Chapter –IV

FINANCIAL APPRAISAL OF PTL

FINANCIAL ANALYSIS OF PTL

A financial statement is a systematic collection of data according to some

logical and consistent accounting procedures. Its purpose is to convey an idea about

some important financial aspects of a business firm. It may show a position at a

moment of time as in the case of the balance sheet, or may reveal a series of activities

over a given period of time as in the case of income statement.

The information contained in these financial statements is used by various

interested parties like management, creditors, investors, government and others to

form judgment about the operative performance and financial position of the firm.

The users of financial statements can get better insight about financial strengths and

weaknesses of the firm if they properly analyze the information given in these

statements.

The process of identifying the financial strengths and weaknesses of the firm

by properly establishing relationship between the items of balance sheet and profit

and loss account is called financial analysis. Such analysis is the starting point for

making effective plans. Forecasting, which is an important pre-requisite of effective

planning, requires understanding of the past to anticipate the future. Financial data can

be used to analyze a firm’s past performance and assess its present financial strength.

The nature of analysis will differ depending upon the purpose of the analyst. The

present analysis is undertaken to evaluate performance of PTL.

Tools of Financial Analysis

Following are the major tools which can be used to analyze a firm’s financial

position.

Financial statements.

Trend Analysis.

Funds and cash flow analysis.

Ratio analysis.

In the present study a combination of these tools has been used.

Types of Financial Analysis

There are some of the methods which can be adopted by an analyst to

comment upon the performance of a particular unit in comparison with its competitors

or over a given period of time. These are:

1. Time Series Analysis.

The most common way to evaluate the performance of a firm is to compare its

current position with its past position. When financial position over a period of time is

compared, it is known as the tike series (or trend) analysis. It gives an indication of

the direction of the change and reflects whether the firm’s financial performance has

improved, deteriorated or remained constant over a period of time. The analyst should

first determine the change, and then he should try to find out the reasons for the

change. The change, for example, may be affected by mere changes in the accounting

policies, without a material change in the firm’s performance.

2. Cross- Sectional Analysis:

Another way of comparison is to compare the financial position of one form

with some selected first in the same industry at the same point of time. This kind of

comparison is known as the cross - sectional analysis. It indicates the relative

financial position and performance of the firm. A firm can easily resort to such a

comparison as it is to get the published financial statements of the similar firms.

3. Performa Analysis.

Analysis of present financial position with the help of projected financial

statements for the future is known as Performa analysis. Future financial position can

be development from the projected financial statements. The comparison of current or

past ratios with future ratios shows the firm’s relative strengths and weaknesses in the

past and the future. If the future ratios indicate weak financial position, corrective

action should be initiated.

4. Industry Analysis.

To determine the financial condition and performance of a firm, its ratios may

be compared with average ratios of the industry of which the firm is a member. This

sort of analysis, known as the industry analysis is considered to be best analysis as it

helps to ascertain the financial standing and capability of firm vis-à-vis other firms in

the same industry.

In the present study, the financial and social performance of PTL is measured.

For this purpose, an analysis of following aspects is done:

1. Profitability analysis.

2. Working capital management.

3. Capital structure analysis.

4. Market performance.

5. Investment pattern.

Key Financials of PTL (Rs. In Lacs)

Particulars 2006 2007 2008Share capital 6

076 6076

6076

Reserve & Surplus 50827 58624

60408

Sales 95855 95885 96959

Net Profit 12935 7798 6517

EPS 21.29 12.84 10.73

Dividend 105% Nil 50%

R & D expenditure (%) of sales

0.79 0.89 0.96

PROFITABILITY ANALYSIS

Profit is the ultimate output of a company and the company will have no future

if it fails to make adequate profits. P.F. Ducker has rightly commented on importance

of profitability of a concern for its survival when he writes,” profits is a condition of

survival. It is the cost of future. It is the cost of staying in the business.” If an

undertaking does not earn profit it cannot expand or diversify, it cannot pay handsome

rewards to various factors of production and it is doomed to fail at last. In fact, profit

is a yardstick by which efficiency of a business unit is measured. The higher the

profit, the more efficient is the business considered. Though changes in total profits

may indicate changes in efficiency, they will not indicate true state of efficiency of a

business or profitability unless profits are related with the size of investment.

