Ratio Analysis IN VISHAKA STEEL PLANT 2011

A STUDY ON 

“RATIO ANALYSIS” IN RASTHRIYA ISPATH NIGAM LIMITED

A project report Submitted in partial fulfillment for the award of the degree of 

“BACHELOR OF BUSINESS MANAGEMENT” MANAGEMENT ” Submitted by

Ms. K .Lalitha Annapurneswari (No: 20723039023) Under the esteemed guidance of  Mr. R. GOPAL RAO Manager (F&A)

DEPARTMENT OF BUSINESS MANAGEMENT T.S.R AND T.B.K DEGREE COLLEGE Visakhapatnam-530013

2007-2010

CERTIFICATE

 This is certify that this project report titled titled the study on Ratio Analysis with reference to RASTHRIYA ISPATH NIGAM LIMITED VISAKHAPATNAM is a bonafide work done by K.LALITHA ANNAPURNESWARI with Regd No:20723039023 under my guidance and supervision and submitted to Andhra University in partial fulfillment for the award of the degree of BBM.

VISAKHAPATNAM DATE:

SRI R. GOPAL RAO, Manager (F&A), RINL (Vizag Steel Plant), Vishakapatnam.

STUDENT’S DECLARATION I, K.LALITHA ANNAPURNESWARI hereby declare that the Proje Project ct repo report rt enti entitle tled d “R “RAT ATIO IO ANALY ANALYSIS SIS” ” with with rega regard rd to RASTHRIYA RASTHRIYA ISPATH ISPATH NIGAM LIMITED LIMITED VISAKHAP VISAKHAPATNA ATNAM M

 , submitted by me

under under the the guid guidan ance ce of Mr. Mr. R.GO R.GOPA PAL L RAO, RAO, Mana Manage ger r (F&A (F&A), ),

VSP of my own work and has not been submitted to any  other University or Institute or published earlier.

Signature of the Student 

K.LALITHA.

 ACKNOWLEDGEMENT 

I would like to forward my sincere thanks and gratitude to Mr. T.UMAMAHESHWARA RAO, corresp T.S. S.R R & T. T.B. B.K K DEGR DEGREE EE AND AND P.G P.G COLL COLLEG EGE E , Mrs. Mrs. V. correspond ondent ent of  T. PADMA, Princ Mr.K.V.RAMANA MANA MURTHI MURTHI , Head Of the Departm rincip ipal al and and Mr.K.V.RA rtment,

Commerce and Management, T.S.R & T.B.K DEGREE & P.G.COLLEGE for allowing me to do this project work. Mr.G.SRINIVASA VASA RAO, Lectur Lecturer er -in-charge -in-charge my My deep gratitude also goes to Mr.G.SRINI

internal guide and faculty in dept. of B.B.M who patiently guided me in completing my  project work.

I would also like to extend my thanks to Mr.R.GOPAL RAO , manager (F&A) who helped me during my training period. I express my sincere thanks to Mr.KOSIREDDI RAJA, Junior Manager, HRD for helping me in obtaining permission for doing project work in RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPATNAM. I would also like extend my gratitude to my parents and friends without whose help and advice this project would not have been possible.

Date:

LALITHA (Signature)

CHAPTERISATION

Chapter

I

Introduction.

Chapte Chapter r II

Steel Steel indust industry ry in India. India.

Chapte Chapter r III

Profile Profile of the Visakha Visakha Steel Steel Plant. Plant.

Chapter IV

Theoretical frame work of Ratio Analysis.

Chapte Chapter r V

Practic Practical al aspect aspects s of Ratio Analys Analysis is in Visakha Steel Plant.

Chapte Chapter r VI

Summar Summary y and sugges suggestio tions ns

INTRODUCTION Steel comprises one of the most important inputs in all sectors of economy. Economy of any country depends on the the strong base of  the iron and steel steel industry. Steel is a versatile material material with multitude of useful proper propertie ties, s, making making it indisp indispens ensabl able e for furthe furtherin ring g and achiev achieving ing contin continual ual growth growth of the econo economymy- be it constr construct uction ion,, manufa manufactu cturin ring, g, infras infrastru tructu cture re or consumables consumables.. The level of steel consumpt consumption’s ion’s has has long been regarded regarded as an index of industrializ industrialization ation and economic economic maturity maturity attained by country. country. Keeping Keeping in view view the the impo import rtan ance ce of stee steel, l, the the inte integr grat ated ed steel steel plan plants ts with with fore foreig ign n collaborations were set up in the public sector in the post-independence era.  The growth of any organization depends on the overall performance such as Production, Marketing, Human resource and Financial performance of the organizati organization. on.

The financial financial performan performance ce of the any organizatio organization n reflects the the

strength, weakness, opportunities and threats of the organization with respect to profits earned, investments, sales realization, turnover, return on investment, net worth of capital. Efficient management of financial resources and deliberate analysis analysis of financial financial results results are pre requisite requisite for success of an enterprise enterprise.. For the achievement of that, Ratio analysis acts as one of the major and important tool tool of effective effective financi financial al manage managemen ment. t.

Every Every organiza organizatio tion n requir requires es ratio

analysis for evaluation of the performances of business.

Strengths and weaknesses: Strengths: •

Land and layout for expansion up to 16mt with proximity to port.

•

Quality producer image.

•

High standing for customer service.

•

Committed work force.

•

Ability to raise funds.

Weaknesses: •

No in-in house key raw materials-iron ore/coal..

•

Lack of level playing field.

•

Single location company-only long products , expose to cyclic markets.

•

Major capital repairs and modernization-nor overdue.

•

High cost of servicing huge equity.

•

Consumption cooking coal contractor at the higher cost in 2008-09.

Opportunities and threats: Opportunities: •

Potential for growth in domestic steel demand-low per capita consumption in India.

•

Huge investment planned in infrastructure in 11th plan.

•

Ease of imports and exports with adjacent up coming gangvaram port(deep draft), VSP and VSPL Threats:

•

High raw material prices and shift of value chain towards raw materials

•

Oligopolistic coal supply side

•

Single iron ore supplier-located in disturbance prone areas

•

Predominant sec ordinarily sector in long products

•

VSP-high earning island

NEED FOR THE STUDY:

 The study concentrates on the financial state of affairs of the company. It involves involves the study of Ratio Analysis. It helps to present a broader picture of the financial financial position of the the Company through through ratios. This helps the the compan company’s y’s succe success ss in meetin meeting g its requir requireme ements nts and produc productio tion n of steel steel in India, which has been supported eventually.

Visakhapat Visakhapatnam nam Steel Plant is a multi-prod multi-product uct steel-manuf steel-manufactur acturing ing unit.  The capital employed employed in a large organizati organization on like VSP is huge; so the effective effective management of this capital is required. For which continuos’ continuos’ monitoring of of the various various operations operations is needed needed for the organization organization.. So in order to achieve achieve its objec objecti tive ves s the the orga organi niza zati tion on with with the the help help of eval evalua uati tion on of ratio ratios s shou should ld implement the best course of action.

Ratio Analysis is useful in the following ways: 1.

Shor Shortt-te term rm and and lon longg-te term rm plan planni ning ng..

2.

Meas Measure uremen mentt and evalua evaluatio tion n of of financ financial ial perfo performa rmance nce..

3.

Stud Study y of fina financ ncia iall tre trends. nds.

4.

Deci Decisi sion ons s maki making ng for for inv inves estm tmen ents ts and and ope opera ratio tions ns..

5.

Diagn iagno osis sis of of fin fina ancia nciall skil skills ls..

Thus a detailed study regarding the Ratio Analysis in Visakhapatnam Steel Plant is to be done to well understand the performance of various Opera Operati tion ons s iden identi tify fy the the shor shortc tcom omin ing g in mana manage geme ment nt and and to sugg sugges estt for for improvement in those areas.

OBJECTIVES OF THE STUDY:

The study is focused with the following objectives:

1. To describe the Organizational Organizational Profile of RINL (VSP)

2. To discuss the significance of the management of ratio analysis in RINL (VSP);

3. To evaluate the ratio analysis management in RINL (VSP) and

4. To summarize and to suggest for the better performance of RINL (VSP).

METHODOLOGY:   There are two general types of data primary data and secondary classified on the basis of purpose of collection or source.

Primary Data: Primary data are those are collected specifically for the resort situ situat atio ion n at hand hand.. Both Both expl explor orat ator ory y and and conc conclu lusi sive ve rese researc arch h situ situat atio ions ns necessitate using a high proportion of primary data. The major sources of  primary data include respondents, analogous and research experiments. Primary sources usually provide more detailed information than the secondary source. This is partly because methods of data collection and the tools used can be tailored more precisely to the informational needs of the researcher.  This also contributes to the flexibility of aliases for the research purpose at hand.

Secondary Data: Secondary data are already published data collected for purposes other than the specific research needs at hand. On the basis of  location of sources, secondary data may again be classified as internal or external data. The data originating with the or available with the organization as a by product of the MIS or the routine reporting system is called internal data data of any any give given n mark market etin ing g rese researc arch h prob proble lem m init initia iall data data coll collect ected ed for for purpose other than that specific problem could be termed internal secondary data.

Secondary data generated out side the organization is termed secondary data and can be collected from a multitude of sources like government publication, trade association publications, official reports, journals and periodicals and public publicati ation on of market marketing ing resear research ch agenci agencies. es. Second Secondary ary data data can also also be though from research an agency through this is a fairly expensive preposition.

For the proposed proposed project the secondary secondary will be collected form annual annual reports reports of the company.

LIMITATIONS OF STUDY:

1.

The major major limita limitatio tion n is the short short span span avail availabl able e for for the the stud study. y.

2.

Relia Reliabil bility ity on usage usage of of seco seconda ndary ry dat data a is anothe anotherr limit limitati ation. on.

3. Some Some aspec aspects ts of fina financ ncia iall info inform rma ation tion are are held held due due to confi confide dent ntia iall lly y of the company. 4. Ther There e was no scope scope of gath gather erin ing g curren currentt inform informat atio ion, n, as the audit auditin ing g has not been done by the time of project work.

Industry PROFLE in India Iron had occupied an important place in the service of mankind, Not only in India but also abroad. abroad.

From From time immemorial immemorial steel steel is in dispensable dispensable to modern modern civilization civilization in

peace and war. In order to Understand the background of the entry of iron and steel into the public Sector in India, it would be desirable to trace it briefly, the history of iron And steel making in India through the centuries.

The development of steel industry in India should be viewed in conjunction With the type and system of government government that had had been ruling the country. The production of steel in significant quantity started after 1900. The growth of steel Indu Indust stry ry can be conv conven enie ient ntly ly stud studie ied d by divi dividi ding ng the the peri period od into into pre pre &pos &postt Independence era (or before before 1950 & after 1950). 1950). The total installed capacity for in-got steel production during pre-independence era was 1.5 million tones/year, which has has risen to about about 8 million million tones of ingot ingot by the seventies seventies.. This is the the result of the bold steps taken by the government to develop this sector.

The growth in chronological order is as follows: 1830

-

Josiah Marshall Health Health constructed constructed the the first Manufacturing plant at pot in Madras Presidency

1874

-

James Erskin Founded the Bengal Iron Works.

1899

-

Jamshedji Tata initiated the scheme for an Integrated steel plant

1906

-

Formation of TISCO

1911

-

Tata Iron & Steel Company started production

1916

-

TISCO was founded.

1944

-

1951-56

-

Formation of mysore iron.

First Five-Year Plan

No new Steel Plant came up. The Hindustan Steel Ltd. (HSL) was born on 19 January January,, 1954, with with the decision decision of setting up three steel steel plants each with one million tone input steel per year at Rourkela, Bhilai and Durgapur,  TISCO stated its expansion programmed. th

1956-61

-

Second Five-Year Plan

A bold decision was taken up to increase the ingot steel output India to 6 million tones per year and production at Rourkela, Bhilai and Durgapur Steel Plants started. 

1961-66 -

Third Five-Year Plan

During the Third five-year Plan the three steel plants under HSL,  TISCO & HSCO were expanded as shown. 

Original

Expanded

(MT/Year)

(MT/Year)

Rourkela

1.0

1.8

Bhilai

1.1

2.5

Durgapur

1.0

1.6

TISCO

1.0

2.0

HSCO

0.5

1.0

Steel Plant

1966-69-Recession period:

The entire expansion expansion programmes programmes was actively executed executed during the period .

1969-74- Fourth Five-Year Plan Salem Steel Plant started.  Licenses were given for setting up of many mini Steel plants and rerolling mills.

Govt.of Govt.of India accepted setting setting up two more steel plants in South: One each at Visakhapatnam Visakhapatnam

(Andhra Pradesh) and Hospet (Karnataka). SAIL was formed during the period on 24 th January 1973. The total installed capacity from 6 integrated plants was 106 106 MT.

1979

-

Annual Plan

  The The erst erstwh whil ile e Sovi Soviet et Unio Union n agre agreed ed to help help in sett settin ing g up the the Visakhapatnam Visakhapatnam Steel Plant. 

1980-85 -

Fifth-Year Plan

Work on Visakhapatnam Visakhapatnam Steel Plant was started with a big bang and top priority was accorded to start the plant.  Scheme for modernization of Bhilai Steel Plant, Rourkela, Durgapur Steel Plant and TISCO were initiated. 

1985-91 -

Seventh Five-Year Plan

Expansion work of Bhilai and Bokaro Steel Plants completed  Prog Progre ress ss on Visa Visakh khap apat atna nam m Stee Steell Plan Plantt pick picked ed-u -up p and the the rationalized concept has been introduced to commission the plant with 3.0MT liquid steel capacity by 1990. 

1991-96 -

Eighth Five-Year Plan

Visakhapatnam Steel Plant started its production Modernization of  other steel plants is also duly envisaged.



1997-2002

-

Ninth Five-Year Plan



Visakhapatnam Steel Plant had foreseen a 7%

Growth during during the entire entire plan plan period.

2002-2007

-

Tenth Five-Year Plan

Steel industry industry registers registers a growth growth of 9.9%. Visakhapat Visakhapatnam nam



Steel Plant has high regime targets and achieved the best of them. 2007-2009 

Eleventh Five-Year Plan

Huge investment plan in infrastructure

Out look:   The The Stee Steell comp compan anie ies s in Indi India a are are look lookin ing g up amid amidst st a toug tough h the the glob global al competition when the market is crisis-crossed with a variety of tariff and nontariff barriers. The dexterity with which the Indian exporters diversified their markets, modified the composition of their export basket to suit the changing

global demands and affected reduced production costs by adopting the stateof-the of-the-ar -artt techno technolog logies ies provid provides es ample ample testim testimony ony to the maturi maturity ty of this this indust industry. ry.

From From a highly highly protec protected ted inwardinward-loo lookin king g enterp enterpris rise e of the pre-

libera liberaliz lizati ation on years, years, it has turned turned into into a modern modern and and global globally ly integr integrate ated d industry industry in an astonishing astonishingly ly short span of time. The economic economic reforms reforms have brought with it immense opportunities for market-led growth of this industry, once a symbol of state control.

