Embed Size (px)
Citation preview
“Study on Financial Ratio analysis ”
CADMACH Machinery PVT. LTD.
Industry Internship Project Report
Submitted in Partial Fulfillment
For the award of
Post Graduate Diploma in Management
Submitted By:
Kavan Patel
Roll No. (With Section) 09 (B)
Batch:
2014-2016
Under the guidance of
Prof. Gurpreet Arora K.L.Rathod
Faculty Guide Industry Guide
Dean Sr. Manager (Costing)
St. Kabir Institute of professional studies CADMACH PVT. LTD.
Submitted To
St. Kabir Institute of Professional Studies, Ahmedabad
July 2015
1
DECLARATION
We hereby declare that this project is the record of authentic work carried
out by me during the academic year 2014 – 15 and has not been submitted to any
other University or Institute towards the award of any degree. This is for the
purpose of fulfillment of St. Kabir Institute of Professional Studies’s partial
requirement for the award of the title of PGDM, only.
Signature of student:
Kavan Patel
2
ACKNOWLEDGEMENT
The Feeling of Gratitude automatically arises from the bottom of heart when we
are helped by anyone. A small but timely help can prove to be achievement of an
important milestone.
I would like to thank Dr. R.K Balyan, Director of K. S. School of Business
Management, who has given us a valuable opportunity towards Practical
knowledge. I am also thankful to my faculty – Prof. Gurpreet Arora for proving
us guidance regarding internship and project report.
I am very much obliged and indebted to Mr. Bakulbhai Vyas, HR Manager of
CADMACH, for allowing me to get training at CADMACH.
I express my deep sense of gratitude to Mr. K. L. Rathod, Sr. Costing Manager of
CADMACH, my project guide, for providing me the constant support and
guidance throughout the project.
Last but not the least all the people who directly or indirectly helped us, deserved
our sincere thanks for their co-operation and support.
3
PREFACE
The Project is on Ratio analysis of Cadmach Machinery Co. Pvt. Ltd. which is
renowned firm in the Pharmaceutical Machinery Industry. CADMACH is a leader
in manufacturing Tablet Press Machines in the India.
The First Part of the project report - Part A delivers an overview of
Pharmaceutical Machinery Industry and brief information about IPMMA.
The Second Part of the project report- Part B delivers an overview of
Cadmach Machinery Co. Pvt. Ltd.
The Third Part of the project report- Part C delivers an overview of Project.
The Fourth Part of the project report - Part D is the heart of Project. To
analyze the ratio analysis using balance sheet of the company.
The Fifth Part of the project report- Part E contains findings, conclusion,
Bibliography, Webliography and Annexure.
4
Contents1 Introduction.................................................................................................................7
1.1 Introduction of the topic/study.....................................................................................7
1.2 Objectives of the Study...........................................................................................10
1.3 Rationale of the study..............................................................................................11
2 Overview of Industry and Company................................................................................12
2.1 Introduction to Industry...........................................................................................12
2.2 Introduction to the company......................................................................................15
National Presence....................................................................................................19
DISTRIBUTION NETWORK....................................................................................20
Partners....................................................................................................................... 22
Competitors.................................................................................................................. 23
2.3 Organization structure.............................................................................................26
2.4 Product/services range.............................................................................................28
2.5 SWOT analysis.....................................................................................................30
3 Research Methodology................................................................................................32
Limitations...................................................................................................................32
4 Data analysis & Interpretation with Theoretical Background...................................................33
(A)PROFITABILITY RATIO.....................................................................................33
(B)LIQUIDITY RATIOS..........................................................................................49
(C)LEVERAGE/CAPITAL STRUCTURE RATIO..........................................................54
(D) ACTIVITY/EFFICIENCY RATIO.........................................................................63
5 Findings................................................................................................................77
6 Conclusion................................................................................................................79
Bibliography and Webliography........................................................................................80
Annexure..................................................................................................................... 81
Annexure A. Calculation of Factory overhead.................................................................81
Annexure B. Calculation of Non Operating Income..........................................................83
Annexure C. Calculation of Average Stock.....................................................................84
5
Annexure D : Profit and loss Account...........................................................................85
Annexure E : Balance sheet........................................................................................86
6
1 Introduction
1.1 Introduction of the topic/study
Ratio Analysis
A. Meaning of Ratio and Ratio Analysis
Meaning of Ratio:
A ratio is an expression of the numerical or quantitative relationship between two
items (numbers). It is a simple arithmetical expression of the relationship of one
number to another.
'Ratio' is the relationship between two or more variables expressed in,
Percentage, or
Rate, or
Proportion.
Meaning of Ratio Analysis:
Ratio Analysis is a systematic use of ratios to interpret the Financial Statements so
that the strengths and weaknesses of a firm as well as its historical performances
7
and current financial condition can be determined. It is one kind of Quantitative
Analysis of information contained in the company’s Financial Statements. Ratio
Analysis is used to evaluate various aspects of a company’s operating and financial
performance such as its efficiency, liquidity, profitability and solvency. The Trend
of these ratios over time is studied in this project to check whether they are
improving or deteriorating. Ratio Analysis is a cornerstone of fundamental
analysis.
B. Importance of Ratio Analysis
The ratio analysis is the most powerful tool of Financial Analysis. It helps to
describe the significant relationship between two comparable figures in the
Financial Statements. With the help of Ratios, one can determine.
A. Profitability: The overall operating efficiency and performance of the
organization.
B. Liquidity: The ability of the organization to meet its current
obligations.
C. Long term Solvency: the long-term or future solvency position of the
business.
D. Efficiency: The efficiency with which the organization is utilizing its
various assets in generating sales revenue.
8
Management has to protect the interests of all concerned parties like Shareholders,
Trade Creditors, Lenders, Employees, and Tax Authority etc. They have to ensure
some minimum operating efficiency and keep the risk of the firm at the minimum
level. Their survival depends upon their operating performance from time to time.
Management uses Ratio Analysis to determine the firm’s financial strengths and
weaknesses, and accordingly takes actions to improve the firm's financial position
and performance.
C. Limitations of Ratio Analysis
The Ratio Analysis is a very useful tool to evaluate the financial position and
performance of a business. The following are some of the limitations of the Ratio
Analysis.
It is difficult to find out a proper basis of comparison. Usually, it is
recommended that ratio should be compared with the industry average (Ideal
ratios/ Benchmarks). But the industry averages are not equally available.
The situations of two companies are never the same. Similarly, the factors
influencing the performance of a company in one year may change in
another year. Thus, comparison of the ratios of two companies or two year
(sometimes) becomes difficult.
The interpretation and comparison of ratios are also rendered invalid by the
changing value of money. The accenting figures, presented in a Financial
9
Statement, one expressed in a monetary unit which is assumed to remain
constant, in fact, prices changes over years and as a result assets acquired at
different dates will be expressed at different rupees in the balance sheet. This
makes comparison meaningless.
The basis to calculate ratios are historical Financial Statements. The
Financial Analysis is more interested in what happens in future, while the
ratios indicate what happened in the past. The management has information
about the company's future plans and policies and therefore is able to predict
future happening to a certain extent. But the outside analyst has to rely on
the past ratios, which may not necessarily reflect the firm's financial position
and performance in future.
1.2 Objectives of the Study
The Ration analysis of CADMCAH is carried out as an Analyst with the following
objectives:
To evaluate financial performance and financial position of CADMACH by
using its financial statements.
To identify financial strengths and weaknesses of CADMACH.
10
To provide suggestions to CADMACH to improve its financial health with
regard to Liquidity, Efficiency (Asset utilization), Profitability and
Solvency, if any.
1.3 Rationale of the study
The various parties like Management, Owners, Long term and Short term
creditors, Suppliers, etc. are keenly interested in knowing the financial
performance and financial position of the organization. So, for them this project
report would act as a helping hand. This will assist all interested parties in
making effective decisions.
11
2 Overview of Industry and Company
2.1 Introduction to Industry
During the 60's and 70's the Pharmaceutical Industry mostly imported
machines from Europe for its processing and packaging needs. But the mid 70's
saw the country going through a severe shortage of foreign exchange and therefore
the Indian Government introduced very high Import duties and restrictive import
licensing policies. This forced all the Pharmaceutical Companies to encourage
some Indian Engineering Enterprises to manufacture machines locally. Perhaps
this was the only route for the Pharmaceutical Industry to enhance production and
cater to the growing demands of the domestic market.
