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Comparative Study of Financial Statements at Kalyani Steels Ltd by Ketan Shetti

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  • 1

    A

    PROJECT REPORT ON

    AN ANALYSIS & COMPARATIVE STUDY OF FINANCIAL STATEMENTS

    FOR KALYANI STEELS LTD., PUNE

    SUBMITTED TO UNIVERSITY OF PUNE

    IN PARTIAL FULFILMENT OF TWO YEARS FULL TIME COURSE MASTERS IN BUSINESS ADMINISTRATION(MBA)

    SUBMITTED BY KETAN P. SHETTI (BATCH 2005-07)

    VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE-48

  • 2

    To Whomsoever It May Concern

    This is to certify that Mr. Shetti Ketan Prakash is a bonafide student of Vishwakarma Institute of Management, Pune. He has successfully carried out his summer project titled AN ANALYSIS AND COMPARATIVE STUDY OF FINANCIAL STATEMENTS at Kalyani Steels Ltd, Pune. in the partial fulfillment of Masters in Business Administration course of University of Pune (2005-2007).

    He has worked under our guidance and directions. His work is found to be good and complete in all respects. During the period we found him hard working, sincere and loyal. We wish him all the best for his future.

    Prof Mahesh Halale. Dr Sharad L. Joshi. (Project Guide) (Director)

  • 3

    ACKNOWLEDGEMENT

    It gives me great pleasure to express my gratitude towards all the individuals who have directly or indirectly helped me in completing this project. First of all I am extremely grateful to Mr. Anant Bhave, Vice President (Accounts and Finance Project), Kalyani Steels Ltd, for providing me integrating project in finance for sixty days. I would like to express my sincere gratitude to my company guide Mr. Rajiv Toye, Associate Vice President (Accounts and Finance), Kalyani Steels Ltd for his invaluable guidance during the project period which helped me in completing the project successfully. I also extent my special thanks to Mr. Anand Shirsat (Asst Personnel Manager), Kalyani Steels Ltd.

    I wish to express my sincere thanks to our Director Dr. Sharad Joshi and my project guide Prof Mahesh Halale for providing me valuable guidance & inputs which helped me to complete this project in true sense.

    I also extend my thanks to all the staff of Finance department of Kalyani Steels Ltd. for their support, which helped me a lot in completing the project.

    Lastly my ingenious thanks to all my colleagues and friends for their kind co-operation and help.

    Ketan Shetti (MBA-II)

  • 4

    CONTENTS

    Sr. No. Topic Page No.

    1. EXECUTIVE SUMMARY 1

    2. OBJECTIVE AND SCOPE OF PROJECT 2

    3. COMPANY PROFILE 3

    4. THEORETICAL BACKGROUND 14

    5. RESEARCH METHODOLOGY 26

    6. RATIO ANALYSIS AND PRESENTATION 27

    7. CONCLUSION 46

    8. BIBLIOGRAPHY 47

    9. ANNEXURE 1 48

    10. ANNEXURE 2 49

  • 5

    EXECUTIVE SUMMARY

    This project named An Analysis and Comparative Study of Financial Statements was carried out at Kalyani Steels Ltd to analyze and understand financial feasibility of the company in terms of liquidity, turnover, solvency, profitability etc. by using Ratio Analysis technique.

    I chose to do this project at Kalyani Steels Ltd because it is a leading manufacturer of Carbon and Alloy steels and an important constituent of the over $ 1.2 billion Pune based Kalyani group. The company was established way back in 1973 mainly to cater to in-house requirements of forging quality steels. Over the years the Kalyani Steels

    Ltd is upgrading its technology and infrastructure to justify its mission statement, Better Steel Through Better Technology .

    The Ratio Analysis technique is the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the items of the balance-sheet and the profit and loss account because the figures recorded in the financial statements are absolutely incapable of revealing the soundness or otherwise of a Company s financial position or performance. Thus the technique of Ratio Analysis

    has been used which is supposed to be powerful tool for financial statements.

    In Ratio Analysis technique a ratio is used as a benchmark for evaluating the financial position and the performance of the firm.

  • 6

    OBJECTIVES

    1. To obtain a true insight into financial position of the company. 2. To make comparative study of financial statements of different years. 3. To draw the correct picture of the financial operations of the company in

    terms of liquidity, solvency, turnover, profitability etc. 4. To find out the reasons for unsatisfactory results.

  • 7

    COMPANY PROFILE

    The Kalyani Group is one of the leading Industrial Houses in India, having core businesses in Steel and Steel based products, Forgings and Automotive Components. The Group s Annual Turnover is over USD 1.5 billion and has joint ventures with some of the world leaders such as Meritor, USA, Carpenter Technology Corporation, USA, Hayes Lemmerz, Germany, Faw Corporation, China etc. Bharat Forge Limited, the flagship company of the group is the 2nd largest forging company in the world and the largest domestic player with a share of 80% in axle components and engine components.

    Bharat Forge Ltd., the flagship company of the US $ 1.5 billion Kalyani Group, is a 'Full Service Supplier' of engine & chassis components. It is the largest exporter of auto components from India and leading chassis component manufacturer in the world.

    With manufacturing facilities spread over 9 locations and 6 countries - two in India, three in Germany, one in Sweden, one in Scotland, one in North America and one in China, the company manufactures a wide range of safety and critical components for passenger cars, commercial vehicles and diesel engines. The company also manufactures specialized components for the railway, construction equipment, oil & gas and other industries. It is capable of producing large volume parts in both steel and aluminium.

    Bharat Forge has built up a strong capability in design and engineering, including a full fledged product testing and validation facility, which gives Bharat Forge a Full Service Supply Capability - from product conceptualization to designing to manufacturing and product testing & validation

  • 8

    Apart from Bharat Forge Ltd., the other major companies in the group are Kalyani Steels, Kalyani Carpenter Special Steels, Kalyani Lemmerz, Automotive Axles,

    Kalyani Thermal Systems, BFL Utilities, Kalyani Net Ventures, Epicenter and Synise Technologies.