Therefore overall efficiency of the business can be measured in terms of profits

related to investments made in the business. The profitability is also evaluated in

terms of return on capital contributed by creditors and owners because if the company

is unable to earn a satisfactory return on investment, its very survival is threatened. To

comment on the overall financial performance of PTL, following two important

profitability ratios are calculated.

1. Profits in relation to sales.

2. Profits in relation to investments.

Relevant financial information which has been used for conducting profitability

analysis is as follows:

Profitability in relation to sales

A company should be able to produce adequate profit on each rupee of its

sales. If sales do not generate sufficient profits, it would be very difficult for

the firm to cover operating expenses and interest charges. To measure the

profitability in relation to sales, following ratios are calculated.

1. Gross Profit Ratio

2. Operating Ratio

3. Operating profit Ratio

4. Expenses Ratio

5. Net Profit Ratio

6. Cash Profit Ratio

Gross Profit Ratio:

This ratio measures the relationship of gross profit to net sales. It reflects the

efficiency with which a firm produces its products. So as higher the gross profit ratio

better the result.

Gross Profit ratio= Gross Profit * 100

Net Sales

In croresParticular 2006 2007 2008Gross Profit 130.7 114.9 99.4Net Sales 958.55 958.85 969.59G.P. Ratio 13.6% 11.9% 10.3%

G/P Ratio of the company is decreasing from 2004 to 2008 which is due to increasing

input costs. But it is quite good i.e. 10.3% with the increasing inflation.

2006 2007 2008

0

200

400

600

800

1000

1200

G.P

Net Sales

2006 2007 20080.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

G.P. Ratio

Operating Ratio:

This ratio establishes the relationship between cost of goods sold and other operating

expenses on the one hand and sales on the other hand. In other words, it measures the

cost of operations per rupee of sales.

Operating Ratio= Operating cost * 100

Net Sales in crores

Particular 2006 2007 2008Operating Cost 833 848.6 872.6Net Sales 958.55 958.85 969.59Operating Cost Ratio 86.9% 88.5% 90.0%

2006 2007 2008

750

800

850

900

950

1000

Operating Cost

Net Sales

2006 2007 2008

85

86

87

88

89

90

91

Opearing Cost ratio

Operating ratio

Operating ratio: Operating ratio indicates the percentage of net sales that is

consumed by operating cost. Higher the operating ratio, the less favorable it is,

because, it would have a small margin to cover interest, income tax, dividend and

reserves. There is no rule of thumb for this ratio as it may differ from firm to firm

depending upon the nature of its business and its capital structure. However, 75 to 85

percent may be considered to be good ratio in case of manufacturing undertaking. So

from the analysis of operating ratio of the company PTL, in every FY from 2004 to

2008 the operating ratio is increasing and in the current year it increases up to 90%

shows only 10% margin left for other charges. It should increase its operating

efficiency.

Operating Profit Ratio:

This ratio is calculated by dividing operating profit by sales.

Operating Profit Ratio= Operating profit * 100

Sales

This ratio can also be calculated as:

Operating Profit Ratio= 100 - Operating Ratio

Operating Profit Ratio of PTL

Particular 2006 2007 2008Operating Profit Ratio

13.1% 11.5% 10.0%

2006 2007 2008

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Operating Profit Ratio

Net Profit Ratio:

This ratio establishes a relationship between net profit and sales and indicates

management’s efficiency in manufacturing and selling the products. It is the overall

measure of a firm’s ability to turn each rupee of sales into net profit. This ratio also

indicates the firm’s capacity to withstand in adverse economic conditions. The

following table shows the net profit margin ratio of PTL.

Net Profit Ratio= Net profit after tax * 100

Net Sales in crores

Particulars 2006 2007 2008Net Profit 129.3 78.0 65.2

Sales 958.55 958.85 969.59N. P. Ratio 13.49% 8.13% 6.72%

2006 2007 2008

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

N.P.Ratio

Cash Profit Ratio:

This ratio measures the relationship between cash generated from operations and the

net sales.

