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Transcript of Biji Project
FINANCIAL PERFORMANCE ANALYSIS OF KERALA AGRO MACHINARIES
CORPORATION LIMITED
PROJECT REPORT
Submitted in Partial Fulfillment of the Requirementsfor the Award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted by
BIJI BABY
(Reg. No.0635F0178)
Under the Guidance of
Miss. M. GOMATHI, M. Com., M. Phil., PGDCA
2006-2008
DEPARTMENT OF MANAGEMENT STUDIES
MAHARAJA COLLEGE FOR WOMEN
(Affiliated to Bharathiar University)
Financial Statement
PERUNDURAI, ERODE – 638052
DECLARATION
I here declare that the project work entitiled “FINANCIAL
PERFORMANCE ANALYSIS OF KERALA AGRO MACHINARIES
CORPORATION LIMITED” submitted to the Bharathiar University,
Coimbatore in partial fulfillment of the requirements award of the Degree of
MASTER OF BUSINESS ADMINISTRATION is a record of
original research work done by me under the guidance of Miss. M.
GOMATHI, M.Com., M. Phil., PGDCA., Lecturer, Department of
Business Management, Maharaja College for women, Perundurai and it has
not formed that basic for the award of any Degree / Deploma /
Associateship / Felloship or other title to any candidate of any University.
Signature of the candidate,
PLACE:
DATE: BIJI BABY.
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Financial Statement
ACKNOWLEDGEMENT
I am extremely greateful to my project guide Miss. M. GOMATHI,
M.Com., M. Phil., PGDCA., Lecturer in Management department,
Maharaja College for Women, Perundurai for her valuable guidance and
suggestion rendered throughout the study.
I own deep sense of gratitude to Sri. MADHAVAN, Manager,
Kerala Agro Machinaries Corporation Limited, Athani, for the help
rendered in providing adequate information for the completion of the
project work.
Last but not the least my sincere gratitude to my parents and friends
who have mentally supported me through the project and to bringing the
report in its final stage.
BIJI BABY.
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Financial Statement
CONTENTS
Sl.No. Particulars Page No.
I. INTRODUCTION TO THE STUDY
I.1. Scope of the study
I.2. Objectives of the study
I.3. Limitations of the study
I.4. Finance - the key function of the business
II. COMPANY PROFILE
II.1. Profile of the company
II.2. SWOT Analysis
II.3. Capital structure of the Company
II.4. Asset structure of the Company
III. REVIEW OF RELATED LITERATURE
III.1. Introduction to Financial Management
III.2. Meaning & concept of financial analysis
III.3. Procedure of financial statement analysis
III.4. Type of financial analysis
III.5. Methods of financial analysis
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Financial Statement
IV. PROBLEM ANALYSIS
IV.1. Research problem
IV.2. Methodology
IV.3. Tools used for analysis
IV.4. Limitations
V. ANALYSIS & INTERPRETATION
V.1. Ratio analysis
V.2. Trend analysis
V.3. Common size statement
V.4. Statement of changes id working capital
V.5. Fund flow analysis
V.6. SWOT analysis
VI. FINDINGS & SUGGESTIONS
VII. CONCLUSION
VIII. ANNEXURE
IX. BIBLIOGRAPHY
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Financial Statement
LIST OF TABLES
TABLES
NO.TITLE
PAGE
NO.
1 Capital Structure of the company.
2 Asset Structure of the company.
3 Working Capital.
4 Current Ratio.
5 Quick Ratio.
6 Gross Profit Ratio.
7 Net Profit Ratio.
8 Return on Shareholders fund.
9 Return on Shareholders fund.
10 Inventory Turnover Ratio.
11 Fixed Asset Turnover Ratio.
12 Current Asset Turnover Ratio.
13 Working capital Turnover Ratio.
14 Trend Analysis
15 Common Size Statement.
16 Schedule of changes in working capital.
17 Fund flow Statement.
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Financial Statement
LIST OF GRAPHS
GRAPH
NOTITLE
PAGE
NO
1 Current Ratio.
2 Quick Ratio.
3 Gross Profit Ratio Return of Shareholders fund.
4 Net Profit Ratio.
5 Return on Shareholders fund.
6 Return on total asset Fund.
7 Inventory Turnover Ratio.
8 Fixed Asset Turnover Ratio.
9 Current Asset Turnover Ration.
10 Working capital Turnover Ratio.
11 Trend Analysis.
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Financial Statement
1. INTRODUCTION
1.1. SCOPE OF STUDY
Financial performance of an organization is a very important factor for the long – term
survival profitability of any organization. The purpose of financial analysis is to diagnose
the information contained in financial statements so as to grudge the profitability and
financial soundness of the firm. For the purpose the study has been conducted for a period
of last five years.
1.2. OBJECTIVE OF THE STUDY
The main objective of the study is to make an analysis of the financial performance
KERALA AGRO MACHINARIES CORPORATION LTD.
The objectives are
To assess the liquidity position of the company
To assess the profitability position KAMCO for the period of 5 years.
To evaluate the turnover position of the company
To assess the effective utilization of the owners fund
To know the working capital of the company
To analyze the current assets & current liabilities of the company
To suggest suitable measures
To improve the financial health of the company
To measure the over all performance of KAMCO
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Financial Statement
To find the long term and short-term solvency position of the company
To ensures the long term liquidity of fund
1.3. LIMATIONS OF THE SUDY
The basic nature of financial statements is historical data. So the information’s
can’t be completely reliable.
The study will be only a professional one based on the data collected annual report
and accounts during the subject to refinement.
KAMCO is government undertaking. So there is lack of confidential data.
To do the performance analysis only the last five years figures are taken in to
account.
1.4. FINANCE – THE KEY FUNCTION OF THE BUSINESS
Finance is defined as the provision of money at the time when it is required. Every
enterprise, whether big, medium or small, needs finance to carry on its operations to achieve its
targets. It is the lifeblood of an enterprise. Without adequate finance, no enterprise can
possibly accomplish its objectives.
Finance is specialized function and draws heavily on the relative function like
marketing, production, personnel, purchase etc. Finance deals with the internal management of
the enterprise so as to maximize its value give the principles affecting valuation. In away,
finance is an aspect of economic theory of firm. Finance has undergone a sufficient change and
its concerned with the “ Flow of Funds” and decision relating business operation effecting the
valuation of the firm. Accounting primarily involves “ Data gathering “relating to an existing
or new project, while finance involves “ Data analysis” with focus on decision making.
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Financial Statement
Accounting is compliling of data in financial term and making the same available for decision
making. These to area related, one’s supporting the other.
II. COMPANY PROFILE
II.1. PROFILE OF THE COMPANY
KERLA AGRO MACHINARIES CORPORATION LTD. (KAMCO) is established in
1973. KAMCO is a fully state owned unit engaged in the manufacturing of power tillers and
other Agricultural products. KAMCo having four units in Kerala. One in Athani, in Plakkad,
in Kalamassery and in Mala. The head office is at Ahani. It was separated from Japanese
company, early days it was known as KAIC.
The main products of this company are power tiller, reapers, etc. This government-
oriented organization is mainly focusing on small farmers. The company has informed with the
intention to manufacture agricultural machineries suitable to small farmers at affordable price.
The company has certain unique feature, which distinguishes it deform other public sectors
enterprise.
They are:-
Company is running on profit continuously for the last 25 years.
1. Company has been paying dividend ranging from 10-30% for the last 20 years without
fail.
2. Company has no loaned funds and hence finance charge is also nil.
3. Company has fixed deposits, which earn interest to the company
4. Company has no working capital loans.
5. Company is professionally managed organization.
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Financial Statement
Company occupies around 50% of total market share of power tillers. Company has deals
in all state and main dealer is located at west Bengal. Main competitor of the company is
VHST.NEW PROJECTS:
The new innovation of the company is launched power stone cutter. The company is
expected the continuous production of the product in the subsequent years.
ISO 9001 – 2000
Company’s quality policy and its uncompromising attitude toward quality parameter
ere rewarded ISO 9001 – 200 certification to the company. Athani, Palakkad nd
kallamessery units are working with ISO9001 – 2000 certificates.
