digjam textiles

8/7/2019 Digjam Textiles

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Sumana D.Baliga Financial Management101202139

Company

Profile

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Digjam Textiles

About Digjam:-

DIGJAM Limited, an S K Birla Group Company, began its activites nearly 60 yearsback in Jamnagar, Gujarat. Since then, it has been catering to the ever-growing demands ofthe Clothing and Fashion industry, in the domestic as well as the international markets.

Digjam Limited is a leading textile company in India, manufacturer of fabrics for suitingand casual wear. In recent years, the company restructured its business portfolios to focus asa textile company manufacturing and marketing fabrics and ready-to-wear clothing under itsown brands.

A complete vertically integrated plant, Digjam has ultra modern production facilities to convert

wool tops to finished fabrics through different processes of Dyeing, Spinning, Weaving andFinishing using state-of-the-art machinery imported from France, Germany, Switzerland andItaly. Stringent quality checks at every stage and process enabled Digjam to bag theprestigious ISO 9001 certification. Keeping pace with the complex requirements of theindustry, Digjam expanded its production capacity to over 5 million meters, of which 35%-40%

(approximately) is exported to major countries across the globe. The present study dealswith the Study of Liquidy,Productivity viz a viz. Financial Efficiency of Birla Group ofCompanies, which are mainly engaged in production of Cement,Textiles, Automobile, Alluminium Products, Engineering, Tea,Agri Products and Paperetc. This study is aimed at exploring theliquidity, productivity viz a viz-financialefficiency of Birla Group of Companies. The Birla Group of Companies played animportant and Multi dimensional role of uplifting and taking our country out oflamentable state of industries we experienced soon after independence. Our overallprogress and around prosperity owe agreat deal to the multifaced role performed bysome of very important Birla companies. The aim is to know how the BirlaGroup shave utilized their resources and to study liquidity,productivity, financial efficiency, and to make the analysis of activity and financialstructure and their contribution to the upliftment and betterment of the society.DigjamLimited is an India-based textile company. The Company is engaged in manufacturing offabrics for suiting and casual wear. The Company operates in the worsted textile segment andruns a composite mill manufacturing worsted fabrics at Jamnagar, Gujarat. The Company's

products include woven fabric of combed wool or combed fine animal hair mixed mainly orsolely with manmade staple fiber, woolen and worsted weaving yarn, and men's and ladiesgarments. During the fiscal year ended September 30, 2010, the Company produced53,38,020 meters of cloth, 23958 pieces of blankets and shawls and 11,175 kilogram of yarnfor sale. As of September 30, 2010, the Company had an installed capacity of 14,800 worstedspindles, 98 looms and 13,05,000 kilogram wool combing per annum. Its clients include AdityaBirla Nuvo, Airport Authority of India, Assam Rifles, Bombay Hospital, Gujarat State FertilizerCorporation, Birla Institute of Technology and Tata Timken Ltd.

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RATIOANALYSIS

Introduction to Ratio Analysis:-

The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successfulfinancial management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, andprogress of your business. Therefore investors and business analysts use ratio analysis to evaluate theperformance and financial position of ta company and to forecast the future performance in order to value theequity of the company

Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performanceand condition with the average performance of similar businesses in the same industry. To do this compare yourratios with the average of businesses similar to yours and compare your own ratios for several successive years,watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important

early warning indications that allow you to solve your business problems before your business is destroyed bythem. Ratios analysis is the process of determining and presenting in arithmetical terms the relationships figuresand groups of figures drawn from these statements. A ratio expresses the results on the basis of comparison oftwo figures in numerical terms.A ratio is a statistical yardstick that provides a measure of relationshipbetween twoaccounting figures. According to Batty Accounting ratios describe the significant relationship which existsbetween figures shows on a balance sheet in a profit and loss account in a budgetary control system or inCONCEPTUAL FRAMEWORK any other part of accounting organization.

Advantages of Ratio Analysis:-

Ratio analysis is an important tool for the financial statement analysis.. In this assignment, we are going toanalyse the financial status of the Digjam Textiles Industries ltd. The five year financial data of the company hasbeen taken into consideration and the ratios for all the years have been calculated. The four major categories of

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ratios that are: liquidity ratios, leverage ratios, activity ratios and profitability ratios are calculated for the last fiveyears financial data.

