Final Project ANUBHA

8/6/2019 Final Project ANUBHA

1/49

A

PROJECT REPORTON

EVALUATING FINANCIAL PERFORMANCE

OF LIFE INSURANCE CORPORATION

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD OF DEGREEOF

MASTER OF BUSINESS ADMINISTRATION (MBA)

SESSION (2009-2011)

SUBMITTED TO: - SUBMITTED BY:-

DEPT. OF MANAGEMENT, ANUBHA

DCRUST, MBA 4th SEM.

MURTHAL 09092807

DEENBANDHU CHHOTU RAM UNIVERSITY OF

SCIENCE AND TECHNOLOGY

DECLARATION


2/49

I, Anubha, student of MBA 4th Semester, studying at Deenbandhu Chhotu Ram

University of Science and Technology, Murthal, hereby declare that the project report on

topic Evaluating Financial Performance of Life Insurance Corporation. submitted

to DCRUST, Murthal in partial fulfillment of Degree of Masters of Business

Administration is the original work conducted by me.

The information and data given in the report is authentic to the best of my knowledge.

This project report is not being submitted to any other University for award of any other

Degree, Diploma and Fellowship.

ANUBHA

MBA 4th SEM.

09092807

ACKNOWLEDGEMENT


3/49

It is my pleasure to be indebted to various people, who directly or indirectly contributed

in the development of this work and who influenced my thinking, behavior, and acts

during the course of study.

I express my sincere gratitude to Prof. Rajbir Singh worthy Principal for providing me an

opportunity to undergo project report at Life Insurance Corporation..

I am thankful to Dr Satpal Singh ( Guide) for his support, cooperation, and motivation

provided to me during the project for constant inspiration, presence and blessings.

I also extend my sincere appreciation to Mr. Pankaj Chaudhary who provided his

valuable suggestions and precious time in accomplishing my project report.

Lastly, I would like to thank the almighty and my parents for their moral support and my

friends with whom I shared my day-to-day experience and received lots of suggestions

that improved my quality of work.

Anubha

MBA 4th SEM.

09092807

Table of Contents:


4/49

Chapters Particulars Page No.

Chapter 1 Statement of Problem

Chapter 2 Objectives of Study

Chapter 3 Industry Profile

Chapter 4 Company Profile

About LIC

Members On the board of the corporation

Competitors of LIC

Vision, Mission and Goals

LIC products

LIC achievements

Chapter 5 Introduction to the Topic

Basis of study

Financial performance

Financial performance measurement methods

Chapter 6 Research Methodology

Chapter 7 Study of the Topic

Table showing ratios calculation

Chapter 8 Data Analysis and Interpretation

Current ratio

Cash ratio

Debt-Equity ratio

Proprietary ratio

Net profit ratio


5/49

Return on shareholders fund

Return on capital employed

Chapter 9 Limitations of Study

Chapter 10 Suggestions and Recommendations

Chapter 11 References


6/49

Statement of Problem

Statement of the problem:


7/49

Development of industries depend on several factors such as financial, personnel,

technology, quality of the product and marketing. Out of these, financial aspect assumes a

significant role in determining the growth of industries. All of the companys operations

virtually affect its need for cash. Most of these data covering operational areas are

however outside the direct responsibility of financial executive. Unless top management

appreciates the value of good financial analysis, there will be a continuing problem for

the financial executive to know the profitability and liquidity of concern.

In this context I am interested in undertaking an analysis of the financial

performance of Life Insurance Corporation (LIC) to examine financial position of LIC.

Hence the present study of the evaluating financial performance of LIC in India has been

undertaken.

Here for my study I will use ratio analysis. As the most common

method of analyzing financial statement is the use of ratios. These ratios are simple

mathematical relationships between various items on financial statement. The analytical

skill lies not in computing the ratios but in determining which ratio to use in each case

and interpreting the results. Just by themselves the ratios are relatively meaningless. Only

by comparing ratios over time or between companies- and by determining the underlying

causes of the difference among them- does ratio analysis help the analyst or manager

gains insight into corporate performance.


8/49

Objectives of Study

Objectives of the study:


9/49

To evaluate financial performance of LIC.

To study financial trend of LIC.

