CHAPTER 1

INTRODUCTION

1.1 INTRODUCTION AND DESIGN OF THE STUDY

Finance holds the key to all human activity. It is guide for regulating investment decisions and expenditure and endeavors to squeeze the most out of every available rupee. Financial management is that managerial activity which is concerned with the planning and controlling of the firms financial resources.

1.1.1 Financial Performance Analysis.

The financial statement provides the basic data for financial performance analysis.

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 information regarding the financial operations of a firm. Nevertheless, they provide some useful information to the extent the balance sheet mirrors the financial position on a particular date in terms of the structure of assets, liabilities and owners equity, and so on.

The focus of financial analysis is on key figures in the financial statements and the significant relationship that exists between them.

1.1.2. Tools of Financial Analysis

A financial analyst can adopt the following tools for analysis of the financial statement. These are also termed as methods of financial analysis.

1.1.2.1. Ratio analysis

Ratio analysis is a widely – used tool of financial analysis. It is defined as the systematic use of ratios to interpret the financial statements so that the strengths and weakness of a firm as well as its historical performance and current financial condition can be determined.

It is also defined as “an expression of the quantitative relationship between two numbers”. (Wixion, Kell, Bedford 1970).

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1.1.2.2 Significance of Ratio Analysis

Ratio analysis determines the following1. The ability of the Firm to meet its current obligations.2. The extent to which the firm has used its current obligations.3. The efficiency with which the firm is utilizing its various assets in

generating sales revenue.4. The overall operating efficiency and performance of the firm.

1.1.2.3 Limitations of Ratio Analysis

1. It is difficult to decide on the proper basis for comparison.2. The comparison is rendered difficult because of differences in

situations of two companies or of one company over years.3. The price level changes make the interpretations of ratios invalid.4. The differences in the definitions of items in the balance sheet and

income statement make the interpretation of ratios difficult.

1.1.2.4 UsesThese can be useful indicators of measures to appraise the financial health

of an organization and its profitability, financial stability (long term and short term), financial management and overall efficiency of the business.

1.1.3 Profitability Ratios Profitability reflects the final of result of business operations.

1.1.4 Turn over RatiosTurn over ratios, also referred to as activity ratios or asset

management ratios, measure how efficiency the assets are employed by the firm.

1.1.5 Liquidity ratiosLiquidity refers to the ability of a firm to meet its obligations in the short run,

usually one year. Liquidity ratios are generally based on the relationship between current assets and current liabilities. The important liquidity ratios are Current ratio, acid-test ratio

1.1.6 Comparative Balance SheetComparative balance sheet as on two or more different dates can be

used for comparing assets and liabilities and finding out any increase or decrease in those items.

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1.2 INTRODUCTION TO COMPANY 1.2.1 Company profile

The company was established in the year 1964 as M/s FESTO ELGI pvt Limited, for manufacturing wood working machines in collaboration with M/S Festo Maschinen Fabrik, Germany. Subsequently, the company diversified its activities in the manufacture of DC motors, signal and transmission equipment for railways and overhead traveling cleaners developed indigenously. The name of the company was changed as M/s ELGI Electric and Industries Limited in the year 1994. There are 3 manufacturing units at present under ELGI Electric & Industries Ltd.

I) Motor Division

Laminated yoke DC motor

AC Motors

II) Textiles Machines Division

III) Alternator Division

Corporate Office

The Corporate office is functioning in a modern office in the city. The Secretariat, Administration, Accounts & Finance and Marketing departments are functioning from corporate office. The manufacturing units are located about 28 kms away from the city. ELGI Electric is using information technology extensively in all its functions. Each staff has been provided with a Computer. ELGI Electric has implemented the management tool of business process re-engineering in the three divisions.

Management

Mr. L.G Ramamurthi, Chairman, Mr. Sumanth Ramamurthi, Managing Director and Mr. S. Dave Jeyaselvan, Executive director, guided by experienced Directors in the Board, Mr. N. Krishnasamraj, Mr. V.Rajagopalan, Mrs. R.Sarojini, Mr. C.R. Subramanian, Mr. Sudarsan Varadaraj, and Mr. D. Vidyaprakash.

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CHAPTER 2

NEED, OBJECTIVES AND LIMITATIONS OF THE STUDY

2.1 NEED FOR THE STUDY

The need for the study is as follows:

1. The study aim at assessing profitability and solvency position of the company.

2. The liquidity and activity positions of the firm are analyzed using liquidity and turnover ratios involving current liabilities.