The financial status of the company is evaluated by understanding the meaning, caution, narration andinterpretation of the ratios.The Du-Pont analysis and Multiple Discriminant analysis have been done to know the profitability of thecompany.The ratios will help the company the ability to meet its current obligations, the extent to which the firm has usedits long-term solvency by borrowing funds, the efficiency with which the firm is utilizing its assets in generatingsales, revenues, and the overall operating efficiency and performance of the firm.

This assignment help us how to know the financial status of any company and shows how important the financialratios are. By using this method we can know the strengths and weakness of any company and helps the traders,investors and shareholders to know about the financial performance of the company

Balance Sheet Ratio Analysis

Important Balance Sheet Ratios measure liquidity and solvency (a business's ability to pay its bills as they comedue) and leverage (the extent to which the business is dependent on creditors' funding). They include thefollowing ratios:

Liquidity Ratios

These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, andWorking Capital.

Current Ratios

The Current Ratio is one of the best known measures of financial strength. It is figured as shown below:

Current Ratio = Total Current Assets / Total Current Liabilities

The main question this ratio addresses is: "Does your business have enough current assets to meet the paymentschedule of its current debts with a margin of safety for possible losses in current assets, such as inventory

shrinkage or collectable accounts?" A generally acceptable current ratio is 2 to 1. But whether or not a specificratio is satisfactory depends on the nature of the business and the characteristics of its current assets andliabilities. The minimum acceptable current ratio is obviously 1:1, but that relationship is usually playing it tooclose for comfort.

If you feel your business's current ratio is too low, you may be able to raise it by:

Paying some debts.

Increasing your current assets from loans or other borrowings with a maturity of more than one year.

Converting non-current assets into current assets.

Increasing your current assets from new equity contributions.

Putting profits back into the business.

Quick Ratios

The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figuredas shown below:

Quick Ratio = Cash + Government Securities + Receivables / Total Current Liabilities

The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, itconcentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: "If all salesrevenues should disappear, could my business meet its current obligations with the readily convertible quick'funds on hand?"

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An acid-test of 1:1 is considered satisfactory unless the majority of your "quick assets" are in accountsreceivable, and the pattern of accounts receivable collection lags behind the schedule for paying currentliabilities.

Working Capital

Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positivenumber. It is calculated as shown below:

Working Capital = Total Current Assets - Total Current Liabilities

Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. Loansare often tied to minimum working capital requirements.

A general observation about these three Liquidity Ratios is that the higher they are the better, especially if youare relying to any significant extent on creditor money to finance assets.

Leverage Ratio

This Debt/Worth or Leverage Ratio indicates the extent to which the business is reliant on debt financing (creditormoney versus owner's equity):

Debt/Worth Ratio = Total Liabilities / Net Worth

Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making itcorrespondingly harder to obtain credit.

Income Statement Ratio Analysis

The following important State of Income Ratios measure profitability:

Gross Margin Ratio

This ratio is the percentage of sales dollars left after subtracting the cost of goods sold from net sales. It

measures the percentage of sales dollars remaining (after obtaining or manufacturing the goods sold) available topay the overhead expenses of the company.

Comparison of your business ratios to those of similar businesses will reveal the relative strengths orweaknesses in your business. The Gross Margin Ratio is calculated as follows:

Gross Margin Ratio = Gross Profit / Net Sales

Reminder: Gross Profit = Net Sales - Cost of Goods Sold

Net Profit Margin Ratio

This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold and all expenses, exceptincome taxes. It provides a good opportunity to compare your company's "return on sales" with the performanceof other companies in your industry. It is calculated before income tax because tax rates and tax liabilities varyfrom company to company for a wide variety of reasons, making comparisons after taxes much more difficult.The Net Profit Margin Ratio is calculated as follows:

Net Profit Margin Ratio = Net Profit Before Tax / Net Sales

Management Ratios

Other important ratios, often referred to as Management Ratios, are also derived from Balance Sheet andStatement of Income information.

Inventory Turnover Ratio

This ratio reveals how well inventory is being managed. It is important because the more times inventory can beturned in a given operating cycle, the greater the profit. The Inventory Turnover Ratio is calculated as follows:

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Inventory Turnover Ratio = Net Sales / Average Inventory at Cost

Accounts Receivable Turnover Ratio

This ratio indicates how well accounts receivable are being collected. If receivables are not collected reasonablyin accordance with their terms, management should rethink its collection policy. If receivables are excessivelyslow in being converted to cash, liquidity could be severely impaired. Getting the Accounts Receivable TurnoverRatio is a two step process and is is calculated as follows:

Daily Credit Sales = Net Credit Sales Per Year / 365 (Days)