    The Kalyani Group's vertical integration, with upstream steel making and downstream machining coupled with international competitiveness at every step, benefits our customers in terms of :

    World Class Technology

    High Quality

    Partnership

    Apart from Kalyani Steels, the 2000 cr. Pune based Kalyani Group encompasses

    Bharat Forge - The flagship company of the group was established in 1961. It is the largest forging company in Asia and one of the three largest and most technologically advanced commercial forge shops in the world. Bharat Forge manufactures a wide range of forgings and machined components for automotives, diesel engines, railways, earthmoving, cement, sugar, steel, coal, ship building and

    oilfield industries.

    Kalyani Brakes Ltd. - Established in 1982, when the automative revolution in India was about to take-off, Kalyani Brakes Ltd.(KBX) is today, a leading manufacturer of brakes in the country. Kalyani Brakes is a joint venture between Robert Bosch, Germany- a Fortune 500 company, and world leader in brake systems, Nippon Air Brake Co. Ltd. of Japan and the Kalyani Group.

    Kalyani Lemmerz Ltd. - The Kalyani Group had promoted Kalyani Wheels as a part of its diversification plan. At that time they had a collaboration with Lemmerz Werke, Germany. Subsequently, Lemmerz Werke became a joint venture partner and the new company was christened as Kalyani Lemmerz Ltd.(KLL). The company manufactures wheel rims for utility vehicles, light and heavy commercial workers and tractors.

  • 9

    Kalyani Sharp India Ltd. - Was established in 1986 as a joint venture between Sharp Corporation, Japan and the Kalyani Group. It is a leading manufacturer and exporter of

    consumer electronic items from India.

    Kalyani Thermal Systems Ltd. - Established in 1979, this company specializes in design, construction and installation of custom engineered Industrial Heat Processing Systems. To stay apace with the latest technology, the company has a technical tie-up

    with Flinn & Dreffein Engineering Co., USA

    Mr. B. N. Kalyani Chairman, Kalyani Group

    The corporate philosophy of the Chairman of the Kalyani Group, Mr. B.N. Kalyani is, "To use our specialized skills and innovative technology to contribute to the welfare of the society. It is our intention to grow with our employees and to aid and encourage them to participate in our goals in order that they realize their full potential. Our prosperity is linked to the prosperity of our customers".

    Kalyani Steels Ltd. was established in 1973, to fulfill the in-house requirements of forging quality steel of the Kalyani Group. It's corporate office is in Pune. Over the

    years, Kalyani Steels has been continuously upgrading its technology and infrastructure. The first such technology update was implemented through a technology tie-up with AICHI Steels of Japan.

  • 10

    Although the forging industry in India is the primary market for the company's products, manufacturers of various components for commercial vehicles, two-wheelers, diesel engines, bearings, tractors, turbines, railways and seamless tubes (oil sector) also form a substantial part of the company's clientele.

    In 1997, the Kalyani Group entered into product sharing with Mukund Ltd. to set up a new plant in the Hospet-Bellary region of Karnataka state.

    At present the products for the KSL are manufactured at its Hospet plant which employs a new facility using less power intensive mini-blast furnace route, provided by Tata Korf-Korf Technology of Brazil. In 1999, the KSL plant in Pune was hived off to KCSSL (Kalyani Carpenter Special Steels Ltd.).

    Kalyani Steels commissions its first 7.5 MW Captive Power Plant

    The plant to generate power equivalent to # 52 million units per annum

    Kalyani Steels Limited, a leading manufacturer of Carbon and Alloy Steels and a part of the over $ 1.2 billion Kalyani Group has commissioned its 7.5 MW capacity Power Plant.

    A company that uses blast furnaces for producing steel has set up the plant for captive consumption by using blast furnace gas generated by its mini blast furnaces. The virtue

    of heat content is utilized to generate electric power.

    The projected power requirement of the integrated steel plant is more than 120 Million units per annum. Setting up our own power plant gives us the advantage to be in a position to control costs and generate power economically. It will reduce reliance on the state electricity grid as well as bring down the input cost of steel production and

    increase the competitiveness of the end products.

  • 11

    The plant has been commissioned at Hospet and will generate power equivalent to approximately 52 Million units per annum.

  • 12

    PRODUCTS

    The various products of Kalyani Steels Ltd. include :

    PRODUCTS GRADES (As per Indian & Various International Standards) :

    CARBON AND ALLOY STEELS (Automobile sectors) 1. Carbon Steels

    A. Forging

    B. Boilers

    C. Auto

    2 wheeler

    Cars

    Tractors

    D. Seamless tube E. Exports

    Transmission

    2. Low Alloys

    A. Forging

    B. Auto

    2 wheeler

    4 wheeler

    C. Seamless tube 3. High Alloys

    A. Forging

    B. Auto

    Heavy engineering

    SPRING STEELS

    BALL BEARING STEELS

  • 13

    ANY OTHER SPECIAL GRADES OF STEEL

    AS PER CUSTOMER'S REQUIREMENTS

    Primary Aluminium smelters cathode/Anode steel bars.

    SIZE RANGE

    AS CAST PRODUCTS

    BILLETS : 120 x 120 mm, 160 x 160 mm & 180 x 180 mm Squares

    BLOOMS : 240 x 280 mm, 280 x 320 mm Rectangle

    ROUNDS : 160, 200, 220 mm Dia Rounds

    AS ROLLED PRODUCTS

    ROUNDS : 83, 85, 100, 105, 110, 125, 130 mm

    RCS : 75, 95, 100, 115, 120, 125, 140, 160 mm

    ANY OTHER SIZE MUTUALLY AGREED.