On the supply side, deregulation meant access to domestic private capital and low-cost overseas funds, advanced technology technology and cheap inputs. inputs. On the demand side, the new policy regime meant opportunities to sell steel in an expanding domestic market and, most importantly, in the large international marts. The Indian Indian steel steel industr industry y is at an importan importantt junctu juncture re today. today.

The global global

stre streng ngth then enin ing g of the the mark market et,, the the pote potent ntia iall grow growth th in dome domest stic ic stee steell consumption and the global shortage of critical raw materials like iron ore and scrap have raised issues like the need to further boost in the production capacities of the plants by modernization, creation of a strong base of raw materials and industry-specific development of the infrastructure.  The Government has been fostering a harmonious growth of the industry on the principles of competitiveness and economic efficiency. It has also also paid the highest attention to help the industry in overcoming structural rigidities within the sector, remove scarcities of essential inputs, develop infrastructure and and remo remove ve the the mark market et-d -dis isto tort rtin ing g force forces s comm common only ly expe experi rien ence ced d by the the developing countries in the course of industrialization. industrialization. The industry is being protected from unfair competition from domestic and overseas sources.

Innovation:   The Govern Government ment propose proposes s to bring in a new steel policy. policy. It would define define the framework of government action in each relevant area as also to create ground conditions for private private sector initiative wherever wherever possible. possible. The Ministry of Steel Steel has stri strive ve to prov provid ide e an effe effect ctiv ive e inte interf rfac ace e betw betwee een n he indus industr try y and and the the vari variou ous s economic agencies like government departments, financial institutions, providers of  input materials and essential services and multilateral agencies.

  The The stee steell indu indust stry ry’s ’s grow growth th and and deve develo lopm pmen entt traj trajec ecto tory ry will will be heav heavil ily y dependent on its ability t mobilize the necessary resources for investment in the coming years. Till recently, when when the steel industry was passing passing through one of the the most most turbul turbulent ent phase phases, s, even even the strong strong compa companie nies s in the indust industry ry would would have have encountered difficulty difficulty in mobilizing financial resources resources from the capital market. The perceived risks that hindered the industry’s resource mobilization efforts are now being replaced by a general general feel good factor. factor. This will help the industry significantly. significantly.  The turn-around in the industry has come at a very Opportune time   The The Indi Indian an stee steell indu indust stri ries es cont contin inue ue to rema remain in focu focuse sed d on the the emer emergin ging g opportunities in the world world market. China is offering great great opportunities to the Indian industry. Despite the massive massive growth in steel steel output in China, there there will always be opportunities for for the Indian exporters. exporters. The international international business has to be carried carried out out cons consis iste tent ntly ly..

Else Else the mark market et will will be lost lost at the firs firstt sign sign of a down downtu turn rn..

 The Indian steel industry has come a long way from the days of control and strives strives to remain globally globally competit competitive. ive. This is the age of technology technology and we have the requisite resources to the lead in take the steel sector.

PROFILE OF VISAKHAPATNAM STEEL PLANT Introduction: Steel occupies the foremost place among the materials in use today and pervad pervades es all walks of life.

All key discover discoveries ies of human human genius, genius, for instan instance, ce,

Steam Engine, Railway, means of Communication and Connection, Automobile, Aero Plane and Computers are in one way or other, fastened together with Steel and its sagacious and Multifaceted applications. Steel is versatile material with multitude of useful properties, making it indispensable for furthering and achieving continual growth of economy be it Construction, manufacturing, infrastructure or consumables. The level of steel cons consum umpt ptio ion n has has long long been been rega regard rded ed as an inde index x of indu indust stri rial aliz izat atio ion n and and economic maturity attained by a country. Keeping in view of the importance of steel, the following integrated steel plan plantts with ith forei oreig gn coll collab abor orat atio ion ns were were set up in publ public ic secto ectorr in post post independence era (Table 2.0) INTEGRATED STEEL PLANTS IN INDIA STEEL PLANT

COLLABORATION

1. Durgapur Steel Plant

Britain

2. Bhilai Steel Plant

Erstwhile USSR

3. Bokaro Steel Plant

Erstwhile USSR

4. Rourkela Steel Plant

Germany

Background of Visakhapatnam Steel Plant:  To meet growing domestic needs of steel, Government of India decided to set up an Integrated Steel Plant at Visakhapatnam. An agreement was signed with erstwhile USSR in 1979 for co-operation in setting up 3.4 MT integrated steel plant at Visakhapatnam.  The project profile of 3 MT Stage in Table 2.1 Description

3 MT STAGE Original

First

Second

Third

Sanction

Revisi

Revisio

Revisio

on

n

n

Implementing Agency

SAIL

RINL

RINL

RINL

Date of sanction by GOI

19.6.79

30.07.

24.06.8

12.07.

82

8

95

Not

01.02.

01.02.8

01.02.

specified

82

2

82

6 years

6

8

½ 10

years

years

yrs

Dec 87

June 90

July 92

3897.2

6849.7

8593.2

8

0

9

Zero Date

Gestation period

Anticipated

Date

of   Not

Commissioning

specified

Capital Cost (Rs crores)

2256.00

Base Date

1 qtr 79

4

½

qtr 4 qtr 87 Jan 94

81 FE Component (Rs. Crores)

Cost Escalation Rs. Crores

Capacity (MT liquid steel per annum)

500.20

--

3.40

679.59

1214.8

1521.5

6

5

1641.2

2952.4

1743.5

8

2

9

3.40

3.00

3.00

 The Company started its commercial production in 1990-91 and its financial results in  Table 2.2 Z

Gross

Operatin

Interest

Depreciat

Net Profit

90-91

245

-88

192

197

-478

91-92

772

-101

437

449

-987

92-93

1185

-31

198

340

-568

93-94

1751

114

346

340

-573

94-95

2209

416

366

415

-364

95-96

3039

633

407

430

-204

96-97

3135

606

430

422

-246

97-98

3071

460

198

439

-177

98-99

2761

15

361

111

-457

99-00

2973

252

382

432

-562

00-01

3436

504

351

445

-291

01-02

4081

690

290

475

-75

02-03

5058

1162

187

455

521

03-04

6169

2053

49

457

1547

04-05

8181

3271

11

1006

2254

05-06

8482

2336

31

416

1890

06-07

9151

2054.34

49

362

1363

07-08

10433

2790

32

488

1943

08-09

10411

1552

88

240

1336

It can can be seen seen from from the the abov above e tabl table, e, duri during ng the the year year 20022002-03, 03, the the company company turned turned around around by earning earning a net profit profit of Rs. 521 Crores. Crores. In the same year, it bagged the PRIME MINISTER TROPHY for its excellent performance in the Steel Steel Industry. In September September 2003, RINL became became a DEBT FREE COMPANY.

TECHNOLOGY: VSP was equipped with state of the art technology of steel making, large scale computerization and automation was incorporated in the plan plantt to achi achiev eve e Inte Intern rnat atio iona nall Leve Levell of Effi Effici cien ency cy and and Prod Produc ucti tivi vity ty,, the the organizational manpower has been rationalized.

The following are some of the important technologies used in the plant.

•

7 meter tall coke over batteries with coke dry quenching plant

•

3200 cubic meter blast furnace, biggest in the country.

•

Bell-less top charging system in blast furnace

•

100% slag granulation at BF cast house

•

Suppressed combustion LD gas recovery

•

100% continuous casting of liquid steel

•

“TEMPCORE” and “STELMORE” cooling process

•

Extensive Waste Heat Recovery System

•

Comprehensive Pollution Control Measures

Raw Material

Source

Iron Ore lumps and fines

Bailadilla, MP

BF Limestone

Jaggayyapeta, AP

BF Dolomite

Madharam, Andhra Pradesh

SMS Dolomite

Madharam, Andhra Pradesh

Manganese Ore

Chipurupalli, Andhra Pradesh

Boiler Coal

Talcher, Orissa

Coking Coal

Australia

Medium Coking coal (MCC)

Gidi/swang/rajarappa/kargali

Major Sources of Inputs: Water Supply: Oper Operat atio iona nall wate waterr requi require reme ment nt of 36 MGD MGD is bein being g met met from from Yele Yeleru ru Wate Waterr Supply Scheme.

Power Supply: Operat Operation ional al power power requir requireme ement nt of 180-20 180-200 0 MW is being being met throug through h captiv captive e power power plant. plant.

The The capaci capacity ty of captiv captive e power power plant is 286.5 286.5 MW. The

plan plantt is sell sellin ing g arou around nd 60 MW of powe powerr to APSE APSEB B (And (Andhr hra a Prad Prades esh h Stat State e Electricity Board).

Major Units of VSP

DEPARTMENTS

ANNUAL

CAPACITY  

UNITS (0. 3 MT STAGE)

(‘000T) COKE OVENS

2261

3

batteries

each

of

67

ovens of 7 Meters heights. BLAST FURNACE

3400

2

fu furnaces

of of

32 3200

m3 m3

each SINTER PLANT

5256

2 sinter machines of 312 sq meter grate area each

STEEL STEEL MELTI MELTING NG

3000

SHOP

3 LD converters each of   150 150

M3

volume

and

six

four strand bloom caster. LMMM

710

Four strand finishing mill

WRM

850

2x10 strand finishing mill

MMSM

850

6 strand finishing mill

PROCESSES COKE OVENS PLANT 

SINTER

BLAST FURANCE

STEEL MELTING

SHOP

CONTINUOUS CASTING

ROLLING MILLS

PRODUCT MIX OF VSP Main Products: 1. PIG IRON

Low Silicon basic grades

2. BLOOMS

245x245 mm

5.5

6.08

meters 315x245 mm

3. BILLETS

125x125 mm

6.40 meters

9.8

10.4 meters

90x9 90x90 0 mm

6.0 6.0

12 mete meters rs

75x7 75x75 5 mm

6.0 6.0

12 mete meters rs

6.0

12 meters meters

65x65 mm

4. WIRE RODS

5.8

5.5 mm, 6 mm, 6.5 mm, 7 mm, 7.5 mm, 8 mm, 9 mm, 10 mm, 11

mm, 12 mm, 12.7 mm, 13 mm & 14 mm

5. REINFORCEMENT BAR BRAND: VIZAG TMT

8 mm, 10 mm, 12 mm, 16 mm, 18

mm, (In straightened or coil form)

20 mm, 22 mm, 25 mm, 28 mm, 32

mm, 36 mm & 40 mm

6. ROUNDS

16 mm, 16.5 mm, 18 mm, 20 mm, 20.64 mm, 22 mm, 25 mm, 28 mm, 32 mm, 33.5 mm,

34 mm, 36 mm, 40 mm, 42 mm, 45 mm, 46.5 mm, 50 mm, 53 mm, 56 mm, 60 mm, 63 mm, 65 mm, 71 mm, 75 mm, 77 mm & 80 mm

7. EQUAL ANGLES

50x50 x 5/6 mm, 60x60 x 6 mm, 65x65 x 6mm, 75x75 x 6/8 mm, 90x90 x 6/8mm, 100x100 x

8/10mm & 110x110 x 8/10 mm

8. CHANNELS

ISMC-

40x32x5 mm, 75x40x4.8mm, 100x50x5mm, 125x65x5.3mm,

150x75x5.7mm & 150x76x6.5mm

9. BEAMS

IPE – 175x85 mm, 150x75 mm &180x91 mm 120x114 mm (HE-BEAMS)

10. FLATS

150x10 mm & 150x12 mm

By-Products 1. FERTILIZER 2. COALCHEMICALS & TAR PRODUCTS

“PUSKALA” Brand Ammonium Sulphate Coal Tar Pitch (Soft) Coal Tar Pitch (Hard) Anthracene Oil

HP Naphthalene Pitch Cresote Mixture Coal Tar Wash Oil Phenol fractions 3. COKE FRACTIONS

Nut Coke (15-25 mm) Coke Dust (Coke Breeze)

4. BENZOL PRODUCTS

Caprolactum grade Benzene NG Toluene/IG Toluene Light Solvent Naphtha (LSN)

5. MISC MISCEL ELLA LANE NEOU OUS S PROD PRODUC UCTS TS

Gran Granul ulat ated ed BF Slag lag Calcined Lime Fines Fly ash, Liquid Argon Liquid Oxygen

Liquid Nitrogen Boiler Coat Dust SMS Slag

FUTURE PLANS: 1.0

VISION: To be a continuously growing world-class company.

•

Harness our growth potential & sustain profitable growth

•

Deliver high quality and cost competitive products and be the first choice of  customers

•

Create Create an inspi inspirin ring g wo work rk enviro environm nment ent to unlea unleash sh the creati creative ve energy energy of  people

•

Achieve excellence in enterprise management

•

Be a respected corporate citizen, ensure clean and green environment and develop vibrant communities around us

2.0

MISSION To attain 16 million ton liquid steel capacity through technological up grad gradat atio ion, n, oper operat atio iona nall

effi effici cien ency cy

international international standards

and and

expa ex pans nsio ion n

to

prod produc uce e

stee steell

at

of cost and quality, and to meet the aspirations

of stakeholders. stakeholders. 3.0 •

OBJECTIVES: Expand plant capacity to 6.3 Mt by 2008-09 8.5 Mt by 2010-11 13.0 Mt by 2014-15 16.0 Mt by 2017-18

With the mission to expand further in subsequent phases as per the Corporate Plan.

•

Sustain gross margin to turnover ration >25%

•

Be amongst the top five lowest cost liquid steel producers in the world

by 09-10 •

Achieve higher levels of customer satisfaction than competitors

•

Instill right attitude amongst employees and facilitate them to excel in

their professional, personal and social •

Be recognized as a excellent business organization organization by 2008-09

•

Be proactiv proactive e in conservi conserving ng environm environment, ent, maintain maintaining ing high levels levels of 

safety and addressing social concerns. 4.0 4.0 COR ORE E VALU ALUES # Commitment # Customer Satisfaction Satisfaction # Continuous improvement # Concern for Environment # Creativity & Innovation

Achievements and Awards:



ISO 9002 for SMS and all the down stream units – it is a unique distinction in the

Indian steel industry. 

Received Indira Priya Darshini Vriskha Mitra Award: 1992-1993.



Nehru Memorial National Award for Pollution Control: 1992=93 &1993-94



EEPC EEPC Expor Exportt Excell Excellenc ence e Awar Award: d:

1994 1994-19 -1995 95 CII (South (Southern ern Region) Region) Energy Energy

Conservation Award: 1995-1996. 

Golden Peacock (1st prize) “National Quality Award –1996”



Steel Ministers Trophy for “Best Safety Performance” in 1996.



Selected for “ World Quality Commitment Award –1997” of J*BAN, Spain.



Udyog Excellence Gold Medal Award for Excellence in Steel Industry.



Ispat Suraksha Puraskar (1 st prize) for longest accident free period, 1991-1994. 1991-1994.



Best Labour Management Award from the Government of AP.



SCOPE Award for the best turnaround for 2001.