CAPITAL STRUCTURE
The authorized capital of the company is Rs.200 lacks and paid up capital Rs.1500900.
Presently it has increased to Rs. 161.46 lacks divided in to 161460 equity share of Rs.100
each fully paid up and entirely help up by Govt.of Kerala. This company is not having any
secured and unsecured loans.
EMPLOYEE DETAILES
OFFICERS : 60
WORKERS : 600
TEMPORARY WORKERS : 3
APPRENTICES TRAINEES : 42
TOTAL : 705
SHIFTS : 2
FUTURE OUTLOOK
In spite of threat from imported and indigenous makes of power tiller, KAMCO Power
Tiller continues to be the preferred choice of farmers attaining the moderate market share
for the year. Power paper also had been able to each the imagination of the small farmers.
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Financial Statement
The response for the newly launched KAMCO SUPER Power Triller is very encouraging .
However the company’s success depends upon the fortunes of the farmer and to this extent
there is an element beyond the control of the Company. Diversification of the products and
services is an essential prerequisite for success. With this view Company is examining
possibilities of entering into other areas while retaining its market share in the existing
products.
II.2. SWOT ANALYSIS
An analysis strength, weakness, opportunities and threts are the key elements for
influents the survival and development of the organization. It will helpful for the
improvement of the organization strategies.
STRENGTH
Largest manufacturing of consumer needed agricultural goods
Capacity to produce high agricultural goods.
A team of professional managers of the organization
High skilled workers are there
Satisfied and committed work forces thy providing
The organization making profit for the last 25 years
Sincere employees. The old are experts in manufacturing work
Manufacturing cost is limited
WEAKNESS
Business diversification is not there
Only limited numbers of products are there.
All products are mainly based on agricultural goods
The agriculture field become dull it will be wrongly effect the business
Lack of modern machineries.
OPERTUNITIES
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Financial Statement
Company is having good opportunities especially in export
The Cochin port and airport is near to the company, which is an added advantage.
THREAT
The major threat is the liberalization policy of the government
Anybody can enter in to the market, which will increase the competition in the business.
II.3. CAPITAL STRUCTURE
A capital structure refers to the total combined investment of a business. Decesion as to
the composition of capitalization is reflected in capital structure. Thus, what type of fund
should a firm seek to meet its investment opportunities in what proportions these funds
would be raised are the basic issues that has to be dealt with under capital structure. It is
there for necessary that a correct estimate of the current and future needs be made to have
an optimum capital structure.
The capital structure of KAMCO, include share capital, capital reserve, current
liabilities and provisions. The total capitalization of the company had increased from
2000-2001 to 2004-2005.
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Financial Statement
CAPITAL STRUCTURE OF THE KAMCO 9in Rs.Lakhs)
Table
Particulars 00-01 01-02 02-03 03-04 04-05
Share Capital 161.46 161.46 161.46 161.46 161.46
Reserve & Surplus
3770.02 4393.46 4982.73 5440.21 5852.68
Loans Nil Nil Nil Nil Nil
Current liabilities and Provisions
1013.08 1192.39 1268.93 974.20 1050.56
Total 4944.56 5747.31 6413.12 6575.87 7064.70
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Financial Statement
II.4. ASSET STRUCTURE
The asset of any firm constitute of the fixed asset and current asset. Current
assets are those assets, which can be readily converted to cash. They include sundry
Debtors, cash and bank balance, inventories, loans and advances, other current assets.
Fixed asset are usually converted to cash only in the long run. Inventories & Sundry
Deabtors constitute the major portion of current assets.
ASSETS STRUCTURE OF THE KAMCO (in rs.Lacks)
Table
Particulars 00-01 01-02 02-03 03-04 04-05
Fixed Asset 931.37 879.75 826.90 714.36 766.01
Current Asset
Loose Tools 12.47 9.93 8.76 11.53 9.86
Inventories 1180.28 1415.13 1437.69 1796.92 1781.92
Sundry
Debtors419.74 592.31 669.22 909.98 891.43
Cash & Bank
balance1436.72 1843.43 2471.56 2247.06 2771.42
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Financial Statement
Other Current
Assets98.66 133.54 138.92 108.89 103.60
Loans &
Advances682.47 688.58 731.72 607.89 648.50
Total 4761.71 5562.67 6284.78 6396.64 6972.75
KAMCO FINANCE DEPARTMENT STRUCTURE
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Financial Statement
As the study is mainly concerned with finance department the organization chart of
finance department only has been shown. Company has various other departments like
marketing, engineering, system, hrm, quality assurance, maintenance stores and production.
Officers of various levels are place and high skilled workers are there.
FUNCTIONS OF FINANCE DEPARTMENT
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MANAGINGDIRECTOR
DY.MANAGER
GENERALMANAGER
MANAGERCOST/AUDIT
ASST.MANAGERCOST/AUDIT
SUPERINTENDENT
ACCOUNTANT ACCOUNTANT
SUPERINENDENT
ASST. MANAGERACCOUNT
DY. MANAGER
DGMFINANCE
16
Financial Statement
FINANCE DEPARTMENT FUNCTIONS
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FUNCTIONS OF FINANCE DEPARTMENT
SALES ACCOUNTING COSTING
BILLPROCESSING
BANKRECEPTS
CASH MANAGEMENT
BANK PAYMENT
17
Financial Statement
The account manager look after the entire function of the company. The finance
department is computerized. The major source of fund includes share capital. Reserve &
surplus and not include loan fund.
FUNCTION
Proper utilization of funds
Developing sufficient funds.
Budget preparing
Pure accounting
Increase profitability
Taxation etc.
The financial function call for stains full planning control and execution of four
activities. The main function of the financial department includes the receipt and payment of
cash, settlement of account proper custody and safe guard important and valuable document.
The other functions are financial planning, budgeting and also analyzing the company’s current
performance with past performance and inform their performance to the necessary authority.
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Financial Statement
III. REVIEW OF RELATED LITERATURE
III.1. INTRODUCTION TO FINANCIAL MANAGEMENT
Financial management refers to the part of the management activity, which is concerned
with the planning and controlling of firm’s financial resources. It deals with finding out
various resources of raising funds for the firm. In other words, financial management
means the entire management efforts devoted to the management of finance both in its
sources and uses. The most appropriate use of funds also reforms a part of financial
management.
Financial management is applicable to every type of organization irrespective of its
size, kind of nature. It is useful to a small concern as to big unit. A trading concern gets
the same utility from its applications as a manufacturing unit may expert. This subject is
important and useful for all types of ownership organizations. Where there is use of
finance, management is helpful.
III.2. MEANING AND CONCEPT OF FINANCIAL ANALYSIS
The term ‘financial Analysis ‘ also known as ‘ analysis and interpretation of financial
statement’, refers to the process of determining financial strength and weakness of the firm by
establishing strategic relationship between the items of the balance sheet, profit and loss
account and other operative data.
The purpose of ‘financial Analysis’ is to diagnose the information contained in financial
statement so as to grudge the profitability and financial soundness of the firm. The analysis
and interpretation of financial statement essential to bring out the mystery behind the figures in
financial statement.
The term financial Statement Analysis includes both ‘analysis’ Ana’ interpretation. While
the term ‘Analysis is to mean the’ the simplification of financial statement’, ‘interpretation’
means’ explaining the meaning and significant of the date so simplified’.
“Analyzing financial statement”, according to Metcalf and Titard, “is a process of
evaluating the relationship between component parts of a financial statement to obtain better
understanding of a firm’s position and performance”.
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Financial Statement
III.3. TYPE OF FINANCIAL ANALYSIS
We can classify various types financial analysis in to different categories depend upon
1. On the basis of material used
According to the materials used, financial analysis can be of two types
a) External analysis
This analysis is done by outsiders who do not have access to the detailed internal
accounting records of the business of the firm. This outsider includes investors. Potential
investors, creditors, potential creditors, government agencies, credit agencies and general
public. For financial analysis these external parties to the firm depend almost entirely of
the published financial statements.