Accounts Receivable Turnover (in days) = Accounts Receivable / Daily Credit Sales

Return on Assets Ratio

This measures how efficiently profits are being generated from the assets employed in the business when

compared with the ratios of firms in a similar business. A low ratio in comparison with industry averages indicatesan inefficient use of business assets. The Return on Assets Ratio is calculated as follows:

Return on Assets = Net Profit Before Tax / Total Assets

Return on Investment (ROI) Ratio

The ROI is perhaps the most important ratio of all. It is the percentage of return on funds invested in the businessby its owners. In short, this ratio tells the owner whether or not all the effort put into the business has beenworthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savingsaccount, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid thedaily struggles of small business management. The ROI is calculated as follows:

Return on Investment = Net Profit before Tax / Net Worth

These Liquidity, Leverage, Profitability, and Management Ratios allow the business owner to identify trends in abusiness and to compare its progress with the performance of others through data published by various sources.The owner may thus determine the business's relative strengths and weaknesses.

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Balance

Sheet

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P& LAccount

Calculated

Ratios

Balane Sheet Year Sep Mar Mar Mar Mar

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10 09 08 07 06

SOURCES OF FUNDS :

Share Capital 95.26 88.76 68.76 68.76 43.76

Reserves Total -93.41

-137.5

3

-125.9

7

-117.8

6 -95.17

Equity Share Warrants 0 0 0 0 0

Equity Application Money 0 0 0 0 0

Total Shareholders Funds 1.85-

48.77-

57.21 -49.1-

51.41

Secured Loans 53.15127.8

4133.0

2138.8

4211.9

3

Unsecured Loans 23.1 18.82 29.15 26.54 30.59

Total Debt 76.25 146.66 162.17 165.38 242.52

Total Liabilities 78.1 97.89104.9

6116.2

8191.1

1

APPLICATION OF FUNDS :

Gross Block248.9

3249.7

8 251.4252.0

5257.6

3

Less : Accumulated Depreciation193.9

6187.3

7184.2

1178.1

9173.0

9

Less:Impairment of Assets 0.12 0.23 0.23 0.23 0

Net Block 54.85 62.18 66.96 73.63 84.54

Lease Adjustment 0 0 0 0 0Capital Work in Progress 0.05 0.28 0.08 0 0.08

Investments 0 4.41 4.42 4.42 70.9

Current Assets, Loans & Advances

Inventories 38.7 39.85 45.01 43.71 40.75

Sundry Debtors 24.88 31.57 26.42 24.54 24.6

Cash and Bank 2.13 0.61 2.21 4.34 29.3

Loans and Advances 13.87 13.92 14.5 13.79 21.24

Total Current Assets 79.58 85.95 88.14 86.38115.8

9Less : Current Liabilities and

ProvisionsCurrent Liabilities 52.53 50.06 50.18 44.01 64.02

Provisions 3.85 4.87 4.46 4.14 16.28

Total Current Liabilities 56.38 54.93 54.64 48.15 80.3

Net Current Assets 23.2 31.02 33.5 38.23 35.59Miscellaneous Expenses not written

off 0 0 0 0 0

Deferred Tax Assets 0 0 0 0 0

Deferred Tax Liability 0 0 0 0 0

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Net Deferred Tax 0 0 0 0 0

Total Assets 78.1 97.89

104.9

6

116.2

8

191.1

1Contingent Liabilities 0.06 0.82 0.84 0.83 13.49

http://www.capitaline.com

Industry :Textiles - Worsted Fabric

(Rs in Crs)

YearSep10(18)

Mar09(12)

Mar08(12)

Mar07(12)

Mar06(3)

INCOME :

Sales Turnover181.0

9136.9

1107.8

1105.8

1 29.35

Excise Duty 0 0 0 0 0

Net Sales181.0

9136.9

1107.8

1105.8

1 29.35

Other Income 68.52 5.92 15.29 7.4 4.38

Stock Adjustments -1.89 -3.28 2.31 3.08 1.42

Total Income247.7

2139.5

5125.4

1116.2

9 35.15

EXPENDITURE :

Raw Materials 84.11 61.68 48.65 41.2 9.85

Power & Fuel Cost 22.53 15.59 12.45 13.34 3.15

Employee Cost 25.71 18.02 19.07 20.03 4.36

Other Manufacturing Expenses 19.59 14.01 13.31 14.23 4.36

Selling and Administration Expenses 28.91 22.66 21.48 19.47 5.34

Miscellaneous Expenses 0 0 0 0 0Less: Pre-operative ExpensesCapitalised 0 0 0 0 0

