabal Alok Impex Ltd. Grabal Alok Impex Ltd. was incorporated in 1993 to produce world-class embroidery.
Grabal Alok was promoted by Alok Industries Ltd., in financial and technical collaboration with
Grabal, Albert Grabher GmbH & Co of Austria.
The company started manufacturing operations in 1996 after setting up its first plant in
Navi Mumbai with an installed capacity of 290 million stitches a year. It has subsequently
expanded capacities, setting up another plant at Silvassa, and has emerged as one of the largest
makers of embroidered fabric with a capacity of 34 billion stitches a year.
Website: www.grabalalok.com
22
Mileta A.S.
In April 2007, Alok acquired 60% of the equity of Mileta a.s, a „top of the line‟ integrated textile
entity situated in the Czech Republic; subsequently, Alok has raised its stake in the company to 79.80%.
Mileta is one of the premium textile enterprises in Europe, manufacturing handkerchiefs, shirting fabrics,
table linen, bed linen and other premium products. Mileta exports most of its production to Europe, North and
South America, Africa, Middle East, Far East and Australia.
The Mileta acquisition brings significant synergies to both entities. While Alok has access
to Mileta‟s premium-product technology and penetrates deeper into high-end European markets,
Mileta now has a strong support base and easy access to India.
Mileta‟s brands – Mileta, Erba, Cottonova, Lord Nelson and Wall Street – have high
recall. Alok has launched some of these brands – Erba (for handkerchiefs) and Lord Nelson (for
premium shirting) – in the Indian market. Cottonova bed linen is now also being manufactured in
Alok‟s plants and being exported.
Mileta‟s plant in the Czech Republic has been modernized by installing 40 new Picanol air
jet looms.
Website: www.mileta.cz
23
Alok International Inc.
Alok International Inc is the USA based subsidiary of Alok Industries Limited. The
objective behind setting up a subsidiary in USA was to provide forward integration to USA
retailers by strengthening the distribution channel. The subsidiary will help Alok to enter into
strategic partnerships in the USA. This channel will be used to increase business with the existing
customers and further widening the customer base. Also it will help Alok to penetrate markets in
South America.
RETAIL
Alok H&A Ltd.
Alok H&A Ltd. was incorporated in 2007 for the domestic retail business under the 'H&A'
banner.
H&A stores are value retail outlets, positioned as complete family stores for apparel, home
textiles and accessories, offering quality textile products at affordable prices.
24
H&A’s products include:
Women's Wear
Ready-to-stitch Indian outfits, readymade garments, western wear and accessories
Menswear
Shirts, trousers, T-shirts, denims, inner wear and accessories
Children’s Wear
Garments from infant to teenagers for boys and girls
Embroidered Fabric
For garments and home decorations
Home Textiles
Bed-sheets, comforters and towels
H&A Store Locator
25
26
Company’s vision
To become the world's best integrated textile solutions enterprise with leadership position across
products and markets, exceeding customer & stakeholder expectation.
Company’s mission
They will:
Offer innovative, customized and value added services to our customers
Actively explore potential markets & products
Optimize use of all resources
Maximize people development initiatives
Become a process driven organization
Be a knowledge leader and an innovator in our businesses
Exceed compliances and global quality standards
Be an ethical, transparent and responsible global organization.
Some of the Alok‟s diversified
27
28
ORGANIZATIONAL CHART
CEO
Mr. Aich
Project Director
Mr.S.C. Goyal
V. P. Made Ups
S.P. Bhupna
President Prod.
Mr. A K Pal
President Comm.
Mr. A K Pal
V.P. Engg
Chief Mgr.Utility
Mr. Kasat DGM Maint.
Mgr. MIS & Costing
Mr. Singh
Mgr. ETP
DGM HR.
Mgr. Exise
V.P. Account
Mgr. Purchase
Mr. Vinoj
Mgr. IT
Mr. Hetal Desai
Mgr. Stores
Mr. Dhavade
Wider
Width
GM
Mr. Waancho
o
Knits
VP
Normal Width
VP
Yarn
Dying
GM
Mr. Naidu
Printing
DGM
Terry Towel
GM
r.
Parvani
AV PPC
DGM Process
GM Knits
Mr. Kaul
GM Q & A
Mr. Chuabal
GM Prod.& Devp
Mr. Jain
DGM Finishing
Mr. Shavant
DGM Folding
Mr. Thakkar
Head Product
Devp.
Mr.
Vaidva
DGM Q & A
GM PPC
CEO
Mr. Aich
29
Chapter 4
Key
Departments
30
PPrroodduuccttiioonn
DDeeppaarrttmmeenntt
Production Department
Production is one of the main stages of an enterprise without which a manufacturer can‟t survive.
It converts the raw material into semi-finished goods and then converts into finished goods.
According to Buffa, “Production management deals with decision making regarding production of
goods & services at the minimum cost according to demand of customers through the
management process of planning, directing, and controlling”.
Production Planning
Alok produces textile products. Before producing product Company plans a schedule on a yearly
base, monthly bases & it goes very deeply by preparing a weekly schedule.
For preparing this schedule they consider the following points.
The lead of the product.
The preparation time of the product.
The demand of the product in market.
According to these points they use to plan the schedule and give the order to produce the product.
31
Responsibility of the Production Manager
The responsibility of the production manager in to the Alok Company is as follows.
To control the cost of the production.
To motivate workers for maximum efforts.
To fulfill demand of the customer.
To plan production schedule.
To avoid defective goods.
To maintain enough semis finish goods as well as finish goods.
To decide on way of handling and re handling.
To maximize utilization of machinery and manpower.
Production Planning and Control
The aim of the department is fulfill the customer requirement on the time better quality and
coordinate with the marketing at head office and the production department at Silvassa (Rakholi)
Buyer-Head Office- PPC- Production
This Department is job is to
Check the possibility of availability yarn
Give the data to customer
Meet the given data
Instruct the production units as per priority
Greige Department:
In this department all the raw material comes from Silvassa (Alok division 2nd
branch). 95% of
raw material receives from Silvassa branch and rest from outside source/party. There are 3
godowns and centralized SAP system to know about the raw material. Then the stitching of cloths
is done and then lot no. is given to each set of roll with quality checked. It has the capacity of
producing 1.50 lack meters/day but they produce only 1.30 lack meter/day. Then this material is
send to Bleaching Department for further process.
32
Bleaching Department:
There are three machines in this department. These machines are imported from Germany.
1. Singedesigne: This machine works for shinning & designing the material.This batch is kept
in rotation for 8Hrs
2. Pre-treatment: This machine works for whiteness & smoothness of the material. There are
three procedures to the material whiteness & smoothness. There are INJECTA,
EXTRACTA, and IMPACTA.
Injecta: Gives the steam pressure to material in water at 200 C for stretching the cloth
from 5 mts to 7 mts.
Extracta: In this section the material is washed by hard washer, soft washer & steam
washer at 90 C.
Impacta: To remove the natural fats & waxes from the material they use this machine.
3. Mercerization: In this process the material is kept in role why dry process or wet process. If
the process is going for continuous process then the wet process is been role and to kept it in
go down it is kept as dry. For the dyeing process the material is been giving in wet form.
Dyeing Department:
In this process 3% color & one 1% chemical is pumped through CDR machine. Then after
dyeing the material the hard wash is done and then the material is been dried and the role is
been send to finishing department.
Finishing Department:
Finishing is applied on the textile material by different chemical and mechanical means. The
finish to be applied on textile material depends upon the end of the fabric.
MACHINERY IN FINISHING DEPARTMENT
STENTER(Monforts) 3
BRUSHING MACHINE(Lafer) 1
SUEDING MACHINE(Lafer) 1
SANFORISER(Monforts) 1
Folding Department
33
After finishing the fabric comes to the folding department for the inspection and packing and
grading. Folding department works in four sections
1. Inspection and Grading
2. Recording & data entry
3. Grouping & Sampling
4. Packing
Laboratory Department:
Alok Industry is certified by ISI so the product is of good quality so this department for tests test
of material is tested by this department or that there is different machine for check the yarn.
Printing Department:
This is the department were printing is done on the material came from engraving department.
There are 12 color shades in a machine. This machine name is Arioli Loop Ager from Germany.
This machine can color 90 meter of cloth in 1 min.
34
Production process Flow Chart of Alok Industries Ltd.
35
HHuummaann
RReessoouurrccee
DDeeppaarrttmmeenntt
Human Resources Department
Meaning:
Human Resource Management (HRM) is the function within an organization that focuses on
recruitment of, management of, and providing direction for the people who work in the
organization. Human Resource Management can also be performed by line managers.
Human Resource Management is the organizational function that deals with issues related to
people such as compensation, hiring, performance management, organization development,
safety, wellness, benefits, employee motivation, communication, administration, and training
Recruitment
For recruitment of worker/staff category employee for all unskilled, semi skilled and highly grade
the firm has different approaches like direct recruitment private employment, agencies,
advertisement in news papers and personal sources. Different technique is used for recruitment as
per situation, need, importance and urgency for recruitment of man power. Minimum education
36
qualification for trainee in STD 10th
pass minimum age criteria for category whether staff or
worker is 18 years on the date of recruitment is must.
- Direct Recruitment:-
The company has adopted recruitment policy for workers belongs to un-skilled and semi skilled
grade employees. On every alternative day at the factory main gate personal department conducts
the recruitment activity at the factory gate for the persons willing to join the company.
- Through private Employment agencies:-
For the recruitment of skilled and highly skilled grade employees this type or recruitment source
are preferred. The data base of candidates with relative qualification experience and training is
available with the agencies. As per our criteria we call prospective candidates for an interview and
evaluation the abilities intelligence attitude and experience.