This was a great opportunity for the Indian Small Scale Engineering
Companies to provide machineries to the Pharmaceutical Industry and thus a
scenario was created whereby 100's of Machinery Manufacturers grow rapidly to
provide the needs of 1000's of Pharmaceutical Companies over a period of time.
In India, there are around 17,000 Pharmaceutical Companies and therefore it
provides tremendous scope for the Machinery Manufacturers to exploit the
potential by providing necessary machinery by ensuring proper design, ease of user
application, simple maintenance and also validation protocol for the new
equipment that are essential for the pharmaceutical companies.
12
The Indian Pharmaceutical Machinery Industry growing by 15-20%
annually and there are more than 800 units today, that are supplying machines to
the Pharmaceutical Industry in India and worldwide. There is bright future for
Indian Pharmaceutical Machinery Industry. However, the machines produced by
Foreign counterparts are five times more expensive than Indian machines (same
machine and same capacity). As Indian pharmaceutical machineries are
inexpensive, foreign people look to the Indian market for those machines.
Now the Indian Pharmaceutical Machine Manufacturers are upgrading
themselves by investing in knowledge. Many Pharmaceutical Machinery
Manufacturers often visit the various countries just to observe the latest
development in the machines and to follow it.
Indian Pharmaceutical Machinery Manufacturers Association (IPMMA)
Indian Pharmaceutical Machinery Manufacturers Association (IPMMA) was
founded on 23rd December, 2001 at New Delhi and was registered as a trade
association to represent specifically the Indian Pharmaceutical Machinery
Manufacturers.
13
Aims & Objectives of IPMMA
• To work towards the benefit of all the manufacturers of pharmaceutical
machinery industry.
• To particularly give encouragement and recognition to Small Scale
Machinery Manufacturers.
• To get recognized by National and International associations related to
Pharmaceutical Industry.
• To get recognized at the Central government offices situated in New Delhi.
• To ensure maintenance of fair business practices in the Pharmaceutical
Industry and Pharmaceutical Machinery Industry.
• To encourage unity and provide mutual help within the members.
• To organize meetings / seminars / conferences / exhibitions / trade fairs as
required by the members.
Role
IPMMA is always committed towards achieving common goals whereby the
benefit will go to all the association members. Indian Pharmaceutical Machinery
Manufacturers have been one of the key contributors in the growth story of the
Indian Pharmaceutical and Drug Industry and therefore the association will put all
efforts to understand the need for up-gradation of the manufacturing, designing,
marketing and banking skills that are required by the industry and try to render
help to small members to grow corresponding with the growth of the
14
Pharmaceutical Industry. The association is already putting efforts to co-ordinate
with several agencies, component suppliers etc. to provide necessary knowledge
that could be imparted to the members under a single roof program that would help
both the supplier as well the industry in order to save time and money for all the
parties concerned.
Recently, IPMMA has already organized another two seminars to share the
knowledge on the latest trends prevailing in the Pharmaceutical Industry globally
for the benefit of its members.
2.2 Introduction to the company
‘CADILA HEALTHCARE’ (Zydus) is a well known pharmaceutical company.
Chairman of CADILA HEALTHCARE, (Late) Mr. R. B. Patel, decided to develop
one company which gives comprehensive support in the Pharmaceutical
Machinery Industries. Because of his efforts, ‘Cadmach Machinery Company
Pvt. Ltd.’ was born in 1967.
Today CADMACH is one of the largest companies in India, engaged in the
manufacturing of a wide range of Pharmaceutical Machineries. CADMACH’s
manufacturing Tableting Press Machines, Allied Machineries, Punches & Dies and
Spares of machinery. But, its special emphasis is on Tablet Press Machines. More
15
than 80% of the Tableting machines in the various Pharmaceutical Companies in
India bear the CADMACH logo.
CADMACH- the name stands for Care And Dedication for Pharmaceutical
Machinery, has now become synonymous with Technical innovation and high
standard of performance in Pharmaceutical Machinery Industry.
Innovations,
Quality,
After Sales Technical Services are the Prime concerns at CADMACH.
CADMACH equipments are designed & developed in-house with a strong focus
on customer satisfaction and equipment efficiency. No wonder, that CADMACH
has retained customers over the years & enjoys a very high market share. For more
than four decades now, CADMACH has developed appropriate capabilities to
compete in the National & International market.
Board of Director: 1) Shri J. V. Khambhatta (Chairman & Managing
Director)
16
2) Shri P. R. Patel (Director)
3) Shri V. J. Khambhatta (Director)
4) Shri K. J. Khambhatta (Director)
Directors at CADMACH are technically very sound with the knowledge of
Engineering, Pharmaceutical and Commerce. The Directors meet regularly and
review the growth at CADMACH. The Directors are easily accessible to discuss
any problem which is faced by any member of CADMACH.
Vision: To be worldwide leader in Pharmaceutical Machinery
Manufacturing Industry (Especially leader in Table
Press Machine Manufacturing.)
Logo:
Objectives:
To increase market share.
To continue good image of the organization.
To manufacture innovative products.
To produce more with cost control.
17
To improve quality of the product.
To increase customer satisfaction.
To increase Employee satisfaction.
To boost export.
Awards: CADMACH is the only Indian company in this market
segment to receive the prestigious Import
Substitution Award, twice from the Government
of India.
It has received the best Performance Award for
Export Excellence, thrice from the Engineering
Export Promotional Council of India.
Website: www.cadmach.com
18
National Presence
A. NATIONAL PRESENCE:
Factory and Head office: Cadmach Machinery Co. Pvt. Ltd.
Plot No.3604/3605,
GIDC Estate, Phase IV,
Vatva, Ahmedabad – 382 445
Gujarat, India
Tel: +91 79 2584 1491/92/93
+91 79 2584 0817
+91 79 2584 1853
+91 79 2584 1391
Fax:+91 79 2584 2602
E-mail: [email protected]
Corporate office: Zydus Tower,
Gandhinagar-Sarkhej Highway,
19
Opposite Iskcon Temple,
Satellite, Ahmedabad-380 015
DISTRIBUTION NETWORK
The Pharmaceutical Machineries of CADMACH are also sold at various places,
apart from INDIA, through CMC machinery. It has many customers at the
following places.
Middle East, North Africa, Greater Arabia
Europe
Africa
Asia
Americas
Australia & Oceania
International customers:
A) USA: 1.Tishicon
2.LNK
3.Reckitt Benkishei
B) African Region: 1.Emzore
20
2.Neimeth
3.Delta Pharma
C) Asian Region: 1.Greater Pharma
2.Global Pharma
3.Wyth Pharma
D) South America: 1.Sun Pharma
2.Renbaxy
3.TKS Zydus
E) Australia: 1.Apex Lab
F) UK: 1.Bristal Lab
2.Nester and many more……
21
Partners
1. CMC MACHINERY 2. KEVIN TECHNOLOGIES
3. KAMBERT 4. CADAM ENTERPRISE
22
5. VAC-U-MAX 6. KEVIN PROCESS
TECHNOLOGIES
Competitors
A. NATIONAL COMPETITORS (PRIME):
KARNAVATI ENGINEERING LTD.
Karnavati Engineering Ltd (KEL) is a well-established (1981 AD)
manufacturer of “RIMEK” Brand of precision components and machinery
for pharmaceuticals (especially Tablet Pressing Machines) and allied
industries. KEL has been at the helm of technology revolution in the field of
Parma machinery for a decade and has become synonymous with tablet
press series worldwide.
CHAMUNDA PHARMA MACHINERY PVT. LTD.
Chamunda Pharma Machinery Pvt. Ltd. was founded in 1981 in
Ahmadabad , INDIA when a team of engineers designing a tablet press
found that available tablet press technology couldn't meet the stringent
demands of the Pharmaceutical Industry in terms of excellence in design,
23
quality of engineering and service, delivery as per the customers' schedule
and at affordable pricing.