To measure strength and weakness of financial performance of LIC


10/49

Industry Profile

Industry profile (Insurance)


11/49

The story of insurance is probably as old as the story of mankind. The same instinct that

prompts modern businessmen today to secure themselves against loss and disaster existed

in primitive men also. They too sought to avert the evil consequences of fire and flood

and loss of life and were willing to make some sort of sacrifice in order to achieve

security.

Life Insurance in its modern form came to India from England in the

year 1818. Oriental Life Insurance Company started by Europeans in Calcutta was the

first life insurance company on Indian Soil. All the insurance companies established

during that period were brought up with the purpose of looking after the needs of

European community and Indian natives were not being insured by these companies.

However, later with the efforts of eminent people like Babu Muttylal Seal, the foreign life

insurance companies started insuring Indian lives. But Indian lives were being treated as

sub-standard lives and heavy extra premiums were being charged on them. Bombay

Mutual Life Assurance Society heralded the birth of first Indian life insurance company

in the year 1870, and covered Indian lives at normal rates. Starting as Indian enterprise

with highly patriotic motives, insurance companies came into existence to carry the

message of insurance and social security through insurance to various sectors of society.

Prior to 1912 India had no legislation to regulate insurance business.

In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were

passed. The Life Insurance Companies Act, 1912 made it necessary that the premium rate

tables and periodical valuations of companies should be certified by an actuary. But the

Act discriminated between foreign and Indian companies on many accounts, putting the

Indian companies at a disadvantage. On the 19th of January, 1956, that life insurance in

India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies

and 75 provident were operating in India at the time of nationalization.


12/49

Company Profile

About LIC

Members on the board of the corporation

Competitors of LIC

Vision, Mission and Goals

LIC products

LIC achievements

Company profile (LIC)


13/49

The Parliament of India passed the Life Insurance Corporation Act on the 19th of June

1956, and the Life Insurance Corporation of India was created on 1st September, 1956,

with the objective of spreading life insurance much more widely and in particular to the

rural areas with a view to reach all insurable persons in the country, providing them

adequate financial cover at a reasonable cost.

LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its

corporate office in the year 1956. Since life insurance contracts are long term contracts

and during the currency of the policy it requires a variety of services need was felt in the

later years to expand the operations and place a branch office at each district headquarter.

Re-organization of LIC took place and large numbers of new branch offices were opened.

As a result of re-organization servicing functions were transferred to the branches, and

branches were made accounting units. It worked wonders with the performance of the

corporation. Today LIC functions with 2048 fully computerized branch offices, 109

divisional offices, 8 zonal offices, 992 satellite offices and the Corporate office. LICs

Wide Area Network covers 109 divisional offices and connects all the branches through a

Metro Area Network. LIC has tied up with some Banks and Service providers to offer on-

line premium collection facility in selected cities.

Members On The Board Of The Corporation:

Shri T.S. Vijayan (Chairman)

Shri D.K. Mehrotra (Managing Director - LIC)

Shri Thomas Mathew T. (Managing Director - LIC)

Shri A.K. Dasgupta (Managing Director - LIC)

Shri Ashok Chawla (Finance Secretary, Ministry of Finance, Govt. of India

Shri R. Gopalan (Secretary, Department of Financial Services, Ministry of

Finance Govt. of India.

Competitors of LIC:


14/49

Insurance is a kind of risk management basically used to evade the danger of a contingent

loss. It involves an equitable transmission of the risk of a loss, from one entity to others

for a premium. Insurance in India covers the areas including loss caused by fire, death,

burglary and peril of sea. There are many Insurance Companies in India who are

competitors of Life Insurance Corporation that are as follows:

Birla Sun Life Insurance

Kotak Life Insurance

Reliance Life Insurance

Bajaj Alliance Life Insurance

HDFC Standard Life Insurance Company

ICICI Prudential Life Insurance

ING Vysya Life Insurance

Kotak Mahindra Insurance

Max New York Life Insurance

Net Life India Insurance

SBI Life Insurance

Tata AIG Insurance

AMP Sammar Life Insurance Company Ltd.

Aviva Life Insurance Company

Shri Ram Life Insurance Co. Ltd

Sahara India Insurance Co. Ltd.