- Through Newspaper:-
For the specific recruitment in many cases the application are invited through the advertisement in
regional/national news papers. All the application will be shown to concern department heads of
short listed candidates are called for interview.
- Through personal Source:-
We invite people for interview whose information/bio-data will come across/ brought to our
knowledge through any of their friend/relatives/classmates or senior or juniors working with our
organization.
MR. SANJAY
PANDEY MR. MURLI
(TRAINING &
DEVELOPMENT
)
MR. KALPESH
RAVAL (EXECUTIVE.
HR)
MR. SAMPATH (ASST.
MANAGER) OF P&A
HRD MR. DIGVIJAY SINGH
(CHIEF MANAGER P & A)
37
Training and development
Every organization needs to have well framed and experienced employee to perform the activities
which have to perform. If the existing people can meet the recruitment then training is of no
importance. But it is found vice-versa as for existing employee also newer knowledge of various
ways of doing and performing the task in more efficient and cost effective manner keeping in
touch with competitiveness, modernization and increase the versatility and adoptability of
employee.
As the jobs have become more complex, the importance and requirement of training has increased
to meet organization objectives. Training is process of learning a sequence of organized input to
improve the employees job skill, knowledge, and change in attitude towards his work.
Training methods:-
On the job
Counseling/direction & guidance
In house training
External training
Employees at all levels are expected to endeavor for “self development” and should try to excel
in their performance on their present job and should prepare for future job.
Training modules:-
AWARENESS PROGRAM
QUALITY
PRODUCTIVITY/SKILLS DEVELOPMENT
SAFETY/HEALTH ENVIRONMENT
LATEST TRAND IN TECHONOLOGY
BEHAVIOURAL AND COMMUNICATION
HRM FOR LINE MANAGER
TECHNOLOGY ASPECTS
COMPUTER AWARNESS PROGRAMME
38
External training:-
Nomination is done for external programme for which there are no internal programmes. The
P&A department will maintain a list of training programme being organized in the country along
with evaluation report on the quality of these programs. Based on individual training requirement,
the P&A department will recommend to the A.Vp/E.D through the concerned department heads,
names of staff to be nominated for various training programmes.
In respect of external nomination, the participants on return of the programme attend by him to
the concerned manager and a copy of it along with a copy reading materials shall be sent to the
P&A department within maximum period of weeks from return of the training programme.
Ethics of employment
Alok Industries Ltd. is professionally managed company; therefore certain ethics of employment
is necessary for achieving climate in organization.
- No interview is to be conducted/Bio-data from be got filled-in without the approval of
personal dept.
- Personal dept arranges and conducts the requirements process only after approval for
requirement is sought. The interview panel is to be earned marked well in advance off the
interview and the interview briefing is required to be given to all the panel members by the
personal dept. No direct hope, commitments, whatsoever regarding employment should be
given to anyone.
- No compromise on quality standard of people should be made.
- Frank and free opinion should be exchanged during the course of interview by the panel.
- All appointment are subjected to credential verification and in case of false, part information
or concealed information, the employment of the concerned person is liable for termination,
without assigning any cause or notice or compensation in lieu thereof.
- All appointment will be subjected to production of satisfactory proof release by the previous
employer, salary terms, and previous employment and experience certificate of all previous
employers.
- All appointments are subjected to credentials given by the selected candidate being verified
and reference report being satisfactory. In case any employee gives wrong information or
conceal facts in either the “Application for employment” from or in subsequent declaration
39
to the company, his employment is liable for termination, without any notice or
compensation in lieu thereof.
Period of the candidate joining the duty, the personnel dept will complete following formalities.
Intimate the date of joining to the dept. head
Seating arrangement (Through personnel dep.)
Arrange through P&A for residential accommodation, if required or agreed upon
Draw up orientation/Training Programme
Finalize the job allocation/description with dept. / division head considering recruitment
objectives.
Induction:
The personnel dept. will be Responsible for
Completing joining formalities, such as joining report, checking of medical
Certificates and medical checkup etc.
Instruction to concern executive.
Acquainting to new entrant with organization structure, Rules & Regulation
Background and history of the company, local information and Assistance.
The induction programme of new entrant will is for five days.
After completing the cycle of indication the new entrant will be sent to the concerned dept.
whenever necessary, the P&A dept. will also issue a general circular regarding the new entrant
and his assignment, for information of all employees in company.
Types of appointment:
PERMANENT: All appointments will be against the permanent sanctioned vacancies. All
appointments would be on probation of six months. Confirmation will not be deemed to have
taken place, unless conveyed in writing. In the absence of any written communication, the
probationary period would automatically stand extended.
40
TEMPORARY: Wherever such appointments are authorized, they will be for limited period,
specified in their terms of appointments, not exceeding 60 days at any stage. Extension of
temporary period beyond 60 days shall also be authorized by A.V.P.
TRAINEES: The Company may engage, from time to time, services of such fresh
graduates/diploma holders (Technical and Non technical). Who on successful completion of
their training period would be absorbed in staff at suitable levels? The terms of appointment
and benefits/facilities for such appointments would be as finalized by the management from
time to time.
Payment of fare to candidates called for interview
Unless otherwise specified, payment of fare to all outstation candidates called for an interview
will be made on the following basis:-
A) All candidates called for Manager & above
B) All persons called for Dy. Manager & below fare
Joining expenses:
It is not the normal practice of the company to pay joining expenses incurred for selected
candidates for joining or moving his residence on selection. Exception this can only be authorized
by the M.D/E.D/A.V.P. in writing.
Letter of intent:
All candidates selected for appointment as staff shall be offered letter of intent
indicates the position for which they have been selected. Formal letter of appointment shall
be handed over to the candidate, on the term mutually agreed upon, on the day of joining duty.
Pre-joining formalities:
Candidates selected for joining as staff will be issued letter of intent indicating, a part
from the position for which selected, the date/ place of reporting, the documents etc. at
the time of reporting duties.
41
MMaarrkkeettiinngg
DDeeppaarrttmmeenntt
Marketing Department
Marketing is an important activity in our society. Marketing today requires more proximity
towards customer. It also requires:
1) Of end users more understanding.
2) Creating more moment of truth and delight.
3) Retaining customer.
4) Relationship marketing.
42
Modern definition of Marketing: -
“Marketing is continues process of discovery and translating consumer wants into appropriate
product services. Creating demand for this product and serving the demand with the help of
distribution such as wholesaler and retailer. “
The American marketing association defined marketing as:-
The performance of business activities that directs the flow of goods and services from
producer to customer
Marketing management:-
Marketing management is an ongoing process involving identification of consumer need and
wants of converting them into appropriate products and satisfying the demand of consumer who
are the most merciless, meanest and toughest marketing disciplinary. It is an important functional
area of business.
-According to Phillip Kotler:
“The market concept is customer orientation backed by integrated marketing aimed at
generated customer satisfaction to satisfy organizational goals.”
43
4Ps of Marketing Mix
Product
Alok is more concern about the product they are always try to give qualitative product to their
buyers, they have product planning & control department.
This is playing vital role in the organization. It creates the link between the production department
and marketing department. It exchanges the information between the departments.
Manufacturing plans are made, based upon input from marketing and designing .The development
of fabric deciding the specification is done by designing while the acceptability to market and the
quality is decided by market.
They conduct booking session twice in a year in order to decide what should be produced for
season.
A yearly plan is 1st made based upon the expectation of marketing. The capacity balancing is then
done & the entire production is divided in to the available production capacity at various locations
depending upon the capacity loading, the requirement for marketing the converted into
manufacturing.
Raw material, Dyes& Chemicals, other horizontal inputs and optimum utilization of capacity are
the major balancing factors which decide the feasibility of timely delivery.
After allocation of plants of various location .Any problem faced at any location need an
immediate attention so that other location take up the production need in order to meet the
deadline of delivery.
Place
Alok is basically fabric manufacturer so they are not selling their product directly. They are
selling their product retailer like Wal-Mart, M&S. They are distributing their product through
agent for international buyers. The web has created a platform whereby organizations can now
directly communicate with the customers, as a result of which many of the channels are being
disinter mediated. This disintermediation does not necessarily mean that they completely
44
eliminate the intermediaries, but rather when it comes to shipping the products it may outsource
some of the distribution functions like the storage, transportation from third party firms.
Price
Pricing strategy at Alok: Pricing is one of the linchpins of marketing strategy and success. Every
organization has their own technique for pricing & Alok is one of them. The company adjusts
product prices to reflect changes in costs and demand and to account for variation in buyers and
situations. Many times they are using online auctions. It is a popular and innovative way of
pricing. Top Management or Responsible person who has authority, they can be participating in
online auction where buyers bid against each other. The highest bidder wins.
They are using Geographical pricing to decide the price. It includes Geographical considerations
strongly influence prices when costs must cover shipping heavy, bulky, low-unit-cost materials.
Buyers are all over the world so there are variations in price in different area of the world.
Another strategy is value pricing where they are offering right quality at fair price.
Many times they compromise with the price when order in bulk. Price is also depending upon the
quality of product. They are always providing high quality product.
Basic structure of Price: Total Fabric Price=Basic price of fabric + Overhead + Transportation
cost + Profit.
Promotion
The next element of the marketing mix is deciding the appropriate set of ways in which to
communicate with customers to foster their awareness of the product, knowledge about its
features, interest in purchasing, likelihood of trying the product and/or repeat purchasing it.
Effective marketing requires an integrated communications plan combining both personal selling
efforts and non-personal ones such as advertising, sales promotion, direct marketing and public
relations. Put together, they are referred to as the promotion mix.
45
Elements of Promotion
Personal Selling
Sales Promotion
Public Relations (PR.
Direct Mail
Trade Fairs and Exhibitions
Advertising
Sponsorship
Alok is promoting their self in such approaches like trade faire & exhibition. It helps to make
new contacts and renewing old ones. The main purpose is to increase awareness and to encourage
trial & attract the new customer.