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TYPE OF FINANCIAL ANALYSIS
On the basis of material used On the basis of modus operandi
HorizontalAnalysis
InternalAnalysis
ExternalAnalysis
VerticalAnalysis
20
Financial Statement
b) Internal analysis
The analysis conducted by persons who have access to the internal accounting records of
the business firm is known as internal analysis. Such an analysis can, therefore performed
by executives and employees of the organizations as well as the government agencies
which have statutory powers vested in them.
II. On the basis of modus operandi
According to the method of the operation followed in the analysis, financial analysis
can also be of two types.
a) Horizontal analysis
Horizontal analysis refers to the comparison of financial data of a company of several
years. The figures for this type of analysis are presented horizontally over a number of
columns the figures of various years are compared with the standard or base year. A base year
is a year chosen as beginning point. The horizontal analyses make it possible to focus attention
on items that have changed significantly during the period under review. Comparative
statements and trend percentage are two tools employed in horizontal analysis.
b) Vertical analysis
Vertical analysis refers to the study of relationship of the various items in the financial
statement of on me accounting period In this type of analysis the figures from financial
statement of a year are compares with a base selected from the same year’s statement.
Common-size financial statements and financial ratios are the two tools employed in vertical
analysis.
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Financial Statement
III.4. PROCEDURE OF FINANCIAL STATEMENT ANALYSIS
There are three steps involved in the analysis of financial statements. These are
1. Selection
2. Classification
3. Interpretation
1. Selection
This step involves selection of information relevant to the purpose of analysis of
financial statement.
2. Classification
It involves the methodical classification of data.
3. Interpretation
It includes drawing of inferences and conclusions.
PROCEDURE
1. The analyst should acquaint himself with the principles and postulates of accounting.
2. The extend of analysis should be determined so that the sphere of work may be decided.
3. Financial data given in the statement should be reorganized and rearranged.
4. A relationship established among financial statement with the help of tools techniques of analysis such as ratios, Trends, common size, fund flow etc.
5. The information is interrupted in a simple and understandable
6. The conclusion drawn from interpretation.
III.5. METHODS OF FINANCIAL ANALYSIS
1. Ratio Analysis
2. Trend Analysis
3. Common-size statement
4. Schedule of changes in working capital
5. Fund flow Statement.
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Financial Statement
IV. PROBLEM ANALYSIS
IV.1. RESEARCH PROBLEM
KAMCO is fully state owned unit engaged in the manufacturing Power tiller
and agricultural products. Company is running on profit continuously for the last 25 years.
Company has no loaned funds and finance charge is also nilled. Company has no working
capital loans.
The company is running on profit continuously but the profit is founded decreasing
even though turnover is see increased. Due to liberalization Company imported brand of power
tillers were available in the market. Brand like Chinese are relatively very low priced
compared to Indian power tillers as a result company could not increase the price to pass on the
increasing cost. Hence profit is declined.
The purpose of financial Analysis is to diagnose the information contained in financial
statements so as to judge the profitability and financial soundness of the firm. Financial
statements are prepared primarily for devesion-making.
They play a dominant role in setting the framework of managerial decisions. But the
information provided in the financial statements is not an end as it self as no meaningful
conclusion can be drawn from these statement alone. However the information provided in the
financial statements is of immense use in making decision thorough analysis and interpretation
of financial statements.
A sound managerial control requires the proper management of the various component
of working capital. Impact of mismanagement of working capital will be very much adverse on
the performance of any firm. Thus the working capital management is an important function in
any business organization.
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Financial Statement
IV.2. METHODOLOGY
1. Data collection
To study is an empirical one. It uses both primary and secondary
Primary Data
Primary data where collected through depth interview with concerned officers of the company.
Secondary Data
Secondary date where collected from the financial statements of KAMCO for five years.
Profit & Loss account, Balancesheet, Books magazines where also referred.
IV.3. TOOLS USED FOR ANALYSIS
The different tool used such as Ratio analysis, working capital analysis, fund flow
analysis provided as an insight on KAMCO performance. The tool SWOT analysis is used to
find out the strength, weakness, opportunities and Threats of KAMCO.
3. Scope of study
Financial performance of an organization is a very important factor for the long term
survival profitability of any organization. The purpose of financial analysis is to diagnose the
information contained in financial statements so as to grudge the profitability and financial
soundness of the firm. For the purpose the study has been conducted for a period of last five
years.
IV.4. LIMITATIONS OF THE STUDY
The basic nature of financial statement is historical data. So the information’s can’t be
completely reliable.
The study will be only a professional one based on the data collected annual report and accounts during the subject to refinement.
KAMCO is government undertaking. So there is lack of confidential data.
To do the performance analysis only the last five years figures are taken in to account.
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Financial Statement
BALANCE SHEET OF KAMCO LTD. ATHANI
Particulars 2001 2002 2003 2004 2005I. Source of funds1. Shareholders funda. Capital 161.46 161.46 161.46 161.46 161.46b. Reserve & Surplus 3770.02 4393.46 4982.73 5440.21 5852.682. Loan funds Nil Nil Nil Nil Nil3. Deffered tax Liabilities Nil Nil 47.57 53.9 51.98Total 3931.49 4554.92 5191.76 5655.57 6066.12II. Application of funds1. Fixed Asseta) Gross block 1626.07 1687.19 1725.7 1749.85 1778.39b) Less Depreciation 694.70 807.44 898.8 983.84 1064.03c) Net block 931.37 879.75 826.9 766.01 714.36d) Capital working progress 7.85 9.64 0.9 6.47 0.53Total 939.22 889.39 827.8 772.48 714.892.Investment in shares 175.00 175.00 175 175.00 175.003. Current asset loan & advance3.Current Asseta) Loose tools 12.47 9.93 8.76 11.53 9.86b) Inventories 1180.28 1415.14 1437.69 1796.92 1781.92c) Sundry debtors 419.74 592.31 669.22 909.98 891.42d) Cash & Bank balance 1436.72 1843.42 2471.56 2247.06 2771.42e) Other current asset 98.66 133.54 138.92 108.89 103.60B. Loans & Advance 682.47 688.58 731.71 607.89 648.50Total 3830.34 4682.92 5457.88 5682.28 6206.75Less: Current Liabilities Provisiona) Current liabilities 602.15 809.40 885.83 668.55 725.18b) Provision 410.92 382.99 383.10 305.64 325.39Total 1013.07 1192.39 1268.93 974.19 1050.56Net Current Asset 2817.27 3490.53 4188.95 4708.09 5156.18Total 3931.49 4554.92 5191.76 5655.57 6066.12
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Financial Statement
PROFOT AND LOSS ACCOUNT OF KAMCO. LTD. ATHANI
Particulars 2001 2002 2003 2004 2005I. IncomeSales 6809.33 6745.14 7342.89 6815.40 7934.39Other Income 195.73 221.06 257.94 218.75 209.6II.Variation in Stock 96.83 394.55 -10.78 285.4 -194.76Total 7101.88 7360.75 7590.04 7322.89 7949.24III. ExpenditureConsumptiona) Material 3817.67 4224.48 4131.73 3985.87 4820.42b) Traded good 378.73 160.85 173.34 193.19 244.15Manufacturing & Other exp. 123.09 364.21 535.76 497.29 582.45Staff Cost 994.32 1028.05 1036.62 1169.93 1271.83Administration & General exp. 85.68 83.62 108.63 99.2 122.7Selling & Distribution exp. 616.89 406.48 495.99 509.22 100.13Depreciation 94.11 110.01 97.59 87.90 81.30Total 6110.49 6377.7 6579.67 6542.63 7223.00Operating Profit 991.39 983.04 1010.37 780.26 726.23Prior period adjustment -1.75 1.56 -6.89 -8.07 -19.55Profit before tax 989.64 984.60 1003.48 772.19 730.90Less: provision for taxationa) Current Tax 355.00 313.00 312.00 253.73 265.00b) Deferred Tax Nil Nil 6.67 6.33 -1.92Profit after Tax 634.64 671.60 684.80 512.12 467.83Profit available for appropriation 634.64 671.60 684.80 512.13 467.83Appropriationa) Proposed dividend 40.37 48.44 48.44 48.44 48.44b) Dividend Tax - - 6.20 6.21 6.92c) Transfer to other Reserve 70.00 70.00 70.00 70.00 70.00Total 524.28 553.17 560.17 387.48 342.47
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Financial Statement
V. ANALYSIS AND INTERPRETATION
V.1. RATIO ANALYSIS
INDRODUCTION
Financial statements are prepared primarily for decision making. They plan a dominant role in setting the frame work of managerial decisions. But the information provided in the financial statements are not an end in it self as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial strengths and weakness of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods and techniques used in analyzing financial statements, such as comparative statements, schedule of change in working capital. Common size percentages, funds analysis, trend analysis and ratio analysis. The ratio analysis is the most powerful tool of financial statements.