Bharti AXA Life Insurance

Vision, Mission and Goals:

LIC Products:


15/49

LIC Achievements:


16/49

Introduction To The Topic

Basis of study

Financial performance

Financial performance measurement methods


17/49

Introduction To The Topic

Basis of study:

The study is based on -Analysis of financial statement:

The financial statements namely profit and loss a/c and balance sheet, of a

business firm contains substantial and extremely useful information about its financial

health. This set of information may also be useful to the management for judging the

business firm from all perspectives such as:

The firm should be able to pay short-term maturing obligations as well as and when they

become

due:

It should make available a satisfactory rate of return on investments made by

shareholders;

Above all, management should ensure that organization is profitable;

Before going further I would like to explain what is financial performance?

Financial Performance:

Financial performance of a company/organization means how a firm is

performing in monetary context. It shows is the position of business financially sound or

not? The objective of going in to business is to make profit. Financial results summarise

the result for a given period. Activities undertaken during such period involves many

facets of co. These include the management of sales, customer care, cost and most

important management of personnel. It is inconceivable that a co. can only have financial

performance measures. There are numerous measures that need to be applied and that

lead to achievement of the objective i.e. the posting of a profit. This means that financial

performance is a part of performance management. The primary goal of financial


18/49

reporting and analysis is to provide information that is useful to the internal and external

users of this information. Internal users of financial information are people who control

the resources of the operation, or the decision makers. External users are people who do

not directly control the resources of the operation. These would include bankers,

accountants, the Internal Revenue Service, and possibly stockholders.

A financial performance measurement system should provide with tools and

metric to understand financial situation. This information can be used for making better

business decisions in a number of areas including:

Business profitability

Pricing

Budgeting

Cost accounting

Capital purchasing

Strategic planning

Incentive compensation etc.

Financial statement analysis is the most objective way to evaluate the

financial performance of a company. Financial analysis involves assessing the leverage,

profitability, operational efficiency and solvency for a company. Financial ratios are the

principle tool used to conduct the analysis. The challenge is to know which ratios to

choose from and how to interpret the result.

People interested in evaluation of financial performance:

Lenders

Banks/ Fnancial Istitutions

Potential Investers

Managers( Internal Analysts)

Government etc.


19/49

Financial performance measurement method:

Financial performance can be measured by different persons and for different purposes,

therefore, the methodology adopted for measuring financial performance may be varying

from one situation to another. However, the following are some of the common

techniques of measuring financial performance:

1. Comparative financial statements.

2. Common- size financial statements.

3. Trend percentage analysis, and

4. Ratio analysis

1. Comparative Financial statement (CFS):

In CFS, two or more BS and/or the IS of a firm are presented simultaneously in columnar

form. The financial data for two or more years are placed and presented in adjacent

columns and thereby the financial data is provided a times perspective in order to

facilitate periodic comparison.

The absolute amount of different items in monetary terms

The amount of periodic changes in monetary terms

The percentages of periodic changes to reveal the proportionate changes.

2. Common Size Statement (CSS):

The CSS represents the relationship of different items of a financial statement with some

common item by expressing each item as a percentage of the common item. In common

size balance sheet, each of the balance sheets is stated as percentage of net sales. The

percentages for different items are computed by dividing the absolute amount of that item

by common base (i.e., the balance sheet total or the net sales as the case may be) and then

multiplying by 100. The percentages so calculated can be easily compared with the

corresponding percentages in some other period. Thus, the CSS is useful not only in


20/49

intra-firm comparisons over a series of different year but also in making inter-firm

comparisons for the same year or for several years.

3. Trend Percentage Analysis (TPA):

The TPA is a technique of studying several financial statements over a series of years. In

TPA, the trend percentage are calculated for each item by taking the figure of that item

for some base year as 100. Therefore, the trend percentage is percentage relationship,

which each item of different years bears to the same item in the base year. Any year can

be taken as base year, but generally,he initial year is taken as the base year. Therefore,

each item of base year is taken as 100 and the same item for other years is expressed as a

percentage of the base year.

4. Ratio Analysis:

Most popular and commonly used fiancial performance measure is Ratios Analysis. It

helps in estimating financial soundness or weekness. Ratio is quantitative relationship

between two items for the purpose of comparison. The items presented in profit an dloss

account and balance sheet are related to each other. This relationship can be calculated

with the help of ratios. For example, profit is related to capital investmed in business and

debtors are related to credit sales. Thus ratio helps in drawing meaningful conclusionsby

establishing relationship between various facts. On the basis of their interpretation,

unfavourable situations in the future can be avoided. Hence comparative and significant

conclusions cannot be drawn from financial data of different years of a business or of

different businesses unless arithmetic relationship is established among such data.