They also promoting through sponsorship where company pay associated with particular events
like Fashion show the attributes of the event are then associated with the organization.
Direct mail is the very highly focused way to develop relationship with customer. The mail is sent
out to the potential buyers and responses are carefully monitored.
Branch Offices of Marketing Plants
Bangalore
Chennai
Delhi
Sri Lanka
United States
Bangladesh
Vapi
Silvassa
Navi Mumbai
Thane
46
Marketing strategies:-
The choice of marketing strategies hinges on a number of consideration like the company‟s.
Current market share.
Current and Planned Capacity
Customer price sensitivity.
Marketing Growth.
Competitors.
The company may find a number of alternatives for fulfilling its purpose but it needs to be select
one The company needs monitor the impact of marketing strategies on its sales, market shares,
cost, profit and long term investment
Strategies related to Product:
A product means a bundle of benefits, which satisfy the human need. According William Stanton,
“A product is a complex of tangible attributes including packing, color and service which the
buyer expect as offering of satisfaction of wants and need.”
Quality:-
For Alok Industries ltd. quality stands at a first place. And it is most important to any production
house. Also consumer satisfaction is the best scale for the quality measures and they are favor in
Alok Industries Ltd.
Packing and Labeling:-
- In Alok product are packed as per the convenience of consumer. So packing is also changed
on the basis of customer.
- The pacing are also change on the basis of the customer feedback.
- The products for exporting are packed separately using some specific material only.
Brand name:
- Brand name is the effective tool to identify and to differentiate
47
- The product from the competitor‟s product.
- Brand name is an attractive parameter for the customer while they choose one among
different product.
- Alok industries ltd .has brand name “ALOK “itself.
Sales department:
In sales department firstly consumer inquiry for our product if consumer like the material of
company so he give order of some quality and from that we make A sales order and the procedure
of sales department is begin.
So consumer check the material and then he give order then companies authorized person decide
that the sales should be done or not if authorized person approve so the department see the when
another parties order will full fill then give date and try to finish that order.
When the order is full filled by department they inform the party and also say to collect their order
when the party comes to collect the order they make legal document and make Challan and the
payment in some specific time period.
48
FFiinnaannccee
DDeeppaarrttmmeenntt
Finance is the lifeblood of the industries because we cannot imagine business without finance, as
it is the central point of all the business activity. Whether big or small, government finance
function is of equal importance. Finance is defined as the provision of money at the time it is
wanted.
Till 1950 finance function was regarded as the function only of rising finance of the
business. There after it has undergone remarkable changes over the time. Since last 30 to 40 years
the important function of finance management is of effective efficient utilization of finance.
Financial management means rising of adequate funds at the minimum cost and using
them effectively in the business. It is concerned with financial problem in business.
49
Management Hierarchy
Accounts & Finance Department
V.P ACCOUNTS
(Mr. Bhuvanesh Gupta)
Senior Manager Accounts
(Mr. Deepak Jain)
Accounts Officers
Assistants
FINANCE & ACCOUNTS DEPARTMENT
50
Procedure of Accounting Department
Gate Entry
Store department GRN (Goods Receipt Note)
Accounts
Booking Checking Payment Audit
Booking process
Payment process
Accounts
Booking
(Assistant)
Manager (Check)
VP Accounts
(Sign)
Assistant Manager (Check sign)
VP Accounts
(Sign)
Party
Distribute
51
Importance of Finance Department:-
1. Finance is required for the scheme of modernization, expansion and development of
existing enterprise.
2. The financial plan helps to check out the success of the company.
3. The effective financial plan will provide sufficient funds to business.
4. Finance department is always linked with success of other departments where it is
responsible to provide necessary finance.
Responsibility of finance Department
In modern enterprises the financial manager occupies a key position. He is one of the dynamic
members of the management and his role day by day becoming more pervasive, progressive,
intensive and significant in solving complex problem. The responsibility of financial manager
includes:
Raising of funds
Minimizing cost of funds raised
Allocate funds prudently
Control the working of an organization
Maintain enough liquidity
Registered Maintained:-
Cash and bank book
Sales register
Debit Note
Credit Note
Purchase register
Trial Balance
Profit & Loss A/C
Balance Sheet
52
Accounting Procedure:
Here the entries are made and it is sent to the head office and there the account is maintained.
The account procedure starts from the raw material enter to the company. The procedure of
account as follows:-
1. The security officers firstly check the goods or raw material enters at the gate and note down
the no. of vehicle.
2. Then the goods and brought to the quality control lab where it is check and approval is OK
then the goods are stored in the stored department and the entry is made there.
3. The book entry is done after the material stored
4. After the book entry is sanded to the account department where the bill order slips are
compared with other.
5. After the document are checked and signed by the head of the department and manager and
manager and the data are entered in the particular account.
6. Then the daily entries are mail to head office.
7. After making the entries the payment activity is made during the period.
8. The required fund for the payment generally comes from the head office.
Credit policy of Alok:
Credit is facility provided by the company, which enables the creditor to extend the pay off period
to some days as per company‟s policy. Alok generally provided the credit facility of 30 days to all
the parties or consumer of product.
Dividend:-
Dividend is that amount of capital or profit, which is shared between the shareholders of the
company after meeting all the expenses. The director had authorized the payment of an interim
dividend of Rs.60 per share during the year the expenses. The director had authorized the
payment of an interim dividend of Rs.60 per share during the year.
Export:-
During the year made the export and the efforts are made to achieve the higher growth.
Insurance:-
53
Plant and machinery, stock, building etc of the companies have been adequate insured.
Accounting policy of Alok:
Basic of preparation of financial statement:- The accompanying financial statement has
been prepared under historical cost convention in accordance with generally accepted
accounting principles and provisions of the company
Use of estimates: - The preparation of financial statement in conformity with the generally
accepted accounting principles required estimates and assumptions to be made that affect
the reported amounts of assets and liabilities on the date of the financial statement and the
reported amounts of revenues and expenses during the period.
Fixed assets: - Fixed assets are recorded at the cost of acquisition including incidental
expenses. They are stated at historical cost.
Depreciation:- Depreciation on the fixed assets is provided on written down value method
excepted in respect of non-factory
Investment;- Investment classified as long term investments a fare started at the cost
provision is made to recognize a declined, other than temporary n the value of investment.
Foreign Currency Transaction; - Transaction in foreign currency is recorded at the original
rate of return exchange in force at the time transaction is affected.
Revenue Recognition: - Revenue in respect of insurance, interest, etc is recognized only
with it is reasonably certain that the ultimate collection will be made.
Audit System: - Audit is the process of checking, verifying and inspecting the financial
procedure and position of the company. They are two types of audit are carried out in Alok
Internal audit
Statutory audit
54
CChhaapptteerr 55
RReesseeaarrcchh
RReeppoorrtt
on
Financial Management
Outline of the study
Financial Ratio Analysis
Introduction
Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the indicated
quotient of two mathematical expressions” and as “the relationship between two or more things”.
In financial analysis, a ratio is used as a benchmark for evaluating the financial position and
performance of the firm. The absolute accounting figures reported in the financial statements do
not provide a meaningful understanding of the performance and financial position of a firm. An
55
accounting figure conveys meaning when it is related to some other relevant information. For e.g.,
a Rs. 5 crore NP may look impressive, but firm‟s performance can be said to be good or bad only
when NP figure is related to the firms investments.
The relationship between two accounting figures, expressed mathematically, is known as a
financial ratio (or simply as a ratio). Ratio helps to summarize large quantities of financial data
and to make qualitative judgment about the firm‟s financial performance. For e.g., consider
Current Ratio, it is calculated by dividing current assets by current liabilities: a ratio indicates a
relationship – a quantified relationship between current assets and current liabilities. This
relationship is an index or yard stick, which permits a qualitative judgment to be formed about the
firm‟s ability t meet its current obligations. It measures firm‟s liquidity. The greater the ratio,
greater is the firm‟s liquidity and vice versa. The point to note is that a ratio reflecting a
quantitative relationship helps to make qualitative judgment. Such is the nature of all financial
ratios.
Ratio analysis is a technique of analysis and interpretation of financial statements. It is the
process of establishing and interpreting various ratios for helping in making decisions. It gives us
better understanding of financial strengths and weaknesses of a firm.
Standards of comparison
The Ratio analysis involves comparison for a useful interpretation of the financial statements. A
single ratio in itself does not indicate favorable or unfavorable condition. It should be compared
with some standard. Standards of comparison may consist of:
Past Ratios, i.e., ratios calculated from the past financial statements of the same firm.
Competitor’s Ratios i.e., ratios of some selected firms especially the most progressive and
successful competitor, at the same point in time.
Industry Ratio i.e., the ratio of industry to which the firm belongs; and
Projected Ratio i.e., the ratios developed using the projected, or proforma, financial statements
of the same firm.
56
Classification or Types of Financial Ratios
Several ratios, calculated from the accounting data, can be grouped into various classes according
to financial activity or function to be evaluated. As stated earlier the parties interested in financial
analysis are short and long term creditors, owners and management. Short-term creditors‟ main
interest is in the liquidity position or the short-term solvency and profitability of the firm. Long-
term creditors‟ on the other hand, are more interested in the long term solvency and profitability
of the firm. Similarly owners concentrate on the firm‟s profitability and financial condition.
Management is interested in evaluating every aspect of the firm‟s performance. They have to
protect the interest of all parties and see that the firm grows profitably.