NATURE OF RATIO ANALYSIS
A ratio is defined as “ the indicated quotient of two mathematical expressions” and as “the relationship between two or more things”. In financial analysis, a ratio is used as an index or yardstick for evaluation the financial analysis, a ratio is used as an index or yardstick for evaluating the financial position and performance of a firm. “The relationship between two accounting figures expressed mathematically known as the financial ratio”. A helps to make qualitative judgment about the firm’s financial position and performance. The ratio indicated a qualitative relationship which is the nature all financial ratios.
A ratio analysis involves compression for a usual interpretation of the financial statements. A single ratio in itself does not indicate favorable or unfavorable condition. It should be compared with some standard.
Standards of comparison may consist of
Ratios calculated from the past financial statements at the same firm
Ratios developed using the projected (or) proforma financial statement of the same firm.
Ratios of same selected firms, especially the most progressive and successful at the same point in time.
Ratio of the industry to which the firm belongs.
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Financial Statement
SIGNIFICANCE OF RATIO ANALYSIS
The ratio analysis is the most powerful tool of the financial analysis. Divers group of people who are interested in analyzing financial information use ratio to determine a particular financial characteristic at the firm in which they are interested with the help of ratios can determine.
The ability to the firm of meets its current obligations.
The extend to which the has used its long term solvency by borrowing funds.
The efficiency with which the firm is utilizing its various assets in generating sales revenue.
The overall operating efficiency and performance of the firm.
LIMITATIONS OF RATIO ANALYSIS
Ratio analysis suffers from some serious limitations.
They are given below:
A single ratio usually does not convey much of sense to make a better interpretation. A member of ratios has to be calculated in making any meaningful conclusion.
Change in accounting procedure by a firm often makes ratio analysis misleading.
Ratio are only means of financial analysis are not an end itself and they have to interpreted different people may interpret the same ratio in different ways.
Differences in accounting procedures make the comparison of ratios difficult and misleading.
The ratio analysis is primarily a quantitative analysis and not a quantitative analysis.
APPLICATION OF A ACCOUNTING RATIOS
To analysis the financial performance through the application of accounting ratio the following ratio are selected and analysis. The selected ratios are grouped under the following four heading.
Liquidity Ratios
Leverage Ratios
Activity Ratios
Profitability Ratios
This chapter deals with Liquidity, Leverage, Activity and Profitability of KAMCO LTD. By applying selected ratios.
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Financial Statement
1. LIQUIDITY RATIOS
Liquidity refers to the ability of a concern to meet its current obligations as and when
they become its due. Christy and Redden “The Liquidity of an asset as money ness” The short
term obligations are met by realizing accounts from current floating or circulating assets. The
current assets should either be liquid or near liquidity. The bankers, suppliers of goods and
other short term creditors are interested in the liquidity of the concern. Ratio can be calculated
Current ratio, Liquid ratio, Absolute Liquid ratio.
a. Current Ratio:
Financial performance of KAMCO LTD., current ratio is the most common ratio for
measuring liquidity. Current ratio expresses relationship between current assets and current
liabilities. It is calculated by dividing the total of current assets by total of the current assets by
total of the current liabilities.
Formulation:
Current AssetsCurrent Ratio = ________________
Current Liabilities
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Financial Statement
CURRENT RATIO OF KAMCO.LTD
Table
YEARCURRENT
ASSETCURRENT
LIABILITIESRATIO
2000-2001 3147.88 1013.08 3.11
2001-2002 3994.33 1192.39 3.35
2002-2003 4726.16 1268.93 3.72
2003-2004 5074.40 974.20 5.20
2004-2005 5558.24 1050.00 5.29
INFERENCE
A current ratio of 2:1 is considered as ideal one. From the above table the
current ratio of the company in the year 2001 – 2005 is increasing. The average current ratio is
4.13:1 which higher than standard ratio. It is more than 2:1 indicate sound solvency position.
CURRENT RATIO OF KAMCO.LTD
Figure
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Financial Statement
b. QUICK (OR) ACID TEST (OR) LIQUID RATIO:
Quick ratio is also called “Acid Test Ratio” or “Liquid Ratio” The quick ratio is a
measure of liquidity designed to overcome this defect of the current ratio. It is used as
complimentary ratio to the current ratio.
Formation:
Quick AssetsQuick/liquid or Acid Test Ratio = ________________
Current Liabilities
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Financial Statement
LIQUID RATIO OF KAMCO.LTD
Table
YEARLIQUIDASSET
LIQUIDLIABILITIES
LIQUIDRATIO
2000-2001 1960.70 1013.08 1.94
2001-2002 2572.60 1192.39 2.15
2002-2003 3279.38 1268.93 2.58
2003-2004 3283.56 974.20 3.37
2004-2005 3754.61 1050.00 3.57
INFERENCE
The average liquid ratio is 2.72:1 it is more than the standard ratio 1:1. It shows the
efficiency of the firm’s capacity to pay off current obligation immediately.
LIQUID RATIO OF KAMCO.LTD
Figure
c) ABSOLUTE LIQUIDITY RATIO OR CASH POSITION RATIO
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Financial Statement
It is a variation of quick ratio. When liquidity is highly restricted in terms of cash and
cash equivalents, this ratio should be calculated. The inventory and the debtors are excluded
from current asset, to calculate the ratio.
Absolute liquid asset include cash in hand and a bank and marketable securities or
temporary investments. The acceptable norm for this ratio is 5:1.
Formation:
Cash + Market SecuritiesAbsolute Liquid Ratio = ______________________
Current Liabilities
ABSOLUTE LIQUIDITY RATIO OR CASH RATIO
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Financial Statement
Table
YEAR CASH&BANKCURRENT
LIABILITIES
ABSOLUTELIQUIDITY
RATIO
2000-2001 1436.72 1013.08 1.44
2001-2002 1843.42 1192.39 1.55
2002-2003 2471.56 1268.93 1.95
2003-2004 2247.06 974.20 2.31
2004-2005 2771.42 1020.56 2.64
INFERENCE
The acceptable form the ratio 5:1. The average absolute liquid ratio is 1.97:1. This
shows that company financial position satisfactory.
ABSOLUTE LIQUIDITY RATIO OR CASH RATIO
Figure
2) SOLVENCY AND LEVERAGE RATIO
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Financial Statement
Financial leverage refers to the use of debt as a source of finance. The debt capital is a
cheaper source of finance as well as riskier source of finance. Leverage ratio helps in assessing
the risk arising from the use of debt capital. Leverage or capital structure ratios may be defined
as “ financial ratios with throw light on the long term solvency of the firm as reflected in its
ability to assure long term creditors with regard to (i) periodic payment of interest during the
period of the loan and (ii) repayment of principle on maturity or in predetermined installments
at due date.
The two types of ratio commonly used to analysis financial leverage are structural ratio
and leverage ratio and leverage ratio, structural ratio are based on the proportions of debt and
equity in the financial structure of the firm.