FLUID PACK
Fluid pack - is one of the leading & trusted manufacturers & exporters of
tableting machines, in India. Fluid pack was established in 1983 with a
small capacity but with big dreams of providing "Better Tableting
Solutions “to the pharma Industry, with best quality and better prices. Fluid
pack’s first ever machine was introduced in 1998 having
"ACCURA" brand, and within a span of 10 years, the company have
achieved a large customer base with more than 1300 installations. At
present, Fluid pack is having presence in more than 47 countries. Fluid
pack is particularly proud of its long - established reputation as an
international level manufacturer of tableting machines. The company has a
proven track record of meeting and exceeding customer's expectations by
providing operator friendly, easy to maintain and cost effective tableting
machines.
B. INTERNATIONAL COMPETITORS (PRIME):
SEJONG PHARMATECH - KOREA
As the specialist in manufacturing pharmaceutical machineries, Sejong
Pharmatech has over twenty years of accumulated know-how and excellence
in making high quality and innovative pharmaceutical machines (especially
24
Tablet Pressing Machines). Their machineries are made with thorough
research and technological advancement to satisfy their client's needs. Its top
priority is to give confidence to all their customers and to accomplish this;
they are continuously focusing on regulation and innovation.
[MANESTY]BOSCH PACKAGING TECHNOLOGY - UK
The product portfolio of Bosch Packaging Technology ranges from filling,
processing, and packaging technology for piece goods and bulk items in the
food, pharmaceutical, and confectionery sectors as well as for health and
hygiene products. It has variety of tablet press machineries in terms of
different output level.
FETTE COMPACTING AMERICA INC.- GERMANY
Fette Compacting America Inc., North America's leader in precision tablet
press technology, is a subsidiary of world-class, German-based
manufacturer, Fette Compacting GmbH, one of the first companies to
develop and perfect the rotary tablet press. Founded in 1991, Fette
Compacting America offers a variety of services to clients in the United
States, Canada, and Puerto Rico, including new and used machine sales,
technical assistance, machine installations, training and seminars, validation,
maintenance, spare parts, and tooling.
IMA ACTIVE DIVISION OF IMA PHARMA - ITALY
IMA Active is the ideal partner for each solid dose processing phase:
Granulation, Tableting, Capsule Filling and Banding, Weight Checking,
25
Coating, Handling and Washing. IMA Active Division offers a complete
range of machines for the processing and the production of solid dose
products: granulation equipment, tablet press machines.
HM Pharmaceutical Machinery - CHINA
HM machinery is a noteworthy name in Chinese pharmaceutical machinery
producers, providing pharmaceutical equipment (especially Tablet Pressing
Machines) in no less than 53 countries. In addition, the company has 1,000
plus satisfied customers which is why the company is directly instrumental
in increasing Chinese pharmaceutical market through its quality equipments.
2.3 Organization structure
26
Organization Chart
Chairman and M.D.: Mr. J. V.
Khambhatta
Director: Mr. P. R. Patel
Director: Mr. V. J. Khambhatta
Director: Mr. K. J. Khambhatta
Technical Dept. R & D Dept. Commercial Depts. Marketing Dept.
Sr. VP Production: Mr. V. R. Patel
G.M.: Mr. B. K. Chhanivara
Sr. VP Marketing: Shri P.H. Vachhrajani
27
GM Production: Mr. M. R. Mistry
Manager QC: Mr. H. B. Patel
Manager PPC: Mr. V. P. Shah
Manager Stores: Mr. H. V. Patel
Sr. Manager Design: Mr. D. P. Chhatralia
Sr. Manager Mr. H. G. Pishavadia
Domestic International – CMC Machinery
Sr. Manager: Mr. Sandeep
Shah
Branch Managers
Manager: Mr. Nilesh Joshi
Assist. Managers: Mr. Parth Chokshi and Mr.
Sugam Handa
Account Dept. Costing Dept. Commercial Dept. Purchase Dept. HR Dept.
GM: Mr. G. K. Barot
DGM: Mr. V.P. Kumpavat
Sr. Manager: Mr. Bakul Vyas
Executive: Mr. Vinubhai
Sr. Manager: Mr. K. L. Rathod
Executive: Mrs.Kinjal Parikh
and Mr.Axat Rawal
GM: Mr. K. B. Amin
Manager: Mr. Suresh Shegokar
Sr. Manager: Mr. Shri D. T. Khamar
Manager: Mr. R.N. Shah
2.4 Product/services range
CADMACH has a wide range of Tablet Presses & other machines to allow the
production of pharmaceutical solids in a laboratory as well as in very high output
Pharmaceutical Production Sites. All CADMACH equipments are modern, reliable
and there is a suitable Tablet Press for each need of the Pharmaceutical Industry.
It also produces tablet compression tooling as well as accessories for the Tablet
Presses. With the group companies, it provides complete granulation solution for
dry as well as wet granulation processes.
PRODUCTS AT GLANCE:
1. High Speed Tablet Presses :
On the basis of an installed basis of more than 10.000 tablet presses, CADMACH
has obtained a high level of experience and applications of know how. The
increasing pressure on production costs in the Pharmaceutical Industry requires
new concepts for manufacturing equipment in terms of performance and
investment costs. CADMACH has taken this challenge and presents a newly
developed range of high performance Tablet Presses incorporating Industry’s
requirements for performance, quality and economics of investment.
28
2. Medium Speed Tablet Presses :
The Medium speed tablet presses are the main work horse of pharmaceutical
production companies that require accurate production with reasonable features &
automation to allow production of tablets. These presses are easy to operate &
maintain.
Due to this philosophy, these tablet presses require less investment.
3. Pilot/Lab Scale Tablet Presses :
Tablet Presses for the formulation & development as well as research are special
equipment & require special features. Cadmach has specially designed equipment
that meets this requirement & helps companies formulate products & launch new
products at lower capital investment and at the same time maintaining the stringent
quality requirements.
29
2.5 SWOT analysis
STRENGTHS:
Satisfied and Loyal Customers
Goodwill in the Market
Satisfied Employees
Teamwork and Team Spirit
Treasure of Experience
Effective Product and After Sales Services
Effective Cost Control to charge Reasonable Price
Good Research Team
WEAKNESSES:
Almost 80% of CADMACH’s business depends on Pharmaceutical Industry
i.e. Sale of pharmaceutical machineries relies on the demand of medicines,
other than this it does not have any weakness.
30
OPPORTUNITIES:
CADMACH can help to the government by increasing Exports of
Pharmaceutical Machineries.
It can stretch its product line in future and can enter into new market
segment.
THREATS:
Although CADMACH has goodwill in the market, there is a threat of the
competition. It has a very tough competition from other Pharma Machinery
Manufactures.
31
3 Research Methodology
In research, Data was collected through Secondary Source i.e. Annual
Reports of the CADMACH. The Ratios are calculated based on that Annual
Reports.
For the clarity of theoretical concepts:
Certain financial books were referred.
Certain websites were also visited.
Periodic reviews session were arranged with the project guide - Mr. K. L.
Rathod and guidelines were provided by him.
Limitations
All future plans and policies of the organization were not known so future
anticipations were not possible to the certain extent.
Due to lack of availability of financial data of other firms of the
Pharmaceutical Machinery Industry, Inter-firm Comparison could not be
carried out.
Ratios of CADMACH could not be compared with the Benchmark/ Ideal
Industry ratios as they were not available (Reliable Ideal Industry ratios
could not be found out).
32
Information available was limited to the certain extent (As only Annual
Reports were provided for the study).
4 Data analysis & Interpretation with Theoretical Background
(A)PROFITABILITY RATIO
The Profitability Ratios are calculated to measure the operating efficiency of the
organization. Besides the management of the organization, creditors and owners
are also interested in knowing profitability of the organization.
Creditors want to get interest and repayment of principal regularly. Owners want to
get a required rate of return on their investments. This is possible only when the
organization earns enough profits.