Cash Profit Ratio= Cash Profit * 100

Net Sales in crores

Particular 2006 2007 2008Cash profit

119.7 109.7 111.6

Net Sales 958.55 958.85 969.59C. P.Ratio 12.5% 11.4% 11.5%

2006 2007 2008

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

C.P. Ratio

C.P ratio

ANALYSIS OF PROFITABILITY OF PTL

PTL has been able to maintain a soundly profitable stance through its focus on

continuous improvement and capital efficiency. In profit there are little fluctuations

from the FY 2004 to 2008. However unprecedented stretch of poor monsoons resulted

into broad spectrum of depressed market environment of the whole tractor industry.

Clearly profitability of PTL’s has shown continuous and steadiest growth. It is the

result of notable improvement in both volume and model mix in tractors underpinned

by its traditional cost efficiencies.

Cost Break Down of PTL:

The raw material constitutes the major portion of the total expenditure in PTL. It

revolves around 79% of total expenditure as is given from the table given below:

Cost Breakdown of PTL (%age of Total Expenditure)

Particulars 2006 2007 2008Material Consumption 82.33 79.54 78.97Finance Charges 0.75 0.11 (1.66)Depreciation 1.78 1.79 1.93Operating & Adm. Exp. 15.14 18.56 20.76

PROFITABILITY IN RELATION TO INVESTMENTS

The profitability of the firm is also measured in relation to its investment. The term

investment may refer to capital employed in the business or the owner’s equity.

Accordingly, return on capital employed (ROCE) and return on Shareholders equity

(ROSE) are calculated to give a broad idea about the overall return on the funds

invested in the business.

Return on capital employed (ROCE) is the best tool which is used by the owners to

know how well the management has used the funds supplied by them and other

parties. A higher ratio will satisfy the owners that their funds earn a handsome return.

To get a true idea about the operating efficiency of a firm ROCE is calculated for a

number of years and the firm’s ratio should be compared with industry average. In

other words both intra-firm and inter-firm comparisons should be made. This ratio

helps management in the formulation of the proper debt policy by comparing the cost

of raising debt with the rate of return on capital employed. ROCE is calculated by

dividing net profit after tax and interest by total capital employed i.e.

ROCE = Net Profit after Tax and Interest

Capital Employed

(Here capital employed = Fixed Assets + Trade Investments + Current Assets –

Current liabilities)

ROCE of PTL (Rs. In Lacs)

Particulars 2006 2007 2008

Net Profit 17045.40 7798.23 6516.87

Net Capital Employed

61061.61 68372.17 68394.68

ROCE 27.91% 11.41% 9.53%

2006 2007 2008

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

ROCE

On seeing the return on capital employed of PTL, it will be found that up to the year

2007 it shows a decreasing trend in its ROCE. This is due to severe demand down-

turn arousing from weakening farm fundamentals across major markets. But in the FY

2007-08 recorded the lower ROCE as 09.53% in comparisons of last three years.

Return on Equity Analysis:

ROE is the relationship between net profits (after interest and taxes) and the

proprietors’ funds. As the primary objective of business is to maximize its earnings,

this ratio indicates the extent to which this 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 the company. As this ratio reveals how well the

resources of the firm are being used, higher the ratio, better the results.

5 Yearly Trends of ROE of PTL (Rs. In Lacs)

Particulars 2006 2007 2008

Shareholders Funds

56901.65

64699.88 66483.51

Net Profit after tax

12933.66

7798.23 6516.87

ROE 22.72% 12.05% 9.80%

.

2006 2007 20080.0%

5.0%

10.0%

15.0%

20.0%

25.0%

ROE

As the table depicts, PTL s’ ROE (Net Worth) in FY 2005-06 is highest amongst the

other financial years which is 22.72% in 2006. Thus PTL is very attractive company

for the purpose of investment with lesser risk of dilution of equity as well as lesser

risk due to less debt equity ratio. But it further decreases in the FY 2007-08 due to

input costs inflation.