Debt equity ratio and debt assets ratio coverage ratio show the relationship between
debt servicing commitments and the sources for meeting these burdens. The important
coverage ratios are interest coverage ratio and cash & flow coverage ratio.
a) Debt Equity Ratios
The financing of total assets of a business concern is done by owner’s equity as
well as outside debts. The relationship between borrowed funds and owner’s capital is a
popular measure of the long-term financial solvency of a firm. This relationship is down by the
debt-equity ratio. It is calculated as follows:
1. Debt-Equity Ratio = External Equity / Internal Equity or
2. Debt-Equity Ratio = Outsiders Funds / Shareholders Funds
Since the company has no secured loan or unsecured loan Debt-Equity ratio not
relevant to compare hence not analyzed.
b) Fixed Assets Ratio
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Financial Statement
Financial policy requires that long-term funds should be used to meet the requirements
of fixed and part of working capital. Fixed assets ratio tells about the relationship between
fixed assets and long-term funds. It is calculated by this formula.
Fixed assets ratio = Fixed assets _______________
Long term funds
c) Interest Coverage Ratio
This ratio also known as fixed charge cover ratio. Loan creditors are not only interested
in capacity of their borrowers in repaying the principle amount but they would also look in to
their ability to pay the interest as and when due. The ability to pay interest is reflected in the
profits of the business. The formula for calculating interest coverage ratio is as follows.
Interest coverage ratio = EBIT ________
interest
As KAMCO has no loaned funds secured or unsecured and loan not shown. So
these three ratios are not relevant to the company.
d) Proprietary Ratio or Equity Ratio
Proprietary Ratio relates the shareholders funds on total assets. This ratio shows
the long term or future solvency of the business.
Proprietary Ratio = Shareholders Funds _________________
Total Asset
Preference share capital, equity share capital plus all reserve and surplus item
are called shareholders fund. The acceptable norm of ratio is 1:3. The ratio shows the general
strength of the company.
PROPRIETARY OR EQUITY RATIO
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Financial Statement
Table
YEARSHARE
HOLDERSFUND
TOTALASSET
PROPRITERYRATIO
2000-2001 3931.49 4944.56 79.51
2001-2002 4554.92 5747.31 79.25
2002-2003 5144.19 6460.69 79.62
2003-2004 5601.67 6629.77 84.49
2004-2005 6014.14 7116.68 84.51
INFERENCE
The acceptable form of the ratio is 1:3. It is very important to creditors as it help them
to find out proportion of shareholders fund in the total assets used business. Higher ratio
indicates secured position to creditors. There was continuous increasing in the ratio. It shows a
satisfactory condition to the creditors of the company.
Figure
3. ACTIVITY RATIOS / EFFICIENCY RATIOS
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Financial Statement
Activity ratio measure the efficiency or effectiveness with which a firm managers its
resources or assets. These ratios are also called turnover ratios, because, they indicate the
speed with which assets are converted or turnover into sales. This category of ratios includes
those ratios which highlight upon the activity and operational efficiency. This ratio are being
used and they are collectively called as “activity ratios” or “performance ratio”.
a. Debtors Turnover Ratio:
Debtor’s turnover ratio indicates the velocity of debt collection of firm. The higher the
value of debtor’s turnover the more efficient is the management of debtors/sales or more liquid
are the debtors. Similarly, low debtors turnover implies insufficient management of debtors/
sales and less liquid debtors.
Formulation:
Opening Debtors + Closing DebtorsAverage Debtors = ______________________________
2
Net Credit Annual Sales
Debtors Turnover Ratio = _____________________
Average Trade Debtors
b. Inventory Turnover Ratio:
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Financial Statement
Inventory turnover ratio indicates the number of times the stock has been turned over
during the period and evaluates the efficiency with which a firm is able to manage its
inventory. The figure of inventory at the end of the year should not be taken for calculating
stock velocity because normally the stock at the year end us low.
Formation:
Opening stock + Closing stockAverage inventory = __________________________
2
Cost of goods soldInventory Turnover Ratio = ______________________
Average inventory at cost
INVENTORY TURNOVER RATIO
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Financial Statement
Table
YEAR SALES INVENTORYINVENTORYTURNOVER
RATIO
2000-2001 6809.32 1180.28 5.77
2001-2002 6745.14 1415.14 4.77
2002-2003 7342.89 1437.7 5.11
2003-2004 6815.40 1796.92 3.79
2004-2005 7934.39 1781.91 4.45
INFERENCE
A higher inventory turnover indicates efficient management of inventory because more
frequently the stock sold. In the year 2000-2001 the inventory turn over ratio is 5.77.
INVENTORY TURNOVER RATIOS
Figure
c) Working Capital Turnover Ratio
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Financial Statement
The working capital turnover ratio is used to measure the efficiency of the firm. This is
also indicates whether or not working capital has been effectively utilized in making sales. In
case the company can achieve higher volume of sales with relatively small amount of working
capital. It is an indication of thee operating efficiency of the company. The ratio is calculated
as follows:-
Formulation:
Net SalesWorking Capital Turnover Ratio = _______________
Working Capital
WORKING CAPITAL TURNOVER RATIO
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Financial Statement
Table
YEAR SALESNET
WORKINGCAPITAL
WC RATIO
2000-2001 6809.32 2817.27 2.42
2001-2002 6745.14 3490.53 1.93
2002-2003 7342.89 4188.95 1.75
2003-2004 6815.40 4708.08 1.45
2004-2005 7934.39 5156.18 1.54
INFERENCE
It shows a decreasing trend. Because good portion of companies working capital has
invested a current deposit in bank or other financial institution. It producing a good amount of
interest net working capital is increasing this is due to increasing in the bank balance &
decreasing current liabilities shows a good sign of health.
WORKING CAPITAL TURNOVER RATIO
Figure
d) Asset Turn Over Ratio
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Financial Statement
Assets are used to generate sales. Therefore a firm should manage its asset efficiently
to maximize sales. The relationship between sales and asset is called asset turnover. Several
assets and turnover ratio can be calculated.
Fixed Asset Turnover and Current Asset Turnover
The firm wish to know its efficiency of utilizing fixed asset and current asset respectively.
Fixed Asset Turnover :
Fixed Asset Turnover = Sales __________
Fixed Asset
Current Asset Turnover:
Current Asset Turnover = Sales ____________
Current Asset
FIXED ASSET TURNOVER RATIO
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Financial Statement
Table
YEAR SALESNET FIXED
ASSET
FIXED ASSETRATIO
2000-2001 6809.32 931.37 7.31
2001-2002 6745.14 879.75 8.88
2002-2003 7342.89 826.9 8.88
2003-2004 6815.40 714.36 9.54
2004-2005 7934.39 766.01 10.36
INFERENCE
The table shows fluctuation in fixed assets. In 2005 the ratio indicate the greater the
intensive utilization of assets and it help to increase in production & sales.
FIXED ASSET TURNOVER
Figure
CURRENT ASSET TURNOVER RATIO
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Financial Statement
Table
YEAR SALESCURRENT
ASSET
CATURNOVER
RATIO
2000-2001 6809.32 3147.88 2.16
2001-2002 6745.14 3994.33 1.69
2002-2003 7342.89 4726.16 1.55
2003-2004 6815.40 5074.40 1.34
2004-2005 7934.39 5558.24 1.42
INFERENCE
The table shows CATR is declining. The CATR of the company for the current year is
1.42 is less than compared to the previous year.
CURRENT ASSET TURNOVER RATIO
Figure
4) PROFITABILITY RATIO:
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Financial Statement
The primary objective of business undertaking is to earn profits. Profit earning is
considered essential for the survival of the business. In the words of Lord Keynes “profit is the
engine that drives the business enterprise”. Profits are an index of economic progress.
Profitability ratios are calculated to measure the overall efficiency of the business. Generally,
profitability ratios are calculated either in relation to sales or in relation to investment.
A company should be able to produce adequate profit on each rupee of sales. If sales do
not generate sufficient profits, it would be difficult for the firm to cover operating expenses and
interest charges and as result will to earn any profits to owner.
Profitability in Relation to Sales are
Gross profit ratio
Net profit ratio
Operating profit ratio
Operating ratio
Profitability in Ratios to Investment
The profitability of the company should also be evaluated in terms of the firm’s investment.
Profitability Ratios in Relation to Investment are
Return on assets (ROA)
Return on share holders equity (ROE)
By employing ratio analysis technique, the effectiveness of use of resources to enhance profitability of the company has been studied.
a) Gross Profit Ratio
The Gross profit ratio is also known as Gross Margin Ratio. The difference
between Net Sales and Cost of Goods sold is known as Gross Profit. The earning capacity of
the business can be ascertained by taking the margin between cost of goods sold and sales
revenue. It test of profitability and management efficiency.