Following ratios show profitability of the organization:
Profitability Ratios based on Sales
(1) Gross Profit Ratio
(2) Operating Profit Ratio
(3) Net Profit Ratio
Profitability Ratios based on Investment(1) Return on Capital Employed Ratio
(2) Return on Equity Shareholders’ Fund
33
(3) Earnings per share
(4) Dividend Per Share
(5) Dividend Payout Ratio
(6) Retained Earning Ratio
(1) PROFITABILITY RATIOS BASED ON SALES
GROSS PROFIT RATIO
Gross profit ratio is the ratio of Gross Profit to Net Sales. The ratio thus reflects the
margin of profit that an organization is able to earn on its trading and
manufacturing activity. It is the most commonly calculated ratio.
Formula:
Gross Profit Ratio = Gross Profit - Non Operating Income(Net) x 100
Net Sales
Where Gross profit = Net sales - Cost of goods sold
Cost of goods sold = Opening stock + Net purchases + Direct expenses -
Closing stock
Gross profit is what is revealed by the trading account. It results from the
difference between net sales and cost of goods sold without taking into account
expenses generally charged to the Profit and Loss Account. The larger the gap, the
greater is the scope for absorbing various expenses on administration,
34
maintenance, arranging finance, selling and distribution. This ratio is expressed in
percentage.
Note: Refer Annexure B to see calculation of Net Non Operating Income.
At CADMACH:
Amounts in Lacs
Year Gross Profit – NOI(Net)
Net Sales Gross Profit Ratio
2009-10 1342.38 5196.16 25.83%2010-11 1552.95 6212.70 25.00%2011-12 1879.77 6866.13 27.38%2012-13 1857.11 6043.29 30.73%2013-14 1929.15 6802.58 28.36%
Interpretation:
Here, we can analyze that the curve of Gross Profit Ratio had been moving upward
still the year 2012-13. The Percentage of GP is enough good .But, The GP Ratio of
35
the last year is lower than its previous year, which is undesirable. From the table
we can see that the sale has not been reduced but the Gross Profit has been
reduced. Hence, it can be observed that GP of the last year reduced due to lack of
cost control on production cost (Percentage increase in the Production Expenses
are more than the percentage increase in sales).
OPERATING PROFIT RATIO
The operating profit ratio is also known as the operating margin ratio. The
operating margin ratio demonstrates how much revenues are left over after all the
variable or operating costs have been paid. Conversely, this ratio shows what
proportion of revenues is available to cover non-operating costs like interest
expense.
Formula:
Operating Profit Ratio =
Operating Income [PBIT – Non Operating Income(Net) x 100
Net Sales
This ratio is important to both creditors and investors because it helps show how
strong and profitable a company's operations are.
A higher operating margin is more favorable compared with a lower ratio because
this shows that the company is making enough money from its ongoing operations
to pay for its variable costs as well as its fixed costs. The operating profit margin
ratio is a key indicator for investors and creditors to see how businesses are
supporting their operations. If companies can make enough money from their
operations to support the business, the company is usually considered more stable.
36
On the other hand, if a company requires both operating and non-operating income
to cover the operation expenses, it shows that the business' operating activities are
not sustainable.
Note: Refer Annexure B to see calculation of Net Non Operating Income.
At CADMACH:
Amounts in Lacs
Year PBIT(Profit Before Interest and Tax) –
Non Operating Income(Net)
Net Sales Operating Profit Ratio
2009-10 180.31 5196.16 3.47%2010-11 215.83 6212.70 3.47%2011-12 240.06 6866.13 3.50%2012-13 221.90 6043.29 3.67%2013-14 273.90 6802.58 4.03%
Interpretation:
37
It can be analyzed that At CADMACH the curve of Net operating profit is an
upward moving curve, which depicts that there is control over increase of certain
dmin and selling expense. But the admin and selling expenses are too much due to
that the Operating Profit ratio is very less when the GP Ratio is this much.
NET PROFIT RATIO
The Net Profit Ratio is used to measure the overall profitability and hence it is very
useful to proprietors. The ratio is very useful as if the net profit is not sufficient,
the organization shall not be able to achieve a satisfactory return on its investment.
Formula:
Net Profit Ratio = Net Profit [PAT-Non Operating Income(Net)] x 100
Net Sales
The two basic components of the net profit ratio are the net profit and sales. The
net profits are obtained after deducting income-tax and generally, non-operating
expenses and incomes are ignored for calculating this ratio. Thus, incomes such as
interest on investments outside the business, profit on sales of fixed assets and
losses on sales of fixed assets, etc are excluded. This ratio is expressed in
percentage.
This ratio also indicates the firm's capacity to face adverse economic conditions
such as price competition, low demand, etc.
38
At CADMACH: Amounts in Lacs
Year Net Profit[PAT-Non Operating
Income(Net)]
Sales Net Profit Ratio
2009-10 102.94 5196.16 1.98%2010-11 79.18 6212.70 1.27%2011-12 127.44 6866.13 1.86%2012-13 75.326 6043.29 1.25%2013-14 128.704 6802.58 1.89%
Interpretation:
It can be analyzed from the graph that there is ups and downs in the percentage of
net profit of CADMACH, which reflects instability in terms of earning net profit.
39
But, the percentage of Net profit of the last year i.e. year 2013-14 is more than the
percentage of last year which can be due to reduction in Interest Expenditure. But
the admin and selling expenses are too much due to that the Net Profit ratio is very
less. This statement can be made as it should be higher than this when the Gross
Profit is this much.
(2) PROFITABILITY RATIOS BASED ON INVESTMENT
Obviously, higher the above calculated ratio, the better is the profitability. But
while interpreting the ratio it should be kept in minds that the performance of
profits also should be seen in relation to Investments or Capital of the organization
and not only in relation to sales.
RETURN ON CAPITAL EMPLOYED RATIO
The term Capital Employed refers to long-term funds supplied by the lenders and
owners of the organization. Return on Capital Employed ratio provides a test of
profitability related to the sources of long-term funds. It is calculated by comparing
the profit earned and the capital employed to earn it. It is also known as “Rate of
Return” or “Rate on Capital Employed”
Formula:
Return on Capital Employed = PBIT x 100
Capital Employed
Where Capital Employed = Equity Share Capital + Preference Share Capital + All
Reserves +P & L A/c Balance + Long term Loans - Fictitious Assets
40
Since the Capital Employed includes shareholders’ funds and long-term loans,
interest paid on long-term loans will not be deducted from profits while calculating
this ratio. This ratio is usually in percentage. The higher the ratio, the more
efficient is the use of capital employed. This ratio is expressed in percentage.
At CADMACH:
Amounts in Lacs
Year PBIT Capital Employed
Return on Capital Employed/Investmen
t2009-10 217.34 1342.99 16.18%2010-11 277.81 1865.17 14.89%2011-12 332.66 1930.93 17.23%2012-13 344.62 1434.19 24.03%2013-14 377.39 1701.41 22.18%
Interpretation:
41
The above graph depicts that at CADMACH the curve of Return on Capital
Employed Ratio is upward moving curve, but in the last year it has been reduced
by approximately 2% than its previous year. The return on investment is higher
than the cost of capital so it is advisable to carry this business.
Note: Deferred Tax Liability is considered as Short term Liability.
RETURN ON EQUITY SHAREHOLDERS’ FUND
Equity shareholders of an organization are more interested in knowing the earning
capacity of their funds in the business. As such, this ratio measures the profitability
of the funds belonging to the equity shareholders. The ratio reveals how profitably
the owner’s funds have been utilized by the organization.
Formula:
Return on Equity = PAT x 100
Equity Shareholders’ Funds
Where Equity Shareholders’ Funds = Equity Share Capital + All Reserves &
Surplus – Fictitious Assets. This ratio is expressed in percentage.
At CADMACH:
Amounts in Lacs
Year PAT Equity Shareholders'
Fund
Return on Equity
2009-10 139.97 1094.67 12.79%
42
2010-11 141.16 1177.78 11.99%2011-12 220.04 1268.81 17.34%2012-13 198.05 1337.00 14.81%2013-14 232.19 1569.19 14.80%
Interpretation:
The above graph depicts that the percentage of Return on Equity was highest in the
year 2011-12. After that the curve has been moving downwards. As the percentage
of return on equity is higher than the rate of return on funds deposited in Bank. The
return on equity of the current year is slight lower than its previous year’s return.
CADMACH has to continuously monitor it so that it will not decline in future.