3. The solvency position of the company is also analyzed using ratios.

2.2 OBJECTIVES OF THE STUDY

1. To make an analysis on the financial performance of M/S ELGI ELECTRIC & INDUSTRIES LTD for 5 financial Years extending from 1999- 2000 to 2003- 2004.

2. To calculate profitability turnover & financial ratio to assess the financial position of the firm.

3. To study the efficiency and liquidity position using ratios.4. To study the trend of financial performance of the company5. To asses individual financial segments and put forth the strength and

weakness of the financial elements of balance sheet through trend analysis.

2.3 LIMITATIONS OF THE STUDY

1. The study is based on the data obtained from the annual reports of the concern i.e. balance sheet.

2. The period under study has been only for 5 financial years i.e. 1999 – 2000 to 2003 – 2004.

3. The study doesn’t take into account the other areas such as dividend policy, capital budgeting etc.

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CHAPTER 3

RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN

The collected data were presented in tables and these tables were analyzed systematically. Ratio analysis, the vital financial tool was used to study the financial performance of Elgi Electric & industries Ltd. A chart and various diagrams are used to explain the analysis clearly. It is an undisputed truth that graphs and diagrams render any complicated discussion and any intricate subject, very simple to any casual reader of the thesis.

Common size financial statement is a tool to assess, in which figures reported are converted into percentages to some common base. Trend percentages are also taken as a tool which is immensely helpful in making a comparative study of the financial statement for several years. The method of calculating trend percentages involves the calculation of percentage relationship that each item bears to the same item in the base year.

3.2 DATA COLLECTION

The study is based on secondary source of data. Secondary data have been mainly obtained from annual reports, records and books of Elgi Electric & industries Ltd.

The secondary data were also collected from audited financial statements periodicals and other records maintained by Elgi Electric & industries Ltd.

3.3 PERIOD OF STUDY

Data of 5 financial years are used for the purpose of study. The 5 years of study ranges from 1999- 2000 to 2003 – 2004.

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CHAPTER 4

ANALYSIS AND INTERPRETATIONS

Year Gross Profit Net Sales Ratio %1999 – 2000 15,524,000 443,655,702 3.502000 - 2001 42,814,000 562,156,209 7.622001 - 2002 26,844,000 558,979,157 4.802002 - 2003 41,968,000 642,036,128 6.542003 - 2004 46,919,000 684,042,985 6.86

4.1 PROFITABILITY RATIO

4.1.1 Gross Profit Margin Ratio

Gross Profit Ratio = (Gross profit / Net sales) x 100Table 4.1.1.1

Figure 4.1.1.2

INTERPRETATION

Gross Profit Margin Ratio

3.5

7.62

4.86.54 6.86

02468

10

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

6

The table reveals Gross Profit Ratio showing slightly increasing trend, it was low in the period 1999 – 2000 with 3.50% and raised during the period 2000 – 2001 to 7.62% then a sudden decrease in the next year to 4.80% and from that it started raising to 6.86% in the period 2003 – 2004.

4.1.2 Net Profit Margin Ratio

Net Profit Ratio = (Net Profit after Tax / Net Sales) x 100

Table 4.1.2.1

Year Net Profit After Tax Net Sales Ratio %

1999 – 2000 2,483,226 443,655,702 0.56

2000 - 2001 27,793,429 562,156,209 4.94

2001 - 2002 13,372,347 558,979,157 2.39

2002 - 2003 26,629,773 642,036,128 4.15

2003 - 2004 22,321,948 684,042,985 3.26

Figure 4.1.2.2

INTERPRETATION

Net Profit Margin Ratio

0.56

4.94

2.39

4.153.26

0

2

4

6

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

7

The ratio was highest in the period 2000 – 2001 and lowest in the period 1999 – 2000. It shows a fluctuating trend.

4.1.3 Operating Profit Margin Ratio

Operating Profit Ratio = (Operating Profit / Net Sales) x 100

Table 4.1.3.1

Year Operating Profit Net Sales Ratio %1999 – 2000 24,963,264 443,655,702 5.63

2000 - 2001 33,518,306 562,156,209 5.96

2001 - 2002 35,247,359 558,979,157 6.31

2002 - 2003 60,449,540 642,036,128 9.42

2003 - 2004 65,282,800 684,042,985 9.54

Figure 4.1.3.2

INTERPRETATION

Operating Profit Margin Ratio

5.63 5.96 6.319.42 9.54

0

5

10

15

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

8

Higher operating profit ratio shows better operating efficiency. The ratio was high in period 2003 – 2004. Therefore the operating efficiency is better in periods 2002 – 2003 & 2003 – 2004.