In view of the requirements of the various users of the ratios, we may classify them into the
following four important categories
1. Liquidity ratios
2. Capital structure/leverage ratios
3. Activity ratios
4. Profitability ratios
57
(A) Liquidity Ratios:
1. Current ratio
2. Liquidity ratio or Quick ratio or acid test ratio
(B) Leverage Ratios
1. Total Debt Ratio
2. Debt-Equity Ratio
3. Interest Coverage Ratio
(C) Activity Ratios
1. Inventory/Stock turnover Ratio.
2. No. of days Inventory
3. Debtor’s turnover Ratio
4. Working capital turnover Ratio
(D) Profitability Ratios
1. Gross Profit Margin
2. Net Profit Margin
3. Rate of return on Investments (ROI) OR Rate of return on Capital Employed
(ROCE)
4. Asset Turnover Ratio
5. Rate of return on Equity
6. Earnings per Share
Classification of Financial Ratios
58
The Ratio analysis involves comparison for a useful interpretation of the financial statements. A
single ratio in itself does not indicate favorable or unfavorable condition. It should be compared
with some standard. Standards of comparison may consist of:
(A) Liquidity Ratios:
These ratios analyse the short-term financial position of a firm and indicate the ability of the
firm to meet its short-term commitments (current liabilities) out of its short-term resources
(current assets).
These are also known as „solvency ratios‟. The ratios which indicate the liquidity of a firm
are:
(1) Current ratio
It is calculated by dividing current assets by current liabilities.
Where,
Current assets, includes Current Liabilities, includes
Inventories of raw material,
Work in progress,
finished goods,
stores and spares,
sundry Debtors/receivables,
short term loans deposits and advances,
cash in hand and bank,
prepaid expenses,
incomes receivables and
marketable investments
And short term securities.
sundry creditors/bills payable,
outstanding expenses,
unclaimed dividend,
advances received,
incomes received in advance,
provision for taxation,
proposed dividend,
instalments of loans payable within 12
months,
bank overdraft and cash credit
Current ratio = Current assets
Current liabilities
59
Conventionally a current ratio of 2:1 is considered satisfactory
The current ratio is a measure of the firm‟s short-term solvency. It indicates the availability of
current assets in rupees for every one rupee of current liability. A ratio of greater than one
means that the firm has more current assets than current claims against them. Current ratios
for last five years of Alok Industries Ltd are as under.
The Current Ratios for the last five years of the company are as under
Table 5.1
Years
Total Current assets
(Rs. Crore)
Total Current liabilities
(Rs. Crore)
Current
Ratio
2005-06 1403.87 668.1 2.10
2006-07 1992.66 1371.21 1.45
2007-08 3377.53 2341.16 1.44
2008-09 2685.93 1976.02 1.35
2009-10 4802.05 2624.07 1.83
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Current ratio 2.1:1 1.45:1 1.44:1 1.35:1 1.83:1
60
Chart 5.1
Interpretation of Current Ratio
Conventionally a current ratio of 2:1 is considered satisfactory for a company. This means in a
worse condition, even if the value of company‟s Current Assets becomes half, the firm is able to
meet its obligations
It can be seen from past records that CR in years 2004-05 & 2006-07 is 2:1 which meets the ideal
ratio for a company as company is able to meet its obligations very well. So CR in these years can
be interpreted to be sufficiently liquid.
But in years 2006-07 & 2007-08 this ratio has decreased to 1.45 & 1.44 respectively but still
company manages to meets its obligations as its current assets are more than its current liabilities.
In year 2008-09 the decreasing trend continues and CR becomes 1.35, as far as meeting
obligations is concerned, it is increasing in 2009-10 its increasing it shows that company having
better liquidity if so it increasing continuously it will better for the company. For the time being
0
0.5
1
1.5
2
2.5
2005-05 2006-07 2007-08 2008-09 2009-10
2.1
1.45 1.44 1.35
1.83
current ratio
61
company‟s CR can be interpreted as moderately liquid increasing it will be good scope for the
company
Suggestions:
Since last three years CR has shown a decreasing trend, but now in 2009-10 CR is increasing it is
and good scope for the company. so Company needs to invest more in its current assets.
Also company should indentify its slow paying debtors and insist them to be quick in payment
Moreover, company needs to exercise control over slow moving and absolute stock of goods,
which impairs company‟s ability to pay bills on time
62
(2) Quick Ratio or Acid Test Ratio or also known as Liquidity ratio
Quick ratio, also called acid test ratio, establishes a relationship between quick, or liquid,
assets and current liabilities. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset. Other assets are considered
to be relatively liquid and included in quick assets are debtors and bills receivables and
marketable securities. Inventories are considered to be less liquid. Inventories normally require
some time for realizing into cash; their value also has a tendency to fluctuate.
Generally, a quick ratio of 1:1 is considered to represent a satisfactory current financial
condition. Although quick ratio is a more penetrating test of liquidity than the current ratio, yet it
should be used cautiously. A quick ratio of 1:1 or more does not necessarily imply sound liquidity
position. It should be remembered that all debtors may not be liquid, and cash may be
immediately needed to pay operating expenses. It should also be noted that inventories are not
absolutely non-liquid. To a measurable extent, inventories are available to meet current
obligations. Thus, a company with a high value of quick ratio can suffer from the shortage of
funds if it has slow paying, doubtful and long duration outstanding debtors. On the other hand, a
company with a low value of quick ratio may really be prospering and paying its current
obligation in time if it has been turning over its inventories efficiently. Nevertheless, the quick
ratio remains an important index of the firm‟s liquidity.
It is calculated by dividing quick current assets by current liabilities (quick current
liabilities)
Where,
Quick assets are current assets (as stated earlier) less prepaid expenses and inventories.
Conventionally a quick ratio of 1:1 is considered satisfactory.
Quick ratio = Quick assets
Current liabilities
63
Quick Ratio for last five year of company is as under:
Table 5.2
Years
Quick Assets
(Rs. Crore)
Total current liabilities
(Rs. Crore)
Quick Ratio
2005-06 1049.5 668.1 1.57
2006-07 1522.04 1371.21 1.10
2007-08 2692.15 2341.16 1.14
2008-09 1739.8 1976.02 0.88
2009-10 3327.64 2624.07 1.26
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Quick ratio 1.57:1 1.10:1 1.14:1 0.88:1 1.26
Chart 5.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2005-06 2006-07 2007-08 2008-09 2009-10
1.57
1.11 1.11
0.88
1.26
64
Interpretation of liquid ratio:
Generally, a quick ratio 0f 1:1 is considered to represent a satisfactory current financial condition.
In years 2004-05 & 2005-06 quick ratio, is almost more than 1.5 times which implies that
company‟s quick assets are 1.5 times more than its liabilities this is because company is able to
convert its assets into cash very successfully. This ratio sets a very rosy current liquidity condition
as company has enough cash to meet its current obligation.
In years 2006-07 & 2007-08 this ratio has reduced to 1.11 times but still company has managed to
be in line with standard ratio, although the ratio has decreased but it cant be said insufficiently
liquid as company liquid assets are almost equal to its current liabilities.
In year 2008-09 the decreasing trend continues and ratio becomes 0.88 times then after in 2009-10
it is increasing to 1.26 times thus its good for the company as liquid assets are increasing.
Suggestions
Company needs to have more liquid asset in form of cash as cash is considered to the most liquid
asset.
Also Company needs to exercise control over its investment in inventories as inventories are
considered to less liquid as compared to BR and other readily convertible or marketable securities.
If company fails to do so then it may not be able to meet its current obligation.
65
(B) Gearing ratios or Leverage ratios
These ratios indicate the long term solvency of a firm and indicate the ability of the firm to meet
its long-term commitment with respect to:
repayment of principal on maturity or in predetermined instalments at due dates and
Periodic payment of interest during the period of the loan.
The process of magnifying the shareholders return through the use of debt is called, “financial
leverage” or “financial gearing” or “trading on equity” Theses ratios are calculated to measure
the financial risk and the firm‟s ability of using debt to shareholder‟s advantage. Leverage ratio
can be calculated from the Balance Sheet items to determine the proportions of debt in total
financing. They can also be computed from profit & loss items by determining the extent to which
operating profits are sufficient to cover the fixed charges.
Leverage ratios are classified as under:
Debt-equity Ratio.
Interest coverage Ratio.
Debt- Equity Ratio
The relationship describing the lenders‟ contribution for each rupee of the owners‟ contribution is
called debt- equity ratio. It is directly computed by dividing total debt by net worth.
Debt-Equity Ratio = Total Debt (TD)
Net worth (NW)
66
Table 5.3
Years
Total Debt
(Rs. Crore)
Net worth
(Rs. Crore) Debt-equity Ratio
2005-06 2212.5 807.53 2.21
2006-07 3336.76 1024.44 2.70
2007-08 5767.31 1431.34 3.93
2008-09 6596.35 1755.06 3.69
2009-10 7119.39 2524.60 2.82
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Debt Equity 2.21:1 2.70:1 3.93:1 3.69:1 2.82
Chart 5.3
0
0.5
1
1.5
2
2.5
3
3.5
4
2005-06 2006-07 2007-08 2008-09 2009-10
2.212.7
3.93 3.69
2.82
67
Interpretation of Debt Equity Ratio:
Generally, A Debt- equity ratio of 2:1 is considered to be conventional.
But here like total debt ratio, debt equity ratio also seems to be very unconventional and
undesirable.
Debt equity ratio has also shown an increasing trend from years 2004-05 to 2007-08. In year
2007-08 ratio is highest i.e. 3.93 times. In year 2008-09 it has reduced to 3.69 times, and in year
2009-10 it is reduce to 2.82 but then too it doesn‟t sound much impressive as company‟s debt is
much higher than its owners‟ stake.
Suggestion:
It‟s high time for company to think about its indebtedness. Company needs to reduce its debt
capital in order to sound financially strong. Otherwise, company may suffer great strains, it may
even fail to pay interest charges of creditors, as a result their pressure and control may further
tightened.