43
EARNINGS PER SHARE
The portion of a company's profit allocated to each outstanding share of common
stock. Earnings per share serve as an indicator of a company's profitability.
Formula:
Earnings Per Share = PAT
No. of Equity Shares
At CADMACH:
Year PAT (Amounts in Lacs)
No. of Equity Shares
Earnings Per Share (In Rs.)
2009-10 139.97 22200 630.502010-11 141.16 22200 635.862011-12 220.04 22200 991.172012-13 198.05 22200 892.122013-14 232.19 22200 1045.91
44
Interpretation:
The above graph depicts that at CADMACH the earnings per share is Rs.1045.91in
the last year which is higher than its previous year’s earnings per share. It is ten
times of its face valve i.e. Rs. 100.
DIVIDEND PER SHARE
Dividend per share (DPS) is the total dividends paid out over an entire year
(including interim dividends but not including special dividends) divided by the
number of outstanding ordinary shares issued. Dividends are a form of profit
distribution to the shareholder. Having a growing dividend per share can be a sign
that the company's management believes that the growth can be sustained.
45
Formula:
Dividend Per Share= Dividend Declared
No. of Equity Shares
At CADMACH:
Amounts in Lacs
Year Dividend Declared
No. of Equity Shares
Dividend Per Share (In Rs.)
2009-10 58.25 22200 262.392010-11 58.05 22200 261.492011-12 129.01 22200 581.132012-13 129.86 22200 584.952013-14 - 22200 -
Interpretation:
It can be analyzed that the management of CADMACH is efficient enough as they
are declaring good amount of dividend.
46
DIVIDEND PAYOUT RATIO
The Dividend Payout Ratio indicates the percentage of earnings paid to
shareholders as dividends. More mature companies tend to have a higher payout
ratio.
Formula:
Dividend Payout Ratio= Dividend Per Share
Earning Per Share
A stable dividend payout ratio indicates a solid dividend policy by the company's
board of directors.
At CADMACH:
Amounts in Lacs
Year Dividend Per Share (In Rs.)
Earnings Per Share (In Rs.)
Dividend Payout Ratio
Retained Earnings Ratio
2009-10 262.39 630.50 41.62% 58.38%2010-11 261.49 635.86 41.12% 58.88%2011-12 581.13 991.17 58.63% 41.37%2012-13 584.95 892.12 65.57% 34.43%2013-14 - 1045.91 - -
47
Interpretation:
The above graph depicts that the curve of dividend payout ratio is moving upward
since the year 2010-11 which gives positive sign to the equity share holders. And it
is also keeping good reserve in the business.
48
(B)LIQUIDITY RATIOS
Adequate liquidity means ability to meet the current or short term obligations when
they become due for payment. Liquidity is a pre-requisite for the survival of the
organization. The Commercial banks and Short Creditors are interested in the short
term solvency (liquidity) of the organization.
These ratios measure the ability of the organization to meet its current obligations.
An organization should ensure that it does not suffer from lack of liquidity and also
it does not have excess of liquidity. Lack of liquidity will result into poor credit
worthiness. A very high degree of liquidity means having idle assets which earn
nothing, Organization’s fund will be unnecessarily lied up as current assets.
Therefore, it is necessary to strike proper balance between excess of liquidity and
lack of liquidity. The ratios which measure liquidity of the organization are as
follow:
(1)Current Ratio
(2)Liquidity Ratio
49
CURRENT RATIO
The current ratio is used to assess the firm’s ability to meet its short-term liabilities
on time. It is generally believed that 2:1 ratio shows a comfortable working capital
position. However this rule should not be taken as a hard & fast rule.
Formula:
Current Ratio = Current Assets
Current Liabilities
It measures whether or not a firm has enough resources to pay its debts over the
next 12 months.
Current Assets are cash and other assets that are expected to be converted to cash
within a year. Current Assets include Debtors, Stock, Cash/Bank Balance, Prepaid
Expenses etc. Current Liabilities are those debts or obligations of an organization
which are due within one year. Current liabilities appear on the company's balance
sheet include Short term debt, Trade Creditors, Accrued liabilities and other debts.
This ratio is expressed in proportion.
At CADMACH:
Amounts in Lacs
Year Current Assets Current Liabilities
Current Ratio In Proportion)
2009-10 2307.28 1594.18 1.44:12010-11 2614.37 1399.58 1.87:12011-12 2341.16 1857.78 1.26:12012-13 2963.64 2503.36 1.18:12013-14 2955.85 2328.85 1.27:1
50
Interpretation:
The above graph depicts that at CADMACH the current ratio has been declining
since the year 2010-11, but in the year 2013-14 i.e. last year it has slight gone up
which indicates positivity.
Hence, it can be concluded that the CADMACH does not have enough current
assets to meet its current obligation. It has to keep its eye on working capital
management so that it would not face liquidity crisis in future. If the current ratio
will be equal or less than 1:1 then it becomes dangerous for CADMACH.
Note: Deferred Tax Liability is considered as Short term Liability, so it is treated
as Current Liability.
51
QUICK /ACID TEST RATIO
The term liquid assets indicate the assets, which can be converted in the form of
cash without any reduction in the value, almost immediately whereas the term
liquid liabilities which are required to be paid almost immediately. In other words,
a higher liquid ratio indicates that there are sufficient assets available with the
organization, which can be converted in the form of cash almost immediately to
pay off those liabilities, which are to be paid off almost immediately. As such
higher the liquid ratio better will be the situation. A liquid ratio of 1:1 is supposed
to be standard and ideal.
Formula:
Quick Ratio = Liquid Assets
Liquid Liabilities
Here, Liquid Assets include all current assets except Stock (Inventory) and Prepaid
Expenses and Liquid Liabilities include all current liabilities except Overdraft and
Outstanding Expenses. Liquid Ratio indicates the backing available to liquid
liabilities in the form of liquid assets. This ratio is expressed in proportion.
At CADMACH:
Amounts in Lacs
Year Liquid Assets Liquid Liabilities Quick/Liquid Ratio (In
Proportion)2009-10 972.35 1584.24 0.61:12010-11 1281.09 1337.25 0.96:12011-12 1012.69 1817.97 0.56:12012-13 1412.31 2434.37 0.58:12013-14 1358.61 2211.77 0.61:1
52
Interpretation:
The above graph depicts that at CADMACH the liquid ratio had declined in the
year 2011-12. Though after that it has been increasing, the process of increment is
gradual and the quick ratio of the last year is too less than the ideal ratio – 1:1.As
CADMACH didn’t have sufficient liquid assets to pay liquid liabilities, it can be
concluded that the CADMCH has to continuously monitor this ratio and if it
become equal or less that 0.50:1 that it become dangerous for it.
Note: Deferred Tax Liability is deducted from current liabilities to find out liquid
liabilities.
53
(C)LEVERAGE/CAPITAL STRUCTURE RATIO
The short term creditors like Bankers and Trade creditors are more concerned with
the organization’s current debt paying ability. On the other hand, long term
creditors are like debenture holder, financial institutes etc. are more concerned with
organization’s long term financial strength. In fact, an organization should have a
short as well as long term strong financial position. Leverage ratios may be
calculated from Balance sheet items to determine the proportion of debt in total
financing. Leverage ratios are also computed from the Profit and Loss items to
determine the extent to which operating profit is sufficient to cover the fixed
charges.
Following are the leverage ratios of the organization:
(1) Debt –Equity Ratio
(2) Proprietary Ratio
(3) Interest Coverage Ratio
(4) Debt to Total Fund ratio
54
DEBT-EQUITY RATIO
The Debt-Equity Ratio establishes relationship between the outside long-term
liabilities and owners' funds. It shows the proportion of long-term External fund
and Internal Equities i.e. proportion of funds provided by long-term creditors and
that provided by shareholders or proprietors. A higher ratio means that outside
creditors has a larger claim than the owners of the business. The company with
high-debt position will have to accept stricter conditions from the lenders while
borrowing money.
Formula:
Debt – Equity Ratio = Long term debt
Equity Shareholders’ fund
Equity share holder's fund can be found out by deducting Fictitious Assets from the
sum of Equity share capital, Preference share capital, Reserves & Surplus. This
ratio is expressed in proportion.