4.1.4 Return on Capital Employed

Return on Capital Employed = (Operating Profit / Capital Employed) x 100

Table 4.1.4.1

Year Operating Profit Capital Employed Ratio %

1999 – 2000 24,963,264 251,868,614 9.91

2000 - 2001 33,518,306 325,379,860 10.30

2001 - 2002 35,247,359 295,678,264 11.92

2002 - 2003 60,449,540 290,317,852 20.82

2003 - 2004 65,282,800 299,028,910 21.83

Figure 4.1.4.2

Return on Capital Employed

5.63 5.96 6.319.42 9.54

0

5

10

15

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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INTERPRETATION

The return on capital employed was low in the period 1999 – 2000 and highest in the period 2003 – 2004. It shows the increasing trend so it is good for the company.

4.1.5 Return on Equity

Return on Equity= (Equity Earnings / Net Worth) x 100

Table 4.1.5.1

Year Equity Earnings Net Worth Ratio %1999 – 2000 3,924,130 94,464,264 4.15

2000 - 2001 30,293,429 112,019,306 27.04

2001 - 2002 14,872,347 116,748,359 12.74

2002 - 2003 31,229,773 138,943,355 22.48

2003 - 2004 35,032,105 134,170,505 26.11

Figure 4.1.5.2

INTERPRETATION

Return on Equity

4.15

27.04

12.74

22.4826.11

0

10

20

30

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

10

The ratio was low in the period 1999 – 2000 and high in the period 2000 – 2001 and 2003 – 2004. Though there was a decline in the period 2001 – 2002 to 12.74% it shows the increasing trend in the succeeding periods.

4.2 TURN OVER RATIO

4.2.1 Debtor’s turnover Ratio

Debtor’s turnover Ratio = (Total Sales / Debtors)

Table 4.2.1.1

Year Total Sales Debtors Ratio (in times)

1999 – 2000 443,655,702 93,213,080 4.76

2000 - 2001 562,156,209 123,053,398 4.57

2001 - 2002 558,979,157 126,619,031 4.41

2002 - 2003 642,036,128 111,904,860 5.74

2003 - 2004 684,042,985 124,894,006 5.48

Figure 4.2.1.2

Debtor’s turnover Ratio

4.76 4.57 4.415.74 5.48

0

2

4

6

8

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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INTERPRETATION

The Debtors turnover ratio shows a fluctuating trend. The ratio was low in the period 2001 – 2002 and high in the year 2002 – 2003. Though it is fluctuating it show a consistent position.

4.2.2 Debt Collection Period

Debt Collection Period = [ (Months/ Days in a Year) / Debtors Turnover]

Table 4.2.2.1

Year Days in a YearDebtors Turnover(in times)

Debt Collection Period (in days)

1999 – 2000 360 4.76 75.63

2000 - 2001 360 4.57 78.77

2001 - 2002 360 4.41 81.63

2002 - 2003 360 5.74 62.72

2003 - 2004 360 5.48 65.69

Figure 4.2.2.2

Debt Collection Period

75.63 78.77 81.6362.72 65.69

020406080

100

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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INTERPRETATION

A shorter collection period implies prompt payment by debtors. The collection period was high in the period 2001 – 2002 (81.63 days) and low in the period 2002 – 2003 (62.72 days).

4.2.3 Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio = (Net Sales / Fixed Assets)

Table 4.2.3.1

Year Net Sales Fixed Assets Ratio

1999 – 2000 443,655,702 147,770,694 3.00

2000 - 2001 562,156,209 139,052,943 4.04

2001 - 2002 558,979,157 132,523,352 4.22

2002 - 2003 642,036,128 128,771,175 4.99

2003 - 2004 684,042,985 144,989,602 4.72

Figure 4.2.3.2

INTERPRETATION

Fixed Asset Turnover Ratio

34.04 4.22

4.99 4.72

0

2

4

6

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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The Fixed Asset Turnover ratio shows an increasing trend. The ratio was low initially and raised in succeeding periods to 4.99 in the period 2002 – 2003 and it slightly decreased to 4.72 in the period 2003 – 2004.