Forms of expressing ratio:

There are basically two ways of expressing ratio i.e. proportion and

percentage.

Classification of ratios:

According to purpose ratios can be classified in four parts i.e.

Liquidity ratios

Profitability ratios


21/49

Activity ratios

Capital structure ratios

Liquidity ratios: It is also called as working capital or short term solvency ratio.

Liquidity means ability of the firm to pay its short term debts on time. Important liquidity

ratios are current ratio, quick ratio, super quick ratio.

Profitability ratios: The main aim of all the business concerns is to earn profit. Equity

shareholders of the company are mainly interested in the profitability of the company.

Profitability ratios measure the various aspects of the profitability of the company such as

(i) what are the rate of profit on sales? (ii) whether the profits are increasing or

decreasing? (iii) whether an adequate return is being obtained on the capital employed?

Profitability ratios include gross profit ratio, net profit ratio, operating ratio, expenses

ratio, return on capital employed, return on shareholders fund.

Activity Ratios: This ratios are calculated on the basis of cost of sales or sales, therefore

these ratios are also called as turnover ratios. These ratios indicate how efficiently the

capital is being used to obtain sales; how efficiently the fixed assets are being used to

obtain sales etc. these ratios include stock turnover ratio, debtors turnover ratio, creditorsturnover ratio, fixed assets turnover ratio, working capital turnover ratio.

Capital structure ratios: These ratios are calculated to assess the ability of the firm to

meet its long term liabilities as and when they become due. These ratios include debt

equity ratio, debt to total fund ratio, proprietary ratio, capital gearing ratio, interest

coverage ratio.

Usefulness of ratio analysis:

Useful in analysis of financial statement.

Useful in judging operating efficiency of business.

Useful for forecasting purposes.

Useful in locating the weak spots of business.

Useful in comparison of performance.


22/49

Benefit to other parties interested in business.

Helps in determining trends etc.

Research Methodology


23/49

Research Methodology:

Research Methodology is the procedure adopted for conducting the research.

Research Methodology should be carefully planned as the accuracy; reliability and

adequacy of results depend on the research methodology followed. It gives the researcher

a guideline by which he can decide which techniques and procedures will be applicable to

a given problem. Research Methodology guiding the present research work has been

explained under the following sub head;

Research design:Research design is the blueprint to study any problem. It is a plan for

collection, analysis and interpretation of data in a manner that is relevant to the research

purpose with economy in procedure. Present study is based on analytical research design

Source of data:

In my study I have decided to use secondary data(5 year Annual Reports of

LIC, libraries-journals, research papers and other e-sources etc.)

Period of study:The study covers a period of five years from 2005-2006 to 2009-2010 to

mean an accounting year of the company consisting of twelve months.

Sampling universe:

I have selected Life Insurance Corporation.

Sampling techniques:

I have selected convenience sampling technique.

Framework of analysis:For the purpose of evaluating financial performance the study makes

use of various accounting ratios extensively. Ratio analysis helps comparison of

performance over years or with other companies. For data analysis I have selected pie

chart and other convenient and suitable tools with ratio analysis.


24/49

Study Of The Topic

Table showing ratio analysis


25/49

Study Of The Topic

As discussed earlier my study include ratio analysis with the help oh annual reports of

LIC of 5 years (2005-06 to 2009-10).

Table showing some popular and commonly used ratios calculation:

Year

Ratios

2005-06 2006-07 2007-08 2008-09 2009-10

Current

Ratio

1.51:1 1.69:1 1.93:1 2.48:1 2.25:1

Cash

Ratio 1.51:1 1.69:1 1.93:1 2.48:1 2.25:1

Debt

Equity

Ratio

3001:07 2136.75 2522.60 2562.02 3052:1

Proprietory

Ratio 0.0059:1 0.0081:1 0.0068:1 0.0065:1 0.0069:1

Net

Profit

Ratio

0.695% 0.605% 0.564% 0.609% 0.57%

Return on

Shareholders

Fund

356.82% 264.20% 274.36% 284.85% 289.38%

Return on

Capital

Employed

5.74% 5% 3.70% 2.98% 3.44%


26/49

Data Analysis And Interpretation

Current ratio

Cash ratio

Debt-Equity ratio

Proprietary ratio

Net profit ratio

Return on shareholders fund

Return on capital employed


27/49

Data analysis and Interpretation

1. Current Ratio:

This ratio explains the relationship between the current assets and current

liabilities of a business. The formula for calculating the ratio is:

Current Ratio = Current Assets/Current Liabilities

Current Assets include those assets which can be converted in to cash with in a years

time and Current Liabilities include those liabilities which are repayable in a years

time.

