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A
PROJECT REPORT
ON
AN ANALYSIS & COMPARATIVE STUDY OF FINANCIAL
STATEMENTS
FORKALYANI 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
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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)
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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)
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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
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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 Punebased 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 thefinancial 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.
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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.
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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 forgingcompany 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
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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
BharatForge - 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.
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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.
Kalyaniis, "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.
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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 mm
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The plant has been commissioned at Hospet and will generate power equivalent to
approximately 52 Million units per annum.
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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
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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
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1045 CK45 EN43B S45C
1055 CF53 EN9 S55C
1065 C60 EN43D S58C
1541 28Mn6 EN15 SMn420H
40Mn4 SMn433H
CARBON- Mn STEEL
SEMI FREE CUTTING
STEEL1137,1141 EN15AM SMn443H,SUM41
1541 16MnCr5 SCR415,SUM420CHROME+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 SCR435CHROME STEEL
5140 41Cr4 SCR440
4130 25CrMO4 EN19C SCM440H
4135 34CrMO4 SCM435,SCM420
CHROME+ MOLY STEEL
4140 42CrMO4
MEDIUM CARBON
CHROME+NICKEL+MOLY
STEEL
4340 -- EN24SNCM431,SNCM439
SNCM447
SAE52100 100Cr6 En31 SUJ1,SUJ2 etcBEARING STEEL
SAE5160 -- EN45A SUP6,SUP9,SUP11
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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
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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)
FURNACESIDERURGICA
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,
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- 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
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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.
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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 group4. Solvency group and
5. Miscellaneous group
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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 AssetsCurrent 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.
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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 SalesFixed 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 thatthe fixed assets are turned over in the form of sales more number of times.
2) Current Assets Turnover Ratio: -
It is calculated as, Net SalesCurrent 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 SalesWorking Capital
A high working capital turnover ratio indicates the capability of the
organization to achieve maximum sales with the minimum investment in the workingcapital. It indicates that working capital is turned over in the form of sales more number
of times.
4) Inventory or Stock Turnover Ratio: -
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It is calculated as, Cost of Goods Sold Avg. Inventory
A high inventory turnover ratio indicates that maximum sales turnover isachieved 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 SalesClosing 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 DebtorsDaily 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.
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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.
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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, PBITInterest 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.
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PROFITABILITY GROUP
1) Gross Profit Ratio: -
It is calculated as, Gross Profit *100Net 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*100Net 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.
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OVERALL PROFITABILITY GROUP
1) Return on Assets: -
It is calculated as, Net Profit *100Assets
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*100Total Shareholders Funds
This ratio indicates the profitability of a firm in relation to the fund
supplied by the shareholders
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MISCELLANEOUS GROUP
1) Capital Gearing Ratio: -
It is calculated as, Fixed income-bearing securitiesEquity 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.
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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.
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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 whetherit is very strong, good, questionable or poor and enables the management to take
necessary steps.
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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 gatheredfrom 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.
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RATIO ANALYSIS
LIQUIDITY GROUP
1) Current Ratio: -
Current Ratio
1.451.56
1.82
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
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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
1.05
1.1
1.15
1.2
1.25
1.3
1.35
1.4
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
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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
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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
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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
2.69
3.08
1.5
0
0.5
1
1.5
2
2.5
3
3.5
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
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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
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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
0
2
4
6
8
10
12
14
16
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
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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
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2003-2004 2004-2005 2005-2006
Financial Years
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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 ascompared with that of creditors.
2) Proprietary Ratio: -
Formula 2003-2004 2004-2005 2005-2006
Total
Assets*100/Owners
Fund
61.38% 51% 56.93%
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Propriotary Ratio
61.38
5156.93
0
10
20
30
40
50
60
70
2003-2004 2004-2005 2005-2006
Financial Years
Percentage
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.
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3) Capital Employed Ratio:-
Capital Employed Ratio
57.5452.27
41.39
0
10
20
30
40
50
60
70
2003-2004 2004-2005 2005-2006
Financial Ratio
Percentage
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
FixedAssets*100/Capital
Employed
57.54% 52.27% 41.39%
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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
24.41 27
36.06
0
5
10
15
20
2530
35
40
2003-2004 2004-2005 2005-2006
Financial Years
Percentage
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%
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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
2.38
4.98
17.07
0
2
4
6
8
10
12
14
16
18
2003-2004 2004-2005 2005-2006
Financial Years
Percentage
Formula 2003-2004 2004-2005 2005-2006
Net Profit(after
taxes)*100/Sales
2.38% 4.98% 17.07%
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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
NetProfit*100/Assets
3.19% 8.95% 17.33%
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Return on Asset Ratio
3.19
8.95
17.33
0
5
10
15
20
2003-2004 2004-2005 2005-2006
Financial Years
Percentage
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%
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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
Percentage
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%
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Return on shareholders Fund
5.2
17.54
14.22
0
5
10
15
20
2003-2004 2004-2005 2005-2006
Financial Years
Percentage
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
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Capital Gearing Ratio
3.52
3.29
2.04
0
0.5
1
1.5
2
2.5
3
3.5
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.
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NOTES FORMING PART OF THE PROJECT REPORT
1. Debtors for sale of assets has not been considered which has been dulymentioned 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.
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CONCLUSION
The company has strong short term liquidity position as both the liquidity ratiosare 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.
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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
http://www.google.com/http://www.bharatforge.com/8/6/2019 IOCL1
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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, CaptivelyConsumed 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 restructuringof loans 57464408
Depn & Write Offs 181608637 4718683795 194931431 7067137890 152545583 4536946161
Profit for the Year 1353886983 648756717 178915733
Less: Trial Rum income net ofexp 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
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