4.2.5 Inventory Turnover Ratio

Inventory Turnover Ratio = (Cost of Goods Sold / Average Inventory)

Table 4.2.5.1

Year Cost of Goods Sold

Average Inventory In times

1999 – 2000 240,246,671 58,290,635 4.12

2000 - 2001 305,918,359 77,811,639 3.93

2001 - 2002 305,609,655 88,734,863 3.44

2002 - 2003 353,912,960 90,990,585 3.89

2003 - 2004 362,439,330 101,639,924 3.57

Figure 4.2.5.2

INTERPRETATION

Inventory Turnover Ratio

4.123.93

3.44

3.893.57

3

3.5

4

4.5

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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A high inventory turnover ratio may be caused by a low level of inventory which may result in frequent stock outs and loss of sales. The ratio was high in the period 1999 – 2000 and low in the period 2001 – 2002 & 2003 – 2004. It shows a decreasing trend.

4.2.6 Stock Velocity

Stock Velocity = (Days in a Year / Inventory Turnover Ratio)

Table 4.2.6.1

Year Days in a YearInventory

Turnover Ratio (in times)

In days

1999 – 2000 360 4.12 87.38

2000 - 2001 360 3.93 91.60

2001 - 2002 360 3.44 104.65

2002 - 2003 360 3.89 92.54

2003 - 2004 360 3.57 100.84

Figure 4.2.6.2

Stock Velocity

87.3891.6

104.65

92.54100.84

70

80

90

100

110

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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INTERPRETATION

The inventory turnover ratio and the velocity period of the company remained stable which is 3.44 times and 104.65 days. In 1999 – 2000 the velocity period was 87.38. Introduction of proper stock control system like periodic stock taking would bring down the velocity period.

4.3 LIQUIDITY RATIO4.3.1 Current Ratio

Current Ratio = (Current Assets / Current liabilities)

Table 4.3.1.1

Year Current Assets Current liabilities Ratio

1999 – 2000 195,883,904 102,660,992 1.91

2000 - 2001 300,572,233 133,910,888 2.24

2001 - 2002 261,060,070 115,396,812 2.26

2002 - 2003 280,750,701 136,000,733 2.06

2003 - 2004 291,217,546 163,281,315 1.78

Figure 4.3.1.2

INTERPRETATION

Current Ratio

1.912.24 2.26 2.06

1.78

00.5

11.5

22.5

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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This ratio indicates the extent to which short term creditors are safe in terms of liquidity of the current assets. Thus, higher the value of the current ratio, more liquid the firm is and more ability it has to pay the bills. However a current ratio of 2:1 is considered generally satisfactory. As per the study the current ratio varies from 1.78 to 2.26. The current ratio was satisfactory during 2000 – 2001, 2001 – 2002 and 2002 – 2003.

4.3.2 Quick Ratio

Quick Ratio = (Quick Assets / Current liabilities)

Quick Assets = Current Assets - Inventory

Table 4.3.2.1

Year Quick Assets Current liabilities Ratio

1999 – 2000 135,269,918 102,660,992 1.32

2000 - 2001 205,562,934 133,913,888 1.54

2001 - 2002 178,599,642 115,396,812 1.55

2002 - 2003 181,229,959 136,000,733 1.33

2003 - 2004 187,458,441 163,281,315 1.15

Figure 4.3.2.2

INTERPRETATION

Quick Ratio

1.321.54 1.55

1.331.15

0

0.5

1

1.5

2

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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The quick ratio of 1:1 is considered satisfactory. Though the quick ratio during the period of study are above the satisfactory level, the period 2001 – 2002 having the ratio 1.55 times was good to the company and it started decreasing in the succeeding years.

4.4 LEVERAGE RATIO4.4.1 Debt Equity Ratio

Debt Equity Ratio = (Total Debt / Share Holders Fund)

Table 4.4.1.1

Year Total Debt Share Holders Fund Ratio

1999 – 2000 93,213,080 94,464,264 0.99

2000 - 2001 123,053,398 112,019,306 1.10

2001 - 2002 126,619,031 116,748,359 1.08

2002 - 2003 111,904,806 138,943,355 0.81

2003 - 2004 124,894,006 134,170,505 0.93

Figure 4.4.1.2

INTERPRETATION

Debt Equity Ratio

0.99 1.1 1.080.81 0.93

0

0.5

1

1.5

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

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The ratio indicates the proportion of owners’ stake in the business. Excessive liabilities tend to cause insolvency. The ratio was high during the period 2000 – 2001 and low during the period 2002 – 2003. The general norm for this ratio is 2:1.