    STEELS GRADES

    CATEGORY AISI/SAE

    DIN B.S. JIS

    1010 CK10 EN2A S10C

    1015 CK15 EN32B S15C

    1025 CK25 EN3B S25C

    PLAIN CARBON STEEL

    1035 CK35 EN8,EN8A S35C

  • 14

    1045 CK45 EN43B S45C

    1055 CF53 EN9 S55C

    1065 C60 EN43D S58C

    1541 28Mn6 EN15 SMn420H

    40Mn4

    SMn433H

    CARBON- Mn STEEL SEMI FREE CUTTING

    STEEL 1137,1141

    EN15AM SMn443H,SUM41

    1541 16MnCr5

    SCR415,SUM420 CHROME+MANGENSE STEEL

    20MnCr5

    CHROME+NICKEL STEEL

    3120 15CrNi6 EN352

    8620

    En353,EN354

    SNCM420H

    4320 17CrNiMO6

    EN36C,EN

    LOW CARBON

    CHROME+NICKEL MOLY STEEL

    361,362,363

    5130 34Cr4 EN18A,EN18C

    SCR435 CHROME STEEL

    5140 41Cr4

    SCR440

    4130 25CrMO4 EN19C SCM440H

    4135 34CrMO4

    SCM435,SCM420

    CHROME+ MOLY STEEL

    4140 42CrMO4

    MEDIUM CARBON

    CHROME+NICKEL+MOLY

    STEEL

    4340 -- EN24 SNCM431,SNCM439

    SNCM447

    SAE52100

    100Cr6 En31 SUJ1,SUJ2 etc BEARING STEEL

    SAE5160

    -- EN45A SUP6,SUP9,SUP11

  • 15

    SIZES :

    As Cast : 120 X 120, 160 X 160 , 240 X 280 mm

    : 160 mm dia,200 mm dia. ,220 mm dia.

    As Rolled Rounds : 80,83,90,100,105,110,125,130 dia.

    As Rolled Rounded Corner Squares (RCS)

    : 75 ,90,95,100,115,125,140,160& 180 mm RCS

  • 16

    KALYANI STEELS LTD FACILITIES:

    EQUIPMENT TECHNOLOGY QUALITY BENEFITS

    1. MINI BLAST FURNACE KORF TECHNOLOGIA

    - Lower Tramp Elements

    (2 Nos. x 250 Cu.M) SIDERURGICA LTDA.,

    - Consistent input to EOF

    Brazil

    2. ENERGY OPTIMISING KORF TECHNOLOGIA

    - Lower Gas Levels(N2)

    FURNACE SIDERURGICA

    LTDA., - Predictable Tapping

    Brazil Chemistry

    3. LADLE REFINING ASEA BROWN - Chemical Homogeneity FURNACE WITH CORED

    BOVERI, - Narrow Hardenability WIRE INJECTION Sweden Band (2 No. x 40/45 MT)

    - Finer & more consistent

    Grain size

    4. VACUUM DESAGGING ALD VACUUM - Low O2, H2, N2 levels (1 No. x 40/45 MT) TECHNOLOGY - Lower Inclusions Vacuum of 1 m bar in Germany - Improved Chemical 3 minutes

    Homogeneity

    5. CONTINUOUS CASTING TECHINT,

  • 17

    - 1 No. x 2 Strand (Pomini Group) Bloom/Round Italy - Bloom Caster capable of

    Casting Blooms & Rounds

    10/18 M radius

    - 1 No. x 3 Strand Billet

    Caster -9/16 M radius

    - Fully Shrouded Casting

    - Low pick up of N2, O2 - Combi Electro Magnetic

    - Reduced level of Stirrer (Mould & Strand)

    segregation & more

    equiaxed grains - Automatic Mould Level

    - Avoids entrapment of Control

    Mould Flux resulting in

    lower macro inclusions

    - T-Shape Tundish

    - Reduction in inclusions

    due to improved floatation

    6. BLOOM / INGOT BENDOTTI - Top & Bottom fired REHEATING FURNACE Italy More uniform 35 T/Hr Pusher Type,

    temperature

    Oil Fired

    7. ROLLING MILL DANIELI - Strict dimensional 750mm 2-High Blooming Italy tolerances Mill

  • 18

    THEORITICAL BACKGROUND

    MEANING OF RATIO: - A ratio is a simple arithmetical expression of the relationship of one number to another. According to Accountants Handbook by Wixon Kell and Bedford, a ratio is an expression of the quantitative relationship between two numbers . In short it can be defined as the indicated quotient of two mathematical expressions. The ratios can be expressed in 1) Percentages 2) fraction and 3) Proportion of numbers.

    MEANING OF RATIO ANALYSIS: - Ratio Analysis is a technique of analysis and interpretation of financial statements. it is defined as the systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performances and current financial condition can be determined. There are a number of ratios which can be calculated from the information given in the financial statements, but the analysts has to select the appropriate date and calculate only a few appropriate ratios from the same keeping in mind the objectives of analysis.

    The following four steps involved in the ratio analysis: -

    1. Selection of relevant data from financial statements depending upon financial analysis.

    2. Calculation of appropriate ratios.

    3. Comparison of the calculated ratios of the same firm in the past or the ratios developed from projected financial statements to the ratios of some other firms or the comparison with ratios of the industry to which firm belonged.

    4. Interpretation of ratios.

  • 19

    INTERPRETATION OF RATIOS: -

    The interpretation of ratios is an important factor. Though calculation of ratios is

    also important but it is only a clerical task whereas interpretation needs skill, intelligence and foresightedness. The impacts of factors such as price level changes, change in accounting policies, window dressing etc should be kept in mind when attempting to interpret ratios. The interpretation of ratios can be made in following ways: -

    1. Intra firm comparison: - Here the ratios of one organization may be compared with the ratios of the same organization for the various years either the previous

    years or the future years.

    2. Inter firm comparison: - The ratios of one organization may be compared with the ratios of the other organization in the same industry and such comparison will be meaningful as the various organization, in the same industry may be facing similar kinds of financial problems.

    3. The ratios of an organization may be compared with some standards, which may be supposed to be the thumb-rule for the evaluation of the performance.

    CLASIFICATION OF RATIOS: - The ratios may be classified under various ways, which may use various criterions to do the same. However for the convenience purpose, the ratios are classified under following groups.

    1. Liquidity group 2. Turnover group

    3. Profitability group 4. Solvency group and 5. Miscellaneous group

  • 20

    LIQUIDITY GROUP: The ratios computed under this group indicate the short-term position of the organization and also indicate the efficiency with which the working capital is being used. Commercial banks and short-term creditors may be basically interested in the ratios falling under this group. Two most important ratios may be calculated under this group.

    1) Current Assets: - It is calculate as, Current Assets Current Liabilities

    Current ratio indicates the backing available to current liabilities in the form of current assets. In other words, higher current ratio indicates that there are sufficient assets available with the organization, which can be converted in the form of cash. A current ratio of 2:1 is supposed to be standard and ideal.