Total Expenditure182.8

8 133.8117.6

9 121.9 30.31

Operating Profit 64.84 5.75 7.72 -5.61 4.84Interest 13.28 11.69 9.22 9.71 2.69

Gross Profit 51.56 -5.94 -1.5 -15.32 2.15

Depreciation 7.66 5.42 6.37 7.22 1.91

Profit Before Tax 43.9 -11.36 -7.87 -22.54 0.24

Tax -0.22 0 0 0 0

Fringe Benefit tax 0 0.2 0.24 0.15 0.06

Deferred Tax 0 0 0 0 0

Reported Net Profit 44.12 -11.56 -8.11 -22.69 0.18

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Extraordinary Items 60.39 1.15 9.28 -11.03 -0.6

Adjusted Net Profit -16.27 -12.71 -17.39 -11.66 0.78

Adjst. below Net Profit 0 0 0 0 0

P & L Balance brought forward

-137.5

3

-125.9

7

-117.8

6 -95.17 -366.1

Statutory Appropriations 0 0 0 0 0

Appropriations 0 0 0 0

-270.7

5

P & L Balance carried down -93.41

-137.5

3

-125.9

7

-117.8

6 -95.17

Dividend 0 0 0 0 0

Preference Dividend 0 0 0 0 0

Equity Dividend % 0 0 0 0 0

Earnings Per Share-Unit Curr 4.28 0 0 0 0.55

Earnings Per Share(Adj)-Unit Curr

Book Value-Unit Curr -3.58 -10 -8.32 -7.14 -63.04

http://www.capitaline.com

DIGJAM TEXTILES"Balance Sheet Summary"

Particulars 2010 2009 2008 2007 2006

Share Capital 95.26 88.76 68.76 68.76 43.76

Reserves -93.41-

137.53-

125.97-

117.86 -95.17

Net worth 1.85 -48.77 -57.21 -49.1 -51.41

long term debt 76.25 146.66 162.17 165.38 242.52

Capital Employed 78.1 97.89104.9

6116.2

8 191.11

"Balance Sheet Summary"

Particulars 2010 2009 2008 2007 2006

Net fixed asset 0.24 0.24 0.23 0.23 0.24

Investments 54.9 66.87 71.46 78.05 155.52

Net Current Asset 23.2 31.02 33.5 38.23 35.59

Miscellaneous expenses 0 0 0 0 0

Net Asset 78.34 98.13105.1

9116.5

1 191.35

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Total Current Assets 79.58 85.95 88.14 86.38 115.89

Net Current Assets 23.2 31.02 33.5 38.23 35.59

"Income Statement Summary"

Particulars 2010 2009 2008 2007 2006

PBDIT 64.84 5.75 7.72 -5.61 4.84

Less Depreciation 7.66 5.42 6.37 7.22 1.91

Less others written off 0 0 0 0 0

PBIT 57.18 0.33 1.35 -12.83 2.93

Less Interest 13.28 11.69 9.22 9.71 2.69

PBT 43.9 -11.36 -7.87 -22.54 0.24

Tax -0.22 0 0 0 0

PAT 44.12 -11.36 -7.87 -22.54 0.24NET SALES 181.09 136.91 107.81 105.81 29.35

Dupont AnalysisParticulars 2010 2009 2008 2007 2006

RONA=PBIT/Net Asset 0.73 0.00 0.01 -0.11 0.02

RONA=(PBIT/Sales)*(Sales/Net Asset) 0.73 0.00 0.01 -0.11 0.02

ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00ROE=Sales/NA*PBIT/Sales*(PAT/PBIT*NA/Networth 23.85 0.23 0.14 0.00 0.00

Leverage/Solvency Ratio

Particulars 2010 2009 2008 2007 2006

Debt-Equity Ratio= total debt/net asset 0.97 1.49 1.54 1.42 1.27

Debt ratio=Debt/Capital Employed 0.98 1.50 1.55 1.42 1.27

Interest coverage=PBDIT/Interest 4.88 0.49 0.84 -0.58 1.80

capital-equity ratio 76.25 146.66 162.17 165.38 242.52

Turnover RatioParticulars 2010 2009 2008 2007 2006

Current asset turnover = Net Sales/Total current assets 2.28 1.59 1.22 1.22 0.25Net current asset turnover= Net Sales/ 7.81 4.41 3.22 2.77 0.82