There is a need to strike a proper balance between use of debt and Equity.
68
Interest Coverage Ratio:
Debt ratio described above are static in nature and fail to indicate the firms‟ ability to meet
interest (and other fixed charges) obligations. The Interest Coverage ratio or the times-interest-
earned is used to test the firms‟ debt-servicing capacity. The interest coverage ratio is computed
by dividing earnings before interest and taxes (EBIT) by interest charges. The interest coverage
ratio shows number of times the interest charges are covered by the funds that are ordinarily
available for their payment. Since taxes are computed after interest, interest is calculated in
relation to earnings before tax. Depreciation is a non-cash item. Therefore, funds equal to
depreciation are also available to pay interest charges.
We can thus calculate this ratio as earnings before interest taxes, depreciation and
amortization (EBITDA) divided by interest
A ratio of 6 to 7 times is considered satisfactory
Table 5.4
Years
EBIDTA
(Rs Crore)
Interest
(Rs Crore)
Interest coverage
Ratio
2005-06 301.26 66.78 4.51
2006-07 410.96 89.04 4.61
2007-08 547.75 131.83 4.15
2008-09 822.61 304.12 2.70
2009-10 1272.48 534065 2.28
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Interest. Coverage Ratio 4.51 4.61 4.15 2.70 2.28
Interest coverage Ratio = (EBITDA)
Interest
69
Chart 5.4
Interpretation of Interest Coverage Ratio:
A ratio of 6 to 7 times is considered satisfactory.
Here Interest coverage Ratio has shown an increasing trend from years 2004-05 to 2006-07 and
has shown a decreasing trend in last two years.
In year 2009-10 ratio is lowest i.e. 2.28 times. In year 2006-07 the ratio is highest i.e. 4.62 times,
but is not at all satisfactory when compared 6-7 times. This indicates excessive use of debt or
inefficient operations.
Suggestions:
As seen earlier in case of total Debt ratio and Debt-equity ratio, even interest coverage ratio is not
satisfactory this is because of the reason that company uses too much of debt capital, so it needs to
review its portfolio regarding use of debt in its capital mix.
Moreover the company should make efforts to improve the operational efficiency, or to retire debt
to have a comfortable coverage ratio. And this can be done by analysing the variability of the
company‟s cash flows over time
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2005-06 2006-07 2007-08 2008-09 2009-10
4.51 4.614.15
2.72.28
Interest coverage ratio
70
(C) Activity Ratios
Funds of creditors and owners are invested in various assets generate sales and profit. The
better the management of assets the larger is the amount of sales. Activity ratios are employed to
evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also
called as turn over ratios because they indicate the speed at with which assets are being converted
or turned over into sales. Activity ratios, thus involve a relationship between sale and assets. A
proper balance between sales and assets generally reflects that assets are managed well. Several
activity ratios can be calculated to judge the effectiveness of asset utilization.
Activity ratios can be further classified as under:
Inventory/Stock turnover Ratio.
No. of days Inventory.
Debtor‟s turnover Ratio.
Asset Turnover Ratio.
71
1) Inventory/ Stock turnover Ratio:
This ratio indicates the number of times inventory is replaced during the year. It measures
the relationship between cost of goods sold and the inventory level. This ratio calculated by
dividing saled by stock (or inventory)
Tbale 5.5
Years
Sales
(Rs. Crore)
inventories
(Rs. Crore) ITR
2005-06 1420.70 333.49 4.26
2006-07 1824.68 425.33 4.29
2007-08 2170.41 649.82 3.34
2008-09 2976.93 907.6 3.28
2009-10 4311.17 1413.49 3.05
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Inventory Turnover Ratio 4.26 times 4.29 times 3.34 times 3.28 times 3.05 times
Inventory turnover Ratio: sales
inventory
72
Chart 5.5
Interpretation of ITR
There is no such standard ratio available; therefore comparison shall be made on basis of past
trends. But high inventory ratio is indicative of good inventory management. And low inventory
implies excessive inventory level than warranted by production and sales activities.
In year 2005-06 the ratio is highest i.e. 4.29 times, which means company is turning its inventory
of finished goods into sales 4.29 times in a year.
In year the ratio has shown a decreasing trend and has finally reached to 3.05 times, which means
company‟s efficiency in turning its inventories is getting reduced.
Suggestions
Company needs to reduce investment in sluggish inventories that leads to unnecessary tied-up of
funds. Failure of doing so may lead to increased costs and reduced profits. So the absolute
inventories must be written off.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2005-06 2006-07 2007-08 2008-09 2009-10
4.26 4.29
3.34 3.28 3.05
Inventory Turnover Ratio
73
2) No. Of Days Inventory:
This ratio is calculated by dividing no. of days in a year with inventory turnover ratio. Generally
for the sake of convenience we take 360 days for calculating this ratio
Table 5.6
Years
Days
in a year
inventory
turnover No. of Days, Inventory
2005-06 360 3.91 92
2006-07 360 3.87 93
2007-08 360 3.10 116
2008-09 360 3.10 116
2009-10 360 2.88 125
Years 2005-06 2006-07 2007-08 2008-09 2009-10
No. of Days,
Inventory
92
Days
93
Days
116
Days
116
Days
125
Days
No of day’s inventory: 360 Days
Inventory Turnover
74
Chart 5.6
Interpretation of no. of days
Here more inventory days indicates that company is holding its stock for longer period of time
and investments in inventories is blocked which would increase costs and reduce profits, on the
contrary less inventory holding days is indicative of good inventory management system for a
company
In year 2005-06 the holding period is least i.e.92 days and then onwards it has shown an
increasing trend and was highest in year 2009-10 i.e. 125 days.
Suggestion:
Company should investigate and find out slow moving or absolute stock and take appropriate
steps to write-off them as soon as possible otherwise this will adversely affect working capital and
liquidity position of the company
Company needs to reduce investment in sluggish inventories that leads to unnecessary tied-up of
funds. Failure of doing so may lead to increased costs and reduced profits. So the absolute
inventories must be written off
0
20
40
60
80
100
120
140
2005-06 2006-07 2007-08 2008-09 2009-10
92 93
116 116125
75
3) Debtors Turnover Ratio
This ratio is a test of the liquidity of the debtors of a firm. It shows the relationship between credit
sales and debtors.
Table 5.7
Years 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Debtors
turnover(days)
120
Days
91
Days
109
Days
102
Days
108
Days
93
Days
Chart 5.7
Debtors Turnover Ratio = Credit Sales X 360 days
Debtors
80
85
90
95
100
105
110
2005-06 2006-07 2007-08 2008-09 2009-10
91
109
102
108
93
Debtors turnover
76
Interpretation of Debtors Ratio or Average collection period
This ratio is indicative of the efficiency of the trade credit management. A high turnover ratio and
shorter collection period indicates prompt payment by the debtor. On the contrary low turnover
ratio and longer collection period indicates delayed payments by the debtor. In general a high
debtor turnover ratio and short collection period is preferable.
Collection period is kept on increasing every year which is not favorable for a company. It implies
that company‟s credit and collection policy is inefficient and liberal.
Suggestion:
Company should improve its collection policy by improving credit terms and policy.
77
4) Total Assets turnover ratio
Some analysts like to compute the total assets turnover in addition to or instead of the net assets
turnover. This ratio shows the firm‟s ability in generating sales from all financial resources
committed to total assets.
Assets are used to generate sales. Therefore, a firm should manage its assets efficiently to
maximize its sales. The relationship between sales and assets is called assets turnover.
Table 5.8
Years
Sales
(Rs. Crore)
Capital Employed
(Rs. Crore) Total Assets Turnover Ratio
2005-06 1420.7 3020.03 0.47 times
2006-07 1824.68 4361.2 0.42 times
2007-08 2170.41 7198.65 0.30 times
2008-09 2976.93 8351.42 0.36 times
2009-10 4311.17 11054.28 0.39 times
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Assets turnover
0.47
times
0.42
times
0.30
times
0.36
times
0.39
Times
Total Assets Turnover Ratio = Total Sales
Capital Employed
78
Chart 5.8
Interpretation of Asset turns over Ratio.
Ratio of more than one should be considered to be satisfactory. But here company is not able to
maintain that ratio which means there are unutilized or underutilized assets in company.
In the year 2005-06 the ratio is highest but doest show any satisfaction. As since company is able
to generate only 0.47 Rs of sales for every one rupee capital employed in net assets. Besides this
in year 2007-08 this condition has gone worsen as ratio reached its lowest level i.e. 0.3 which
shows company‟s inefficiency in utilizing its assets.
Suggestions
Company‟s sales have increased but not in the proportion of increase in net assets or capital
employed.
Company needs to improve a lot as far as operational performance is concerned, more sales
promotion activities should be carried out t increase sales at this given level of assets On the other
hand it necessary to check whether assets are properly valued ie. Whether undervalued or
overvalued because valuation of assets is very important.
0.470.42
0.30.36 0.36
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
2005-06 2006-07 2007-08 2008-09 2009-10
Asset Turnover Ratio
Asset Turnover Ratio
79
5 Working Capital Turnover Ratio
A firm may also like to relate net current assets (or net working capital gap) to sales. It may thus
compute net working capital turnover by dividing sales by net working capital.
This ratio is computed by dividing Sales by Net working Capital.
Net Working Capital =( TotalCurrent Assets) –(Total Current Liabilities)
Table 5.9
Year Sales Current Assets Current
Liabilities
Net Working
Capital
Working
Capital
Turnover
2008-09 2976.93 2685.93 500.19 2185.74 1.36 times
2009-10 4311.17 4801.88 544.00 4257.88 1.01 times
Year 2009-2010 2008-09
Working Capital Turnover 1.01 times 1.36 times
Working Capital Turnover = Sales
Net working Capital
80
Table 5.9
Interpretation of Working capital Turnover Ratio
From this point of view company‟s working operational performance is quite sound.