    2) Liquid Ratio or Acid Test Ratio: - It is calculated as, Liquid Assets

    Liquid Liabilities

    Here liquid assets include all assets except inventory and p/p exps and liquid liabilities except overdraft or cash credit or o/s exps. Liquid ratio indicates the backing available to liquid liabilities in the form of liquid assets. The term liquid assets indicate the assets, which can be converted in the form of cash without any reduction in the value. Almost immediately whereas the term liquid liabilities which are required to be paid almost immediately. In other words, a higher liquid ratio indicates that there are sufficient assets available with the organization, which can be converted in the form of cash almost immediately to pay off those liabilities, which are to be paid off almost immediately. As such higher the liquid ratio better will be the situation. A liquid ratio of 1:1 is supposed to be standard and ideal.

  • 21

    TURNOVER GROUP:

    Ratios computed under this group indicate the efficiency of the organization to use the various kinds of assets by converting them in the form of sales. Under this group the following classification of ratios are made.

    1) Fixed Assets Turnover Ratio: - It is calculated as, Net Sales

    Fixed Assets

    A high fixed assets turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in fixed assets. It indicates that the fixed assets are turned over in the form of sales more number of times.

    2) Current Assets Turnover Ratio: - It is calculated as, Net Sales

    Current Assets

    A high current assets turnover ratio indicates the capability of the organization to achieve maximum sales with the maximum investment in current assets. It indicates that the current assets are turned over in the form of sales more number of times.

    3) Working Capital Turnover Ratio: - It is calculated as, Net Sales

    Working Capital

    A high working capital turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in the working

    capital. It indicates that working capital is turned over in the form of sales more number of times.

    4) Inventory or Stock Turnover Ratio: -

  • 22

    It is calculated as, Cost of Goods Sold

    Avg. Inventory

    A high inventory turnover ratio indicates that maximum sales turnover is achieved with the minimum investment in inventory. As such as a general rule, high inventory turnover ratio is desirable.

    5) Debtors Turnover Ratio: - It is calculated as, Net Credit Sales

    Closing Sundry Debtors

    This ratio indicates the speed at which the sundry debtors are converted in the form of cash. However the intention is not correctly achieved by making the calculation in this way. As such this ratio is normally supported by the calculation period, which is calculated as below.

    a) Calculation of Daily Sales: - It is calculated as, Net Credit Sales

    No of Working Days

    b) Calculation of Collection Period: - It is calculated as, Closing Sundry Debtors

    Daily Sales

    The average collection period as computed above should be compared with the normal credit period extended to the customers. If the average collection period is more than the normal credit period allowed to the customers, it may indicate over investment in debtors which may be the result of over extension of credit period, liberalization of credit term, ineffective collection procedure and so on.

  • 23

    6) Capital Turnover Ratio: - It is calculated as, Sales Capital Employed

    This ratio indicates the efficiency of the organization with which the capital employed is being utilized. A high capital turnover ratio indicates the capability of the organization to achieve maximum sales with minimum amount of capital employed. As such higher the capital turnover better will be the situation.

    SOLVENCY GROUP

    Ratios computed under this group indicate the long-term financial prospects of the company. The shareholders debenture holders and other lenders of long-term finance/ term loan may be basically under this group. Following ratios may be computed under this group.

    1) Debt-equity Ratio: - It is calculated as, External Liabilities . Shareholders Fund

    Debt-equity ratio indicates the state of shareholders or owners in the organization vis--vis that of the creditors. It indicates the cushion available to the creditors on liquidation of the organization. A high debt-equity ratio may indicate that financial status of the creditors is more than that of the owners. A very high debt-equity ratio may make the proportion of investment in the organization a risky one. On the

    other hand a very low debt equity rate may mean that the borrowing capacity of the organization is being underutilized.

  • 24

    2) Proprietary Ratio: - It is calculated as, Total Assets

    Owners Fund

    This ratio indicates the extent to which the owner s funds are sunk in different kinds of assets. If the owner s fund exceeds fixed assets, it indicates that a part owners fund invested in the current assets also and if owners fund are less than fixed assets it indicates that the creditors finance a part of fixed assets either by long term or short term.

    3) Capital Employed Ratio: - It is calculated as, Fixed Assets *100

    Capital Employed

    This ratio indicates the extent to which the long-term funds are sunk in fixed assets.

    4) Interest Coverage Ratio: - It is calculated as, PBIT

    Interest Charges

    This ratio indicates protection available to the lenders of long-term capital in the form of funds available to pay the interest charges i.e. profits. Normally a high ratio will desirable but too high a ratio may indicate underutilization of the borrowing capacity of the organization whereas too low a ratio may indicate excessive long-term borrowings or inefficient operation.

  • 25

    PROFITABILITY GROUP

    1) Gross Profit Ratio: - It is calculated as, Gross Profit *100

    Net Sales

    The gross profit ratio indicates the relation between production cost and sales and efficiency with which the goods are produced or purchased. A high gross profit ratio may indicate that the organization is able to produce or purchase at a relatively lower cost.

    2) Net Profit Ratio: - It is calculated as, Net Profit after Taxes *100

    Net Sales

    The net profit ratio indicates that portion of sales available to the owners after the consideration of all types of expenses and costs either operating or non-operating or normal or abnormal. A high net profit ratio indicates higher profitability of the business.

    3) Operating Ratio: - It is calculated as, Mfg COGS + operating exps*100

    Net Sales

    This ratio indicates the percentage of net sales, which is absorbed by the operating cost. A high operating ratio indicates that only a small margin of sales is available to meet the expenses in the form of interest, dividend and operating exps. As such low operating ratio will always be desirable.

  • 26

    OVERALL PROFITABILITY GROUP

    1) Return on Assets: - It is calculated as, Net Profit *100

    Assets

    Return on assets measures the profitability of the investment in a firm. As such higher return on assets will always be preferred. However Return on assets does not indicate the profitability of various sources of funds, which finance total assets.

    2) Return on Capital Employed: - It is calculated as, Net Profit after taxes+Int on Long Term Loans*100 Capital Employed

    Return on capital employed measure4s the profitability of the capital employed in the business. A high return on capital employed indicates a better and profitable use of long-term funds of owners and creditors. As such a high return on capital employed is preferred.