Env Environ ironme ment nt

Exce Excell llen ence ce

Awar Award d

fro from

Gree Greent ntec ech h

Foun Founda dati tio on

for for

ener energy gy

conservation in 2002. 

Best Enterprise award from SCOPE, WIPS for 2001-2002.



“ SAIL chairman`s silver plaque” for No Fatal Accident for the year 1999.



PRIM MINISTER`S award for the best performance in 2002-2003.



ISTD Award for “Best HR Practices” – 2002.



“World “World Quality Quality Commi Commitme tment nt Intern Internat ation ional al Star Star Awar Award” d” in the Gold Gold categ categor ory y

conferred by Business Initiative Directions, Paris 

“Organizational Excellence Award” for 2003-04 conferred by INSSAN



National Energy Conservation Award, 2004 and Special Prize from Ministry of 

Power, Govt. of India. 

QCFI-NMDC Award for best quality circle implementatiom in PSU category in

2007-08. 

RINL has been awarded “Enterprise excellence award –2007” in 2008-09.

The above awards are besides a number of awards at the local, regional & national level competitions in the area of Quality Circles, Suggestion Schemes etc.

HALLMARK OF VIZAG STEEL AS AN ORGANISATION

Today, Today, VSP is moving moving forward forward with aura of confidence confidence and with pride amongst its employees who are determined to give their best for the company to enable it to reach new heights in organizational excellence.

At the same time, no single advantage accruing from a knowledge society if found wanting by the neighborhood community with the growth & development

of a phenomenon phenomenon called VIZAG STEEL STEEL existing so close to its proximity. Futuristic enterprises, academic activity, planned & progressive residential localities but few of the the plen plenti tifu full ripp ripple le effe effect cts s of this this tran transf sfor orma mati tion on and and each each one one of us take take immense pride to uphold the philosophy of mutual (i.e., individual and societal) progress.

As a “NET POSITIVE COMPANY” in January, 2006 by wiping out all it’s accumulated losses during 2008-09.

STATISTICAI INFORMATION PRODUCTION PERFORMANCE PERFORMANCE – (‘000 TONS)

2007-

3913

2008 YEAR

HOT METAL

2008-

3546

3322

3074

LIQUID STEEL

3145

SALEABLE STEEL 2701

2009

420 LABOUR PRODUCTIVIT 42 Y  3 (Tones/man year)

1999-2000

2943

2656

2382

192

2000-2001

3165

2909

2507

211

2001-2002

3485

3083

2757

228

2002-2003

3941

3356

3056

253

2003-2004

4055

3508

3169

262

20042005

39

41

398

3603

3237

414

53 2006- 4046

2007

3173

20 2005-

2006

3560

3606

3290

413

COMMERCIAL COMMERCIAL PERFORMANCE – (Rupees in Crores)

Year

Sales

Domestic

Exports

Turnover

Sales

2000-01

3436

3122

322

2001-02

4081

3710

371

2002-03

5059

4433

626

2003-04

6174

5406

768

2004-05

8181

7933

248

2005-06

8469

8026

443

2006-07

9126

8702

425

2007-08

10433

9878

555

2008-09

10411

9733

767

FINANCIAL PERFORMANCE (RUPEES IN CRORES)

Year

Gross Margin

Cash Profit

Net profit

2000-01

504

153

(-) 291

2001-02

690

400

(-) 75

2002-03

1049

915

521

2003-04

2073

2024

1547

2004-05

3271

3260

2008

2005-06

2383

2355

1251

2006-07

2633

2584

9363

2007-08

3515

3483

1943

2008-09

2355

2267

1336

INTRODUCTION TO FINANCIAL MANAGEMENT

About three decades ago, the scope of financial management was confined to raising of funds, whenever needed and little significance used to be attached to fina financ ncia iall deci decisi sion on-m -mak akin ing g and and prob proble lem m solv solvin ing. g.

As a cons conseq eque uenc nce, e, the the

trad tradit itio iona nall fina financ nce e text texts s were were stru struct ctur ured ed arou around nd this this them theme e and and cont contai aine ned d description of the instruments and institutions of raising funds and of the major events, such as promotion, reorganization, readjustment, merger, consolidation etc., etc., when funds funds were were raised raised..   judic judiciou ious s utiliz utilizati ation on of funds. funds.

In the mid-fift mid-fifties ies,, the emphas emphasis is shifted shifted to the The modern modern thinki thinking ng in financ financial ial manageme management nt

accords a far managers do not perform the passive role of scorekeepers of  financial data and top management areas and play a dynamic rote in solving comple complex x manage managemen mentt proble problems. ms.

They They are now responsi responsible ble for shapi shaping ng the

fort fortun unes es of the the ente enterp rpri rise se and and are are invo involv lved ed in the the most most vita vitall mana manage geme ment nt decisi decision on of alloca allocatio tion n of capital capital..

It is their their duty to ensure ensure that that the funds are

raised most economically and used in the most efficient and effective manner. Because Because of this change change in emphasis, emphasis, the descriptive descriptive treatment treatment of the subject of  financial management is being replaced by growing treatment of the subject of  financial management is being replaced by growing analytical content and sound theoretical underpinnings.

Financial management is that managerial activity which is concerned with the planni planning ng and controll controlling ing of the firm`s firm`s financ financial ial resourc resources. es.

Though Though it was a

branch of economics till 1890, as a separate activity or discipline it is of recent origin. Still, it has no unique body of knowledge of its its own, and draws draws heavily on economics for its theoretical concepts even today.

SCOPE OF FINANCE:

What is Finance? Finance? What are a firm’s activities? How are they related related to the firm’s other activities? activities? Firms create create manufacturing manufacturing capacities capacities for for production of goods; goods; some provide provide services to customers. customers. They sell their goods goods or services to earn profits. profits. They raise raise funds to acquire acquire manufacturing manufacturing and other other facilities.

Financ Financing ing decisi decision on is an import important ant functi function on to be perfor performed med by the financ financial ial manager. Broadly, he or she must decide when, where and how to to acquire funds to meet the firm’s firm’s investmen investmentt needs. The central central issue issue before him or her is to determ determine ine the propor proportio tion n of equity equity and debt. debt. known known as the firm’s firm’s capital capital structur structure. e.

The mix of debt debt and equity equity is

The financi financial al manager manager must strive strive to

obtain the best financing mix of the optimum capital structure for his of her firm. Once the financial manager is able to determine the best combination of debt and and equi equity ty,, he or she she must must rais raise e the the appr approp opri riat ate e amou amount nt thro throug ugh h the the best best availa available ble sources sources..

In practice practice,, a firm firm consid considers ers many other other factors factors such as

control, flexibility, loan convenience, legal aspects etc., in deciding its capital structure.

FINANCIAL RATIO ANALYSIS INTRODUCTION: As observed, a basic limitation of the traditional financial statement comprising the balance sheet and the profit and loss account is that they do not give all the inform informati ation on related related to the financi financial al operat operation ion of the firm. firm.

Nevert Neverthel heless ess,, they they

provide some extremely useful information to the extent that the Balance Sheet mirrors the financial position on a particular date in terms of the structure of  assets, liabilities and owner’s equity and so on. The profit and loss loss account shows shows the results of operations operations during a certain certain period of time in terms of the revenues revenues obtained obtained and the cost cost incurred incurred during the year. year. Therefore, Therefore, much can be learnt learnt about a firm from a careful examination of its financial statements as invaluable documents documents/perf /performanc ormance e analysis. analysis. Users of financial financial statements statements can get further insigh insightt about about financ financial ial streng strengths ths and weakn weakness esses es of the firm firm if they they proper properly ly analyz analyze e inform informati ation on report reported ed in these these statemen statements. ts.

Manage Managemen mentt shoul should d be

particularly interested in knowing financial weakness of the firm to take suitable corrective actions. The future plans of of the firm should be laid down in view of of the firm’s financial strengths strengths and weaknesses. weaknesses. Thus, financial analysis is the the starting point for making plans, before using any sophisticated forecasting and planning procedures. Understanding the past past is a pre-requisite for anticipating the future. future.

MEANING AND RATIONALE: Ration Ration analysis is a widely – used tool tool of financial analysis. analysis. It is defined as the systematic use of ration to interpret the financial statements so that the strengths and weaknesses of the firm as well as its historical performance and current financial condition can be be determined. Ratio analysis is a powerful tool of financial

anal analys ysis is..

A rati ratio o is defi define ned d as “the “the indi indica cate ted d quot quotie ient nt of two two math mathem emat atic ical al

expressions” and as the “the relationship between two or more things”. In financial analysis, a ratio is used as a benchmark for evaluating the financial position and performance of a firm.  The term ratio refers to the numerical or quantitative relationship between two items/variables. This relationship relationship can be expressed as: Percentages, say, Net Profits are 25% 25% of Sales (assuming Net Profit of Rs.25,000 and Sales of Rs.1,00,000), 1. Fraction Fraction (Net (Net profit profit is 1/4 1/4th of Sales) and 2. Proportion Proportion of numbers (the relationship relationship between Net profits profits and Sales is 1:4). 1:4).

These alternative methods of expressing items, which are related to each other, are, for purpose purpose of financial financial analysis, analysis, referred referred to as ratio analysis analysis.. It should should be noted that computing the ratios does not add any information already inherent in the above above figures of profits profits and sales. sales. What the ratios ratios do is that they reveal reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them them..

The The rati ration onal ale e of ratio ratio anal analys ysis is lies in the the fact fact that it make makes s relat related ed

inform informati ation on comparab comparable. le.

A single single figure figure by itself itself has no meaning meaning but when

expr expres esse sed d in term terms s of a rela relate ted d figu figure re,, it yiel yields ds sign signif ific ican antt infe infere renc nces es..

For For

instance, the fact that the Net profits of a firm amount to, say Rs. Ten Lakhs throws no light on its adequacy or otherwise. The figure of Net profit has to be considered in relation to other variables. How does it stand stand in relation to sales? sales? If, therefore, therefore, Net profits profits are shown in terms terms of  their relationship with items such as Sales, Assets,Capital employed, Equity capital and so on, meaningful conclusions can be drawn regarding their adequacy. To carry the above example further, assuming the capital employed to be Rs.50 lakh and Rs.100 lakh, the Net profit are 20% and 10% each respectively. Rati Ratio o anal analys ysis is,, thus thus,, as a quan quanti tita tati tive ve tool tool,, enab enable les s anal analys ysts ts to draw draw quantitative answers to questions such as; are the Net profits adequate? Are the assets assets being being used used efficien efficiently? tly? Is the firm solvent? solvent? Can the the firm meet meet its current obligations and so on?

IMPORTANCE AND LIMITATIONS OF RATIO ANALYSIS Importance: As a tool tool of financial financial management, ratios are of crucial significance. significance. The impo import rtan ance ce of rati ratio o anal analys ysis is lies lies in the the fact fact that that is pres presen ents ts fact facts s on a comp compar arat ativ ive e basi basis s and and enab enable les s the the draw drawin ing g infe infere renc nce e rega regard rdin ing g the the

perfo erform rman ance ce of a firm firm..

Rat Ratio analy nalys sis is rele relev vant ant in asse asses ssing ing the

performance of a firm in respect to the following aspects. i.

Liquidity position

ii.

Long-term solvency

i i i.

Operational ef efficiency

iv.

Overall pr profitability

v.

Inter-firm comparison, and

vi.

Trend analysis

Liquidity position: - With the help of ratio analysis conclusions can be regarding regarding the liquidity liquidity position position of a firm. The liquidity liquidity position position of a firm would be satisfactory if it is able to meet its current obligations when they become become due. A firm can be said to to have the ability ability to meet meet its short-ter short-term m liabilities if it has sufficient liquid funds to pay the interest on its shortmaturing maturing debt usually usually within within a year as well as to repay the principal. principal. This abilit ability y is reflecte reflected d in the liquid liquidity ity ratio ratio of a firm. firm. The liquidi liquidity ty ratios ratios are particularly useful in credit analysis by banks and other suppliers of shortterm loans.

Long-term solvency: - Ratio analysis is equally useful for assessing the long-term long-term financial financial viability viability of a firm. This aspect aspect of the financial financial position position of a borrower is of concern to the long-term creditors, security analysts and the pres presen entt and and pote potent ntia iall owne owners rs of a busi busine ness ss..

The The long long-t -ter erm m solv solven ency cy is

measured by the leverage/capital structure and profitability ratios, which focus on earning power and operating efficiency. Ratio analysis reveals the strength and weaknesses of a firm in this respect. The leverage ratios, for instance, will indi indica cate te whet whethe herr a firm firm has has a reas reason onab able le prop propor ortio tion n of vari variou ous s sour source ces s of  finance or if it is heavily loaded proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its consistent with the risk involved.

Operating Efficiency: - Another dimension of the usefulness of the ratio analysis, relevant from the view point of management, is that it throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this this kind of operational operational efficiency.

Overall Profitability: - Unlike Unlike the outside parties, parties, which are interested interested in one one aspe aspect ct of fina financ ncia iall posi positi tion on of a firm firm,, the the mana manage geme ment nt is cons consta tant ntly ly concerned concerned about about the over-all over-all profitabilit profitability y of the enterprise. enterprise. That is, they they are concerned about the ability of the firm to meet its short-term as well as longterm obligations to its creditors, to ensure a reasonable return to its owners and secure secure optimu optimum m utiliz utilizati ation on of the assets assets of the firm.

This This is possib possible le if an

integrated view is taken and all the ratios are considered together.

Inter-firm Inter-firm Comparison: Comparison: - Rati Ratio o anal analys ysis is not not only only thro throws ws ligh lightt on the the financial position of a firm but also serves as a stepping stone to remedial measures. This is made made possible due to inter-firm comparison comparison and comparison comparison with with indust industry ry averages averages..

A single single figure figure of a particula particularr ratio ratio is meanin meaningle gless ss

unless it is related to to some standard standard or norm. One of the popular popular techniques is to compa compare re the ratios ratios of a firm firm with the indus industr try y aver averag age. e.

An inter inter-f -fir irm m

comparison would demonstrate the firm’s position vis-à-vis its competitors.

Trend Analysis: - Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether whether the financial position of of a firm is improving improving or deteriorati deteriorating ng over the years. years. This is made made possible possible by the use of  trend analysis. analysis. The significan significance ce of a trend analysis analysis of ratios ratios lies in the fact that the analysis can know the direction of movement, the is, whether the movement is favorable favorable or unfavorable. unfavorable. For example, example, the ratio may may be low as compared to the norm but the trend trend may be upward. On the other hand, hand, though though the present level may be satisfactory but the trend may be a declining one.

Limitations: Ratio Ratio Analysis Analysis is a widely widely used tool tool of financi financial al analysis analysis..

Yet, Yet, it suffers suffers from

various limitations. The operational implication implication of this is that while using ratios,

the conclusions should should not be taken taken on their face value. Some of the limitations, which characterize ratio analysis, are i.

Diff Diffic icul ulty ty in comp compar aris ison on..

ii. ii.

Impa Impact ct of Infl Infla ation tion,, and and

iii. iii.