Since from year 2008-2009 to 2000-2010 working capital turnover ratios has shown an decreasing
trend. In year 2009-2010 this ratio is lowest i.e. 1.01times which implies that for every one rupee
of working capital company is able to generate 1.01 rupee of sales.
Suggestions
Company must try to maintain this level of working capital but not being so optimistic it
should see that net working capital doesn‟t get reduced which stagnates growth. Because
due to inadequate working capital it becomes difficult for the firm to undertake profitable
project.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2008-09 2009-10
Net Working Capital
81
D) Profitability Ratios
Profit is the difference between revenues and expenses over a period of time (usually one year).
Profit is the ultimate „output‟ of a company, and it will have no future if it fails to make sufficient
profits. Therefore the financial manager should continuously evaluate the efficiency of the
company in terms of profits. The profitability ratios are calculated to measure the operating
efficiency of the company. Besides management of the company, creditors and owners are also
interested in the profitability of the firm. Creditors want to get repayment of their principal
regularly. Owners want to get a required rate of return on their investments. This is only possible
when the company earns enough profits.
Profitability Ratios can be classified as under:
Gross Profit Margin
Net Profit Margin
Rate of return on Investments (ROI) OR Rate of return on Capital Employed (ROCE).
Rate of return on Equity
Earnings per Share.
EBIT Rattio
82
1) Gross Profit Margin:
The Gross Profit Margin reflects the efficiency with which management produces each unit of
product. This ratio indicates the average spread between the cost of goods sold and the sales
revenue. A firm should have a reasonable gross profit margin to ensure coverage of its operating
expenses and ensure adequate return to the owners of the business i.e. shareholders.
To judge whether the ratio is satisfactory or not, it should be compared with the firm‟s past ratios
or with the ratio of similar firms in the same industry or with the industry average.
This ratio is calculated by dividing gross profit by sales. It is expressed as a percentage.
Table 5.10
Years EBIT
(Rs. Crore)
Sales
(Rs. Crore)
GP Margin
(%)
2005-06 220.78 1420.7 15.29
2006-07 278.92 1824.68 15.19
2007-08 385.79 2170.41 17.26
2008-09 589.11 2976.93 19.41
2009-10 886.80 4311.17 20.57
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Gross Profit Margin(%) 15.29% 15.19% 17.26% 19.41% 20.57%
Gross Profit Margin = EBIT
Sales
83
Table 5.10
Interpretation of GP ratio:
GP ratio has shown an increasing trend which shows company‟s profitability condition is well
also company‟s operating efficiency is also satisfactory.
In years 2007-08 and 2008-09 and 2009-10there is more than 2% & 4%increase in GP ratio
respectively as compared to that of year 2005-06, which indicates that company is operating at an
efficient pace. This is because both sales and operating profit have increased in these years.
Suggestions
Company should maintain this pace of selling finished goods so that it can fetch desired rate of
operating profit.
Moreover company should make efforts to reduce its variable costs in order to earn more profit
margins in near future.
15.29 15.1917.26
19.41 20.57
0
5
10
15
20
25
2005-06 2006-07 2007-08 2008-09 2009-10
GP Margin
84
2) Net Profit Margin:
This ratio is calculated by dividing net profit by sales. It is expressed as a percentage.
This ratio is indicative of the firm‟s ability to leave a margin of reasonable compensation to the
owners for providing capital, after meeting the cost of production, operating charges and the cost
of borrowed funds.
Table 5.11
Years
PAT
(Rs Crore)
Sales
(Rs Crore)
NP Margin
(%)
2005-06 109.21 1420.7 7.62
2006-07 135.18 1824.68 8.77
2007-08 167.73 2170.41 8.68
2008-09 188.37 2976.93 6.16
2009-10 237.44 4311.17 5.72
Years 2005-06 2006-07 2007-08 2008-09 2009-10
Net Profit Margin (%) 7.62% 8.77% 8.68% 6.16% 5.72%
Net Profit Margin = PAT
Sales
85
Table 5.11
Interpretation of NP Ratio:
Company‟s NP ratio trend has shown an increasing during the years 2004-05 to 2005-06. But
after that it has shown a decreasing trend from year 2007-08 to 2009-10.
This reduction in the ratio is also due to making more cost of goods sold, as company‟s other
charges are reduced as compare to previous year but ratio has reduced. This doesn‟t sounds
profitable.
Suggestion:
So company must purchase the material as and when needed so as to reduce cost of goods sold.
And company also needs to exercise control over its unnecessary administrative and office
expenses.
If company is not able to control its cost of goods sold it will damage its profitability position
which reduce investor‟s confidence.
7.628.77 8.68
6.16 5.72
0
1
2
3
4
5
6
7
8
9
10
2005-06 2006-07 2007-08 2008-09 2009-10
Net profit margin
Net profit margin
86
3) Rate of return on Investments (ROI)
OR Rate of return on Capital Employed (ROCE).
This ratio measures the relationship between net profit and capital employed. It indicates how
efficiently the long-term funds of owners and creditors are being used.
Table 5.12
Years
EBIDTA
(Rs Crore)
Total Assets
(Rs Crore)
ROCE
(%)
2005-06 301.26 3020.03 9.97
2006-07 410.96 4361.20 9.42
2007-08 591.38 7088.49 8.34
2008-09 822.61 8203.71 10.02
2009-10 1272.48 11225.87 11.33
Years 2005-06 2006-07 2007-08 2008-09 2009-10
ROCE(%) 9.97% 9.42% 8.34% 10.02% 11.33%
Rate of return on Capital Employed = EBIDTA
Total Assets
87
Table 5.12
Interpretation of return on capital Employed:
In year 2009-10 return on capital employed is highest i.e. 11.33% in these five years and in year
2007-08 this return is minimum i.e. about 8.34% but again in year this ratio has increased to
almost 11.33% which may be termed as quiet satisfactory.
9.97 9.428.34
10.0211.33
0
2
4
6
8
10
12
2005-06 2006-07 2007-08 2008-09 2009-10
ROCE
ROCE
88
4) Return on Shareholders’ equity
This ratio measures the relationship of profits to owner‟s funds. Shareholders fall into two groups
i.e. preference shareholders and equity shareholders.
Table 5.13
Years 2005-06 2006-07 2007-08 2008-09 2009-10
ROE(%) 13.52% 13.19% 11.71% 9.13% 9.79
Years PAT
(Rs Crore)
Net worth
(Rs Crore)
ROE
(%)
2005-06 109.21 807.53 13.52
2006-07 135.18 1024.44 13.19
2007-08 167.73 1431.34 11.71
2008-09 188.35 2063.03 9.13
2009-10 247.34 2524.60 9.79
Return on Shareholders’ equity = PAT
Net Worth
89
Table 5.13
Interpretation of Return on Equity:
ROE indicates how well the firm has used the resources of owners. In fact, this ratio is one of the
most important relationships in financial analysis. The earning a satisfactory return is most
desirable objective of the business.
Here company is having highest return on equity i.e. of almost 13.52% in the year 2005 -06
While in concluding years this ratio has shown a decreasing trend and has reached to 9.13% in the
year 2008-09. Then after it increase to 9.79%
This ratio is of great concern to present as well as prospective shareholders as company is able to
generate at least 10% on its net worth.
13.52 13.1911.71
9.13 9.79
0
2
4
6
8
10
12
14
16
2005-06 2006-07 2007-08 2008-09 2009-10
ROE
ROE
90
5) Earnings per Share
Table 5.14
years 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
EPS 7.25 6.6 9.7 11.4 9.64 4.57
Table 5.14
Interpretation of EPS
EPS calculation is made over years indicate whether or not the firm‟s earning power on per-share
basis has changed over that period. The EPS of the Company simply shows the profitability of the
firm on a per-share basis, it does not reflect how much dividend and how much is the retained
earnings in the business.
In the year 2007-08 EPS is highest i.e. 11.4 Rs per share, but in year 2009-10 it is less it is 4.57
Rs. Per share.
6.6
9.711.4
9.64
4.57
0
2
4
6
8
10
12
2005-06 2006-07 2007-08 2008-09 2009-10
Earning per share
Earning per share
91
EBIT Ratio
Earning Before Interest and Tax ratio: This ratio is calculated by dividing PAT (Profit After
Tax) by EBIT.
Table 5.15
Year 2009-2010 2008-2009 PAT 247.34 188.35 EBIT 886.80 589.11
EBIT Ratio 0.27 times 0.31 times
Table 5.15
0.25
0.26
0.27
0.28
0.29
0.3
0.31
0.32
2008-09 2009-10
EBIT RATIO
EBIT Ratio = PAT
EBIT
92
Working
Capital
Management
Working Capital Management
Meaning:Working Capital means the difference between current assets and currents
liabilities, and therefore, represents that position of current assets which the firm has to finance
either from long-term funds or bank borrowings.
93
Concepts Of Working Capital:
There are two concepts of Working Capital- gross and net.
1.Gross Working Capital refers to the firm`s investments in currents assets. Current Assets are the
assets which can be converted into cash within an accounting year and include cash, short term
securities, debtors, bills receivables and stock.
2.Net Working Caapital refers to the difference between current assets and current liabilities.
Current Liabilities are those claims of outsiders which are expected to mature forpayment within
an accounting year and include creditors, bills payable and outstanding expenses.