    3) Return on Shareholders Funds: - It is calculated as, Net Profit after Taxes*100

    Total Shareholders Funds

    This ratio indicates the profitability of a firm in relation to the fund supplied by the shareholders

  • 27

    MISCELLANEOUS GROUP

    1) Capital Gearing Ratio: - It is calculated as, Fixed income-bearing securities

    Equity Capital

    A high capital-gearing ratio indicates that in the capital structure, fixed income bearing securities are more in comparison to the equity capital in that case the Company is said

    to be highly geared. On the other hand, if fixed income-bearing securities are less as compared to equity capital the company is said to be lowly geared.

    2) Earning Per Share: - It is calculated as, Net Profit after tax and dividend

    Number of equity shares o/s

    It is widely used ratio to measure the profit available to the equity shareholders on a per share basis. As such increasing Earning Per Share may indicate the increasing trend of current profits per equity share.

    3) Dividend Payout Ratio: - It is calculated as, Dividend Per Share *100

    Earning Per Share

    It measures the relationship between the earnings belonging to the equity shareholders and the amount finally paid to them by way of dividend. It indicates the policy of management to pay cash dividend.

  • 28

    ADVANTAGES OF RATIOS

    1. Ratios simplify the comprehension of financial statements. They tell the whole

    story as a heap of financial data is condensed in them. They indicate the changes in the financial condition of the business.

    2. They act as an index of the efficiency of enterprise. As such they serve as an instrument of management control. It is an instrument for diagnosis of the financial health of an enterprise. The efficiency of the various individual units similarly situated can be judged through inter-firm comparisons.

    3. The ratio analysis can be if invaluable aid to management in the discharge of its basic functions of forecasting, planning, co-ordination, communication and control. A study of the trend of strategic ratio may help the management in this respect. Past ratios indicate trends in cost, sales, profit and other relevant facts.

    4. The ratio analysis provides data for inter-firm comparison or intra-firm comparison. Comparison cannot be made with absolute figures. Net profit of one firm cannot be compared with the net profit of the other firm. But the percentages of net profits can be compared to evaluate the performance. Similarly performance and efficiency of different departments in the same firm can be compared with the help of ratios.

    5. Investment decisions can at times be based on the conditions revealed by certain ratios.

    6. They make it possible to estimate the other figure when one figure is known.

  • 29

    LIMITITIONS OF RATIO ANALYSIS

    Though ratio analysis technique has got number of advantages, it attracts equal number of disadvantages too. Some of important advantages are as follows:

    1) The ratios of the other organization May not be readily available. 2) Different accounting policies may be followed by the constituent organization

    in the industry. 3) The constituent organization in the same industry may vary from each other in

    terms of age, location, extent of automation, quality of management and so on 4) The technique of ratio analysis may prove to be inadequate in some situation if

    there is difference of opinions regarding the interpretation of certain items while computing certain ratios.

    5) As the ratios are computed on the basis of financial statements, the basic limitation, which is applicable to the financial statements, is equally applicable in case of the technique of ratio analysis also.

    Thus the ratio analysis points out the financial condition of business whether it is very strong, good, questionable or poor and enables the management to take necessary steps.

  • 30

    RESEARCH METHODOLOGY

    1) DATA COLLECTION

    a) Primary Data: - Primary data related to the project was collected from the discussion and interaction with the senior employees and executives in the organization from Accounts and Finance department.

    b) Secondary Data: - Secondary data was collected from the documents, which were in printed forms like annual reports, pamphlets, reference books based on Financial Management and through websites.

    METHODOLOGY FOR ANALYSIS

    The methodology opted for carrying out project was by way of collection of data from the company s annual reports for the past three years i.e. from 2003-2004 to

    2005-2006, for the calculation of ratios. The theory related to ratios was gathered from various financial management books, which served the purpose of calculation and analysis of ratios. Further based on the above statements ratios related to liquidity, turnover, solvency, profitability and over profitability groups and miscellaneous groups have been calculated and interpreted in an intra firm comparison method. Similarly the ratios have been presented in graphical format to have clear understanding of it during three financial years and changes in it.

  • 31

    RATIO ANALYSIS

    LIQUIDITY GROUP 1) Current Ratio: -

    Current Ratio

    1.45 1.561.82

    0

    0.5

    1

    1.5

    2

    2003-2004 2004-2005 2005-2006

    Financial year

    Significance: - This ratio is calculated for knowing short term solvency of the organization. This ratio indicates the solvency of the business i.e. ability to meet the liabilities of the business as and when they fall due. The Current Assets are the sources from which the current liabilities are to be met. Certain authorities have suggested that in order to ensure solvency of a concern current assets should be twice the current liabilities and therefore this ratio is known as 2:1 ratio . However it depends upon

    Formula 2003-2004 2004-2005 2005-2006

    Current Assets/Current

    Liabilities

    1.45 1.56 1.82

  • 32

    the nature of industry. The standard Current Ratio applicable to the Indian industries is 1.33:1. Here the Current Ratio of Kalyani Steels Ltd indicates that it has got sufficient assets to pay off short term liabilities as and when they fall due. The company has maintained its short term solvency through out the years and it is improving its short term solvency status which is appreciable.

    2) Acid Test Ratio: -

    Acid Test Ratio

    1.17

    1.24

    1.35

    1.051.1

    1.151.2

    1.251.3

    1.351.4

    2003-2004 2004-2005 2005-2006

    Financial Years

    Significance: -

    This ratio serves as a realistic guide to the short term solvency of the company. It is a measure of the extent to which liquid resources are immediately available to meet current obligation. In so far as it eliminates inventories as part of

    Formula 2003-2004 2004-2005 2005-2006

    Liquid Assets/Liquid Liabilities

    1.17 1.24 1.35

  • 33

    current ratio, this is a more rigorous test of liquidity than the Current Asset Ratio and when used in conjunction with it, gives a better picture of the firms ability to meet its short term debts out of its short term assets. An Acid Test Ratio of 1:1 is considered to be ideal and standard. Here the Acid Ratios of Kalyani Steels Ltd through out the years considered indicates that it has adequate assets which can be converted in the form of cash almost immediately to pay off those liabilities which are to be paid off immediately. It must be remembered that the company is improving its Acid Test Ratio year by year at a constant rate which is appreciable as such higher the liquid ratio better the situation

    TURNOVER GROUP

    1) Fixed Assets Turnover Group:

    Fixed Asset Turnover Ratio

    2.65

    4.31

    3.12

    0

    1

    2

    3

    4

    5

    2003-2004 2004-2005 2005-2006

    Financial Years

    Formula 2003-2004 2004-2005 2005-2006

    Net Sales/Fixed Assets

    2.65 4.31 3.12

  • 34

    Significance:-

    This ratio measures the efficiency in the utilization of fixed assets. This ratio indicates whether the fixed assets are being fully utilized. It is an important measure of the efficient and profit earning capacity of the business. Normally standard ratio is taken as five times.