Concep nceptu tua al Div Diversit rsity y

Difficulty in comparison: -

One serious limitation of ratio analysis arises

out of the difficulty difficulty associated associated with there comparab comparability. ility. One technique technique that is employed is inter-firm comparison. But such comparison is vitiated by different procedures adopted by various firms. 

Differences in basis basis of inventory valuation valuation (e.g.:- last in first out, average average cost

and cost); 

Different depreciation methods (i.e. straight line Vs. written down basis);



Estimated working life of assets, particularly of plant and equipment;



Amortization of deferred revenue expenditure such as preliminary expenditure

and discount on issue of shares;  

Capitalization of lease;  Treatment  Treatment of extraordinary extraordinary items of income and expenditure; and so on.

Second Secondly, ly, apart apart from from differ different ent accou accounti nting ng proced procedure ures, s, compan companies ies may have have differ different ent account accounting ing proced procedure ures, s, implyi implying ng differ differenc ences es in the compos compositi ition on of  assets, particularly current assets. For these reasons, reasons, the ratios of two firms may may not be strictly comparable.

Impact of Inflation: of Inflation: -

 The second major limitation of the ratio analysis is

a tool of financial financial analysis is associated with price level changes. This infact is a weakness of the traditional financial statements, which are based on historical cost. An implication implication of this feature feature of the financial financial statement statements s as regards ratio ratio analys analysis is is that that assets assets acquired acquired at differ different ent period periods s are, are, in effect effect,, shown shown at different prices in the balance sheet, as they are not adjusted for changes in the price price level.

As a result result,, ratio ratio analysi analysis s will will not yield yield strictly strictly compar comparabl able e and

therefore, dependable results.

Conceptual Diversity: The The fact factor or that that infl influe uenc nces es the the usef useful ulne ness ss of rati ratios os is that that ther there e is difference of opinion regarding the various concepts used to compute the ratios.

  The There re is alw always ays room room for for dive divers rsit ity y of opin opinio ion n as to what hat cons consttitut itutes es shareholder`s equity, debt, assets, profit and so on. Finall Finally, y, ratios ratios are only only a post-m post-mort ortem em analys analysis is of what what has happened happened betwee between n two balanc balance e sheet dates. dates.

For one thing thing the positi position on in the interim interim

period is not revealed by ratio analysis. Moreover, they give give no clue about the future. In brief, ratio analysis analysis suffers from serious serious limitations. The analyst should should not be carried away by its over simplified nature, easy computation with high degree degree of precis precision ion..

The reliabi reliabilit lity y and signifi significan cance ce attach attached ed to ratios ratios will

largely largely depend upon upon the quality of data on which which they are based. They are as good as the data data itself. Nevertheles Nevertheless, s, they are an important important tool tool of financial analysis.

Precautions for use of ratios:  The calculation of ratios may not be a difficult task but their use is not easy.   The The info inform rmat atio ion n on whic which h thes these e are are base based, d, the the cons constr trai aint nts s of fina financ ncia iall stat statem emen ents ts,, objec objecti tive ves s for for usin using g them them,, the the calib caliber er of the the anal analys yst, t, etc, etc, are are important factors, which influence the use of ratios. ratios. Following guidelines/factors may be kept in mind interpreting various ratios.



 The reliability of ratio is linked to the accuracy of information in financial statements. Before calculating ratios one should see whether proper concepts and conventions are used for preparing preparing financial financial statemen statements ts of not. Competen Competentt auditors auditors should should properly audit the statements. statements.

 The purpose of of the user is also important for the analysis of ratios. A creditor, a banker, banker, an investor, investor, a sharehold shareholder, er, all has different different objects for studying studying ratios.   The The purp purpos ose e (or) (or) obje object ct for for whic which h rati ratios os are are requ requir ired ed to be stud studie ied d shou should ld always always be kept in mind mind for studyi studying ng various various ratios. ratios.

Differ Different ent objects objects may

require the study of different ratios. 

Another precaution precaution in ratio analysis is the proper proper selection of appropriate appropriate ratios. The ratios should match the purpose for which these are required.

Calcul Calculati ating ng a large large number number of ratios ratios without without determ determini ining ng their their need need in the present present context may may confuse confuse the things instead instead of solving solving them. Only those those ratios should be selected which can throw proper light on the matter to be discussed.



Unless otherwise the ratios calculated are compared with certain standards one will not be reach at conclusions. These standards may be a rule of of thumb as in current ratio (2:1), (2:1), may be industry industry standards, may be projected ratios etc. The compar compariso ison n of calcul calculate ated d ratios ratios with with the standard standards s will will help help the analys analystt in forming his opinion about financial situation of the concern.



 The ratios are only the tools of analysis but their interpretation will depend upon the caliber caliber and competence competence of the analyst. analyst. He should should be familiar with with various financial statements and the significance of changes etc.



A wron wrong g inte interp rpre reta tati tion on may may crea create te havo havoc c for for the the conc concer ern n sinc since e wron wrong g conclu conclusio sions ns may bad to wrong wrong decisi decision ons. s.

The utility utility of ratios ratios is linked with with

expertise of the analyst. 

 The ratios are only guidelines for the analyst; he should not base his decisions entirely entirely on them. He should study study any other relevant relevant informatio information, n, situation situation in the the conc concer ern, n, gene genera rall econ econom omic ic envi enviro ronm nmen entt etc. etc.,, befo before re reac reachi hing ng fina finall conclusions.

 The study of of ratios in isolation may not not always prove useful. The interpretation shou should ld use use the the rati ratios os as guid guide e and and may may try try to soli solici citt any any othe otherr rele releva vant nt information which helps is reaching a correct decision.

Users of financial analysis:

Financ Financial ial analys analysis is is the proces process s of identi identifyi fying ng the financ financial ial stren strength gths s and weaknesses of the firm by properly establishing relationships between the items of bala balanc nce e shee sheett and and prof profit it and and loss loss accoun account. t.

Fina Financ ncial ial analy analysi sis s can can be

undertaken by management of the firm, or by parties outside the firm, viz., owners, investors and others.  The nature of analysis will differ depending on the purpose of the analyst. 

 Trade creditors are interested in firm’s ability to meet their claims over a very short period period of time. time. Their analysis analysis will, therefor therefore, e, confine confine to the evaluatio evaluation n of the firm’s firm’s liquidity position.



Suppliers of long-term debt on the other hand are concerned with the firm’s long-term solvency solvency and survival. survival.

They analyze analyze the firm’s firm’s profitabilit profitability y over time, its ability ability to

generate cash to be able to pay interest and repay principle and the relationship between various sources of funds. (Capital structure relationship).



Investor Investors, s, who have invested invested their money in the firm’s share, are most most concerned concerned about about the firm’s earnings earnings..

They restore restore more more confidence confidence in those firms firms that show

steady steady growth growth in earnings earnings..

As such, they they concentrate concentrate on the analysis analysis of the firm’s firm’s

prese present nt and future future profita profitabil bility ity..

They They are are also also inter interest ested ed in the the firm’s firm’s financi financial al

structure to the extent it influences the firm’s earnings ability and risk. 

Management of of the firm would be interested interested in every aspect aspect of the financial analysis. analysis. It is their overall responsibility to see that the resources of the firm are used most effectively and efficiently, and that the firm`s financial condition is sound.

Types of Ratios Several ratios, calculated from the accounting data, can be grouped into various classes classes according according to financial financial activity activity or function function to be evaluated. evaluated. As stated stated earlier, the parties interested in financial analysis are short-term and long-term creditors, creditors, owners owners and management management.. Short-term Short-term creditors creditors` ` main interest interest is in the the liqu liquid idit ity y posi positi tion on or the the shor shortt-te term rm solv solven ency cy of the firm firm..

Long Long-t -ter erm m

creditors`, on the other hand, are more interested in the long-term solvency and profitability of the firm. Similarly, owners concentrate concentrate on the the firm’s profitability and financial condition. condition. Management is interested in evaluating every aspect of  the firm’s performance. They have to protect the interests interests of all parties and see that the firm firm grows profitably. profitably. In view of of the requirements of the various various users of ratios, we may classify them into the following four important categories:



LIQUIDITY RATIOS



LEVERAGE RATIOS



ACTIVITY RATIOS



PROFITABILITY RATIOS

LIQUIDITY RATIOS

It is extremely essential for a firm to be able to meet its obligations as they beco become me due. due.

Liqu Liquid idit ity y rati ratios os meas measur ure e the the firm firm’s ’s abil abilit ity y to meet meet curr curren entt

obligations. In fact, analysis of liquidity needs the preparation of cash budgets and cash cash and and Fund Fund Flow Flow stat statem emen entts; but but liqu liquid idit ity y rati ratios os,, by esta establ blis ishi hing ng a relati relations onship hip betwee between n cash cash and and other other curren currentt assets assets to curren currentt oblig obligatio ations ns

provid provided ed a quick quick measure measure of liquidit liquidity. y. A firm should should ensure ensure that it does does not suffer from lack of of liquidity, and also that it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in a poor creditworthin creditworthiness, ess, loss of creditors` creditors` confidence, confidence, or even in legal tangles resulting in the closure of the the company. A very high degree of of liquidity is also bad; idle idle assets earn nothing. nothing. The firm’s funds will be unnecessarily tied up in current current assets assets..

Theref Therefore ore,, it is necessar necessary y to strike strike a proper proper balance balance

between between high liquidity liquidity and lack of liquidity. liquidity. The most common common ratios, ratios, which indicate the extent of liquidity or lack of it, are: 1.

CURRENT RATIO

2.

QUICK RATIO

3.

CASH RATIO

CURRENT RATIO:

  The The curr curren entt rati ratio o is calc calcul ulat ated ed by divi dividi ding ng curre current nt asse assets ts by curr curren entt liabilities. Current assets CURRENT RATIO

= Current liabilities

Current assets include cash and those assets, which can be converted into cash cash within within a year, year, such such as Market Marketabl able e Securi Securitie ties, s, Debtor Debtors s and Invent Inventori ories. es. Prep Prepaid aid expe expens nses es are are also also incl includ ude e in curr curren entt asse assets ts as they they repre represe sent nt the the payments that will not be made by the firm in future. future. Current Liabilities include Creditors, Bill payable, Accrued expenses, Short-term bank loan, and Income  Tax Liability and Long-term debt maturing in the current year.  The current ratio is a measure of the firms` short-term short-term solvency. The higher the current current ratio, the larger is the amount amount of rupees available available per Rupee of current current liab liabil ilit ity, y, the the more more is the the firm firms` s` abil abilit ity y to meet meet curr curren entt obli obliga gati tion ons s and and the the greater is the safety of funds of short-term creditors. QUICK RATIO:

 The Quick ratio is calculated by dividing quick assets by quick liabilities. Quick assets QUICK RATIO = Quick liabilities

Quic Quick k asse assets ts or Liqu Liquid id asse assets ts mean means s thos those e asse assets ts whic which h are are imme immedi diat atel ely y conver convertib tible le into cash without without much loss. loss.

All current current assets assets except except prepai prepaid d

expens expenses es and invent inventori ories es are categori categorized zed in liquid liquid assets. assets.

Quick Quick liabil liabiliti ities es

means those liabilities, which are payable within a short period. period. Normally, Bank overdraft and Cash credit facility, if they become permanent mode of financing are in quick liabilities. As this ratio concentrates on cash, marketable securities and receivables in rela relati tion on to curr curren entt oblig obligat atio ion, n, it prov provid ides es a more more pene penetr trat atin ing g meas measur ure e of  liquidity than current ratio.

CASH RATIO:

 The cash ratio is calculated by dividing cash + marketable securities by current liabilities. Cash + Marketable Securities

CASH RATIO = Current liabilities

Since cash is most liquid asset, a financial analyst may examine cash ratio and its equivalent equivalent to current liabilities. liabilities. Trade investment investment or marketable marketable securities securities are equivalent of cash; therefore, they may be included in the computation of  cash ratio.

LEVERAGE RATIOS   The short-term creditors like bankers and suppliers of raw material are more concerned with the firms` current debt-paying debt-paying ability. On the other other hand, longterm term credito creditors rs like like debent debenture ure holder holders, s, financ financial ial instit instituti utions ons etc., etc., are more more concerned concerned with the firms` firms` long-term long-term financial financial strength. strength. In fact, a firm should should have strong strong short-as short-as well as long-term long-term financial financial position. position. To judge the longlong-

term financial position of the firm, financial leverage, or Capital structure, ratios are calcula calculated ted..

These These ratios ratios indica indicate te mix of funds funds provide provided d by owners owners and

lender lenders. s. As a genera generall rule, there there should should be an approx approxima imate te mix of debt and owner’s equity in financing the firms` assets.

 The manner manner in which assets assets are financed has a number number of implications implications.. First, between debt and equity, equity, debt is more risky from from the firms` point point of view. The firm has a legal obligation to pay interest on debt holders, irrespective of the profits profits made or losses losses incurred incurred by the firm. If the firm fails fails to debt holders holders in time, they can take legal action against it to get payment and in extreme cases, can force the firm into liquidation.

Secondly, use of debt is advantageous for shareholders in two ways: a.

They They can can ret retai ain n cont contro roll of the the firm firm with ith a limi limite ted d sta stake and

b.

Thei Theirr ear earni ning ngs s wil willl be be mag magni nifi fied ed,, whe when n the the firm firm earn earns s a rat rat of of ret retur urn n on on the the tota totall

capital employed higher higher than the interest interest rate on the the borrowing borrowing funds. The process process of  magn magnify ifying ing the the shar shareh ehol olde ders rs retu return rn thro throug ugh h the the use use of debt debt is calle called d “fin “finan anci cial al leverage” or “financial gearing” or “trading on equity”.

Leverage ratios may be calculated from the balance sheet to determine the proportion proportion of debt in total total financing. financing. Many variation variations s of these ratios ratios exist; but all these ratios indicate the same thing-the extent to which the firm has relied on debt in financing financing assets. assets. Leverage Leverage ratios are also also computed computed from the profit profit and and loss loss item items s by dete determ rmin inin ing g the the exte extent nt to whic which h oper operat atin ing g prof profit its s are are sufficient to cover the fixed charges.

DEBT – EQUITY RATIO  The  The relat relation ionshi ship p descr describin ibing g the lender lender contr contribut ibution ion for for each each rupee rupee of the owner owner’s ’s contr contribut ibution ion is calle called d

DEBT-E DEBT-EQUI QUITY TY RATI RATIO. O. DEBT DEBT – EQUITY EQUITY RATI RATIO O is directl directly y

computed by the following formula.

DEBT

DEBT-EQUITY RATIO

= EQUITY 

Proprietary Ratio:

 This ratio states relationship between share capital and total assets. Proprietors equity represents equity share capital, preference share capital and reserv reserves es and surplus surplus..