Determinants of Working Capital:
1. Nature of Business
2. Market and Demand Conditions
3. Technology and Manufacturing Policy
4. Credit Policy
5. Availability of Credit from Suppliers
6. Operating Efficiency
7. Price Level Changes
94
Schedule showing changes in Working Capital
Particulars 2010 2009 Increase Decrease Current Assets a.Investments 1576.82 1068.69 499.13 bDebtors 1126.46 913.77 21269 c.Cash and Bank Balance 1410.67 427.43 983.24 d.Loans and Advances 910.51 665.32 245.19 Total Current Assets [A] 5015.46 3075.21 Current Liabilities and Provisions a.Current liabilities 729.90 653.33 76.57 b.Provisions 57.97 31.81 26.16 Total Current Liabilities[B] 787.87 685.14 Net working Capital[A-B] 4227.59 2390.07 1837.52
Analysis of working Capital:
The firm should maintain a sound working Capital position. It should have adequate working
capital to run its business operations. Both excessive as well as inadequate working capital
positions are dangerous from the firms point of view.
The dangers of excessive working capital are as follows:
1. It results in unnecessary accumulation of inventories. Thus, chances if inventory mishandling, waste,
theft and losses increase.
2. It is an indication of defective credit policy and slack collection period. Consequently. higher incidence
of bad debts results, which adversely affects profits.
3. Excessive working capital makes management complacent which degenerates into managerial
inefficiency.
95
4. Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make
dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative
profits.
Inadequate Working Capital is also bad and has the following dangers:
1. It stagnates growth. it becomes difficult for the firm to undertake profitable projects for non-
availability of working capital funds.
2. It becomes difficult to implement operating plans and achieve the firm`s profit target.
3. Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments.
4. Fixed assets are not efficiently utilized for the lack of working capital funds. Thus, the firm`s
profitability would deteriorate.
5. Paucity of Working Capital-funds render the firm unable to avail attractive credit oppurtinities etc.
6. The firm looses its reputation when it is not in a position to honour its short-term obligations. As a
result, the firm faces tight credit terms.
96
Financial
Leverage
Meaning Of Financial Leverage
A company can finance its investments by debt and equity. The company may also use preference
capital. The rate of interest on debt is fixed irrespective of the companys rate of return on assets.
The company has a legal binding to pay interest on debt. The rate of preference dividend is also
fixed; but preference dividends are paid when the company earns profits. The ordinary
shareholders are entitled to the residual income. That is, earnings after interest and taxes(less
preference dividends) belong to them. The rate of the equity dividend is not fixed and depends on
the dividend policy of the company.
The use of the fixed-charges sources of funds, such as debt and preference capital along with the
owners equity in the capital structure, is describes as Financial Leverage or Gearing or Trading on
equity.
97
Types Of Leverages:
1.Degree Of Operating Leverage:
The degree of operating leverage (DOL) is defined as the percentage change in the earnings
before interest and taxes relative to a given percentage percentage change in sales.
2.Degree Of Financial Leverage:
When the economic conditions are good and the firm`s EBIT is increasing, its EPS
increases faster with more debt in the capital structure.
The degree of Financial Leverage (DFL) is defined as the percentage in EPS due to a
given percentage change in EBIT.
DOL = % change in EBIT
% change in sales
DOL = Contribution
EBIT
DFL = EBIT
EBIT - Interest
DFL = % change in EPS
% change in EBIT
98
3. Degree Of Combined Leverage:
Operating and financial leverages together cause wide fluctuation in EPS for a given
change in sales. If a company employees a high level of operating and financial
leverage, even a small change in the level of sales will have dramatic effect onEPS.
A company with cyclical sales will have a fluctuating EPS; but the swings in EPS
will be more pronounced if the company also uses a high amount of operating and
financial leverage.
The degree of operating and financial leverages can be combined to see the effect of
total leverages on EPS associated with a given change in sales. The degree of
combined leverage is given in the equation:
% change in EBIT For year 2009-2010:
DCL= % change in EBIT * % change in EPS
% change in Sales %change in EBIT
OR
DCL = % change in EPS
% change in sales
99
= 909.87-589.11
589.11
= 0.54
% change in sales For the year 2009-2010:
= 4311.17-2976.93
2976.93
= 0.44
DOL for the year 2009-2010:
= 0.54
0.44
= 1.22
% change in EBIT For year 2008-2009
= 589.11-385.79
385.79
= 0.52
% change in sales For the year 2008=2009
= 2976.93-2170.41
2170.41
= 0.371
100
DOL for the year 2008-2009
= 0.52
0.371
= 1.40
DFL for the year 2009-2010:
= EBIT
EBIT-Interest
= 909.87
374.79
= 2.42
DFL for the year 2008-2009:
= EBIT
EBIT- Interest
= 589.11
284.99
=2.06
DFL = EBIT
EBIT - Interest
DCL = DOL*DFL
101
DCL= DOL*DFL
For the year 2009-2010
=1.22*2.42
=2.9524
For the year 2008-2009
= 1.40*2.06
=2.884
Degree Of Leverages:
Year 2009-2010 2008-2009
DOL 1.22 1.40
DFL 2.42 2.06
DCL 2.9524 2.884
102
Cash Flow
Statement
analysis
103
Meaning Of Cash Flow:
Cash Flow is a simple and objectively defined concept. It is simply the difference between rupees
received and rupees paid out.
Cash Flow should not be confused with profit. Changes in profits do not necessarily mean
changes in cash flows.
Components of Cash Flows:
A typical investment will have three components of cash flows:
1. Initial Investment
2. Annual Net Cash Flows
3. Terminal Cash Flows
Cash Flow Statement:
A statement of changes in financial position on cash basis, commonly known as the cash flow
statement, summarises the cause of changes in cash position between dates of the two balance
sheets. It indicates the sources and uses of cash. Thus, this statement analyses changes in non-
current accounts as well as current accounts to determine the flow of cash.
104
Sources and Uses of Cash
The following are the sources of Cash:
1.The profitable Operations of the firm,
2.Decrease in Assets (except Cash)
3. Increase in Liabilities (including debentures or bonds), and
4. sale proceeds from an ordinary or preference share issue.
The Uses Of Cash are:
1. The loss from operations,
2. Increase in assets (except cash),
3. Decrease in liabilities (including redemption of debentures or bonds),
4. Redemption of redeemable preference shares, and
5. Cash dividends.
105
Cash Flow statement Of ALOK INDUSTRIES
Year Ended
31.03.2010
Year Ended
31.03.2009
A] cash flow from operating activites
Net profit before Tax 376.76 284.99
Adjustments for
Depreciation 362.61 233.50
Excess of cost over fair value of current investments - 0.68
Loss of assets due to fire 37.91 -
Dividend income (1.02) (0.17)
Intrest paid(net) 535.08 304.12
Profit on sale of fixed assets(net) (1.60) (1.74)
Profit/loss on sale of current investment (net) (0.60) 2.24
Operating profit before working capital changes 1307.10 823.61
Adjustment for
increase in inventories (530.57) (256.26)
Increase in trade receivable (271.04) (276.48)
Increase in loans and advances (328.82) (80.71)
Increase in current liabilities 1.11 0.89
Cash generated from operating 231.79 211.05
Income taxes paid (47.23) (37.11)
Net cash generated from operating activites 184.56 173.94
B] Cash flow from investing activities
Purchase of fixed assets (1524.56) (2310.29)
Sale of fixed assets 2.33 8.62
Purchase of investments (567.85) (219.69)
Sale of investments 817.40 157.64
Margin money deposits matured/(placed) (48.32) 62.91
Fixed deposits pledged with bank (444.00) -
Dividend received 1.02 0.17
Interest received 13.45 66.42
Share application money(given) - 199.52
Inter corporate deposite(granted)/refunded-net 1.25 3.35
Net cash used in investment activity (1749.28) (2031.35)
Cash flow from financing activities
Proceeds from issue of equity share capital 736.74 -
Share application money received - 137.50
106
Proceeds from borrowing(net) 1924.35 817.85
Dividend paid(including tax thereon) (17.28) (26.11)
Interest paid (526.06) (337.71)
Net cash generated from financing activities 2117.75 591.53
Net increase/decrease in cash and cash equi.(A+B+C) 553.03 (1265.88)
Cash and cash equivalents
at the beginning of the periods 277.57 1543.45
At the end of the period 830.60 277.57
Net increase in cash and cash equivalents 553.03 (1265.88)
107
Analysis
Cash flow statement shows changes in cash flows from operating activities, investment activities
and financing activities. The above table provides Cash Flow statement of ALOK INDUSTRIES
for the year 2010.
The following points may be observed from the ALOK INDUSTRIES`s Cash Flow Statement for
the year 2010.
1. ALOK IND utilized Rs 1524.56 Crore in acquiring fixed assets.]
After adjusting for investment income and sale of assets, the net outflow on account of
investment activities was Rs 1749.28 crore.
2. ALOK IND generated Rs 184.56 crore cash flow from its operating activities.
3. ALOK IND net cash flow from its operating, investment and financing activities is a
positive figure Rs 553.03 crore.
108
Chapter 6
Findings from the Project
Company needs to invest more in its current assets if it fails to do so then in near future
company‟s CL may increase over CA and short term liquidity position might be in threatening
condition and it may struggle to meet its current obligations.
Company needs to keep more liquid asset in form of cash as cash is considered to the most liquid
asset.
Company needs to exercise control over its investment in inventories as inventories are
considered to less liquid as compared to BR and other readily convertible or marketable securities.
If company fails to do so then it may not be able to meet its current obligation.
Company needs to improve its debt position by reducing debt in its capital mix, otherwise it may
led to creditors‟ pressures and constraints on managements independent functioning and energies.
If company fails to reduce its debt, it may get entangled in a Debt Trap.
It‟s high time for company to think about its indebtedness. Company needs to reduce its debt
capital in order to sound financially strong. Otherwise, company may suffer great strains, it may
even fail to pay interest charges of creditors, as a result their pressure and control may further
tightened. Company needs to review its portfolio regarding use of debt in its capital mix.