WORKING CAPITAL MANAGEMENT

Working capital refers to the excess of current assets over current liabilities.

Management of working capital is concerned with the problems that arise in

attempting to manage the current assets, the current liabilities and the interrelationship

that exists between them. In other words, it refers to all aspects of administration of

both current assets and current liabilities. The basic goal of working capital

management is to manage the current assets and current liabilities of a firm in such a

way that a satisfactory level of working capital is maintained, i.e. it is neither

inadequate nor excessive. This is so because both inadequate as well as excessive

working capital implies idle funds which earns no profit for the business and

inadequacy of working capital may lead the firm to insolvency. Working capital

management policies of a firm have great effect on its profitability, liquidity and

structural health. A sound working capital management policy is one which ensures

lowest cost, adequate liquidity and sound structural health of the organization.

PRINCIPLES OF WORKING CAPITAL

MANAGEMENT

The following are the main principles of a sound working capital management

policy:

1. Principal of Risk Variation

Risk in this context, refers to inability of a firm to meet its obligations as and

when they become due for payment. Larger investment in current assets with less

dependence on short-term borrowing increases liquidity reduces risk and thereby

decreases the opportunity for a loss. To the contrary, less investment in current assets

with greater dependence on short-term borrowings increases risk, reduces liquidity as

well as profitability. Thus there is a definite and inverse relationship between the

degree of risk and profitability. A conservative management prefers to minimize the

risk maintaining a higher level of current assets or working capital while a liberal

management assumes greater risk by reducing working capital. However the goal of

management should be to establish a suitable tradeoff between profitability and risk.

2. Principle of Cost of Capital.

Cost of raising capital is different for different sources of raising working

capital finance. It is generally dependent on the degree of risk involved in raising

capital from a particular source. Higher the risk, higher is the cost and lower the risk,

lower is the cost. A sound working capital management should always try to achieve a

proper balance between these two.

3. Principle of Equity Position.

This states that the amount of working capital invested in each component

should be adequately justified by a firm’s equity position. Every rupee invested in the

current asset should contribute to the net worth of the firm. Thus this principle is

concerned with planning the total investment in current assets. The level of current

assets may be measure with the help of two ratios.

i. Current assets as a percentage of total assets.

ii. Current assets as a percentage of total sales.

While deciding about the composition of the current assets, the financial manager

may consider the relevant industrial average.

4. Principle of Maturity of Payment.

This principle states that a firm should make every effort to relate maturities of

payment to its flow of internally generated funds. It is concerned with planning the

sources of finance for working capital. Maturity pattern of various current obligations

is an important factor in risk assumptions and risk assessments. Generally, shorter the

maturity schedule of current liabilities in relation to expected cash inflows the greater

is the inability to meet its obligations in time.

Nature of Working Capital Requirements

The working capital requirements of a concern can be classified as:

1. Permanent or fixed or regular working capital requirements.

2. Temporary or variable working capital requirements.

Permanent working capital is that minimum amount which should always be

deployed to carry the business operations without interruption. This part of working

capital should generally be financed from the fixed capital sources. Temporary

working capital is that amount which is required for the seasonal demands and some

special exigencies such as rise in prices, strikes, extensive advertisement to capture

more markets, etc. It should be financed from short term sources of capital.

Both kinds of working capital - permanent and temporary are necessary to

facilitate production and sale through the operating cycle.

FINANCING OF WORKING CAPITAL

Permanent working capital should be financed in such a manner that the

enterprise may have its uninterrupted use for a sufficiently long period. Important

sources are:

1. Shares: Issue of shares is the most important source for raising the long term

capital. Raising of permanent capital through the issue of shares has certain

advantages like there is no fixed burden on the resources of the company and,

moreover, no charge is created on the assets of the company.

2. Debentures: A debenture is an instrument issued by the company

acknowledging its debt to its holder. Debentures carry a fixed rate of interest which is

a legal charge against revenue of the company. The debentures are generally given

floating charge on the assets of the company.

The firm issuing debentures also enjoy a number of benefits such as trading on equity,

retention of control, tax benefit, etc.