Gross Profit Ratio = Gross Profit ___________
Net Sales
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Financial Statement
GROSS PROFIT RATIO
Table
YEARGROSSPROFIT
SALES GROSSPRIFT
RATIO
2000-2001 1431.68 6809.32 21.03
2001-2002 2778.33 6745.14 41.19
2002-2003 2474.56 7342.89 33.70
2003-2004 2238.78 6815.40 32.85
2004-2005 2918.73 7934.39 36.79
INFERENCE
Higher gross profit ratio better result. In the year 2002 GPR is 41.19 which less than
the year 2005, ratio is 36.79.
GROSS PROFIT RATIO
Figure
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Financial Statement
b) Net Profit Ratio
Net profit margin ratio establishes a relationship between net profit and sales and
indicates management’s efficiency in manufacturing administrating and selling the products.
This ratio is the overall measure of the firms ability to turn each purpose in to net profit. The
net profit margin ratio is measured by dividing profit after tax by sales.
Net Profit Ratio = Net Profit __________
Net Sales
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Financial Statement
NET PROFIT RATIO
Table
YEARNET
PROFITSALES
NETPROFITRATIO
2000-2001 634.64 6809.32 9.32
2001-2002 671.60 6745.14 9.95
2002-2003 684.80 7342.89 9.32
2003-2004 512.13 6815.40 7.51
2004-2005 461.83 7934.39 5.89
INFERENCE
Generally higher ratio better the profitability. The NPR of the company for the
current year is 5.89 is less than compared to the previous year.
NET PROFIT RATIO
Figure
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Financial Statement
B) OPERATING PROFIT RATIO
The ratio establishes the relationship between total operating expenses and sales. Total
operating expenses include cost of goods, administrative expences, financial expenses and
selling expences. Cost of goods sold is known as operating expenses and the rest are known as
other operating expenses.
Operating profit Ratio = Operating profit ______________
Sales
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Financial Statement
OPERATING PROFIT RATIO
Table
YEAROPERATING
PROFITSALES
OPERATINGPROFITRATIO
2000-2001 991.39 6809.32 14.56
2001-2002 983.04 6745.14 14.57
2002-2003 1010.37 7342.89 13.45
2003-2004 780.26 6815.40 11.45
2004-2005 726.23 7934.39 9.15
INFERENCE
The ratio indicates general profitability of the concern. Operating profit ratio of the
company for the current year is 9.15 is less than compare to previous year.
OPERATING PROFIT RATIO
Figure
a) Return On Shareholders Fund
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Financial Statement
The ratio establishes the profitability from the shareholders point of view.
Return on shareholder’s fund = Net profit ________________ * 100
Shareholders fund
The term net profit as used here, means net income after payment of interest and tax
including net operational income. Shareholder’s fund includes both preference and equity
share capital and all reserves and surplus belonging to shareholders.
RETURN ON SHAREHOLDERS FUND
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Financial Statement
Table
YEARNET
PROFIT
SHAREHOLDERS
FUNDRATIO
2000-2001 634.64 3931.49 16.14
2001-2002 671.60 4554.92 14.74
2002-2003 684.80 5144.19 13.31
2003-2004 512.13 5601.67 9.14
2004-2005 461.83 6014.14 7.78
INFERENCE
It measures the earning power of equity capital. The ratio is decreasing is first
company’s profit is decreasing due to increasing cost of production. In addition to that reserve
and surplus also increasing due to plowing back of profit.
b) RETURN ON SHAREHOLDERS FUND
Figure
b) Return On Total Asset
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Financial Statement
Profitability can be measured in term of relationship between net profit and assets. This ratio also known as profit-to-asset ratio. It measures the profitability of investment.
Return on total asset = Net Profit __________
Total asset
RETURN ON TOTAL ASSET
Table
YEARNET
PROFIT
SHAREHOLDERS
FUNDRATIO
2000-2001 634.64 3931.49 16.14
2001-2002 671.60 4554.92 14.74
2002-2003 684.80 5144.19 13.31
2003-2004 512.13 5601.67 9.14
2004-2005 461.83 6014.14 7.78
INFERENCE
The return on total assets is fluctuating year by year. The return on total assets of the
company for the current year is 6.57.
RETURN ON TOTAL ASSET
Figure
c) Earnings Per Share:
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Financial Statement
Earnings per share measure the profit available to equity shareholders on a per share
basis. It is calculated by dividing the net profit available to equity shareholders by the number
of outstanding shares.
Earning per share is useful in analyzing the effect on change in leverage on net
operating earnings to the ordinary shareholders.
Formulation:
Net Profit after Tax – Preference Dividend Earnings per Share = ____________________________________
No of Equity Share
EARNING PER SHARE
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Financial Statement
Table
YEARNET
PROFITTOTALASSET
RATIO
2000-2001 634.64 161.46 3.93
2001-2002 671.60 161.46 4.15
2002-2003 684.80 161.46 4.21
2003-2004 512.13 161.46 3.71
2004-2005 461.83 161.46 2.89
INFERENCE
The earning per share is decreasing. The reason for decrease is competition in the
market with low-priced and low quality imported of power tiller.
EARNING PER SHARE
Figure
VALUE ADDITION
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Financial Statement
Table
YEARNET
PROFITSHARES RATIO
2000-2001 6906.16 4196.4 2709.76
2001-2002 7139.69 4385.33 2754.36
2002-2003 7332.11 4305.07 3027.04
2003-2004 7100.8 4179.06 2921.74
2004-2005 7739.63 4844.84 2894.79
INFERENCE
Value addition represents the combination of the company. Purchase represents the
contribution of various suppliers. Value addition of the company represents contribution of
men & machine. Increasing value addition shows favorable trend if employee strength and
machine capacity remains the same. To make it relative value addition per employee also can
be analyzed.
V.2. TREND ANALYSIS
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Financial Statement
Trend percentage is also referred to trend ratio. The financial performance for a series
of years may be analyzed to determine the trend of the data contained therein. This method of
analysis is adopted to determine, the direction, upward or downward. The method of
calculating trend percentage includes the calculation of percentage relationship the each item
bears to the same item in the base year. Any year may be taken as the base year. Each item of
the base year is taken as 100 and on that basis the percentage for each of the item of each of the
year is calculated.
There are different steps for calculating trend percentage.
1. Selection of the base year, which may be earliest, latest on any intervening period.
2. Assignment of a weight of 100 to each amount of the base year is next step.
3. Mention each item amount of every other year as a percentage of its base year amount by applying the formula.
Trend percentage thus shows not only the magnitude but also the direction upward or down ward profit various years and hence is quite useful in horizontal analysis.
While calculating the trend percentage care be taken regard in various point such as:
1. The accounting principle followed should be constant through out the period on which analysis is made.
2. The base year should be carefully selected. It should be normal year and representative of the item shown the statement.
3. Tend percentage should be calculated only for item having logical relationship with one another.
4. Trend percentage should be studied after considering the absolute figures on which they are based, otherwise they me give misleading result.
5. The figure for the current year should also be adjusted in the light of price level changes as compared to the base year before calculating trend percentage.
In order to know the change in figures, trend percentage of various items of the company is calculating.
From the table, it is understood that the company is growing widely its assets and liabilities shown an increasing trend. Details are followed.
The company still now issues shares and collect money. It keeps adequate resources and surplus every year.