The latter latter ratio is also also called called capital capital employe employed d to total total

assets. EQUITY SHARE CAPITAL PROPRIETORY RATIO = TOTAL TANGIBLE ASSETS

PROPRIETORS EQUITY 

(OR) TOTAL TANGIBLE ASSETS

INTEREST COVERAGE RATIO:

 This ratio indicates the extent to which earnings can decline without resultant financial hardship to the firm because of its inability to meet annual interest cost. For example, coverage of 5 times means that a fall in earnings unto (1/5 th ) level would be tolerable, as earnings to service interest on debt capital would be sufficiently available. This ratio is measured ad follows: follows: EARNINGS BEFORE INTEREST & TAXES (EBIT)

INTEREST COVERAGE RATIO =

INTEREST CHARGES

FIXED ASSETS TO NET WORTH:

 This ratio indicates the extent to which Equity capital is invested in the net fixed assets. It is expressed as as follows: follows:

FIXED ASSETS FIXED ASSETS TO NET WORTH = NET WORTH

NET WORTH is represented by Equity Share Capital plus Reserves and Surpluses. If the fixed assets are more than the Net Worth, difficulties may arise, as the depreciatio depreciation n will reduce reduce profit. This also means that that creditors have contribu contributed ted to fixed assets. The higher this ratio, the less will be the protection protection to creditors. If this ratio is too high, the firm may find itself handicapped, as too much capital is tied up in fixed assets but not circulating

ACITIVITY RATIOS Funds creditors and owners are invested in various assets to generate sales and profits. profits. The better better the management management of assets, assets, the larger the amount amount of sales. Activ Activit ity y ratio ratios s are are empl employ oyed ed to eval evalua uate te the the effi effici cien ency cy with with whic which h the the firm firm managers managers and utilizes utilizes its assets. assets. These ratios ratios are also called Turnove Turnoverr Ratios because they indicate the speed with which assets are being converted or turned over into sales. sales. Activity Activity ratios, ratios, thus, involve involve a relationship relationship between sales sales and assets. A proper balance between between sales and assets generally reflects that assets are manag managed ed well. well.

Seve Several ral activ activit ity y rati ratios os can be calc calcul ulat ated ed to judge judge the the

effectiveness of asset utilization.

INVENTORY TURNOVER RATIO:

Inventory turnover ratio indicates the efficiency of the firm in producing and sellin selling g its its products products.. It is calcul calculate ated d by dividi dividing ng the cost of goods goods sold sold by the average inventory.   The The aver averag age e inve invent ntor ory y is the the aver averag age e of open openin ing g and and clos closin ing g bala balanc nce e of  inventory. In a manufacturing company inventory of finished goods is used to calculate inventory turnover. Cost of goods sold INVENTORY TURNOVER RATIO = Average inventory

DEBTORS TURNOVER RATIO:

A firm firm sells sells good goods s for for cash cash and credit credit..

Cred Credit it is used used marke marketi ting ng tool tool by a

number number of companies. companies. When the firm extends extends credits credits to its customers, customers, debtors debtors (accou (accounts nts receiva receivable bles) s) are created created in the firms` firms` account accounts. s.

The debtor debtors s are

expe expect cted ed to be conv conver erte ted d into into cash cash over over a shor shortt peri period od and, and, ther theref efor ore, e, are includ included ed in curren currentt assets assets..

The liquid liquidity ity positio position n of the firm depends depends on the

quality quality of debtors to a greater greater extent. extent. Financial Financial analysts analysts apply apply three ratios ratios to  judge the quality or liquidity of debtors: a.

Debtors turnover,

b.

Collection period and

c.

Aging schedule of debtors Credit Sales

DEBTORS COLLECTION PERIOD RATIO = Avg.Accounts Receivable

DEBTORS COLLECTION PERIOD RATIO:

 This ratio indicates the extent to which the debts have been collected in time.  The debt collection collection period indicates the average debt collection period. This ratio is a good indicator to the lenders of the firm, because it explains to them whether their their borrowe borrowerr is collect collecting ing from from its debt in time.

An increas increase e in this this period period

indicates blockage of funds in debtors. Months/Days (in a year) DEBTORS COLLECTION PERIOD RATIO = Debtors turn over

Debtors

X

Months/Days(in a year)

(or) Sales FIXED ASSETS TURNOVER RATIO:

 The fixed assets turnover ratio measures the efficiency with which the firm is util utiliz izing ing its its inve invest stme ment nts s in fixe fixed d asse assets ts,, such such as land land,, buil buildi ding ng,, plan plantt and and machinery, machinery, furniture, furniture, etc. It also indicates indicates the adequacy adequacy of sales in relation relation to the investment in fixed fixed assets. The fixed assets turnover ratio is sales divided by net fixed assets. assets. The firm assets assets turnover turnover ratio should should be compared compared with past and future ratios and also with ratio of similar firms and the industry average.  The high fixed assets turnover ratio indicates efficient utilization of fixed assets in generating sales, while low ratio indicates inefficient management and utilization of fixed assets. Sales FIXED ASSETS TURNOVER RATIO = Net fixed assets

WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio indicates the velocity of the utilization of net working working capital. capital. This ratio ratio indicates indicates the number number of times the working working capital capital is turned over in the course of a year. This ratio measures the efficiency with which the workin working g capita capitall is being being used by a firm. A higher higher ratio ratio indicat indicates es efficien efficientt utilization utilization of working working capital and low low ratio indicates indicates otherwise. otherwise. But a very high working capital turnover ratio is not a good situation for any firm and hence care

must be taken taken while while interpreting interpreting the ratio. ratio. Making Making of comparative comparative and Trend Trend Analysis can at best use this ratio for different firms in the same industry and for various periods. This can be calculated as follows: follows:

Sales WORKING CAPITAL TURNOVER RATIO =

Net Working Capital

NET WORKING CAPITAL CAPITAL = Current Current Assets - Current Liabilities Liabilities

(Excluding short-term bank borrowings)

PROFITABILITY RATIOS A company should earn profits to Survive and Grow over a long period of time. Profits are essential, but it would be wrong to assume that every action initiated by management of a company should be aimed at maximizing profits, irrespective of social consequences. Profit is the difference between revenues and expenses over a period of time (usually a year). Profit is the ultimate “Output” of of a company, and it will have have no future if it fails to make sufficient sufficient profits. Therefore, the financial manager should contin continuou uously sly evaluate evaluate to the efficie efficiency ncy of the compan company y in term of profit profits. s.

The

prof profit itab abili ility ty rati ratios os are calc calcul ulat ated ed to meas measur ure e the the opera operati ting ng effi effici cien ency cy of the the company. company. Besides Besides management management of the company, company, creditors creditors and owners are also intere intereste sted d in the profit profitabil ability ity of the firm.

Credit Creditors ors want want to get intere interest st and

repayment of principle principle regularly. Owners want to get a required rate of return return on their investment. This is possible only when the company company earns enough enough profits. Generally two major types of profitability ratios are calculated. PROFITABILITY IN RELATION TO SALES 

PROFITABILITY IN RELATION TO INVESTMENT

PROFITABILITY RATIOS IN RELATION TO SALES 1.

GROSS PROFIT MARGIN

2.

CASH MARGIN

3.

OPERATING MARGIN

4.

NET PROFIT RATIO

GROSS PROFIT MARGIN:

reflec ects ts the the effi effici cien ency cy with with whic which h the the mana manage geme ment nt Gross Gross profit profit margin margin refl produces each unit of product. This ratio indicates the average spread between the cost of goods goods sold and the sales revenue. When we subtract the the gross profit margin from 100%, we obtain the ratio of Cost of goods to Sales. Both this shows profits relative to sales after the deduction of production costs, and indicates indicates the relation relation between between Production Production costs costs and Selling price. price. A high gross profit margin relative to the industry average implies that the firm is able to produce at relatively lower cost. A high gross profit profit margin ratio is a sign of good management. A gross margin ratio may increase due to any of the following factors. Higher sales prices, cost of goods sold remaining constant, i. Lower Lower cost of goods goods sold, sales sales prices prices remaining remaining constant constant,, ii. A combination combination of variations variations in sales prices and costs, costs, the margin margin widening, and and iii. Increas Increases es in the proportiona proportionate te volume volume of higher margin margin items. items.

  The The anal analys ysis is of thes these e fact factor ors s will will reve reveal al to the the mana manage geme ment nt that that how how a depressed gross profit margin can be improved.

A low gross profit margin may reflect higher cost of goods sold due to the firms` inability to purchase raw materials at favorable terms, inefficient utilization of  plant and machinery, resulting in higher cost cost of production. production. The ratio will also be low due to fall in prices in the market, or market reduction in selling price by the firm in an attempt to obtain large sales volume, the cost of goods sold remaining unchanged. The financial manager manager must be able to detect the causes of of a falling gross margin and initiate action to improve the situation.

Sales – Cost of goods sold (or) Gross profit GROSS PROFIT MARGIN RATIO =

Sales

NET PROFIT MARGIN RATIO:

Net Net prof profit it is obta obtain ined ed when when oper operat atio ion n expe expens nses es,, inte intere rest st and and taxe taxes s are are subtracted from the gross profit.

If the non-operating income figure is substantial, it may be excluded from PAT to see profitability profitability arising directly from sales. Net profit margin ratio establishes a relationship between net profit and sales and indicated management’s efficiency in manufacturing, administering administering and selling the products. products. This ratio is the overall measure measure of the firms` firms` ability to turn turn each rupee rupee sales into into net profit. profit. If the net marg margin in is inad inadeq equa uate te,, the the firm firm will will fail fail to achi achiev eve e sati satisf sfac acto tory ry retu return rn on shareholder`s funds.   This This ratio ratio also also indica indicates tes the firms` firms` capacit capacity y to withst withstand and advers adverse e econom economic ic conditions. A firm with a high net margin ratio would be in an advantageous position to survive in the face of falling selling prices, rising costs of production or declining demand for the product. It would really be be difficult for a low net margin firm to withstand withstand these these adversities. adversities. Similarly, Similarly, a firm higher net profit profit margin can make better use of favorable condition, such as rising selling prices; fall in costs of  produc productio tion n or increa increasin sing g demand demand for the product. product.

Such Such a firm firm will be able able to

accelerate its profits at a faster rate than a firm with a low net profit margin will. An analyst will be able to interpret the firm’s profitability more meaningfully if  he/s he/she he eval evalua uate tes s both both the the ratio ratioss-gr gros oss s marg margin in and and net net marg margin in-jo -join intl tly. y.

To

illustrate, if the gross profit margin has increased over years, but the net profit margin has either remained constant or declined, or has not increased as fast as the gross margin, this implies that the operating expenses relative to sales have been increasing increasing..

The increasing increasing expenses expenses should should be identified identified and controlled controlled..

Gross profit margin may decline due to fall in sales price or increase in the cost of  production. Profit after tax NET PROFIT MARGIN RATIO =

CASH MARGIN RATIO:

Sales

Cash profit excludes excludes depreciation. It means Net profit after interests and taxes but before depreciation. depreciation. This ratio indicates indicates the relationship between the profit, which accrues accrues in cash and sales. Greater Greater percentage percentage indicates indicates better position position and Vice-Versa as it shows the correct profit earned by the firm.  This ratio is expressed as cash profit to sales. Cash profit CASH MARGIN RATIO =

X

100

Sales

OPERATING MARGIN RATIO:

Operating margin ratio is also known as Operating Operating Net profit ratio. It is the ratio of operating operating profit to sales. sales. This ratio ratio establishes establishes the relations relationship hip between between the total cost incurred and sales. Operating profit is the Net profit after depreciation but Before Interests and Taxes. The purpose of computing computing this ratio is to find out the overall operational efficiency efficiency of the business business concern. It measures the const of operations per rupee of sales.  This ratio is expressed as operating profit to sales. Operating profit

OPERATING MARGIN RATIO =

X

100

Sales

PROFITABILITY RATIOS IN RELATION TO INVESTMENT

1.

RETURN ON INVESTMENT

2.

RETURN ON NET WORTH

3.

RETURN ON CAPITAL

4.

RETURN ON GROSS BLOCK  

RETURN ON INVESTMENT:

 The term investmen investmentt refers to Total Assets. Assets. The funds funds employed employed in Net assets are known as Capital Capital Employed. Employed. Net assets assets equal net fixed assets assets plus current

assets assets minus Current Current liabiliti liabilities es exclud excluding ing Bank loans. loans.

Altern Alternati ativel vely, y, Capita Capitall

employed in equal to Net worth plus total debt.

 The conventional approach of calculating return on investment (ROI) is to divide PAT PAT by Inve Invest stm ment. ent.

Inve Invest stme ment nt rep repres resents ents poo pool of fun funds supp suppli lied ed by

shareholders and lenders, while PAT represents residual income of shareholders; therefore, it is conceptually conceptually unsound to use PAT in the calculation calculation of ROI. Also, as discus discussed sed earlier, earlier, PAT is affect affected ed by capita capitall struct structure ure..

It is, therefore therefore more

appr approp opri riat ate e to use use one one of the the foll follow owin ing g meas measur ures es of ROI ROI for for comp compar arin ing g the the operating efficiency of firms. EBIT (1-T) ROI = ROTA = Total Assets

EBIT (1-T) ROI = RONA = NET Assets

Where ROTA and RONA respectively Return on Total assets and Return on Net assets.RONA is equivalent of Return on Capital Employed. RETURN ON NET WORTH:

NET Worth is also known known proprietors proprietors Net Capital Capital Employed. Employed. The Return Return should be calculated with reference to profits belonging to shareholders, and therefore, profit profit shall be Net profit profit after interest interest and tax. tax. The profit profit for this purpose purpose will include even non-trading non-trading profit. This is given as follows: follows: Net profit after interest & tax RETURN ON NET WORTH =

X 100 Shareholders funds

RETURN ON CAPITAL:

 The ROCE is the the second type of ROI. The term capital employed employed refers to longterm funds supplied by the the creditors and owners of of the fund. It can be computed computed in two ways. First, it is equal to non-current non-current liabilities liabilities (long-term (long-term liabilities) liabilities) plus plus owner’s owner’s equity. Alternativel Alternatively, y, it is equivalent equivalent to Net Working Working Capital plus Fixed Fixed

Assets Assets..

Thus, Thus, the Capita Capitall Employ Employed ed provides provides a basis basis to test test the profita profitabil bility ity

related to the sources sources of long-term funds. A comparison of this ratio with similar firms, with the industry average and overtime would provide sufficient insight into how efficiency the long-term funds of owners and creditors are being used.  The higher the ratio, the more efficient is the use of Capital Employed.

NET PROFIT AFTER TAX/EBIT ROCE =

X 100 Average Total Capital Employee

RETURN ON GROSS BLOCK:

 This ratio establishes a relationship between net profit and gross fixed assets.   This This ratio emphasi emphasizes zes the profit profit on invest investmen mentt in Fixed Fixed Assets. Assets.

This This ratio ratio is

expressed as follows:

Net profit RETURN ON GROSS BLOCK =

X

100

Gross Block 

NET PROFIT PROFIT is profit profit before before Tax.

Gross Gross Block Block means means Gross Gross fixed assets assets i.e., i.e.,

Fixed assets before deducting depreciation.