    The financial year 2003-04 had not so good fixed asset turnover ratio. The financial year 2004-05 had an appreciable fixed assets turnover ratio indicating fixed assets are turned over more number of times. This was due to around 72% growth in sales. This shows better asset management policy as compared to the past year. The same ratio came down to 3.12 times in the financial year 2005-06 due to fall in sales by around 31.48%.

    2) Working Capital Turnover Ratio: -

    Working Capital Turnover Ratio

    8.63 8.48

    3.33

    0

    2

    4

    6

    8

    10

    2003-2004 2004-2005 2005-2006

    Financial Years

    Formula 2003-2004 2004-2005 2005-2006

    Net Sales/Working

    Capital

    8.63 8.48 3.33

  • 35

    Significance: -

    This ratio signifies achievement of maximum sales with less investment in

    working capital. As such higher the ratio better will be the situation. The financial year 2003-04 and 2004-05 saw excellent ratio as the company was able to achieve maximum sales with less investment in working capital which shows better working capital management policy. It must be remembered that working capital ratio has been increasing through out the years but the financial year 2005-06 failed to maintain the past records due to fall in sales by 31.48%. The year 2005-06 had heavy investments in working capital which shows rise in activity.

    3) Current Asset Turnover Ratio: -

    Capital Asset Turnover Ratio

    2.693.08

    1.5

    00.5

    11.5

    22.5

    33.5

    2003-2004 2004-2005 2005-2006

    Financial Years

    Formula 2003-2004 2004-2005 2005-2006

    Net Sales/Current Assets

    2.69 3.08 1.5

  • 36

    Significance: -

    This ratio indicates capability of the organization in efficient use of current assets. This ratio indicates whether current assets are fully utilized. It indicates the sales generated per rupee of investment in current assets. The financial year 2004-05 had good current asset turnover ratio because it had excellent sales in that year. It must remembered that investments in current assets are increasing year by year at constant rate but the company failed to register growth in sales and its sales fell down by 31.48%.

    4) Capital Turnover Ratio: -

    Capital Turnover Ratio

    1.52

    2.25

    1.29

    0

    0.5

    1

    1.5

    2

    2.5

    2003-2004 2004-2005 2005-2006

    Financial Years

    Significance: -

    Formula 2003-2004 2004-2005 2005-2006

    Sales/Capital Employed

    1.52 2.25 1.29

  • 37

    This ratio indicates whether capital employed is turned over in the form of sales more number of times. As such higher the capital turnover better will be situation.

    The financial year 2004-05 had acceptable ratio because it had better sales as compared to other two years. Due to addition or purchase of fixed assets and heavy investments in working capital due to rise in activity, the capital turnover ratio for 2005-06 came down as compared previous years.

    5) Inventory Turnover Ratio: -

    Inventory Turnover Ratio

    13.99

    1.82

    7.45

    02468

    10121416

    2003-2004 2004-2005 2005-2006

    Financial Years

    Significance: -

    It is an indication of the velocity with which merchandize moves through the business. This is a test of inventory to discover possible trouble in the form of overstocking or overvaluation.

    Formula 2003-2004 2004-2005 2005-2006

    Net Sales/Average Inventory

    13.99 1.82 7.45

  • 38

    A low inventory turnover may reflect dull business, overinvestment in inventory or accumulation of absolute and unsaleable goods. A high inventory turnover indicates relatively lower amount of working capital locked in inventories. The financial year 2003-04 had excellent inventory turnover ratio locking up smaller part of funds in inventory. The company had low inventory turnover ratio for the year 2004-05 thus indicating over investment in inventory but it has improved in the financial year 2006 indicating less investment in inventory.

    SOLVENCY GROUP

    1) Debt-Equity Ratio: -

    Formula 2003-2004 2004-2005 2005-2006

    External

    Liabilities/Shareholders Fund

    1.24 1.39 1.07

    Debt-Equity Ratio

    1.241.39

    1.07

    00.20.40.60.8

    11.21.41.6

    2003-2004 2004-2005 2005-2006Financial Years

  • 39

    Significance: -

    It is a measure of financial strength of a concern. Lower the ratio greater the

    security available to the creditors. A satisfactory current ratio and ample working capital may not always be a guarantee against insolvency if the total liabilities are inordinately large. The purpose of this ratio is to derive an idea of the amount of capital supplied be the owners and of assets cushion available to creditors on liquidation. Generally 1:2 ratio is acceptable, but the ratio of at least 1:1 is desirable as banks even do accept this. The greater the interest of the owners as compared with that of the creditors, the more satisfactory is the financial structure of the business because in such a situation the management is less handicapped by interest charges and debt repayment requirements. A company having a stable profit can afford to operate on a relatively high debt-equity ratio; whereas in the case of a company having an unstable profit, a high debt-equity ratio reflects a speculative situation. Too much reliance on external equities may indicate undercapitalization, whereas too much reliance on internal equities may lead to over-capitalization. All the financial years considered has debt-equity ratio more than 1:1, which is appreciable and acceptable indicating equal amount of interest of the owners as compared with that of creditors.