At CADMACH:
Amounts in Lacs
Year Long term debt Equity Share holders' Fund
Debt equity Ratio (In
Proportion)2009-10 248.32 1094.67 0.23:12010-11 687.39 1177.78 0.58:12011-12 662.12 1268.81 0.52:12012-13 97.19 1337.00 0.07:12013-14 132.22 1569.19 0.08:1
55
Interpretation:
The above graph depicts that at CADMACH the Debt-Equity ratio has been
declining since the year 2010-11 which indicates the business of CADMACH is
running through the use of owners’ fund (Small share of outsiders’ fund). From the
table it is found that the CADMACH had raised huge amount through sources of
long term finance but it had paid off liabilities within very short time period which
indicates that it does not believe in delaying payments.
Hence, it can be concluded that the CADMCAH can easily raise money through
sources of long term finance. The long term lenders will not hesitate in providing
funds as the last records regarding payment of long term liabilities, indicates that
the risk involved in lending money to CADMACH is less.
Note: Deferred Tax Liability is considered as Short term Liability.
PROPRIETARY RATIO
56
The Proprietary Ratio is a variant of the debt-to-equity ratio. It is also known as
equity ratio or net worth to total assets ratio.
This ratio relates the shareholder's funds to total assets. Proprietary / Equity ratio
indicates the long-term or future solvency position of the business.
Formula:
Proprietary Ratio = Equity Shareholder's Fund
Total Assets
Total assets include all assets, including Goodwill. This ratio throws light on the
general financial strength of the company. It is also regarded as a test of the
soundness of the capital structure. Higher the ratio or the share of shareholders in
the total capital of the organization better is the long-term solvency position of the
organization. A low proprietary ratio will include greater risk to the creditors. This
ratio is expressed in percentage.
At CADMACH:
Amounts in Lacs
Year Equity Shareholder's
Fund
Total Assets Proprietary Ratio (In Percentage)
2009-10 1094.67 2947.11 37.14%2010-11 1177.78 3327.08 35.40%2011-12 1268.81 3828.52 33.14%2012-13 1337.00 4006.54 33.37%2013-14 1569.19 4147.37 37.84%
57
Interpretation:
The above graph depicts that at CADMACH the Proprietary Ratio had been
declining till the year 2011-12, but in the year 2012-13 it had been slightly gone
up. But in the last year it has reached to 37.84% which indicates that it generates
strong long-term solvency position of the organization and reduces the risk of
creditors.
INTEREST COVERAGE RATIO
58
The Interest Coverage Ratio is used to determine how easily a company can pay
interest on outstanding debt. The interest coverage ratio is calculated by dividing
an organization’s Profit before interest and tax of one period by the organization’s
Fixed Interest Expenses of the same period:
Formula:
Interest Coverage Ratio = PBIT (Profit Before Interest and Tax)
Fixed Interest Expenses
The lower the ratio, the more the company is burdened by debt expense. When a
company's interest coverage ratio is 1.5 or lower, its ability to meet interest
expenses may be questionable. An interest coverage ratio below 1 indicates the
company is not generating sufficient revenues to satisfy interest expenses. This
ratio is expressed in times.
At CADMACH:
Amounts in Lacs
Year Profit before Interest and Tax
Fixed Interest Charges
Interest Coverage Ratio
(In Times)2009-10 217.34 7.82 27.792010-11 277.81 18.78 14.792011-12 332.66 38.00 8.752012-13 344.62 41.51 8.302013-14 377.39 32.41 11.64
59
Interpretation:
The above graph depicts that at CADMACH the Interest coverage ratio had
declining since the year 2009-10 because of raising of outside fund. But it does not
reflect negativity as in the last year it has gone up and it indicates that the earning
of CADMACH is 11.64 times of its Interest Charges.
Hence, it can be concluded that the CADMACH has ability to earn enough Profit
before interest and tax to recover its Fixed Interest Charges which reduces the risk
of lenders regarding payment of interest. And in the last year it was gone up.
Though it is due to reduction in long term liability, but Profit before interest and
tax has also been gone up which shown its success in earning.
60
DEBT TO TOTAL FUND RATIO
Debt to Total Fund Ratio indicates what proportion of equity and debt the company
is using to finance its assets.
Formula:
Debt to Total Fund Ratio = Debt [LL + CL]
Total Fund [Share Capital+ R&S+ LL + CL]
A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without this
outside financing. If this were to increase earnings by a greater amount than the
debt cost (interest), then the shareholders benefit as more earnings are being spread
among the same amount of shareholders. However, the cost of this debt financing
may outweigh the return that the company generates on the debt through
investment and business activities and become too much for the company to
handle. This can lead to bankruptcy, which would leave shareholders with nothing.
The ideal ratio is 1:2.This ratio is expressed in percentage.
.
61
At CADMACH:
Amounts in Lacs
Year Debt Total Fund Debt to Total Fund Ratio
2009-10 1852.44 2947.11 62.86%2010-11 2149.30 3327.08 64.60%2011-12 2559.71 3828.52 66.86%2012-13 2669.54 4006.54 66.63%2013-14 2578.15 4147.34 62.16%
Interpretation:
The above graph depicts that at CADMACH the proportion of debt in total fund
was almost nearer to 66.66% which should be nearer to 33.33%.
Hence, it can be analyzed that CADMACH has more Short liabilities compare to
Long term liabilities.
62
(D) ACTIVITY/EFFICIENCY RATIOFunds of Creditors and Owners are invested in various assets to generate sales and
profit. The better the management of assets, better the amount of sales. These
ratios indicate the efficiency of the organization to use the various kinds of assets
by converting them in the form of sales. Activity or Efficiency ratio is also called
as Turnover Ratio/Assets Management Ratio. Higher the Ratio, better it is.
Several activity ratios can be calculated to judge the effectiveness of asset
utilization.
(1) Stock/Inventory Turnover Ratio
(2) Total Asset Turnover Ratio
(3) Debtor Turnover Ratio
(4) Debtor Collection Period [Average age of debtors]
(5) Creditors Turnover Ratio
(6) Creditors Payment Period
63
STOCK/INVENTORY TURNOVER RATIO
A ratio showing how many times a company's inventory is sold and replaced over
a period.
Formula:
Inventory Turnover Ratio = Net Sales
Average Stock
Here, Sales are considered as it is valued at market value, while inventories are
usually recorded at cost. Also, average inventory may be used instead of the ending
inventory level to minimize seasonal factors.
A low turnover implies poor sales and, therefore, excess inventory. A high ratio
implies either strong sales or ineffective buying. Too high inventory levels are
unhealthy because they represent an investment with a rate of return of zero. It also
opens the company up to trouble should prices begin to fall.
At CADMACH:
Amounts in Lacs
Year Net Sales Average Stock Stock Turnover Ratio (In
Times)2009-10 5196.16 1208.54 4.302010-11 6212.70 1332.58 4.662011-12 6866.13 1327.08 5.172012-13 6043.29 1429.55 4.232013-14 6802.58 1554.39 4.38
64
Interpretation:
The graph depicts that at CADMACH the sales are converted 4.38 times of
average inventory in the last year (2013-14). As the industry ideal ratio is not
known, it is difficult to conclude that this ratio is good or bad.
The stock turnover ratio of the year 2013-14 is more than the ratio of its previous
year 2012-13 which is due to percentage increase in sales is more compare to
percentage increase in the inventory. But still CADMACH should assess whether
the inventory level is appropriate or not, if it is appropriate then it should take steps
to increase sales by increasing selling and distribution expenses or any other ways.
Note: Refer Annexure C to see calculation of Average Stock.
65
TOTAL ASSET TURNOVER RATIO
The Total Asset Turnover Ratio measures the ability of an organization to use its
assets to generate sales efficiently. The Total Assets include all assets including
Fixed Assets, like Plant and Machinery, equipments etc. as well as Current Assets
like Inventory and Debtors etc.