4.4.2 Debt – Assets Ratio

Debt – Assets Ratio = (Total Debt / Total Assets)

Table 4.4.2.1

Year Total Debt Total Assets Ratio

1999 – 2000 157,404,350 251,868,614 0.62

2000 - 2001 213,360,554 325,379,860 0.66

2001 - 2002 178,929,905 295,678,264 0.61

2002 - 2003 151,374,497 290,317,852 0.52

2003 - 2004 145,762,978 299,028,910 0.49

Figure 4.4.2.2

INTERPRETATION

Debt – Assets Ratio

0.62 0.66 0.610.52 0.49

0

0.2

0.4

0.6

0.8

1999 – 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004

19

The ratio was high during the period 2000 – 2001 and low during the period 2003 – 2004. It shows a decreasing trend.

CHAPTER 5

FINDINGS, SUGGESTIONS AND CONCLUSION

5.1 FINDINGS

1. Gross Profit Ratio shows an increasing trend from 1999 – 2004, though there was slight decrease during the period 2001 - 2002. There is a significant change in cost of material consumed. The companies highest gross profit ratio was during the period 2000 – 2001.

2. Net Profit Ratio has a slow growth and decline during the period of study. It indicates insignificant improvement in conditions of the business.

3. Operating Ratio is the test of operational efficiency. The efficiency has risen slightly during the period of study.

4. The Return on Capital Employed ratio shows increasing trend in all financial years during the period of study. Highest of 21.83% was during the period 2003 – 2004.

5. Return on Equity Ratio shows an increasing trend though there is a slight decrease during the year 2001 – 2002. Highest during the period 2000 – 2001 (27.04%).

6. Earning per Share Ratio in 2000 – 2001 and 2003 – 2004 is 0.76 and 0.74 respectively, these were the highest.

7. Debtors Turnover Ratio shows slight variations between the periods. It varies from 4.41 to 5.74. Higher the ratio it signifies that the debt are being collected more promptly. This ratio indicates that the debts are being collected more promptly in the company.

8. Debt collection period indicates the quality of debtors since it measures the fastness with which money is collected from them. As it is between 2 to 3 months, it indicates the debt collection efficiency is satisfactory in the business. In general the amount of receivables should not exceed 3 – 4 months of credit sale.

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9. Fixed asset turnover ratio shows an increasing trend in all the financial years except during 2003 – 2004. The ideal ratio is 0.67. During the period of study it doesn’t fall below 3.

10.Total asset turnover ratio shows an increasing trend in all the financial years during the period of study. It shows that the assets are well utilized.

11. Inventory turnover ratio indicates the utilization of inventory in an efficient manner. It is therefore clear that the sales are quick and stock does not consist of non-salable items. It was higher in 1999 – 2000, indicates speedier movement of stock. It has decreased from 4.12 to 3.44 with a difference of 0.68 times.

12.Stock velocity shows the duration of the stock at the company. The company takes 87.38 days to 104.65 days to clear the stocks.

13.The current ratio was favorable during 2000 – 2003 14. the quick ratio was above the satisfactory level as it shows a

favorable trend15.Debt equity ratio shows that the company is depending outsiders

more during the year 2000 – 2001.

5.2 SUGGESTIONS

1. The management may take proper decisions to maintain their absolute liquid ratio, so that they can maintain their liquidity position in the long run.

2. The liquidity position could be strengthened by reducing the current liabilities.

3. The management may try to increase the EPS by increasing the profitability of the company.

4. The cash balance level of the company when compared to current liabilities is minimum and the management may improve the cash balance to an optimum level to meet the contingencies.

5. The company may tighten the credit policy to the customers to reduce the debt collection period.

5.3 CONCLUSION

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On studying the financial performance (thro ratio analysis) of ELGI ELECTRIC & INDUSTRIES LTD., for a period of five years from 1999 – 2000 to 2003 – 2004, the study reveals that the financial performance in general is satisfactory. It could be concluded that the company has been performing well.

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