    2) Proprietary Ratio: -

    Formula 2003-2004 2004-2005 2005-2006

    Total

    Assets*100/Owners

    Fund

    61.38% 51% 56.93%

  • 40

    Propriotary Ratio

    61.3851

    56.93

    010203040506070

    2003-2004 2004-2005 2005-2006

    Financial Years

    Perc

    enta

    ge

    Significance: -

    This ratio is normally a test of strength of credit-worthiness of the concern. To the extent the percentage of liability increase or the percentage of capital dwindles, the credit strength of the concern deteriorates. A high proprietary ratio is however a frequently indicative of over-capitalization and an exercise investment in fixed assets. A low proprietary ratio on the other hand is a symptom of undercapitalization and an excessive use of creditors funds to finance the business. The financial year 2003-04 had good proprietary ratio as it indicates assets are financed to the extent of 69% by the owners funds and the balance is financed by the outsiders. The year 2004-05 had fall in proprietary ratio but in the year 2005-06 the company has improved due to rise in reserve and surplus due to appreciable profits in the last financial year.

  • 41

    3) Capital Employed Ratio:-

    Capital Employed Ratio

    57.5452.27

    41.39

    010203040506070

    2003-2004 2004-2005 2005-2006

    Financial Ratio

    Perc

    enta

    ge

    Significance: -

    Normally a proprietor should provide all the funds required to purchase fixed assets. If the capital employed ratio exceeds 100%, it indicates that the company has used short-term funds for acquiring fixed assets, which policy is not desirable. When the amount of proprietor funds exceeds the value of fixed assets i.e when the percentage is less that 100, a part of the net working capital is supplied by the shareholders, provided that there are no other non-current assets. Though it is not possible to lay down a rigid standard as regards the percentage of capital which should be invested in fixed assets in each industry there always is a maxim which should not be exceeded so that the harmony among the fixed assets, debtors and stock is not disturbed. The ratio should generally be 65%.

    Formula 2003-2004 2004-2005 2005-2006

    Fixed Assets*100/Capital

    Employed

    57.54% 52.27% 41.39%

  • 42

    It should be remembered that all of the financial years studied had cap employed ratio below 65% which also suggest that the company had equally funded for working capital for current assets through long term funds which has been accepted principle of financial management.

    PROFITABILITY RATIOS

    1) Gross Profit Ratio: -

    Gross Profit Ratio

    24.4127

    36.06

    05

    10152025303540

    2003-2004 2004-2005 2005-2006

    Financial Years

    Perc

    enta

    ge

    Significance: -

    This ratio indicates the degree to which selling prices of goods per unit may decline without resulting in losses on operations for the firm.

    Formula 2003-2004 2004-2005 2005-2006

    Gross

    Profit*100/Sales

    24.41% 27% 36.06%

  • 43

    A high gross profit ratio as compared with that of the other firm in the same industry implied that the firm in question produces its products at lower cost. It is a sign of good management. A low gross profit ratio may indicate unfavorable purchasing and make-up policies, the inability of management to develop sales volume, theft, damage, bad maintenance, market reduction in selling prices not accompanied by proportionate decrease in the cost of goods etc. The company is growing at a constant rate as far as gross profit is concerned which is appreciable indicating efficiency in production of goods at relatively lower costs.

    2) Net Profit Ratio: -

    Net Profit Ratio

    2.384.98

    17.07

    02468

    1012141618

    2003-2004 2004-2005 2005-2006

    Financial Years

    Perc

    enta

    ge

    Formula 2003-2004 2004-2005 2005-2006

    Net Profit(after taxes)*100/Sales

    2.38% 4.98% 17.07%

  • 44

    Significance: - This ratio differs from the ratio of operating profits to net sales in as much as it is calculated after adding non-operating incomes, like interest, dividends on investments etc to operating profits and deducting non-operating expenses such as loss on sale of old assets, provisions for legal damage etc. from such profits. The ratio is widely used as a measure of over-all profitability and is very useful to the proprietors. Reading along with the operating ratio it gives an idea of the efficiency as well as profitability of the business to a limited extent. The company has improved its net profits by 6.17 times in the year 2005-06 from the 2003-04 which is appreciable which shows considerable proportion of net sales to the owners and shareholders after all costs, charges and expenses including income tax, have been deducted.

    OVER PROFITABILITY GROUP 1) Return on Assets: -

    Formula 2003-2004 2004-2005 2005-2006

    Net

    Profit*100/Assets

    3.19% 8.95% 17.33%

  • 45

    Return on Asset Ratio

    3.19

    8.95

    17.33

    0

    5

    10

    15

    20

    2003-2004 2004-2005 2005-2006

    Financial Years

    Perc

    enta

    ge

    Significance:-

    The ratio is a measure of the return on the total resources of the business enterprise. It shows how efficiently management has used the funds provided be the creditors and the owners. It can be referred that the financial year 2003-04 had not so good ratio because of high operating expenses. However the company is improving year by year at a constant rate. The financial year 2005-06 had 17.33% as returns on its various resources which is appreciable.

    2) Return on Capital Employed: -

    Formula 2003-2004 2004-2005 2005-2006

    PAT+Int*100/Capital Employed

    3.65% 13.70% 23.86%

  • 46

    Return on Capital Employed

    3.65

    13.7

    23.86

    0

    5

    10

    15

    20

    25

    30

    2003-2004 2004-2005 2005-2006

    Financial years

    Perc

    enta

    ge

    Significance: -

    Return on capital employed measures the profitability of the capital employed in the business. A high business return on capital employed indicates better and profitable use of long term funds of owners and creditors. As such a high return capital employed will always be preferred. The company has rising trend of return on capital employed indicating efficient use of funds of the creditors and owners by the management which is appreciable.

    3) Return on Shareholders Fund: -

    Formula 2003-2004 2004-2005 2005-2006

    PAT*100/Total Shareholders Funds

    5.20% 17.54% 14.22%

  • 47

    Return on shareholders Fund

    5.2

    17.54

    14.22

    0

    5

    10

    15

    20

    2003-2004 2004-2005 2005-2006

    Financial Years

    Perc

    enta

    ge

    Significance:-

    The ratio shows how well the firm used the resources of the owner. This ratio is a measure of the profitableness of an enterprise. The realization of a satisfactory net income is the major objective is being achieved. The financial year 2003-04 had low returns on shareholders fund as compared to next financial years. However the management of the company is improving in

    utilizing the resources of the owner in efficient way.