The company should make efforts to improve the operational efficiency, or to retire debt to have a
comfortable coverage ratio, by analysing the variability of the company‟s cash flows over time
Failure of reducing investment in sluggish inventories doing so may lead to increased costs and
reduced profits. So the absolute inventories must be written off.
Company should investigate and find out slow moving or absolute stock and take appropriate
steps to write-off them as soon as possible otherwise this will adversely affect working capital and
liquidity position of the company
Company needs to reduce investment in sluggish inventories that leads to unnecessary tied-up of
funds. Failure of doing so may lead to increased costs and reduced profits. So the absolute
inventories must be written off
Company should improve its collection policy by improving credit terms and policy.
109
More sales promotion activities should be carried out t increase sales at this given level of assets.
On the other hand it necessary to check whether assets are properly valued i.e. whether
undervalued or overvalued because valuation of assets is very important.
Company should make efforts to reduce its variable costs in order to earn more profit
margins in near future.
So company must purchase the material as and when needed so as to reduce cost of goods sold.
And company also needs to exercise control over its unnecessary administrative and office
expenses.
If company is not able to control its cost of goods sold it will damage its profitability position
which reduce investor‟s confidence.
110
Chapter 7
Suggestion and conclusion
SUGGESTIONS
The company has to take measures to increase sales and utilize the assets effectively.
There is an increase in return on assets. Hence, the company should take measures to maintain with the
return on assets.
The company must control the administrative expenses so that it does not indicate negative effect
on net profit.
Optimum utilization of resources will help the company to get more profits.
Maintenance of liquid assets will definitely help the company in facing the unexpected situation.
In conducting of successful business, shareholder‟s wealth plays a vital role.
CONCLUSIONS
Every organization needs the financial manager to manage the financial activities of a company by using different
analytical tools, which helps the company in taking managerial and tactical decision. So every manager should
make proper analysis of operational performance of the company. The analysis and interpretation of various ratios
will help in giving better understanding of the financial conditions and the performance of the organization. It is a
perfectly organized company having all the departments well organized to perform the activities that lead to the
customer‟s satisfaction. Company is performing satisfactorily as the increasing trend and is expected to grow in the
coming years also. Though the company assets are not fully utilized and maintained well, the firm is in a liquidity
position as it is earning profit from last 3 years. The company should take some necessary precautions regarding
utilizing the assets. Finally I can conclude that the “Alok industries” is performing efficiently at the outset
satisfactorily
111
Bibliography
Book Referred:
CFM-McGraw-Hill Professional Series in Finance (7th edition) 2010,
Prasanna Chandra.
Tata McGraw Hill Education Private Limited, (5th edition) 2010, M Y
Khan , P K Jain
Websites access:
- Website access from the data source on 20 may 2011
http://www.iloveindia.com/economy-of-india/textile-industry.html
- Website access from the data source on 26 may2011
http://www.alokind.com.
- Website access from the data source on 1 june 2011 for Annual Reports
of Alok industries ltd., years-2001-02, 2005-06 & 2008-09.
http://www.alokindustries.com
112
Annexure
Financial highlights 2010
PARTICULARS 2009-10
2008-09
2007-08
2006-07
2005-06
Operating Profits Net Sales
4311.17
2976.93
2170.41
1824.68
1420.70 Operating Profit
1272.48
822.61
547.75
410.96
301.26 Depreciation
362.61
233.50
161.96
123.04
80.48 PBIT (Operating)
909.87
589.11
385.79
287.92
220.78 Interest
535.08
304.12
131.83
89.04
66.78 PBT (Operating)
374.80
284.99
253.96
198.88
154.00 PAT(Operating)
247.34
188.37
167.73
135.18
109.21 Cash Profit (Operating)
711.89
513.98
393.14
302.50
220.70 Dividend
22.97
17.28
26.28
28.75
30.20 Net Cash Accruals
688.93
496.70
366.86
273.75
190.50
Financial Position
Gross Fixed Assets 8215.61
6692.71
4368.05
2954.20
2121.89
Net Fixed Assets 7145.11
5983.36
3891.30
2583.80
1874.24
Current Assets 4801.88
2685.93
3377.52
1992.66
1403.87
Investments 229.69
478.58
618.96
219.49
39.70
Foreign Currency Translation Monetary account
0.17
11.20
- - -
Total Assets 12176.85
9159.58
7887.79
4795.95
3317.81
Equity Share Capital 787.79
196.97
187.17
170.37
157.47
Reserves and Surplus 1908.40
1410.39
1134.01
854.07
650.06
Share Application Money - 137.50
- - -
113
Share Warrants - 10.20
110.16
- -
Tangible Net Worth-(1) 2716.19
1755.06
1431.34
1024.44
807.53
Deffered Tax Liability-(2) 406.98
307.97
210.48
141.82
100.10
Total Long Term Borrowings
Preference Share Capital - - - - 68.00
Secured Loans 6056.69
4984.43
3706.66
2049.13
1392.13
Unsecured Loans –FCCB 107.21
121.01
94.87
202.87
220.63
Unsecured Loans 272.81
51.09
103.28
6.48
61.32
6436.71
5120.53
3904.81
2258.48
1742.08
Total Short Term Borrowings
Secured Loans 1186.19
608.64
550.00
215.00
85.00
Unsecured Loans 43.40
168.02
745.01
294.36
62.34
Working Capital Borrowings 843.78
699.16
567.49
568.92
323.08
2072.97
1475.83
1862.50
1078.28
470.42
Total Borrowings-(3) 8509.68
6596.35
5767.31
3336.76
2212.50
Total Current Liabilities Current Liabilities and
provisions-(4)
544.00
500.19
478.66
292.93
197.68
Total Liabilities (1 to 4) 12176.85
9159.58
7887.79
4795.95
3317.81
EPS (Regular) 4.57
9.64
11.40
9.70
6.68
CEPS ( Regular) 9.04
24.04
20.53
16.99
12.61
Book Value 34.48
89.10
76.47
60.13
51.28
114
PROFIT AND LOSS ACCOUNTS
PARTICULARS SCHEDULE NO
YEAR ENDED
31.3.2010
YEAR ENDED
31.3.2009 INCOME
Sales (Inclusive of Excise Duty) 14 4371.42 2999.73
Less: Excise Duty 71.64 34.77 4299.78
2964.96 Job Work Charges Collected (Tax
Deducted at source Rs 0.25 Crore [ Previous year Rs 0.07 crore])
11.39 11.97
4311.17 2976.92
Other Income 15 64.02 20.82 Increase in stocks of Finished Goods
and process Stock 16 333.82
385.67
4709.01 3383.41
EXPENDITURE Purchase of Traded Goods 398.46
105.26 Manufacturing and Other expenses 17 3038.07
2455.54 Interest (Net) 18 535.61
304.12 Depreciation/Amortisation 362.61
233.50
PROFIT BEFORE TAX 374.74 284.99
Provision for tax- Current Tax (63.56) (32.98)
MAT credit entitlement 34.26 28.65
Deffered Tax (99.01) (89.80)
Fringe Benefit Tax (1.75)
Excess/(short) provision for income tax in respect of earlier years
0.86 (0.74)
NET PROFIT FOR THE YEAR 247.34 188.37
Add: Balance brought forward from the previous year
276.63 296.20
AMOUNT AVAILABLE FOR 523.97
115
APPROPRIATION 484.57
APPROPRIATIONS
Add/(Less) : Excess / (short) provision for dividend
[Including tax on dividend Rs 0.00 Crore
( Previous year Rs 0.02 crore) of earlier year]
0.17
(Refer Note 17 of Part B of Schedule 19)
Less:Transfer to general Reserve (20.00)
Transfer to Debenture Redemption Reserve
(300.10) (190.83)
-Proposed Dividend on Equity Shares
(19.69) (14.77)
Corporate Dividend Tax Thereon (3.27) (2.51)
BALANCE CARRIED TO BALANCE SHEET
180.91 276.63
EARNINGS PER SHARE (Refer Note No 12. Of Part B
of Schedule 19)
Basic 4.57 8.85 Diluted 4.57 7.74
Significant Accounting Policies and Notes To Account
19
116
BALANCE SHEET AS ON 31ST MARCH 2010
Particulars Schedule No.
As at 31.3.2010
As at 31.3.2009
I SOURCES OF FUNDS (1)Shareholders Fund
(a) Capital 1 787.79 196.97
(b) Share Application Money - 137.50
(c) Share Warrants - 10.20 (d) Reserves and Surplus 2 1928.40 1410.39
2716.19 1755.06 (2) Loan Funds
(a) Secured loans 3 8086.66 (b) Unsecured loans 4 423.02
8509.68 (3) Deffered Tax Liability (Net) 406.98
(Refer Note No 11. Of Part B of Schedule 19)
Total 11632.85
II APPLICATION OF FUNDS
(1) Fixed Assets
(a) Gross Block 5 7276.36 4534.44 (b) Less: Depreciation 1070.50 708.85 (c) Net Block 6205.86 3825.59
(d) Capital Work-in-progress 6 939.25 2158.27
7145.11 5983.86 (2) Investments 7 229.69 478.58 (3) Foreign Currency Translation
Monetary Account 0.17 11.20
(4) Current Assets, Loans and Advances
(a) Inventories 8 1474.41 943.84 (b) Sundry Debtors 9 1101.23 884.19 (c) Cash and Bank Balances 10 1390.29 344.95 (d) Loans and Advances 11 835.95 512.95
4801.88 2685.93
Less : Current Liabilities and provisions
(a) Current Liabilities 12 488.93 471.40
(b) Provisions 13 55.07 28.79
117
544.00 500.19
Net Current Assets 4257.88 2185.74 Total 11,632.85 8659.38