3. Public deposits: Public deposits are the fixed deposits accepted by a business

enterprise directly from the public. This source of raising finance became popular

because of the imperfect development of banking system in the country. This mode of

financing has a large number of advantages such as very simple and convenient

source of finance, taxation benefits, trading on equity, and inexpensive source of

finance.

4. Retained Earnings: It refers to reinvestment by a concern of its surplus

earnings in its business. It is an internal source of finance and it often referred to as

self financing or ploughing back of profits. It is most suitable for an established firm

for its expansion, modernization, replacement, etc. But excessive resort to ploughing

back of profits may lead to monopolies, misuse of funds, over capitalization,

manipulation in the value of the shares, etc.

5. Loans from Financial institutions: Financial institutions such as

Commercial Banks, Life Insurance Corporation, State Financial Corporation of India,

Industrial Development Bank of India, etc. also provide short term, medium term and

long term loans.

Temporary/Variable working capital is financed through;

1. Commercial Banks. Commercial banks are the most important source of short

term capital. They provide a wide variety of loans tailored to meet the specific

requirements of a concern.

2. Trade Credit. The trade credit arrangement of a concern with its suppliers is an

important source of short term finances. The use of trade credit depends upon the

buyer’s need for it and the willingness of the sources of supply to extend it.

3. Advances. A company can meet its short term working capital requirements by

getting advances from their customers and agents against orders. This source of

finance is especially suitable for those industries which have long production cycles.

4. Commercial Papers: Commercial papers are unsecured promissory notes sold

by the issuers to investors through agents like Merchant bankers and security houses.

Commercial papers provide an avenue for short term borrowings to highly rated

corporate borrowings at cheaper rates of interest as compared to bank borrowings.

The rating of the company by any rating agency is a pre-requisite for issuing

commercial papers.

In a nutshell, working capital is the life blood and controlling nerve centre of

the business. No business can be successfully run without an adequate amount of

working capital. Whether a particular business is managing its working capital

properly or not can be judged by analyzing the liquidity position of that unit and the

concerned information (like debtors analysis, creditors analysis etc).

To comment upon the working capital management in PTL,

the technique of ratio analysis is adopted.

The following ratios have been calculated for the said purpose.

1. Current ratio.

2. Comparative debtors’ analysis.

3. Working capital turnover ratio.

4. Inventory Turnover analysis.

5. Creditor’s turnover.

Current Ratio:

The current ratio is an indicator of a firm’s short term solvency. A firm, to survive on

a continuing basis, should maintain sufficient liquidity. As a rule of thumb, 2:1 is

considered to be an ideal current ratio. The idea of having double the current assets as

to current liabilities is to provide a cushion against possible losses and to ensure a

smooth day to day functioning of the firm. There is, however, nothing very sacrosanct

about the 2:1 ratio. What is more important is the quality of current assets, how fast

and to what extent can they be converted into cash.

5 Yearly Trend of Current Ratio of PTL

Years Current Assets Current

Liabilities

Ratio

2006 66579.18 16565.46 4.02:1times

2007 72458.42 13940.70 5.19:1times

2008 62323.63 18433.35 3.38:1times

A relatively high current ratio is an indication that the firm is liquid and has the ability

to pay its current obligations in time and when they become due. On the other hand, a

low current ratio represents that the liquidity position of the firm is not good and the

firm shall not be able to pay its current liabilities in time. The above table indicates

that there are also fluctuations in the current ratio of PTL. In FY 2004 it was 3.39:1

and then increases to 5.20:1 in FY 2007 and in FY 2008 it further decreases to 3.38:1.

The reason of increment in the current ratio because decrease in current liabilities and

increase in current assets in the FY 2007. In all the years it is above than the standard

2:1.

2006 2007 20080

10000

20000

30000

40000

50000

60000

70000

80000

Current Assets

Current Liabilities

Debtors/Receivables Turnover Ratio:

Debtor’s turnover ratio indicates the velocity of debt collection of firm. In simple

words, it indicates the number of times the average debtors are turned over during a

year.