This ratio is used to assess the firms ability to meet its short term liabilities on time.

According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio.

It means that current assets of a business should, atleast, be twice of its current liabilities.

The reason for assuming 2:1 as the ideal ratio is that the current assets include such assets

as stock, debtors etc., from which full amount can not be realized in case of need. Hence

even if half amount is realized from the current assets on time, the firm can still meet its

current liabilities in full. The higher the ratio, the better it is, because the firm will be able

to pay its current liabilities more easily. If the current ratio is less than 2:1, it indicates

lack of liquidity and shortage of working capital. But a much higher ratio is not

necessarily good for company as it indicate poor investment policy of management.

Particulrs/Year Current

assets

Current

Liab.

Ratios

2005-06 2855376.72 1881804.57 1.51:1

2006-07 3431573.80 2026671.36 1.69:1

2007-08 4279502.77 2208785.03 1.92:1

2008-09 4871466.75 1959021.90 2.48:1

2009-10 4947809.41 2190219.82 2.25:1


28/49

Interpretation:

My study of current ratio shows increase in liquidity position of

company till 2008-09. Therefore, it can be said that short term financial position of the

company is satisfactory. Means thereby short term creditors need not to worry about their

receipts i.e. payment from LIC. Meaning thereby company is in position to pay its current

liabilities in time.

Calculation show that current ratio is declining in 2009-10 as compare to 2008-09 but

there is no fear of problem as ideal level i.e.2:1 is not compromised. It could happen that

company has used its resources like cash for investment or some part of debtors are paid

during 2009-10.


29/49

2. Cash Ratio:

Cash Ratio indicates whether the firm is in a position to pay its current liabilities within

a month or immediately. The formula for calculating the ratio is:

Cash Ratio = (Cash + Short Term Securities) / Current liabilities

Although receivables, debtors and bills receivables are generally more liquid than

inventories, yet there may be doubts regarding their realization into cash immediately or

in time. Hence some authorities are of the opinion that the absolute liquid ratio should

also be calculated with current ratio so as to exclude even receivables from current assets

and find out the absolute liquid assets. Prepaid expenses too are excluded from the list of

liquid assets because they are not expected to be converted in to cash.

An ideal Cash Ratio is .05:1. Rupee 1 worth absolute liquid assets are consideredadequate to pay rupees 2 worth current liabilities in time as all the creditors are not

expected to demand cash at the same time and then cash may also be realized from

debtors and inventories. If it is more it is considered to be better. This ratio is better test

for short term financial position of company than the current ratio, as it considers only

those assets which can be easily and readily converted into cash. Stock is not included in

liquid assets as it may take a lot of time before it is converted into cash.

Particulrs/Year Cash Current

Liab.

Ratios

2005-06 2855376.72 1881804.57 1.51:1

2006-07 3431573.80 2026671.36 1.69:1

2007-08 4279502.77 2208785.03 1.92:1

2008-09 4871466.75 1959021.90 2.48:1

2009-10 4947809.41 2190219.82 2.25:1


30/49

Interpretation:

My study shows that cash ratio is similar to current ratio as ther is no stock

lying and no bills receivables are there. But as per analysis point of view cash ratio is not

sound during the period of study, specially in last 2 years of my study i.e. 2008-09 and

2009-10. As in 2008-09 cash ratio is 2.48:1 and in 2009-10 cash ratio is 2.25:1 which

shows that company is not using its resources efficiently. LIC is having extra cash lying

idle which it can use as investment somewhere to have some earning. No doubt company

is short term financially sound, it can pay its creditors but having this much ratio is also

not sound indication.


31/49

3. Debt-Equity Ratio:

Debt-Equity ratio, also known as External-Internal Equity Ratio is calculated to measure

the relative claims of outsiders and owners against the firms assets. This ratio indicates

the relationship between the external equities or the outsiders fund and the internal

equities or the shareholders fund. Thus:

Debt-Equity Ratio = outsiders fund/shareholders fund

Here outsider fund represents for policyholders fund and internal funds represents for

shareholders fund.