RATIO ANALYSIS IN VSP/RINL

LIQUIDITY RATIOS

Liquidity Liquidity ratios ratios judge the firm’s firm’s ability to meet short-ter short-term m obligations obligations.. These These ratios give a good insight into a firm’s ability to remain solvent in the events of  adversities. For this purpose, short-term resources are compared with short-term short-term obligations.

CURRENT RATIO:

CURRENT ASSETS CURRENT RATIO

= CURRENT LIABILITIES

  This ratio ratio relates relates current assets assets to current current liabilities. liabilities. It is found out out dividing dividing current current assets by current current liabilities liabilities.. It is the most commonl commonly y used measure measure of  short-term solvency.

Table 4.1: Year wise current assets and current liabilities.(Rs. in Crore)

S. N o.

PARTS

01-02

02-03

03-04

04-05

05-06

06-07

07-08

08-09

1216.45 A

Inventory

B

Sundry Debtors

C

Cash Bank

D

Other assets

E

F

G

1111.37

857.55

706.34

1255.31

3215 1203.24

49.30 212.49

&

Loans advances

CURRENT ASSETS

Current liabilities & provision

217.57

85.62

165.65

541.57

1359.71

5621.70

& 223.38

1713.76

1220.99

5.26

241.63

1863.58

1229.74

24.32

550.90

2726.88

184.36

710.12

6047.50

1063.84

8252.00

191.27

7699.1

6624.1 7

292.44

258.91

1958.49

1569.6 9

11804.59

11859. 32

3191.62

4181.5 2

3.69

2.83

7194.68

100.17 5.41

93.41 216.80

3932.60 161.12

1761

314.48

1518.90

10448.10

1235.35

1424.15

1587.86

2104.30

2.21

4.25

5.20

4.97

1.52

H

CURREN T RATIO

1.40

Current Ratio

6

5

4

3

2

1

0 2 00 001 -0 -02 2 00 002 -0 -03 2 00 003 -0 -04 2 00 004 -0 -05 2 00 005 -0 -06 2 00 006 -0 -07 2 00 007 -0 -08 2 00 008 -0 -09

Interpretation:

 The Current ratio for the year 2008-09 was 2.83. That is, for every rupee of  Current Liability the firm is holding 2.83 of Current Current Assets. It shows that that the firm was able to meet its obligations.

Observations:

1.

Ther here is is a de decre crease in in th the Cur Currrent ent Lia Liabi bili liti ties es unt until 2009.

2.

The The com compa pany ny’s ’s Curr Curren entt Lia Liabi bilit litie ies s wer were e mor more e or or les less s the the same same in comp compar aris ison on with with

the previous year. 3.

The The com compa pany ny’s ’s Curr Curren entt ass asset ets s hav have e bee been n inc incre reas asin ing g eve every ry year year..

4.

Ther here is a consta nstant nt incr incre ease in sale sales s, whic which h was was res respons ponsib ible le fo for inc increas ease in

debtors. 5.

Also the company was maint intaini ining more cash balances when compared to

previous years which could be due to increase in turnover.

 The Current Ratio for the year 1.40 in 2001-02 and then to 1.52 in 2002-03 and then to 2.21 in 2003-04 and then to 4.25 in 2004-05 and then to 5.20 in 2005-06 and then 4.97 in 2006-07 and then to 3.69 in 2007-08 and then to 2.83 in 200809. It means that the company was improving its short-term solvency position despite increase in its competition from all around.

QUICK RATIO: LIQUID ASSETS QUICK RATIO/LIQUID RATIO = CURRENT LIABILITIES

LIQUID ASSETS ASSETS = CURRENT ASSETS – INVENTORY

  Thi This s is a narr narrow ow meas measur ure e of liqu liquid idit ity. y.

This This rati ratio o conc concen entr trat ates es on cash cash,,

marketable marketable receivables receivables in relation relation to current current obligation. obligation. So, it provides provides a more penetrating measure of liquidity than current ratio. Table 4.2:  Year wise liquid assets and current liabilities.

(Rs. in Crore) PARTICULARS

01-02

02-03

03-04

04-05

212.49

217.58

85.62

49.30

Sundry Debtors

Cash & Bank

161.12

Other assets

5.40

541.57 1359.71 3932.61

5.26

24.31

100.18

05-06

165.65

06-07

07-08

08-09

216.80

93.41

191.27

5621.7 7194.68 7669.11 6624.17

184.36

314.48

292.43

258.91

LIQUID ASSETS CURRENT LIABILITIES

379.01

764.11 1469.64 4082.09 5971.71 7725.96 8084.95 7074.35

1220.99 1229.74 1235.35 1424.15 1587.86

2104.3 3191.62 4181.32 2

QUICK  RATIO

0.31

4

0.62

1.19

2.87

3.76

3.67

.53

1.69

QUICK RATIO

3.5 3 2.5 2 1.5 1

QUICK RAT RAT IO

0.5 0

Interpretation:

 The Quick ratio for the year 2008-2009 was 1.69. That is, for every one rupee of Quick Liabilities the firm is holding 1.69 RS of Quick Assets.

Observations:

1. There is is a decrease decrease in the total liquid liquid assets. assets. 2. There is a decrease decrease in the the quick liabili liabilities ties until until 2009. 2009. 3. There is a decrease decrease of Quick Quick liabilitie liabilities s in the last last two years. years. 4. Ther There e is a cons consta tant nt incr increa ease se in sale sales, s, whic which h was was resp respon onsi sibl ble e for for incre increas ase e in debtors.

5. Also Also the the comp compan any y was was main mainta tain inin ing g low low cash cash bala balanc nces es when when comp compar ared ed to previous years, which could be due to decrease in turnover.  The Quick Ratio has gradually increased from 0.310 to 0.621 in 2003, and then to 1.19 in 2004, and then to 2.87 in 2005 and then to 3.76 in 2006 and then to 3.67 in 2007 and then to 2.53 in 2008 and then to 1.69 in 2009. It means that the compan company y has not recove recovered red its shortshort-ter term m solven solvency cy posit position ion despit despite e all around increased competition.

CASH RATIO: Cash & Marketable Securities CASH RATIO = Current Liabilities

  This This ratio is also known known as super quick quick ratio. ratio.

It reflect reflects s only the absolut absolute e

liquidity available with the firm.

Table 4.3:  Year wise Cash position and current liabilities.

(Rs. in Crores)

PARTICUL ARS

Cash

&

Bank

Current Liabilities

CASH RATI O

01-02

02-03

03-04

04-05

05-06

161.12

541.57

1359.71

3932.60

5621.70

1172.25

1173.02

1116.25

1335.55

0.13

0.44

1.10

2.76

06-07

07-08

08-09

7194.66

7699.11

6624.17

1587.86

2104.30

3191.62

4181.32

3.54

3.42

2.41

1.58

CASH RATIO 4 3 2

CASH RATIO

1 0

Interpretation:

 The Cash ratio for the year 2008-2009 was 1.58. That is, for every one rupee of  Current Current Liabilitie Liabilities s the firm firm is holding holding 1.58. 1.58. Cash in its Curren Currentt Assets. Assets. That is, is, the firm is able to maintain nearly 50% of Cash reserves in its current assets.  This could be obtained due to increase in its turnover. Also, the ratio was almost satisfying the the ideal Cash Ratio i.e., 1:2. This indicates that the firm’s Cash position is satisfactory. Observations:

1.

Ther here is an inc increas ease in the tot total Cur Currrent Asse ssets. ts.

2.

Ther here is is a de decre crease in in th the Cur Currrent ent Lia Liabi bili liti ties es unt until 2009.

3.

Ther here is a cons consttant main mainte tena nanc nce e of the the Cur Current rent lia liabi bili liti tie es in the the las last coup couple le of  of 

years. 4.

There is constant inc increase in sal sales, which ich was responsibl ible for increase in

debtors. 5.

Also the company was maintaining low cash balances when compared to

previous years, which could be due to decrease in turnover.

 The Cash Ratio which was low during the year 2001-02 and increased from 0.13 to 0.44 in 2003, and then to 1.10 in 2004, and then to 2.76 in 2005 and then to

3.54 in 2006 and then to 3.42 in 2007 and then to 2.41 in 2008 and then to 1.58 in 2009. It means that the company has not recovered its Cash reserves position to a grea greate terr exte extent nt..

This This is due due to decre decreas ase e in cash cash rese reserv rve e rath rather er due to

increase in its Current liabilities. LEVERAGE RATIOS Leve Levera rage ge rati ratios os indi indica cate te to what what exte extent nt the the firm firm has has fina financ nced ed its its investments by borrowing. Use of debt financing increases the risk of the the firm. Leverage ratios reflect the financial risk exposure of the firm. DEBT – EQUITY RATIO: DEBT DEBT – EQUITY RATIO = EQUITY 

Debt-equity ratio is the ratio of the total debt in the firm (both long-term and short-term) to equity; where equity is the sum of ordinary share capital and preferential share capital. Table 4.4:  Year wise Debt and Equity position. (Rs. in Crore)

PARTICULA RS

2001-02

2002-03

200304

200405

200506

200607

200708

200809

Secured Loans

1373.48

711.07

37.17

88.94

88.15

604.45

332.78

907.95

Unsecured Loans

615.89

474.83

-

442.42

369.44

312.51

107.95

100.04

Deferred Loans

1.21

1.33

-

-

-

-

-

-

DEBT

1990.58

1187.23

37.17

531.36

457.59

916.96

440.73

1007.7 6

EQUITY

7827.31

7827.31

7827.3 1

7827.3 1

7827.3 1

7827.3 1

7827.3 1

7827.3 1

DEBTEQUITY  RATIO

0.254

0.152

0.005

0.067

0.059

0.117

0.056

0.128

LEVERAGE RATIO 0.3 0.25 0.2 0.15

DEBT-EQUI DEBT -EQUITY TY RATIO

0.1 0.05 0

Interpretation:

 The Debt-Equity ratio for the year 2008-09 was 0.128. It is clear that from debtequity equity ratio that VSP`s lenders lenders have contributed contributed fewer funds than owners have.

Lend Lender’ er’s s cont contri ribu buti tion on is time times s of owne owner’ r’s s cont contri ribu butio tion n for for 2008 2008-09 -09..

This This

relationship describes the lender’s contribution for each rupee of the owner’s contribution. Public sector companies companies are expected to maintain 1:1 ratio. Under unfavorable conditions, firms desire desire to use a low debt-equity ratio. This ratio shows shows that debt is of the equity. This less debt indicates less risk to shareholders. Observations:

1.

There is is a co constant in increa rease in the deb debtt le level.

2.

The equity level is constant.

 The debt-equity ratio has increased from 0.254 in 2001, but it decreased to 0.152 in the year 2002 and to 0.005 in 2003 and to 0.067 in 2004 and to 0.059 in 200506 and 0.117 in 2006-07 and to 0.056 in 2008 and to 0.128 in 2009. This increase in the ratio is due due to increase in the the debt level. This shows that that the firm is able able to decrease its interest burden by clearing its debt.

PROPRIETORY RATIO: EQUITY SHARE CAPITAL PROPRIETORY RATIO = TOTAL TANGIBLE ASSETS

 This ratio states relationship between share capital and total assets. Proprietary equity represents equity share capital, preference share capital and reserv reserves es and surplu surplus. s.

The latter latter ratio is also also called called Capital Capital employe employed d to total total

assets. Table 4.5:

 Year wise shareholders fund (Net Worth) and total Net Assets.(Rs. in

Crore)

PARTICULARS LARS

200 200102

200203

200304

200405

200506

200607

200708

2008-09

SHAREHOLDER S FUND

TOTAL ASSETS

7827.3 1

7827.31

7827.3 1

7827.3 1

7827.31

7827.31

7827.1

7827.31

NET5956.0 3

5702.99

6124.2 4

8549.8 9

1051.99

12836.6

-

-

137.24

127.8

91.54

744.04

60.97

-

-

PROPRIETARY  131.41 RATIO

PROPRIETORY RATIO 800 700 600 500 400 300

PROPRIETARY RATIO

200 100 0

Interpretation:

 The Proprietary ratio for the year 2006-2007 was 60.97. This relation describes shareh sharehold olders ers contrib contributi ution on for each rupee of the total net assets assets..

This This ratio

reflects that the shareholder’s contribution was 60.97 of the total net assets.  This shows that the firm has increased its contribute to the assets. Observations:

1.

Ther here is is a consta nstant nt decr decre ease in in the the Total tal Net Net Assets sets..

2.

Ther There e is sig signi nifi fica cant nt imp impro rove veme ment nt in in sha shareho rehold lder er’s ’s fun fund d when when co compa mpared red to the the

previous years.

Earlier Earlier the proprietary proprietary ratio was in a declining declining trend. trend. That is, in 2001-02 2001-02 it was 131% in 2002-03 2002-03 it was 137%. 137%. Later it improved improved in the year 2003-04 2003-04 to 127%

and to 91% in 2004-05 2004-05 and and to 744% in 2005-06 2005-06 and to 60% in 2006-07 2006-07.. This This shows that the firm improved its proprietary fund, by way of earning profits. EBIT INTEREST COVERAGE RATIO = INTEREST CHARGES

EBIT = (+/-) Net Profit/Loss + Interest Interest = Interest and Finance charges

Intere Interest st covera coverage ge ratio ratio indicat indicates es the extent extent to which which earning earnings s can declin decline e without resultant financial hardship to the company because of its inability to meet annual interest cost.

Table 4.6:  Year wise Interest Coverage Ratio.

(Rs. in Crores)

PARTICULARS

2001-02

2002-03

2003-04

2004-05

2005-06

EBIT

215.31

706.51

1596.07

2019.20

1283.43

INTEREST CHARGES

290.46

185.83

48.89

11.11

31.06

INTEREST COVERAGE

0.741

3.80

32.65

181.75

41.32

INTEREST COVERAGE RATIO 200

150 INTEREST 100

COVERAGE RATIO

50

0

Interpretation:

 The interest coverage ratio for the year 2006-07 was 29.18. It shows that the profits profits of the firm are nearly nearly 29 times of its interest interest liability. liability. The higher higher the ratio, ratio, better better it is both for the firm and and for the lenders. lenders. Also, it shows shows the firm’s firm’s ability ability to handle fixed charge liabilities. This is obtained due to two reasons reasons that is increase increase in the earnings of the firm and also due to decrease of the interest charges; which is due to decrease in the debt level. Observations:

1.

There is almost almost 29-fold 29-fold increase increase in the the Earning Earnings s before before Interes Interestt and Taxes Taxes (EBIT) (EBIT)..

2.

There There is sign signifi ifican cantt improv improveme ement nt in decl declini ining ng of the the inter interest est char charges ges..

The ratio has increased to 0.74 in 2001-02, and then to 3.80 in 2002-03, and then there was a increase in the ratio to 32.65 in 2003-04 and to 181.75 in 2004-05 and decreased decreased to 41.32 41.32 and 29.16 in the year year of 2006-07. 2006-07. This shows shows that the the firm is increasing its efficiency by increasing its EBIT and decreasing its interest burden.