Debtors Turnover Ratio = Total sales

Debtors

Avg. collection period = No. of Months

D.T.R

5 Yearly Trend of Debtor Turnover Ratio of PTL

Years Sales Debtors D.T.R Collection

Period (months)

2006 95855 52776 1.82 6.61

2007 95885 50364 1.90 6.32

2008 96959 28135 3.45 3.48

Since 1989, the company’s main product i.e. tractor which accounted for nearly 95%

of its turnover is being sold against cash only. In fact sales of tractors are executed

against advances from the dealers. Since liquidity position of a company depends

upon the quality of its debtors to a great extent, two ratios i.e. Debtors Turnover Ratio

and Average Collection Period are calculated to judge the quality and liquidity of

debtors of the company and comment on efficiency.

A close analysis of this ratio of five years from 2004 to 2008 as given in chart

shows PTL has a very low turnover ratio of about 1.15 times in 2004 but it increasing

Y-O-Y and it is highest in the current year i.e. 3.45. The reason is, during the year,

PTL has made special efforts to reduce dealer outstanding by focusing attention on

increasing retail sales and reducing dealer stocks and thereby increase in collection

from dealers.

Current Assets & Current Liabilities of PTL in Period 2007-08

Current Assets Total %age

Inventories 11379.38 18.26

Sundry Debtors 28135.08 45.14

Cash & Bank 19883.14 31.90

Loans & Advances 2581.83 4.14

Other C. A. 344.20 0.56

TOTAL 62323.63 100

Current Liabilities Total %age

Sundry Creditors 8342.12 72.36

Acceptances 1331.06 11.55

Dividend Payable & other

109.91 0.95

Interest Accrued 54.04 0.47

Other Liabilities 1690.89 14.67

TOTAL 11528.02 100

Net Working Capital (C.A. - C.L.)

50795.61

Working Capital Turnover Analysis:

The amount of working capital is sometimes used as a measure of a firm’s liquidity. It

is considered that between the two firms, the one having the larger amount of working

capital has the greater ability to meet its current obligations. Working capital turnover

analysis is, therefore, used to measure the efficiency with which the firms are using

their working capital. For this purpose, working capital turnover ratio, which indicates

the velocity of the utilization of net working capital, is worked out. A higher ratio

indicates efficient utilization of working capital. In the following lines a comparative

statement of working capital turnover ratio of PTL is produced.

Net Working Capital of PTL (Rs. In Lacs)

Year Current Assets Current Liabilities Net Working Capital

2006 66579.18 11054.69 55524.49

2007 72458.42 13940.70 58517.72

2008 62323.63 18433.35 43890.28

2006 2007 2008

0

10000

20000

30000

40000

50000

60000

70000

Net Working Capital

Working Capital Turnover Ratio of PTL

Years Sales Net W. C. W.C. Turnover Ratio

2006 95855 55524.49 1.73:1

2007 95885 58517.72 1.64:1

2008 96958 43890.28 2.21:1

An analysis of this table shows there is slight variation of the ratio from 2004 to 2007.

But it is quite high in 2008 in respect to other years. This no doubt indicates the

maximum use of working capital or quick turnover of current assets due to handsome

sales of its main products (tractors). To ensure maximum profitability, working

capital has to be managed skillfully to avoid situation of both, under and over trading.

2006 2007 20080

0.5

1

1.5

2

2.5

W.C. Turnover Ratio

Inventory Turnover Analysis:

Every firm has to maintain a certain level of inventory of finished products so as to be

able to meet the requirements of the business and ensure an uninterrupted production.

This analysis is done by calculating inventory turnover ratio. Inventory turnover ratio

which is calculated by dividing sales by average inventory indicates the number of

times the stock has been turned over during the year. It also evaluates the efficiency

with which a firm is able to manage its inventory. A lower inventory turnover is an

indicator of higher efficiency in managing the inventory.