Formula:
Total Assets Turnover Ratio = Net Sales
Total Assets
The lower the total asset turnover ratio, as compared to historical data for the firm
and industry data, the more sluggish the firm's sales. This may indicate a problem
with one or more of the asset categories composing total assets - inventory,
receivables, or fixed assets. There could be a problem with inventory. The firm
could be holding obsolete inventory and not selling inventory fast enough. With
regard to accounts receivable, the firm's collection period could be too long and
credit accounts may be on the books too long. Fixed assets, such as plant and
equipment, could be sitting idle instead of being used to their full capacity. All of
these issues could lower the total asset turnover ratio. This ratio is expressed in
times.
66
At CADMACH:
Amounts in Lacs
Year Net Sales Total Assets Total Asset Turnover Ratio(In
Times)2009-10 5196.16 2947.11 1.762010-11 6212.70 3327.08 1.872011-12 6866.13 3828.52 1.792012-13 6043.29 4006.54 1.512013-14 6802.58 4147.37 1.64
Interpretation:
The above graph depicts that at CADMACH the curve of Total Asset turnover
ratio curve had been moving downwards since the year 2011-12 till the year 2012-
13 and then it had gone slight up. As industry ideal ratio is not known, it is difficult
67
to conclude that the Total Asset turnover of the last year – 1.64 times is good or
bad. But as it is more than the last year’s ratio, it depicts positivity sign.
Hence, it can be concluded that the level of efficiency of management of
CADMACH has gone up in terms of utilizing its assets. But Management needs to
take actions towards optimum utilization of its assets and sell out ideal assets.
DEBTORS TURNOVER RATIO
Ratio of Net Credit Sales to trade debtors is called Debtors Turnover Ratio. It is
also known as Receivables Turnover Ratio. It is a component of current assets and
as such has direct influence on working capital position (liquidity) of the business.
This ratio is expressed in times.
Formula:
Debtors Turnover Ratio = Net Credit Sales
Debtors
Perhaps, no business can afford to make cash sales so extending credit to the
customers is a necessary. But care must be taken to collect Book debts quickly and
within the period of credit allowed. Otherwise chances of debts becoming bad and
unrealizable will increase. How effective or efficient is the credit collection? To
provide answer debtors turnover ratio or receivable turnover ratio is calculated.
68
Figure of trade debtors for this purpose should be gross i.e. provision for bad and
doubtful debts should not be deducted from the amount of debtors. This ratio is
expressed in times.
Normally higher the debtors turnover ratio better it is. Higher turnover signifies
speedy and effective collection. Lower turnover indicates sluggish and inefficient
collection leading to the doubts that receivables might contain significant doubtful
debts. Receivables collection period is expressed in number of days. It should be
compared with the period of credit allowed by the management to the customers as
a matter of policy. Such comparison will help to decide whether receivables
collection management is efficient or inefficient.
DEBTOR COLLECTION PERIOD [AVERAGE AGE OF
DEBTORS]
The Debtors/Receivable Turnover ratio when calculated in terms of days is known
as Average Collection Period or Debtors Collection Period Ratio.
The average collection period ratio represents the average number of days for
which a firm has to wait before its debtors are converted into cash.
Formula:
Average Collection Period = 365 days Debtors Turnover Ratio
69
The Average Collection Period ratio measures the quality of debtors. A short
collection period implies prompt payment by debtors. It reduces the chances of bad
debts. Similarly, a longer collection period implies too liberal and inefficient credit
collection performance. It is difficult to provide a standard collection period of
debtors.
At CADMACH:
Amounts in Lacs
Year Net Credit Sales Debtors Debtors Turnover Ratio(In Times)
2009-10 5196.16 804.42 6.462010-11 6212.70 1047.92 5.932011-12 6866.13 926.02 7.412012-13 6043.29 1326.32 4.562013-14 6802.58 1240.60 5.48
Interpretation:
70
The above graph of Debtor Turnover Ratio depicts that the Debtor turnover ratio
has gone up which shows positivity sigh, but it is still 73.95% lower than the
highest ratio amongst the ratios of five years consequent years.
Amounts in Lacs
Year Days of Year Debtor Turnover Ratio
Debtor Collection Period(In Days)
2009-10 365 6.46 56.512010-11 365 5.93 61.572011-12 365 7.41 49.232012-13 365 4.56 80.112013-14 365 5.48 66.57
Interpretation:
Here, it can be analyzed that CADMACH has too liberal credit policy. If this is to
maintaining good relationships with loyal customers or to create new customers
71
then it is fine. But still it has to carry Cost Benefit analysis of keeping this kind of
credit policy.
CREDITORS TURNOVER RATIO
The Creditors Turnover Ratio is a ratio that measures the speed with which an
organization pays its suppliers. It is calculated by taking the total credit purchases
from suppliers and dividing it by the trade creditors during the same period.
Formula:
Creditors Turnover Ratio = Net Credit Purchase
Trade Creditors
The Creditors Turnover Ratio shows that how many times per period the
organization pays its suppliers. If the turnover ratio is falling from one period to
another, this is a sign that the company is taking longer to pay off its suppliers than
it was before. The opposite is true when the turnover ratio is increasing, which
means that the organization is paying of suppliers at a faster rate.
CREDITORS PAYMENT PERIOD
Average payment period means the average period taken by the organization in
making payments to its creditors. It is computed by dividing the number of
working days in a year by Creditors Turnover Ratio.
Formula:
72
Creditors Payment Period = 365
Creditors Turnover Ratio
A shorter payment period indicates prompt payments to creditors. Like accounts
payable turnover ratio, average payment period also indicates the creditworthiness
of the organization. But a very short payment period may be an indication that the
organization is not taking full advantage of the credit terms allowed by suppliers.
Managers try to make payments promptly to avail the discount offered by
suppliers. Where the discount is available for early payment, the amount of
discount should be compared with the benefit of the length of the credit period
allowed by suppliers.
At Cadmach Amounts in Lacs
Year Net Credit Purchase
Trade Creditors Creditors Turnover Ratio
(In Times)2009-10 2594.11 1159.49 2.242010-11 2634.74 825.71 3.192011-12 3183.15 1095.92 2.902012-13 2677.01 1172.19 2.282013-14 2989.02 1525.07 1.96
73
Interpretation:
The above graph of Creditors Turnover Ratio depicts that the Creditors Turnover
Ratio has been moving downward which signs that the organization is taking
longer to pay off its suppliers than it was before.
Amounts in Lacs
Year Days of Year Creditors Turnover Ratio
Creditors Payment Period(In Days)
2009-10 365 2.24 163.142010-11 365 3.19 114.392011-12 365 2.90 125.672012-13 365 2.28 159.822013-14 365 1.96 186.23
74
Interpretation:
Here, it can be analyzed that CADMACH has received an average credit of 186.23
days from its suppliers, which is more than the average collection period (66.57
days).
Hence, it can be observed that CADMACH can take following actions only if they
would not result into undesirable consequence in future.
It can liberalize its existing credit policy to certain extent, so that it can
generate more sales.
It can reduce the payment period to certain extent and get an advantage of
discount from suppliers.
75
5 Findings
Based on the Ratio analysis it is found that…………….
The Gross profit ratio of CADMACH of the last year is lower than its
previous year which indicates that the control over Production Expenses is
required by the Production Manager. The curve of Operating profit ratio is
upward moving curve. Hence, it can be observed that CADMCAH has
76
control over Admin and S & D (Selling and Distribution) Expenses, as the
percentage of increase in these expenses is lower than the percentage
increase in sales. But the Operating Profit Ratio and Net Profit are too less
when GP is this much. The reason behind this is too much Admin and
Selling & Distribution Expenses.
The return on investment is more than the cost of capital. Hence, it depicts
that the capital is used efficiently at CADMACH. The return on equity of the
current year is slight lower than its previous year’s return still it is
percentage of return is good.
The owner is getting enough return on the funds invested by them. The
curve of Earning per Share and Dividend payout Ratio depicts that the
owners are highly satisfied at CADMACH. The amount of Dividend per
Share is approximately six times of the money invested by them (Face
Value: Rs. 100 and DPS: Rs.584).The return on equity of the current year is
slight lower than its previous year’s return. It has to continuously monitor it
so that it will not decline in future.
The liquidity position of the CADMACH of last year is better than its two
previous years. But it has to take certain actions to increase liquidity ratios
so that it would not face any problem regarding lack of liquidity in future.