FIXED ASSETS FIXED ASSETS TO NETWORTH = NET WORTH

FIXED ASSETS

=

GROSS BLOCK – DEPRICIATION

NET WORTH

=

SHAREHOLDERS FUND (PAIDUP CAPITAL)

(+/-) NET PROFIT/LOSS (+/-) RESERVES &SURPLUS/ MISCELLANEOUS EXPENDITURE

Fixed assets to Net Worth indicate the extent to which equity capital is invested in net fixed assets.

Table 4.7: Year wise fixed assets to net worth position.

(Rs. in Crore)

PARTICU LAR S

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

FIXED

4235.03

3827.57

3372.12

2441.30

2078.26

1790.46

2744.47

3286.02

4851.79

6878.32

7546.33

7533.54

1.54

1.16

0.69

0.35

0.27

0.24

ASSETS

NET WORTH FIXED ASSETS TO NET WORTH

FIXED ASSET TO NET NET W ORTH 1.6 1.4 1.2 1 FIXED ASSETS TO

0.8

NET WORTH

0.6 0.4 0.2 0

Interpretation:

 The Fixed Assets to Net worth ratio for the year 2006-07 was 0.24. It shows that the ratio ratio is more more than than one. It means means that fixed fixed assets assets are part part financed financed from from outsiders` outsiders` funds. funds. Higher Higher this ratio, the less less will be the protection protection to creditors. creditors. So, the current year ratio could be identified as improvement in its position.

Observations:

1.

There is increase in the Fixed Assets.

2.

Ther There e is is imp impro rove veme ment nt in the the Net Net wort worth h whe when n com compa pare red d to to the the prev previo ious us year years. s.

 The ratio was 1.5 in 2001-02 and to 1.16 in 2002-03 and 0.69 in 2003-04 and 0.35 in 2004-05 and 0.27 in 2005-06 and 0.24 in 2006-07. The higher this this ratio, the less will will be the protection protection to creditors. creditors. But in the current current year ratio ratio there is decrease in the ratio it is due to increase in the Net worth which could not be depicted as improvement in the ratio.

ACTIVITY RATIOS Activity ratios indicate how well the firm is managing various classes of assets such as inventory inventory or fixed assets. assets. These ratios also referred to as turnover ratio; because they show show how quickly quickly assets are being converted into sales. It is very

difficult to make a general statement in this regard. Still, high turnover ratios are usually associated with good assets management and low turnover ratios are associated with bad assets management. SALES INVENTORY TURNOVER RATIO = INVENTORIES

 This ratio indicates indicates how efficiently efficiently the firm is managing its inventory. This ratio roughly indicates how many times per year the inventory is replaced. Tabl Table e 4.8: 4.8:

Year Year wis wise e inve invent ntor ory y turn turnov over er rat ratio io.. (Rs. in Crore) 2001 -02

200203

200304

200405

2005 -06

200607

200708

200809

SALES

4080. 94

5058.2 5

5462. 90

7359. 84

7305. 71

7932. 66

1088.3 7

9128.3 8

INVENTORI ES

1159. 42

984.46

781.9 5

980.8 2

1236. 99

1210. 80

1761.5 0

3215.3 8

5.14

6.99

7.50

5.91

6.55

5.16

2.83

PARTICUL ARS

INVENTORY  3.52 TURNOVER RATIO

INVENTORY TURNOVER RATIO 8

6 INVENTORY

4

TURNOVER RATIO RATIO

2

0

Interpretation:

 The Inventory Inventory turnover turnover ratio ratio for the year 2008-09 was 2.83 2.83 times. That is, the firm is able to convert its inventory for nearly 2 times within a year. Normally, higher the ratio indicates the better inventory inventory management. Though the ratio is not so high it is is reasonably high. It shows that there is a rapid turning of the inventor inventory y into into receiv receivabl ables es through through sales. sales.

Hence, Hence, it is evident evident that that the

decrease in the ratio is obtained due to decrease in its turnover. Observations:

1. 2.

There is is an an in increas ease in in th the sa sales ye year af after ye year.   There There are fluctu fluctuati ations ons in the invento inventory. ry.

The invento inventory ry has decreas decreased ed

during the last couple of years .

 This indicated indicated that more sales are generated generated with high investment investment in inventory. inventory.  This shows bad signs. Also, this is even identified from non-improvement in the Ratio year after after year. That is, 4.28 4.28 times in 2003, 2003, and from 6.98 times times in 2004, and then to 7.50 times in 2005, and then to 5.91 times in 2006 and 6.55 in 2007, and then to 5.1 times in 2008, and then to 2.83 in 2009.

DEBTORS TURNOVER RATIO:

SALES DEBTORS TURNOVER RATIO

= DEBTORS

Debtor Debtors s consti constitut tute e an importan importantt consti constitue tuent nt of curren currentt assets assets..

Qualit Quality y of 

debtors debtors determines determines to a great extent a firm’s liquidit liquidity. y. Debtor’s Debtor’s turnover turnover ratio is very important as it depicts the efficiency of the staff entrusted with the task of  collection from debtors.   Table 4.9: Year wise debtors turnover ratio.

(Rs. in Crore)

PARTIC UL-

200102

200203

200304

200405

200506

200607

200708

200809

SALES

4080.94

5058.25

5462.90

7359.84

7305.71

7932.66

9088.37

9128.38

SUNDRY DEBTORS

193.16

215.03

151.59

67.46

107.48

191.54

93.41

191.27

DEBTORS TURNOVE R RATIO

21.13

23.52

36.04

109.10

67.97

44.42

97.27

47.72

DEBTORS TURNOV TURNOVER ER RATIO 120 100 80 DEBTORS

60

TURNOVER RATIO RATIO

40 20 0

Interpretation:

 The Debtors Debtors turnover turnover ratio for the year 2008-09 2008-09 was 47.72 times. times. That is, the firm is able to convert Credit Sales (Debtors) into Cash in 47 times in a year. It shows that the debtors are collected soon. Observation:

1.

There is is an an in increas ease in in th the sa sales in in al all th the ye years. rs.

2.

There is is constant in increase in debtors.

 The Debtors Turnover Ratio was fluctuating all the years` i.e. 23.52 in 2002, 36.04 in 2003, 109.10 in 2004, 67.97 in 2005, 44.42 in 2006-07 , 97.29 in 2008, 47.72 in 2009

.

DEBTORS COLLECTION PERIOD RATIO : 365

DEBTORS COLLECTION PERIOD RATIO = Debtors Turnover Ratio

 This ratio indicates the extent to which the debts have been collected in time.  The debt collection period indicates indicates the average debt collection period. This ratio is a good indicator to the lenders of the firm, because it explains to them whether their borrow borrower er is collec collectio tion n from from its debt debt in time. time.

An increase increase in this period period indica indicates tes

blockage of funds in debtors.

Table 4.10:

 Year wise fixed assets to net worth position.

(Rs. in Crore)

PARTICULARS

200102

200203

200304

200405

200506

200607

200708

200809

DAYS

365

365

365

365

365

365

365

365

DEBTORS TURNOVER RATIO

21.13

23.52

36.04

109.10

67.97

44.42

97.39

47.72

DEBTORS

17.27

5.52

10.13 3.35

5.37

8.22

3.75

7.64

COLLECTION

DEBTORS COLLECTION PERIOD 20

15 DEBTORS COLLECTION PERIO PE RIOD D

10

5

0

Interpretation:

 The firm is able to turnover its Debtors for 47.72 times in a year. This shows that the debt from from the debtors is collected collected very soon. Increasing Increasing the sales sales with less credit period is said to be a very good position. . So, it is clear that the firm is managing its debtors efficiently. Observations:

1.

Ther here is an inc increas ease in the sale sales s in all the yea years.

2.

Ther There e is an an decr decrea ease se in in debt debtor ors s befo before re but but the there re is is a incr increa ease sed d rati ratio o in cur curre rent nt

year.

 The Debtors collection period was varying for every year but it was less in all the years. That is, is, it has varied varied from 15 days days to 10 in 2003, 2003, to 3 days in 2004, 2004, to 5 days in 2005, and then to 8 days in 2006, to 3 days in 2007, to 7 days in 2008. But the credit period maintained was low and it has improved its performance by decreasing decreasing the credit credit period from the last couple couple of years. This shows shows that the firm improved its position further by increasing its turnover.

 Table that though the sales has shown substantial increase, the company was able to maintain the debtors at more or less the same level, which indicates efficient management of debtors/credit sales.

FIXED ASSETS TURNOVER RATIO :

SALES FIXED ASSETS TURNOVER RATIO = NET FIXED ASSETS

 This ratio depicts the turnover of fixed assets during the course of business.  The ratio indicates, indicates, whether capitalization is proper. If disproportionate amount has has been invested in assets, this ratio will communicate this message.  Year wise fixed assets turnover ratio.

Table 4.11:

(Rs. in Crore)

PARTIC UL

200102

200203

200304

200405

200506

200607

200708

200 8-09

SALES

4080.94

5058.25

5462.90

7359.84

7305.71

7932.66

9088.37

9128.38

NET FIXED

4235.03

3827.57

3372.12

2441.30

2078.26

1790.46

1384.64

1256.25

0.96

1.32

1.62

3.01

3.52

4.43

6.56

7.26

FIXED ASSETS TURNOVE R RATIO

FIXED ASSET T URNOVER RNOVER RAT RAT IO 8 6 FIXED ASSETS TURNOVER RATIO

4 2 0

Interpretation:

 The ratio for for the year 2008-09 2008-09 was 7.26 times. Interpreti Interpreting ng the reciprocal reciprocal of  this ratio, one may say that for generating a sale of one rupee, the company needs 0.26 times investment in fixed assets.

Observations:

1.

Ther There e is is an an inc incre reas ase e in in the the sale sales s in all all the the year years. s.

2.

Ther here is is an an inc incrreas ease in in the the Fixe ixed Ass Asse ets. ts.

There is an increase increase in the ratio ratio in all the years. That is, the Ratio Ratio has increased increased from 1.32 in 2002, 1.62 in 2003, 3.01 in 2004, 3.52 in 2005, and 4.43 in 2006, 6.56 in 2007, 7.26 in 2008. This indicates that the company had improved its performance in managing its fixed assets.

WORKING CAPITAL TURNOVER RATIO:

SALES

NET WORKING CAPITAL

WORKING CAPITAL TURNOVER RATIO =

 The Working Capital Turnover Ratio studies the velocity or utilization of the working capital of the firm during a year.

NET WORKING CAPITAL

[CURRENT ASSETS – SHORT TERM =

BANK BORROWINGS] BORROWINGS] - CURRENT

(OR) WORKING CAPITAL

LIABILITES

Table 4.12: Year wise Working Capital Turnover Ratio

(Rs. in Crore) PARTICU L A R S

200102

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

SALES

4080.9 5

5058.25

5462.90

7359.84

7305.71

7932.66

9088.37

9128.38

492.79

633.86

1491.33

4623.37

6664.14

8343.80

8612.97

7678.00

NET WORKING CAPITAL

WORKING CAPITAL TURNOVE R RATIO

8.28

7.98

3.66

1.59

1.10

0.95

1.05

1.18

WORKING CAPITAL TURNOVER RATIO 10 8 6

WORKING CAPITAL TURNOVER RATIO

4 2 0

Interpretation:

 The ratio for for the year 2008-09 2008-09 was 1.18 times. Interpreti Interpreting ng the reciprocal reciprocal for the year 2006-07 only 0.95 of net current assets are used to generate 1 rupee of  sales.

Observations:

1.

Ther There e is is an an inc incre reas ase e in in the the sale sales s in all all the the year years. s.

2.

Ther There e is a con const stan antt incr increa ease se in the the Net Net Work Workin ing g Ca Capita pital. l.

The Ratio has decreased from 8.28 to 7.98 in 2003, to 3.66 in 2004, to 1.59 in 2005, and then to 1.10 in 2006 and then to 0.95 0.95 in 2007,and then to 1.05 in 2008, and then to 1.18 in 2009. 2009. From the table we can say that there is an increase in the capital invested in working capital but this increase is corresponding the increase in sales, which has increased about 24%

PROFITABILITY RATIOS Prof Profit its s are are the the ulti ultima mate te test test of mana manage geme ment nt effe effect ctiv iven enes ess. s.

Thes These e rati ratios os

communicate the profitability of events that have already taken place.

BASED ON SALES GROSS PROFIT RATIO :

GROSS PROFIT GROSS PROFIT RATIO =

X

100

SALES

Gross profit is considered to be a reliable guide as regards adequacy of selling prices. Further is acts as an indicator of the the efficiency of inventory control. control.  Table  Table 4.13: 4.13: Year Year wise wise Gross Gross profit profit ratio. ratio. (Rs. in Crore)

PARTIC ULARS

GROSS PROFIT

200102

-47.43

200203

200304

200405

200506

518.12

1500.7 6

2811.2 0

1882.6 9

SALES

4080.9 4

5058.2 5

5462.9 0

7359.8 4

7305.7 1

GROSS PROFIT RATIO

-1.16

10.24

27.47

38.20

25.77

200607

200708

200809

2271

3027

2116

8343.8 0

9088.3 7

9128.38

27.21

33.30

23.18

PROFITABILITY RATIO 40 30 20

GROSS PROFIT RATIO

10 0 -10

Interpretation:

  The The Gros Gross s prof profit it marg margin in refl reflec ects ts the the effi effici cien ency cy with with whic which h mana manage geme ment nt produces produces each unit unit of product. product. The Gross Gross profit margin margin for the year 2008-09 2008-09 was was 23.1 23.18% 8%..

It shows shows that that for for ever every y 1 rupe rupee e of sales sales of the the Gros Gross s prof profit it

obtained obtained to 0.27. The decrease decrease in the ratio is due to increase increase sales sales and also decrease in the Gross profit. Observation: 1.

Ther There e is is an incr increa ease se in the the Sal Sales es year year afte afterr yea year. r.

2.

Ther There e is is in-c in-con onsi sist sten entt gro growt wth h in in the the Gros Gross s pro profi fit. t.

 The ratio has been increasing every year. It has increased from 10.24% in 2002200203, and then to 27.47% in 2003-04, and then to 38.20% in 2004-05 and then 25.77% in 2005-06 and then to 27.98% in 2006-07 and then 33.30% in 2008 and then then to 23.18% 23.18% in 2009.. 2009.. This This decrease decrease in the ratio is due to decrease decrease in the Gross profit. profit. It shows that that the firm has not improved improved its efficiency efficiency in managing managing and utilizing the plant and machinery.

OPERATING MARGIN: OPERATING PROFIT OPERATING MARGIN =

X 100

SALES

 The Operating margin establishes the relationship between the total cost incurred excluding excluding interest interest and sales. This ratio is used used to find out the overall operatio operational nal efficiency of the business concern. Table 4.15:

 

Year wise Operating profit ratio.