Inventory Turnover of PTL in 5 Years

Particulars 2006 2007 2008

Sales 95855 95885 96958

Inventory 8816.04 13426.61 11379.38

I. Turnover Ratio

10.87 7.14 8.52

The above table shows PTL has the moderate inventory ratio during this period. This

indicates that the company has a good inventory management. In FY 2004 there is

lowest inventory turnover. This is due to excessive inventory level than required by its

production and sales activities. The inventory turnover ratio should be moderate

because we can’t blindly accept very high inventory turnover ratio as indicative of

efficient inventory management as it may be due to very low levels of inventory

which generally results into frequent stock outs. And frequent stock outs may hamper

production activities and may ultimately affect profits.

Creditors Turnover Analysis:

The analysis of creditor’s turnover is basically the same as of debtor’s turnover ratio

except that in place of trade debtors, the trades creditors are taken as one of the

components of the ratio and in place of average daily sales, average daily purchases

are taken as the other component of the ratio. It can be calculated as:

Creditors Turnover Ratio = Net Credit Annual Purchases

Average Trade Creditors

Average Payment Period Ratio = Average Trade Creditors

Average Daily Purchases

Creditors Turnover Analysis of PTL in 5 Years

Year Purchases Sundry Creditors

Creditors Turnover

Payment Period (months)

2006 67384 9443 7.14 1.68

2007 72573 10272 7.06 1.70

2008 66368 8342 7.95 1.51

The average payment period ratio represents the avg. number of days taken by

the firm to pay its creditors. Generally lower the ratio better is the liquidity position of

the firm and higher the ratio less liquid is the position of the firm. From the analysis,

the payment period has been reduced from 3.93 in FY 2004 to 1.51 in FY 2008 hence

we can say PTL has better liquidity position.

CAPITAL STRUCTURE ANALYSIS

In order to ensure an economic use of its funds, a company has to plan its

capital structure. Capital structure of a company, is also known as its financial plan,

refers to the composition of long term sources of funds in its total capital. It gives an

idea about the proportion of debt and equity in the financial structure of the business.

A properly planned capital structure is most important to maximize the use of various

funds and to be able to adapt more easily to the changing conditions. The analysis of

capital structure shows the debt or equity raising capacity of various companies and

the amount of risk they bear.

Debt equity position of PTL:

This ratio indicates the relationship between the external equities or the outsider’s

funds and the internal equities or the shareholders funds. Thus,

Debt Equity Ratio = Outsiders funds

Shareholders funds

This ratio is calculated to measure the extent to which debt financing has been used in

the business. The ratio indicates the proportionate claims of owners and the outsiders

against the firm’s assets. The purpose is to get an idea of the cushion available to

outsiders on the liquidation of the firm. As a general rule, there should be an

approximate mix of owners’ funds and outsiders’ funds in financing the firm’s assets.

A low debt equity ratio is considered as favorable from the long term creditors’ point

of view because a high proportion of owner’s funds provide a larger margin of safety

to them. A high debt equity ratio which indicates that the claims of outsiders are

greater than those of owners, may not be considered by creditors because it gives a

lesser margin of safety for them at the time of liquidation of the firm.

Debt Equity Position of PTL (Rs. In Lacs)

Year Net Worth Loans Debt Equity Ratio

2006 56902 1298 0.02:1

2007 64700 1074 0.02:1

2008 66483 404 0.006:1

Here net worth includes share capital and reserve and surplus. Loans include both

secured and unsecured.

PTL is the very low debt company with a debt equity ratio 0.006:1 in the FY 2008 on

account of repayment of loan and reducing interest costs. The reserve and surplus also

increased from Rs. 58624 lacs in FY 2007 to Rs. 60408 lacs in FY 2008. In fact,

bolstered by the notable improvement in both volume and model mix of tractors

underpinned by PTL’s traditional Cost efficiencies and operations have generated this

sizably enhanced surplus.

The lowest debt equity ratio as recorded by PTL maintains the fact that company

does not rely on the outside sources for its routine operations rather it depends on its

internal sources. This fact helps the company to win confidence of its creditors, who,

in turn can/will extend liberal credit.

PTL is a cash rich company and strong internal cash generation is expected

over the next few years and this will completely cover planned capital expenditure,

and thus reducing the fear of dilution.