The debt equity ratio is calculated to measure the extent to which debt financing has been

used in a business. The ratio indicates the proportionate claims of owners and the

outsiders against the firms assets. The purpose is to get an idea of the cushion availableto outsiders on the liquidation of the firm. A ratio of 1:1 may be usually considered to be

a satisfactory ratio although there can not be any rule of thumb or standard norm for all

types of businesses. In some businesses a high ratio 2:1 or even more may be considered

satisfactory. A high debt equity ratio may not be considered good by the creditors

because it gives a lesser margin of safety for them at the time of liquidation of the firm.

So ideal ratio is 2:1.

Particulrs/Year Debts Equity Ratios

2005-06 53118611.71 17699.85 3001:1

2006-07 62566417.89 29280.99 2137:1

2007-08 77659709.17 30784.61 2523:1

2008-09 84087747.65 33607.91 2562:1

2009-10 111696914.80 36587.32 3052:1


32/49

Interpretation:

As standards say that debt equity ratio should be more than 2:1 but much

more than 2:1 could be dangerous. But here in case of insurance sector as policyholders

fund is treated as long term debs so in that sense as more the ratio is as it is good for

company because more than 90% fund used by insurance company are from outside and

much the funds from outside means much policyholder fund is good for company

working. So here as study shows that till 2008-09 debt equity ratio is declining bt in

2009-10 it starts increasing showing good business by LIC.


33/49

4. Proprietary ratio:

This ratio indicates the proportion of total assets funded by owners or shareholders. The

formula for calculating this ratio is:

Proprietary Ratio = Equity/Total Assets OR Shareholders Funds/Total Assets

A higher proprietary ratio is generally treated as indicator of sound financial position

from long term point of view, because it means that a large proportion of total assets is

provided by equity and hence the firm is less dependent on external sources of finance .

On the contrary, a low proprietary ratio is a danger signal for long term lenders as it

indicates a lower margin of safety available to them. The lower the ratio, the less secured

are the long terms loans and they face the risk of losing their money.

Particulars/Year Shareholders

Fund

Total assets Ratios

2005-06 17699.85 2981591.18 0.0059:1

2006-07 29280.99 3571929.53 0.0081:1

2007-08 30784.61 4491272.29 0.0068:1

2008-09 33607.91 5169447.19 0.0065:1

2009-10 36587.32 5260108.33 0.0069:1


34/49

Interpretation:

My study shows that proprietary ratio during all five years is not sound. As

per the accounting rules proprietary ratio should be as high as possible and 62.5% is

considered better. Proprietary ratio of LIC is not even 1%. Study shows it is .59% during

2005-06, .81% during 2006-07, .68% during 2007-08, .65% during 2008-09, .69% during

2009-10. Proprietary ratio of LIC is showing fluctuations earlier positive then negative

and a bit positive later on. This ratio shows that LIC is not using its own funds to acquire

total assets. Here LIC is less dependent on internal sources and more dependent on

external sources which in turn is increasing its cost and could be dangerous.

This is only one side point of view. Here in case of LIC if we properly examine the

balance sheet than sources of companys fund is not only shareholder fund. It also

include policyholder fund that company could use for acquiring its assets. And here for

acquiring assets company has used both sources of fund i.e. Shareholder fund and

policyholder fund. So from this point of view companys proprietary ratio should not be

considered only from shareholders fund point of view. Both shareholder fund and

policyholder fund should be used to calculate actual proprietary fund in case of LIC.


35/49

5. Net Profit Ratio:

This ratio shows the relationship between net profit and sales. Here as it is not amanufacturing unit it will not be having sales. So here as insurance company net sales are

taken as equivalent to net premium received. So here the formula for this ratio is:

Net Profit Ratio = Net Profit/Net Premium Received

The two basic elements of the ratio are net profits and net premium received. The net

profits are obtained after deducting income tax and generally non- operating incomes and

expenses are excluded from the net profit for calculating this ratio.This ratio measures the

rate of net profit earned on sales. It helps in determining the overall efficiency of the

business operations. An increase in the ratio over the previous year shows improvement

in the overall efficiency and profitability of the business. This ratio is very useful as if the

profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its

investment. This ratio also indicates the firms capacity to face adverse economic

conditions such as price competition etc. Obviously higher the ratio, the better is the

profitability.