(Rs. in Crore)

PARTIC ULARS

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

OPERATI NG PROFIT

215.37

703.98

1549.72

2822.43

1913.93

2268.17

2790.25

1552.57

SALES

4080.94

5058.25

5462.90

7359.84

7305.71

7932.66

9088.37

9128.88

OPERAT ING MARGIN RATIO

5.27

13.92

28.36

38.40

26.20

28.59

30.70

17.00

OPERATING MARGIN RATIO 40 35 30 25 20 15 10 5 0

Interpretation:

OPERATING OPER ATING MARGIN MARGIN RATIO

 The Operating Operating margin margin is the profit profit before interest interest and taxes. taxes. This ratio ratio shows the operati operating ng efficienc efficiency y of the company. company. The ratio ratio for the year 2008-09 2008-09 was 17.00%. This ratio reflects that there is consistent growth growth in the operating ratio though there is involvement of more operating expenses. Observations:

1.

Ther here is an inc increas ease in the Sale Sales s year ear after fter yea year.

2.

Ther here is is inin-c consis nsisttent ent gr growth in the the Ope Operrating ing Pro Profi fit. t.

3.

There is is al also decrease in in ex expenses.

There was decrease from 2008-09 to substantial from year after year. This shows the the non-efficient management of the business affairs. NET PROFIT RATIO :

NET PROFIT NET PROFIT RATIO =

X

100

SALES

 The Net Profit Profit ratio reveals reveals the overall overall profitability profitability of the concern. concern. It reveals reveals the efficiency of management in manufacturing, selling and administrative and other activities of the firm. Table 4.16:

(Rs. in Crore)

 Year wise Net Profit ratio.

PARTIC UL AR

200102

200203

200304

200405

200506

200607

200708

200809

NET PROFIT

-75.15

520.68

1547.18

2008.09

1252.37

1363.43

1942.74

1335.75

SALES

4080.94

5058.25

5 7359.84

7305.71

7932.66

9088.37

9128.88

17.14

17.19

21.37

14.63

5462.90 NET PROFIT RATIO

-1.84

10.29

28.32

27.28

NET PROFIT RATIO 30 25 20 15

NET PROFIT RATIO

10 5 0 -5

Interpretation:

 T The he Net Net prof profit it is the the fina finall prof profit it of the the comp compan any y afte afterr dedu deduct ctin ing g all all the the expenditures. The profit percentage for the year 2008-09 was 14.63%. Though ther there e

is heavy avy

amo amount levi levied ed on

Depr Deprec ecia iati tio on

and and

Defer eferre red d

Reven evenue ue

Expenditure. So, this could be further improved by in decreasing the expenditure or increasing the sales.

Observations:

1.

Ther here is posi positi tiv ve Net pro profit fit in the curr urrent ent year ear.

2.

There is decrease in the interest charges.

The firm was running with negative results before one year, but turn turned ed to maxi maximi mize zed d leve levell last last year year and and main mainta tain ined ed the the same same strat strateg egy y of  maxi maximi mizi zing ng in the the curr curren entt year year also. also.

This This is due due to increa increase se in sale sales s and and

decrease decrease in the interest burden. burden. So, it could be said that the the firm not improved improved its overall performance level by decreasing its efficiency levels.

BASED ON INVESTMENT:

PROFIT BEFORE TAX RETURN ON INVESTMENT =

X

100

CAPITAL EMPLOYED

 The Return on investment states the efficiency or otherwise with which the firm is operated.  Year wise Return on Investment.

Table 4.17:

(Rs. in Crore)

PROFIT  BEFOR E

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

TAX 

PROFIT BEFORE

-75.15

520.68

1547.18

2105.15

1889.51

2222.34

4461.42

4942.67

7064.66

8742.40

10134.26

31.90

21.61

21.93

TAX 

CAPITAL

4727.82

EMPLOYED

RETURN ON INVESTMENT 

-1.59

11.67

31.81

RETURN RETURN ON INVEST INVEST M ENT 35 30 25 20 RETURN ON INVESTMENT

15 10 5 0 -5

Interpretation:

  The Return Return on Investment Investment for for the year 2006-07 was was 21.93%. 21.93%. This shows shows the earning earning capacity capacity of the capital capital employed employed by the firm. That is, the firm firm is able to generate 21.93% of profit for the capital employed by the firm. Observations:

1. There is increase in Sales every every year. year. 2. There is improvement improvement in the profitability (EBT). (EBT). 3. There is increase in the Capital Capital Employed.

  The ratios, which were negative before last year i.e., till the year 2002, have improved there after i.e., from 2003. That is, from –1.57 to 11.67 in 2001-02, then to 31.81 in 2003-04 and then to 31.90 in 2005 and then to 21.61 in 2006 has been decreased.. This shows that there is improvement in the the ratio. The improvement in the ratio is due to increase in profitability (EBT), which is due to increase in sales and decrease in interest interest charges. This shows that that the firm improved a lot lot in its its prof profit itab abil ilit ity y with with less less capi capita tall empl employ oyme ment nt..

This This show shows s that that the the firm firm has has

improved its efficiency.

PROFIT AFTER TAX RETURN ON NETWORTH =

X 100 NET WORTH

 The Return on Net Worth is also known as proprietors` net capital employed.   The The ret return urn shoul hould d be calcu alcula latted with ith ref referen erence ce to pro profit fits belo elongin nging g to shareholders, and therefore, profits shall be net profit after interest and tax. Table 4.18:

PARTICULARS

 Year wise Return on Net Worth (Rs. in Crore)

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

-75.15

520.66

1547.18

2008.09

1252.37

1363.43

NET WORTH

2744.47

3286.02

4851.79

6878.32

7546.33

7533.54

RETURN ON NET WORTH

-2.74

15.85

31.88

29.19

16.59

18.09

EARNINGS AFTER  TAX

RETURN ON ON NETWORTH NETWORTH

35 30 25 20 RETURN ON NET

15

WORTH

10 5 0 -5

Interpretation:

  The Return Return on Net worth ratio for for the year 2006-07 was was 18.09%. 18.09%. This shows shows that that the the firm firm is able able to gen generat erate e a retu return rn of 15% 15% (app (app.) .) on the fund unds of  shareholde shareholders. rs. This indicates indicates that the firm has well the utilized utilized the resources resources of  owners to generate return on the funds of owners. Observations:

1.

There is increase in Sales every year.

2.

Ther here is impro provem vement ent in the the pro profita itabili bility ty (EAT EAT).

3.

There is decrease in Net Worth.

 The ratio had fallen to –2.74% in 2001-02, and then increased to 15.88% in 200203, and then to 31.88% in 2003-04 and then 29.19% in 2004-05 and then 16.59% in 2005-0 2005-06 6 and and then then 18.09 18.09 in 2006 2006-0 -07. 7.

This This shows shows that that there there is a grea greate terr

improv improveme ement nt in the ratio. ratio. The improv improveme ement nt in the ratio ratio is due to increase increase in profitability. NET PROFIT AFTER INTEREST BEFORE TAX

RETURN ON CAPITAL =

X 100 SHARE CAPITAL

 The Return on Capital (Equity) ratio indicates what kind of rate of return was earned on Book value of owners` equity. Table 4.19:

 Year wise Return on capital employed. (Rs. in Crore)

PARTICULAR  S 2001-02

PROFIT BEFORE

-75.15

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

520.68

1547.18

2253.77

1889.51

2222.34

2995

2027

7827.31

7827.31

7827.31

7827.31

7827.31

7827.31

7827.31

28.79

24.14

28.39

38.26

25.89

TAX

SHARE CAPITAL

7827.31

RETURN ON CAPITAL -0.96 EMPLOYED

6.65

19.77

RETURN ON CAPITAL 40 35 30 25 20

RETURN ON CAPITAL EMPLOYED

15 10 5 0 -5

Interpretation:

  The The Return Return on capi capita tall in the year 20082008-09 09 was 25.89 25.89%. %.

This This ratio ratio

indicates that the firm is able to generate 29.89% of return earned on the book value of share capital. Observations:

1. There is improvement improvement in the firm’s profitability profitability (EAT) (EAT) when compared to previous previous years. 2. The share share capita capitall was consta constant nt in all the year years. s.

 The performance of the firm was low low in the previous previous years. But it turned turned out to profitability position in the current year. The improvement in the ratio is due to increa increase se in profitabi profitabilit lity y (EAT) (EAT) of the firm. This This shows shows that that the firm is able able to increase the return of its shareholders.

NET PROFIT BEFORE TAX RETURN ON GROSS BLOCK =

X 100 GROSS BLOCK 

 The Return on Gross Block establishes a relationship between Net profit and Gross Fixed asset.

Table 4.20:

 Year wise Return on Gross Block(Rs. in Crore)

PARTICUL ARS

200102

200203

2003-04

200405

200506

2006-07

2007-08

2008-09

PROFIT BEFORE

-75.15

520.6 8

1547.18

2253.7 7

1889.5 1

2222.34

2995

2027

GROSS BLOCK 

8702.7 9

8730. 76

8709.71

8763.4 9

8832.1 3

8875.62

8900.83

9005.99

RETURN ON GROSS BLOCK 

-0.86

5.96

17.76

25.72

21.39

25.04

33.64

22.50

 TAX

RETURN ON GROSS BLOCK 35 30 25 20 RETURN ON

15

GROSS BLOCK

10 5 0 -5

Interpretation:

 The Return Return on Gross Block Block for the year 2008-09 2008-09 was 22.50%. 22.50%. This ratio ratio shows that a return of 25%(app) earned on the investment of capital in fixed assets. Observations:

1.

Ther here is is inc incrrease in in the the Gro Gross Blo Block ck year af after ter yea year. r.

2.

Ther here is impro provem vement ent in the the pro profita itabili bility ty (EBT EBT).

 The Return on Gross Block was negative before 2003, but there was a constant betterment in the ratio every year. It has increase from negative value to 5.96% in 2003, and then to 17.76 in 2004 and then to 25.72 in 2005 and then 21.39 in 2006 and 25.04 in 2007 and then to 33.64 in 2008 and then to 22.50 in 2009.  This shows that the firm has not been improved its efficiency.

SUMMARY 

 The Visakhapa Visakhapatnam tnam Steel Steel Plant is the most modern integrate integrated d steel plant. plant. It is the only shore-based plant in India for producing 3 million tones of steel from India. Visa Visakh khap apat atna nam m Stee Steell Plan Plantt prod produc uces es a vari variet ety y of prod produc ucts ts usin using g the the fast fastes estt technology available. available. Visakhapatnam Steel Plant has only the technology technology but also also the knowle knowledge dge of its customer customer needs. needs.

The The RINL RINL has also also establis established hed a dealer dealer

network to effectively serve the growing demand for Vizag Steel. Financial management is that managerial activity, which is concerned with the planning and controlling of the firm’s financial resources, its activities, and the mix of debt and equity which is nothing nothing but its Capital Capital Structure. The financial manager must strive to obtain the best financing mix or the optimum capital structure for his or her firm.   The The anal analys ysis is of fina financ ncia iall stat statem emen ents ts is, is, thus thus,, an impo import rtan antt aid aid to fina financ ncia iall analys analysis. is.

Users Users of financ financial ial stateme statements nts can get furthe furtherr insigh insightt about about financia financiall

strengths and weaknesses of the firm if they properly analyze information reported in these statements. statements. The future plans of of the firm should be laid down in view of of the firm’s financial strengths and weaknesses. Ratio Ratio analysi analysis s is a widely widely – used used tool of financial financial analys analysis. is. Ratio Ratio is used used as a benchmark for evaluating evaluating the financial position position and performance of a firm. As a tool of financial management, management, ratios are of crucial significance. Ratio analysis is relevant in assessing the performance of a firm in respect to the following aspects:

•

Liquidity position

•

Long – term solvency

•

Operational Operational efficiency

•

Overall profitability

•

Inter – firm comparison, comparison, and

•

 Trend analysis

SUMMARY OF RATIOS ANALYSIS IN VSP/RINL:

Ratio analysis is the technique to know the financial position of the company. Ratio analysis in Visakhapatnam Steel Plant is very important as it indicates the liquidity, solvency and profitability position of the VSP.



Liquidity ratios i.e., Quick ratio and Cash ratio ratio are up to the conventional conventional ratios. So, it

could be further improved by decreasing its Current liabilities and increasing its Current assets in par with its requirements. requirements.



Although Although Debt – Equity ratio is low, it is in a satisfacto satisfactory ry position. position. Under Under unfavorable unfavorable

conditions lower Debt/Equity Debt/Equity is desirable. The increase in the interest coverage coverage ratio shows that the firm has improved its ability to a greater extent in handling fixed charge liabilities. Also the Proprietary ratio is in satisfactory state.



Invent Inventor ory y turnov turnover er ratio ratio has has impro improve ved d in the curren currentt year year,, shows shows the opera operatio tional nal

efficienc efficiency y of the firm in managing the inventorie inventories. s. The increase increase in the Debtors Debtors turnover turnover ratio and decrease in the Debtors collection period shows the effective management of  debtors/credit debtors/credit sales.



 There is a Net Profit Profit in the current year. year. All the profitability ratios ratios basing on investment investment

like return on investment, net worth, capital and gross block which were negative in the previous years. years. But turned positive and has yielded reasonable reasonable results in the current year.



 The analysis for the purpose of the investing in shares generally concentrates on the

return on equity of VSP, which is increasing; therefore therefore the shares may be purchased.

SUGGESTIONS Some of the Suggestions drawn from the findings of the ratio analysis for the better performance of VSP/RINL are as follows. 

 The liquidity Position of the firm is increasing, which which is evident from the findings. findings. Even

though the Current Current ratio is increasing increasing steadily every year. year. It is still far from satisfactio satisfaction. n.

As against the conventional conventional ratio 2:1. It is still still only 1.59:1. 1.59:1. The same same way the the quick ratio ratio needs to be improved further. 

  Tho Thoug ugh h the the comp compan any y has has reco record rded ed very very good good impr improv ovem emen entt in mana managin ging g the the

inventories and Debtors. Debtors. The firm was not not able to generate the reasonable reasonable turnover turnover over the fixed assets. assets. So, this calls for further further improvement improvement in the ratio, ratio, by generating more more sales. 

 The company has recorded recorded profits in the current year year for the last 5 years. It is due to

the fact that vast improvement improvement in Gross profit profit ratio. The company may may put some more special efforts to further consolidate its position by concentrating on more market share. 

Another reason reason for the company to have the less Net Profit i s, due to the increase in its

expenditure and operating operating expenses. expenses. The company company may consider by that efficiency efficiency can be improved further by reducing the operating expenses. 

  The The othe otherr main main area area wher where e VSP VSP has has trem tremen endo dous us scop scope e for for impr improv ovem emen entt is in

manufacturing manufacturing of value added products and concentrating concentrating on the Exports. Exports. This will result in better sales realization and higher profit.

1.

Financial Management: Theory & Practice (4th Edition) Eugene F. Brigham and Michael C. Ehrhardt

2. Elem Elemen ents ts of Mana Manage geme ment nt Acco Accoun unti ting ng Leslie Chadwick 

3.

Principles of Corporate Finance (7th Edition) Richard Brealey Stewart Myers

4.

Accounting & Finance for Managers Barry J. Cooper

WWW.VIZAGSTEEL.COM