TREND RATIO
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Financial Statement
Table
Particulars 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005
ASSETS
Fixed Assets 939.22 889.39 827.8 772.48 714.89 100.00 94.67 88.14 82.25 76.12
Current Assets
Loose Tools 12.47 9.93 8.76 11.53 9.86 100.00 79.63 70.25 92.46 79.06
Inventories 1180.28 1415.14 1437.69 1796.92 1781.92 100.00 199.90 121.81 152.25 150.97
Sundry Debtors 419.47 592.31 669.22 909.98 891.42 100.00 141.20 159.54 216.94 212.51
Cash & Bank 1436.72 1843.42 2471.56 2247.06 2771.42 100.00 128.30 172.02 156.40 192.90
Other CA 98.66 133.54 138.92 108.89 103.60 100.00 135.35 140.81 110.36 105.00
Loans & Advance 682.47 688.58 731.71 607.89 648.50 100.00 100.90 107.20 89.00 95.00
Investment in share 175.00 175.00 175.00 175.00 175.00 100.00 100.00 100.00 100.00 100.00
Total Assets 4944.55 5747.31 6460.69 6629.77 7116.68 100.00 116.24 130.66 134.00 143.90
LIABILITIES
Share Capital 161.46 161.46 161.46 161.46 161.46 100.00 100.00 100.00 100.00 100.00
Reserve & Surplus 3770.02 4393.46 4982.73 5440.21 5852.68 100.00 116.54 132.17 144.30 155.00
Loans Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Deferred Tax Liabilities
1013.07 1192.39 1268.93 974.19 1050.56 100.00 117.70 125.26 96.20 103.70
Total Liabilities 4944.55 5747.31 6460.69 6629.77 7116.68 100.00 116.24 130.66 134.00 143.90
COMMON SIZE IN THE PROFIT & LOSS ACCOUNT
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Financial Statement
Table
Particulars 2001 % 2002 % 2003 % 2004 % 2005 %
Sales 6809.32 6745.14 7342.89 6815.40 7934.39
Add: Variation in stock
96.82 394.55 -10.78 285.40 -194.76
Total 6906.14 7139.95 7332.11 7100.80 7739.63
Material goods 4196.44 60.76% 4385.33 61.39% 4305.07 58.72% 4179.06 58.85% 5064.57 65.04%
Manufacturing exp.
123.09 1.78% 364.21 5.10% 535.76 7.30% 497.29 7% 582.45 7.52%
Staff cost 994.32 14.39% 1028.05 14.39% 1036.62 14.14% 1169.93 16.48% 1271.83 13.15%
Administration & General exp.
85.68 1.24% 83.62 1.17% 108.63 1.48% 99.2 1.39% 122.7 1.59%
Selling & distribution exp.
616.89 8.93% 406.48 5.69% 495.99 6.76% 509.22 7.11% 100.13 1.29%
Depreciation 94.11 1.36% 110.01 1.54% 97.59 1.33% 87.9 1.23% 81.3 1.05%
Total 6110.49 6377.7 6579.67 6542.63 7223
Operating profit
991.39 14.35% 983.04 13.77% 1010.37 13.77% 780.26 10.99% 726.23 9.38%
INFERENCE
Material cost of the firm increasing. In the year 2004 that was 58.8% but in the
year 2005 that was 66% may be that’s because of competition. If competition increased we
can’t increase the product price. In the year 2004 staff cost is 16.48% and in the year 2005
staff cost is 13%. The increase is due ANNUAL increment and increase in DA rate. So
gradually there will be an increase in the staff cost. Diversification and growth is main method
for decreasing prorate ate expenses.
FUND FLOW STATEMENT
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Financial Statement
The statement if changes in financial position, prepared to determine only the source
and uses of working capital between dates of two balance sheets is known as Fund Flow
statement. In other words, the statement showing source and application of funds is popularly
known as Fund flow statement. It is condensed report of how the activities of the business are
financial and how the financial sources were used during the institutions and financial
managers, etc.uses the fund flow statement widely. The basic purpose of this statement is to
indicate on a historical basis where cash came and where it was used.
The basic purpose of a fund flow statement is to reveal the changes in the working
capital in the two balance sheets. A Fund flow statement helps in explaining how effectively
the management has used its working capital and suggest ways to improve working capital
position of the firm.
Found flow statement is a useful tool in the finance manager’s analystical kit. The
management can formulate its financial policies, dividend, reserves etc. on the basis of this
statement. It tells whether source of funds increase or decreasing or constant. It point out the
cause for changes in working capital.
Preparation of Fund flow statement
a) Statement of changes in Working capital
b) Fund flow statement.
a) Statement of changes in working capital
The working capital does change due to various transactions. The working capital
position at the beginning period is changed to a different position at the end of the period. A
statement of working capital is prepared depict the changes in WC. WC represent excess of
current assets over current liabilities. It is necessary to measure the increase or decrease there
in by preparing a statement of change in WC.
Fund flow statement.
b) Fund flow statement.
After preparing the statement of working capital, the statement of sources and
application of fund is prepared. This statement is prepared with the help of the remaining items
in the balance sheet of the two periods- all non-current asset and non current liabilities and
other information given in the problem.
STATEMENT OF CHANGES IN WORKING CAPITAL
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Financial Statement
Table
Particulars 2001 2002 Increase (Dr) Decrease (Cr)
Current asset
1. Loose Tools 12.48 9.93 2.55
2. Inventories 1180.28 1415.14 234.86
3. Sundry debtors 419.74 592.31 172.57
4. Cash & Bank 1436.72 1843.43 406.71
5. Prepaid Exp. 6.89 6.59 0.3
6. Work in Progress 7.85 9.64 1.79
7. Loans & Advance 682.47 688.58 6.11
8. Other Current Asset 98.66 133.54 34.88
Total 3825.09 4699.16
Current Liabilities
1. CL 602.15 809.40 207.25
2. Provision 410.92 382.99 27.93
3. Prospond Divident 40.37 48.43 8.06
4. Provision for taxation 355.00 313.00 42
Total 1408.94 1553.82
Working capital 2436.65 3145.34
Increase in Working Capital 708.69 708.69
3145.34 3145.34 926.85 926.85
FUND FLOW STATEMENT FOR THE YEAR ENDED 31 ST MARCH 2002
Table
Source Amount Application Amount
Fund from operation 771.86 Increase in working capital 708.69
Purchase of fixed assets 63.17
771.86 771.86
STATEMENT OF CHANGES IN WORKING CAPITAL
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Financial Statement
Particulars 2002 2003 Increase(Dr) Decrease(Cr)Current Asset1. Loose Tools 9.93 8.76 1.172. Inventories 1415.14 1437.69 22.553. Sundry Debtors 592.31 669.22 76.914. Cash & Bank 1843.43 2471.56 628.135. Prepaid Expense 6.59 9.08 2.496. Working Progress 9.64 0.903 8.747. Loans & Advance 688.58 731.72 43.14
8. Other CA 133.54 138.92 5.38
Total4699.16 5467.85
Current Liabilities1. CL 809.40 885.83 76.432. Provision 382.99 383.10 00.113. Prospond Dividend 48.43
4. Provision for Taxation313.00 318.67 5.67
Total 1553.82 1636.03
Working Capital 3145.34 3831.82
Increase in Working Capital686.48 686.48
3831.82 3831.82 778.60 778.6
FUND FLOW STATEMENT FOR THE YEAR ENDED 31 ST MARCH 2003
Source Amount Application Amount
Fund from operation 734.95 Increase in working capital 686.48
Purchase of fixed assets 48.47
734.95 734.95
STATEMENT OF CHANGES IN WORKING CAPITAL
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Financial Statement
FUND FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH 2004
Source Amount Application Amount
Fund from operation 647.32 Increase in working capital 584.15
Purchase of fixed assets 63.17
647.32 647.3
STATEMENT OF CHANGES IN WORKING CAPITAL
Particulars 2004 2005 Increase(Dr) Decrease(Cr)Current Asset
Maharaja College for Women Erode
Particulars 2003 2004 Increase(Dr) Decrease(Cr)Current Asset1. Loose Tools 8.76 11.5 2.772. Inventories 1437.69 1796.92 359.233. Sundry Debtors 669.22 950.98 240.764. Cash & Bank 2471.56 2247.06 224.55. Prepaid Expense 9.08 9.92 0.846. Working Progress .903 6.47 5.577. Loans & Advance 731.72 607.89 123.83
8. Other CA138.92 108.89
30.03
Total5467.85 5698.66
Current Liabilities1. CL 885.83 668.55 217.282. Provision 383.10 305.64 77.463. Prospond Dividend 48.43 48.43
4. Provision for Taxation318.67 260.06
58.61
Total1636.03 1282.69
Working Capital 3831.82 4415.97
Increase in Working Capital584.15 584.15
3831.82 4415.97 962.52 962.52
64
Financial Statement
1. Loose Tools 11.5 9.86 1.632. Inventories 1796.92 1781.92 15.003. Sundry Debtors 909.98 891.43 18.564. Cash & Bank 2247.06 2771.43 524.375. Prepaid Expense 9.92 6.71 3.226. Working Progress 6.47 0.53 5.947. Loans & Advance 607.89 648.50 40.61
8. Other CA108.89 103.60
5.29
Total5698.66 6213.98
Current Liabilities1. CL 668.55 725.18 56.632. Provision 305.64 325.39 19.753. Prospond Dividend 48.43 48.43
4. Provision for Taxation260.06 263.08
3.02
Total1282.69 1362.08
Working Capital 4415.97 4851.90
Increase in Working Capital435.93 435.93
4851.90 4851.90 565.00 565.00
FUND FLOW STATEMENT FOR THE YEAR ENDED 31ST MARCH 2005
Source Amount Application Amount
Fund from operation 465.57 Increase in working capital
Purchase of fixed assets
435.93
29.64
465.57 465.57
MANANGEMENT OF WORKING CAPITAL
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Financial Statement
Working capital is the lifeblood and nerve center of a business. It is essential to
maintain the smooth running of the business. There are number of aspect of working capital
management that makes an important topic for study. They are follows:
There is a positive correlation between the sale of firm and its current assets, so as to
increase sale, a corresponding increase in current asset is required. Hence their proper
administration becomes significant.