CADMACH enjoys long credit period from its supplies i.e. on an average
187 days which is thrice of its collection period. It can liberalize its Debtor
collection policy only if; that will not increase chances of defaults of
debtors.
77
CADMCAH can also reduce the payment period and get two benefits, one is
that it can receive discount as payment is made early and another benefit is
that it will strengthen the relationship existing between them. But before
taking decision of early payment once Cost Benefit Analysis should be
carried out.
CADMACH is utilizing its Assets efficiently.
CADMACH has stable Debt to Total fund ratio (nearer to 66.67%).It has
enough earnings from which it can pay off its interest. Long term lenders
would fill free to lend money to it as it less risky for them. But the current
liabilities are too much.
6 Conclusion
It can be concluded that …………..
The CADMCAH has to only focus on Liquidity position and Cost Control
over Administration & Selling Expenses to certain extent. Otherwise the Overall
Financial Performance of CADMACH is excellent and overall Financial
Position is Strong enough. Because…..
78
It is efficiently utilizing its Assets.
Its Sales has been increasing over the period.
It keeps good portion of return in the business as Reserve for further
Growth.
It has been declaring good amount of dividend to its Shareholders which
delights them.
It has been also spending good amount on Employee Welfare.
It receives long credit period from its trade creditors.
And it also able to earn enough profit to pay interest on debt.
Bibliography and Webliography
BOOKS :
1. Financial Management – Khan and Jain
2. Financial Management – I. M. Pandey
79
WEBSITES :
www.cadmach.com
www.pharmaceuticalmachinery.in
www.ipmma.org
karnavatiengineering.com
www.chamunda.in
www.fluidpack.net
sejongtrading.en.ec21.com
boschpackaging.com
www.fetteamerica.com
www.ima-pharma.com
www.tabletpressgroup.com
www.investopedia.com
www.accountingformanagement.org
www.accountingtools.com
www.bakeru.edu
80
Annexure
Annexure A. Calculation of Factory overhead
FACTORY OVERHEAD CALCULATIONAmount in Lacs
Particular 2009-10 2010-11 2011-12 2012-13 2013-14
INSURANCE 6.57 5.56 5.52 8.67 8.41REPAIR & MAINTENANCE: BUILDING 5.25 15.16 25.14 18.08 22.76 PLANT & MACHINERY 21.48 10.05 16.52 11.47 20.86GENERAL CHARGES 20%(MISC. EXPENSES+MKT. AND S&D EXP.+BANK CHARGES)
55.96 75.92 125.33 116.23 82.63
TOTAL FACTORY OVERHEAD 89.26 106.69 172.51 154.45 134.66
CALCLATION OF 20% GENERAL CHARGESAmount in Lacs
YearParticular 2009-
102010-11 2011-12 2012-
132013-
14
MISC. EXPENSES 220.75 289.84 150.99 150.64 143.75MKT. AND S&D EXPENSES 55.16 89.48 410.73 393.31 200.94BANK CHARGES 3.87 0.27 64.94 37.22 68.45
TOTAL GENERAL CHARGES 279.78 379.59 626.66 581.17 413.1420% 0.20 0.20 0.20 0.20 0.20
20% GENERAL CHARGES 55.96 75.92 125.33 116.23 82.63
81
Annexure B. Calculation of Non Operating Income
82
Particular 2009-10
2010-11
2011-12
2012-13
2013-14
Amount in Lacs
Other Income 52.90 88.55 132.29 175.32 147.84
Less: Tax (Other Income*.30)
15.87 26.57 39.69 52.60 44.35
Non Operating Income
37.03 61.99 92.60 122.72 103.49
Annexure C. Calculation of Average Stock
FinishedGoods WIP Raw Material
Total
2009-10Opening 66.85 754.29 264.07 -
Closing 54.70 957.02 320.15 -
Average 60.78 855.66 292.11 1208.54
2010-11Opening 54.7 957.02 320.15 -
Closing 209.55 781.25 342.48 -
Average 132.125 869.135 331.315 1332.58
2011-12Opening 209.55 781.53 342.48 -
Closing 105.79 861.1 353.98 -
Average 157.67 821.315 348.23 1327.215
2012-13Opening 105.79 861.1 353.98 -
Closing 28.24 1079.02 430.96 -
Average 67.015 970.06 392.47 1429.55
2013-14Opening 28.24 1079.02 430.96 -
Closing 2.09 1043.36 525.1 -
Average 15.165 1061.19 478.03 1554.39
83
Annexure D : Profit and loss Account Income statement
Amt in lacs
Particular 2009-102010-11
2011-12
2012-13 2013-14
income
sales 5196.16 6212.76866.1
36043.2
9 6802.58 other income (non operating income - gross) 52.9 88.55 132.29 175.32 147.84 inc/dec in stock 190.58 -20.92 -23.91 140.37 -61.81
Total income 5439.646280.3
36974.5
16358.9
8 6888.61
less: manufacturing expenses
consumption 2603.542955.0
23180.0
92600.0
3 2894.88 stores and spares 141.37 159.63 152.76 185.1 184.73 power and fuel 58.94 65.18 74.72 82.67 87.69 ojp expenses 454.29 517.17 535.45 434.42 436.65 packing material 52.46 65.75 68.92 62.55 70.21 factory overhead 89.26 106.69 172.51 154.45 134.66 personnel expenses (60%) 660.37 795.96 817.69 859.93 1047.15
4060.23 4665.45002.1
44379.1
5 4855.97Gross profit (including non operating income) 1379.41
1614.93
1972.37
1979.83 2032.64
less: other expense personnel expenses (40%) 440.25 530.64 545.12 573.28 698.1
84
depriciation 67.25 75.28 84.14 99.59 113.03
other admin. And mkt. expenses 654.57 731.21010.4
5 962.34 844.06
Profit before interest and tax 217.34 277.81 332.66 344.62 377.39less: interest 7.82 18.78 38 41.51 32.41Profit before tax 209.52 259.03 294.66 303.11 344.98less:provision for tax 69.55 117.87 74.62 105.06 112.79Profit after tax 139.97 141.16 220.04 198.05 232.19less: non operating income (net) 37.03 61.99 92.61 122.72 103.49Net profit 102.94 79.18 127.44 75.33 128.7
Annexure E : Balance sheetBalance sheet
Particular 2009-10 2010-11 2011-12 2012-13 2013-14
SOURCES OF FUNDS Share holder's funds Share capital 22.2 22.2 22.2 22.2 22.2 Reserve and surplus 1072.47 1155.58 1246.61 1314.8 1546.99
1094.67 1177.78 1268.81 1337 1569.19Non current liabilities Long term borrowing 248.32 687.39 509.2 7.75 60.07 Deferred tax liability 9.94 62.33 39.81 68.99 117.08 Other long term liability - - 4.49 7.52 9.71 Long term provisions - - 148.43 81.92 62.44
258.26 749.72 701.93 166.18 249.3Current liabilities Short term borrowing - - 164.05 188.52 283.88 Trade payable 1159.49 825.71 1095.92 1172.19 1525.07 Other current liabilities 143.89 315.07 404.34 957.34 460.53 Short term provision 290.8 258.8 193.47 185.31 59.37
1594.18 1399.58 1857.78 2503.36 2328.85Total 2947.11 3327.08 3828.52 4006.54 4147.34
APPLICATION OF FUNDSFixed assets Tangible assets 639.82 706.22 819.4 778.41 1004.28 Intangible assets - - 60.64 63.75 61.01 Capital work in progress - 6.48 8.14 - -
639.82 712.7 888.18 842.16 1065.29Non-current investments 0.01 0.01 0.01 0.01 0.01Long term loans and advances - - 114.65 200.73 126.19Other non-current assets - - 484.52 - -
85
Current assets Inventories 1331.87 1333.28 1320.87 1538.22 1570.55 Trade receivable 804.42 1047.92 926.02 1326.32 1240.6 Cash and bank balance 12.96 47.02 7.93 3.59 59.85 Short term loans and advances 158.03 186.15 73.76 76.48 56.7 Other current assets - - 12.58 19.03 25.15
2307.28 2614.37 2341.16 2963.64 2952.85Total 2947.11 3327.08 3828.52 4006.54 4147.34
86