Particulars/Year Net Profit Net Sales Ratios

2005-06 63158.01 9075919.72 0.659%

2006-07 77362.03 12778225.94 0.605%

2007-08 84462.59 14970558.79 0.564%

2008-09 95734.88 15718655.04 0.609%

2009-10 106071.68 18598591.22 0.57%


36/49

Interpretation:

Higher the profit higher is the chances of sound position. But here net profit

ratio is declining till 2007-08 and its start increasing in 2008-09 but again start declining

in 2009-10, indicating poor position of LIC from profitability point of view.


37/49

6. Return on Shareholder fund:

Return on shareholders fund popularly known as ROI or return on shareholders

investment is the relationship between net profits and the proprietors funds. Thus:

Return on Shareholders Fund = Net profit(after interest and tax)/ Shareholders

Fund

The two basic components of this ratio are net profits and shareholders funds.

Shareholders fund here includes share capital and reserves and surplus. The net profit are

derived at after deducting interest and tax, visualized from the point view of owners,

because those will be the only profits available for shareholders.

The ratio is one of the most important ratios used for measuring the overall efficiency of

the firm. As the primary objective of the business is to maximize its earnings, this ratioindicates the extent to which the primary objective of business is being achieved. This

ratio is of great importance to the present and prospective shareholders as well as the

management of company, as this ratio reveals how well the resources of a firm are being

used, higher the ratio better are the results, because in such a case equity shareholders

may be given a higher dividend. By comparing the previous years ratio with that of the

current year of the business we can ascertain whether the return on equity shareholders

fund s is increasing or not.

Particulars/Year Profit after

Int., Tax and

Dividend

Shareholders

Fund

Ratios

2005-06 63158.01 17699.85 356.82%

2006-07 77362.03 29280.99 264.20%

2007-08 84462.59 30784.60 274.36%

2008-09 95734.88 33607.91 284.85%

2009-10 105879.90 36587.32 289.38%


38/49

Interpretation:

In 2005-06 return on shareholders fund was sound but it starts declining in

2006-07 again start increasing till 2009-10 showing safety to shareholders and indication

of increase in value of shareholders worth showing sound position of LIC.

7. Return on Capital Employed:


39/49

This ratio reflects the overall profitability of the business. It is calculated by comparing

the profit earned and the capital employed to earn it. This ratio is also known as rate of

return or yield on capital. The ratio is computed as under:

Return on Capital Employed = Profit before interest, tax and dividend/ Capital

Employed

Capital employed can be computed by following formula:

Capital Employed = Fixed Assets+ Current Assets - Current Liabilities

Since the profit is overall objective of a business enterprise, this ratio is a barometer of

the overall performance of the enterprise. It measures how efficiently the capital

employed in the business is being used. The owners are interested in knowing the

profitability of the business in relation to amounts invested in it. A higher percentage of

return on capital employed will satisfy the owners that their money is profitably utilized.

Particulars/Year EBIT Capital Employed Ratios

2005-06 63158.01 1099786.61 5.74%

2006-07 77362.03 1545258.17 5.00%

2007-08 84462.59 2282487.26 3.70%

2008-09 95734.88 3210425.29 2.98%

2009-10 105879.90 3069888.45 3.44%


40/49


41/49

8. Dividend Payout Ratio:

It ia also known as payout ratio. It measures the relationship between the earnings

available to equity shareholders and the dividend distributed among them.In other words

it shows what percentage of profits after taxes and preference dividend is paid as

dividend to equity shareholders. It can be calculated as follows:

Dividend Payout ratio = Dividend paid to equity shareholders/ EAT

Here EAT stands for Profit after tax and dividend i.e. total earnings belonging to equity

shareholders.

If dividend payout ratio is subtracted from 100, it will give what percentage of profit is

remained in the business.

How much profit is to be distributed as dividend and how much to be retained, depends

on need and policies of company. For example if a company is suspecting a big need of

finance in future, such company should have more retention ratio i.e. retaining profits

instead of distributing them as dividend to shareholders. As its better to have internal

financing rather than external financing and retained earnings are better source of internal

financing. Also company should make its investors satisfied by paying regular and

satisfied dividend as return. So now decision regarding how much to pay and how much

to retain depends upon companys need and policy as there is no ideal ratio for dividend

payout ratio.