Working capital needs are generally financed through outside sources, so acuminous
care is necessary to utilize them in the best way.
Working capital is particularly important for small firm has relatively limited access to
the long-term capital market. Therefore it must rely heavily on trade credit and short-
term bank loans, which are current liabilities.
The basic objective of working capital management is to manage each of firm’s current asset
and current liabilities in such a way an acceptable level of working capital is always
maintained in the business. Each current assets must be managed effectively in order to
maintain the firm’s liquidity while not keeping too high the profitability of the concern.
Hence the problem of efficient working capital management is to establish a trade off
between liquidity and profitability.
CONCEPT OF WORKING CAPITAL
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Financial Statement
a) Balance sheet concept
b) Operating Cycle Concept
a) Balance sheet Concept
There are two interpretation of working capital under the balance sheet concept.
Sheet concept.
1. Gross working capital
2. Net working capital
Gross working capital is the capital invested in total current asset of the enterprise.
Net working capital is the excess of current asset over current liabilities.
Net Working Capital = Current Asset – Current Liabilities
As per the general practice, net working capital is referred to simply as working capital.
b) Operating cycle Concept
Operating cycle is the time duration required to convert sales, after the conversion of
resources in to inventories in to cash.
Working capital cycle
VI. FINDINGS
Maharaja College for Women Erode
Cash
Raw materialsDebtors
Sales Work in progress
Finished goods
67
Financial Statement
The study covers an analysis of KAMCO LTD over a period of the year from 2000-
2001 to 2004-2005. The various findings and conclusion of the study are stated in the relevant
chapter itself. However it is considered suitable to provide summary of those findings and
conclusions.
LIQUIDITY RATIO
The ratios for measuring the short-term liquidity of the company are current ratio,
quick ratio and absolute ratio. Current ratio of the company range from 3.72 to 5.29.
An ideal current ratio is 2:1. Average current ratio for the last five years is 4.13, better
sound solvency position.
Companies’ quick ratio for the last five years is 2.72. The standard norm fixed for
quick ratio is 1:1. The company has made a very good liquid ratio. This is favorable
to creditors.
The average absolute liquid ratio is 1.97. This shows that company’s financial position
is satisfactory.
PROFITABILITY RATIO
Profitability ratio shows the operating efficiency of the company. The first profitability
ratio in relation to sales in the gross profit margin. In the year 2002 CPR is 41.99,
which less than the year 2005 ratio is 36.79.
Net profit ratio shows a downward trend. It range from 9.95 to 5.89, current year ratio
is less than the previous year ratio due to high operating cost.
The operating profit ratio has decreased from 14.56 in 00-01 to 9.15 in 04-05; the
reason can be attributed to increasing operating cost.
The measure the earning power of equity capital. The ratio is decreasing. The reason
for decreasing due to increasing cost of production. In addition to that reserve surplus
also increasing pawing back of profit. The ratio is great impotent to the present and
prospective shareholder’s as well as the management of the company.
The company is getting sufficient return on the use of its assets. This is evident by that
the returns have gone up many folds as compared to total asset. The return on total
assets is fluctuating year by year. The return on total assets of the company for the
current year is 6.57.
EFFICIENCY RATIO
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Financial Statement
A higher inventory turnover indicates efficient management of inventory because more
frequently the stock sold. In the year 200-2001 the inventory turn over ratio is 5.77.
The Working turnover ratio is not hopeful. A major part of capital is transferred to
short-term deposits.
Debtor’s turnover indicates the number of times debtor’s turnover each year. Majority
of the company sales are against advanced receipt and the year end debtor’s shown in
the balance sheet represent amount available against document recognized through
bank during march and relative during April/ March.
Fixed asset turnover ratio show upward and Current assets turnover ratio downward
trend. In 2005 the ratio is 10.36 indicate the greater the intensive utilization of assets
and it help to increase in production & sales. The CATR of the company for the
current year is 1.42 is less than compared to the previous year.
SOLVENCY RATIO
KAMCO has no loaned funds secured or unsecured and loan not shown. So these
debt-equity, Fixed asset and interest coverage ratios are not relevant to the company.
RECOMMEDATIONS
From the above study it is clear that the KAMCO LTD. has to make some more
improvements in performance. Following are the recommendations for further improvement.
There exist wide gap between gross profit ratio and net profit ratio because of heavy
operating cost. Steps must be taking to reduce all operating expense.
In order to increase the operating profit, if it is possible to increase the sales, reduce the
total capital employed in the business.
Management should take necessary steps to monitor the constant increase in the current
liabilities.
Stock turnover ratio of the company is low efforts must be made to increase sales.
No company can survive without growth. The is because in an inflationary economy
operating cost will definitely increase year after year to cover the increase in expense
or either price should be increased or volume of sale should be increased. In
competitive economy increasing price may not be feasible the alternative is to increase
the sales volume for this diversification of products also may be tried.
VII. CONCLUSION
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Financial Statement
In this study an attempt is made to provide an idea about the way on which a decision
can be taken to plan the field of finance for better progress. Analysis and interpretation of
financial statement s shows that the financial position of KAMCO is quite satisfactory level. In
the last year company’s sales turnover is better, but net profit is comparatively less than
previous year. Through this analysis it can be concluded that even through the company is
progressing. There are so many problems in the industry like competitors with low cost
machines, increasing cost of material etc. So steps must be taken to improve the efficiency in
utilization of all factors of production for better prospect in future.
VIII. ANNEXURE
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Financial Statement
NET PROFIT FOR THE FIVE YEARS AT AGLANCE
Table
Figure
IX. BIBLIOGRAPHY
Maharaja College for Women Erode
YEAR NET PROFIT
2000 - 2001 634.64
2001 - 2002 671.60
2002 - 2003 684.80
2003 - 2004 512.13
2004 - 2005 467.83
71
Financial Statement
R.K. Sharma & Shashi. K. Gupta, Management Accounting. Principles and
Practices, New Delhi, Kalyani Publishers, 1986.
S.P Jain & K.L. Narang, Companay Accounts, Klyani Publishers, New Delhi
Pillai R.S.N. and Bagavathi. V., Management Accounting, New Delhi, S. Chand &
Company Ltd., 1997
Maheswari. S.N. Principles of Management Accounting, New Delhi. Sullan Chand
and Sons, 1985.
Annual Reports of Kerala Agro Machinaries Corporation Ltd., for five years from
2000 – 2001 to 2004 – 2005.
WEB SITE:
www.kamcoindia.com
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