    MISCELLANEOUS GROUP

    1) Capital Gearing Ratio: -

    Formula 2003-2004 2004-2005 2005-2006

    Eq

    Cap+Res&Sur/Pref Share&Loan Cap

    3.52 3.29 2.04

  • 48

    Capital Gearing Ratio

    3.52 3.29

    2.04

    00.5

    11.5

    22.5

    33.5

    4

    2003-2004 2004-2005 2005-2006

    Financial Years

    Significance: -

    The ratio is a means of analysis of the capital structure. If the proportion of

    preference shares and loan capital is high, or where the proportion of ordinary share capital is low, capital is said to be highly geared and reverse is the position in low gearing. Low gearing indicates that the equity share capital is not paid an adequate return because the profits are swallowed up by the high charges in the form of interest and dividends. Capital gearing signifies the process of maintaining a desired and appropriate gear ratio in an enterprise. When inflationary conditions are expected, high gearing is to be employed and in the period marked by trade depression, low gearing should be employed. Here the company is geared which indicates that it attempts to employ fixed income bearing securities in the capital structure with an intention to increase the earnings of the shareholders.

  • 49

    NOTES FORMING PART OF THE PROJECT REPORT

    1. Debtors for sale of assets has not been considered which has been duly mentioned in the schedules.

    2. While considering long term loans for capital gearing ratio interest accrued on loans has not been considered.

    3. While considering net sales, returns from sales has been deducted from gross sales.

    4. Gross profit is calculated by deducting manufacturing expenses from Net Sales.

  • 50

    CONCLUSION

    The company has strong short term liquidity position as both the liquidity ratios are favorable and appreciable which concludes that company has got sufficient assets to pay off short term debts as and when they fall due.

    The company had excellent turnover of various assets in the year 2004-2005 as the sales rose by 72% indicating better assets management policy. The assets were efficiently employed to generate maximum sales. However for the year 2005-2006 the turnover ratios suffered because of fall in sales by 31.48% and also there was rise in activity as compared to past years. For inventory turnover the year 2004-2005 was crucial as it had minimum investment in different inventories avoiding thus blockage of funds.

    The company has strong solvency position as all the solvency ratios are

    favorable. Debt-equity ratio is favorable indicating equal share of owners and creditors. The working capital ratio indicates the company has funded for working capital through long term funds which represents accepted finance policy. The proprietary ratio indicates around 60% of assets are financed by owners fund which indicates reasonable creditworthiness to the company.

    The company has got excellent gross profit ratio and the trend is rising which is appreciable indicating efficiency in production cost. The net profit for the year 2005-2006 is excellent and it is 6.17 times past year indicating reduction in operating expenses and large proportion of net sales available to the shareholders of company.

    The company has excellent overall profitability ratios indicating effective use of funds provided be shareholders and creditors.

    According to the capital gearing ratio the company is geared by including fixed income bearing securities with an intention to increase the income of shareholders.

  • 51

    BIBLIOGRAPHY

    Following books were referred for carrying out the project: -

    Financial Management M Y Khan/ P K Jain

    Financial Management I M Pandey

    Financial Management S M Inamdar

    Management Accounting M G Patkar

    Annual Reports from 2003-2004 to 2004-2005 of Kalyani Steels Ltd

    Following websites were referred: -

    www.kalyanisteels.com

    www.bharatforge.com

    www.google.com

  • 52

    PROFIT & LOSS ACCOUNT FOR THE LAST 3 YEARS

    2005-2006 2004-2005 2003-2004

    INCOME

    Sales, Gross 7546482590 9230188514 5325946924

    Less: Excise Duty 2107705856 1602250358 738809546

    Net Sales 5438776734 7627938156 4587137378 Power Generated, Captively Consumed 200262113 21778011

    Operating income 89089729 5728128576 56243793 7705959960 57733225 4644870603

    Divestment of interest:

    Profit on sale of long term inv 315272877

    Other Income 29169325 9934647 70991291

    6072570778 7715894607 4715861894

    EXPENDITURE

    Materials consumed & Mfg Exps 3782570647 6302132759 3787655900

    Employees emoluments 170870364 110773625 92360079

    Other exps 537406659 382713027 320722030

    Interest 46227488 76587048 126198161 Int. differentials on restructuring

    of loans 57464408

    Depn & Write Offs 181608637 4718683795 194931431 7067137890 152545583 4536946161

    Profit for the Year 1353886983 648756717 178915733 Less: Trial Rum income net of exp 380128 3571647

    PBT 1353506855 645185070 178915733

    Prov for Taxation

    Current Tax 118300000 48725000 11250000

    Deferred Tax 223432003 266372520 48004325

    FBT 1600000 343332003 215097520 59254325

    PAT 1010174852 430087550 119661408

  • 53

    CONSOLIDATED BALANCE SHEET FOR THE LAST 3 YEARS

    2005-2006 2004-2005 2003-2004 1] Sources of Funds 1) Shareholders Funds a) Capital 420909667 420909667 420909667 b) Reserve and Surplus 2896814903 3317724570 2031416703 2452326370 1876415780 22973254447 2) Loan Funds a) Secured Loans 849696020 1317598093 1395860045 b) Unsecured Loans 105969319 955665339 85981060 1403579153 105116584 1500976629 3) Deferred Tax Adjustments a) Deferred Tax Liabilities 463700909 471447205 541940259 b) Deferred Tax Assets 2342749 461358160 233521048 237926157 470386622 71553637

    Total 4734748069 4093831680 3869855713 2] Application of Funds 1) Fixed Assets a) Gross Block 2893972992 2816968999 2508709521 b) less: Depreciation 997974575 817594121 623522746 c) Net Block 1895998417 1999374878 1885186775 d) Capital WIP Exp to date 95838867 1991837284 104672254 2104047132 404231664 2289418439 2) Investments 911931257 807969286 810719920 3) Current Assets, Loans & advances a) Inventories 999684728 587317212 358171941 b) Sundry Debtors 1103840173 1328572775 906932119 c) Cash and bank Balance 85432259 81082914 161689106 d) Other Current Assets 62037142 55771123 39659941 e) Loans and Advances 1737634738 914667776 579889270

    3988629040 2967411800 2046342377

    Less: Current Liabilities & Provisions a) Liabilities 1833921502 1627367457 1244441874 b) Provisions 323728010 158229081 32183149

    2157649512 1785596538 1276625023 Net Current Assets 1830979528 1181815262 769717345 Total

    4734748069

    4093831680

    3869855713

  • 54

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