Particulars/Year Dividend

Paid

Profit After

Tax

Ratios

2005-06 69660.16 63158.01 110%

2006-07 62177.05 77362.03 80.37%

2007-08 75780.88 84462.59 89.72%

2008-09 82958.97 95734.88 86.65%

2009-10 92911.58 106071.68 87.59%


42/49

Ratios

0

20

40

60

80

100

120

2005-06 2006-07 2007-08 2008-09 2009-10

Year

Ratio Ratios

Interpretation:

Above table shows that earlier LIC was distributing whole its profit even more but later it

started retaining a part of its profit.


43/49


44/49

Limitations of Study

However I have tried my best in collecting the relevant information yet there always use

to present some limitations under which researcher has to work. Here following are somelimitations under which I had to work:

1. This study of evaluating financial performance have same limitations as of ratio

analysis i.e.

Difficulty in comparison.

Impact of inflation.

Conceptual diversity.

2. Non coverage of certain aspects (Due to confidential nature of some documents).

3. Lack of knowledge and experience.

4. Problem of window dressing.

5. Difficult to understand information provided in annual reports.

6. Time constraint.


45/49

Suggestions and Recommendations


46/49

Suggestions and Recommendations:

1. LIC should concentrate on better investment policies.

2. Profitability of LIC is not sound. So company should plan that can help it in

having better profitability.

3. Internal financing should be used much for acquiring assets rather than acquiring

from external financing.

4. Annual reports show that return on investment, both of shareholders fund and

policyholders fund are going downward. So co. should have some reliable and profitable

plans to improve it.

5. As company is in its growing stage and capturing a high market share, company

should be very careful to customers.

6. The Co. should make its customer aware about the activities of insurance.

7. LIC should retain adequate part of its profit as internal financing is better source

than external financing.


47/49

References


48/49

References:

1. Khan, M Y, Financial Management.

2. Goel, D K, Management Accounting and Financial Management.

3. Gupta, Shashi K, Management Accounting (Principles and Practices).

4. Kothari C.R., Research Methodology Methods and Techniques (Second

Edition) New Age International Publishers, Ansari Road, Daryaganj, New Delhi-

110002.

5. Pandey, I.M. Financial Management, 3rd edition, New Delhi, Vikas Publication

House Pvt. Ltd.

6. Hamsalakshmi R and Manicham M, Financial performance analysis of selected

software companies Finance India, Vol. xix, No. 3 Sep. 2005.

7. Khatik S K and Singh Kumar Pardeep, Financial appraisal of IDBI bank Ltd

Finance India, Vol. xix no.3, sep.2005.

8. Cornett Marcia Million, Ors Evren and Tehranian Hassan, Bank performance

around the introduction of a section 20 subsidiary The Journal of Finance, Vol.

Lvii, No. 1, Feb 2002.

9. Shankaran K, Financial performance evaluation of pharmaceutical companies in

India Finance India, Vol. xvi no.3, Sep.2002.


49/49

10. Dsouza Juliet and Megginson William L, The financial and operating

performance of privatized firms during the 1990s, The journal of finance, Vol.

Liv. No. 4 august 1999.

11. Cameron Jasmine, Measuring performance through financial information: a case

study National Library of Australia, Canberra, Australia.

12. Rudolph Heinz, Hinz Richard, Antoln Pablo, and Yermo Juan, Evaluating the

Financial Performance of Pension Funds.

13. Ronay A K, Istanbul Technical University, Faculty of Management, Istanbul,

Turkey, Performance measurement of insurance companies by using balanced

score card.

14. Tavakkoli M, New methods to evaluate financial performance of companies by

Fuzzy logic: case study.

15. Tarawneh Medhat, International Research Journal of Finance and Economics.

16. Isaiah Gaabalwe Bojosinyana Mosalakae.

17. Khan Denis A, University of Wyoming.

18. Jermanis Darja , System of measures for evaluating financial performance of the

company Lsaco.

19. Love Ross O, Extention Economist, Evaluating financial performance and

position.

20.Kannadhasan M, MBA, MFT, M.Phil, (Ph.D) Faculty Member, Bharathidasan

Institute of Management, Risk evaluation of financial performance in

manufacturing industry.

21.www.licindia.in.

22 S h E i
http://www.licindia.in/http://www.licindia.in/http://www.licindia.in/

Documents

Final Project ANUBHA