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Net current assets

Assets turnover= Net sales/Net Assests 2.31 1.40 1.02 0.91 0.15

Fixed asset turnover= Net sales/ Netfixed assets 754.54 570.46 468.74 460.04 122.29Net assets turnover= Net sales/ Capitalemployed 2.32 1.40 1.03 0.91 0.15

Total Assets=Sales/Total Assets2.3186

941.3986

111.0271

530.9099

590.153576

474

Profitability RatioParticulars 2010 2009 2008 2007 2006

Gross Margin(PBIT/NET SALES) 0.32 0.00 0.01 0.00 0.10

Net Margin(PAT/NET SALES) 0.24 -0.08 -0.07 0.00 0.01ROI(before tax) PBDIT/NET ASSET 0.83 0.06 0.07 -0.05 0.03

Return on equity (PAT/NET WORTH) 23.85 0.23 0.14 0.46 0.00

Equity-Related RatioParticulars 2010 2009 2008 2007 2006

No of ordinary shares477220

00477220

00477220

00477220

004772200

0

Divdends 0 0 0 0 0

Market value 1.41 0.72 2.83 0.86 0.75

EPS (in Rs.) 4.28 0 0 0 0.55

DPS 0.00 0.00 0.00 0.00 0.00

Payout Ratio=DPS/EPS 0.00 0.00 0.00 0.00 0.00

Payout ratio=Dividends/PAT 0.00 0.00 0.00 0.00 0.00

Dividend yield= DPS/Market Value 0.000 0.000 0.000 0.000 0.000

Earnings Yield= EPS/Market Value 3.035 0.000 0.000 0.000 0.733

P/E Ratio= market value/EPS 0.329#DIV/0

!#DIV/0

!#DIV/0

! 1.364Book value per share(in Rs.)= Net

worth/ No. of ordinary shares 0.00 0.00 0.00 0.00 0.00M/B value= market value/ book value -0.39 -0.07 -0.34 -0.12 -0.01

SHORT TERM SOLVENCY OR LIQUIDITY RATIOS

PARTICULARS 2010 2009 2008 2007 2006

CURRENT RATIO=CURRENTASSETS/CURRENT LIABILITIES

1.411493

1.564719

1.613104

1.793977

1.443212951

QUICK RATIO=CURRENT ASSET-INVENTORY/CURRENT LIABILITIES

78.84328

85.15396

87.24303

85.38682

115.2534802

CASH RATIO=CASH/CURRENT 0.0405 0.0121 0.0440 0.0986 0.457669

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LIABILITIES 48 85 41 14 478NET WORKING CAPITAL TO TOTAL

ASSTES=NET WORKING CAPITAL/TOTALASSET 78.9074 85.43861 87.66191 86.00152 115.5550097INTERVAL MEASURE=CURRENTASSET/AVG DAILY OPERATING COST

0.435149

0.642377

0.748917

0.708614

3.823490597

PBIT 43.9 -11.36 -7.87 -22.54 0.24

INTEREST 13.28 11.69 9.22 9.71 2.69

inTEREST Coverage= PBIT/INTERESR3.305723

-0.97177

-0.85358

-2.32132

0.089219331

Inventory Turnover Ratio=COGS/AvgInv

179.7577

137.0591

107.8433

106.1605

29.29723926

Debtors Turnover Ratio=Net CreditSales/Avg Debtors

7.278537

4.336712

4.080621

4.311736

1.193089431

Net Profit Margin=PAT/SALES-136.97

-148.27

-115.68

-128.35 -29.11

Financial leverage=NA/NW42.34595

-2.0121

-1.83866

-2.37291

-3.722038514

Assets turnover=Sales/Net Asset2.311591

1.39519

1.024907

0.908162

0.153383852

Financial leverage Income= PAT/EBIT0.771598

-34.4242

-5.82963

1.75682

0.081911263

Equity multiplier=TotalAssets/Networth

42.21622

-2.00718

-1.83464

-2.36823

-3.717370161

Operating profit margin=EBIT/Sales0.315755

0.00241

0.012522

-0.12126

0.099829642

Total Cost= 48.24 33.61 31.52 33.37 7.51103.7 75.69 61.96 55.43 14.21

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IM PANDEYQUESTIONS

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LIQUIDITYANALYSIS

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Liquidity Analysis

Common Financial Ratios:-

Short Term Sovency Ratios:-

As the name suggests groups are intended to

provide information about a firms liquidity and these ratios are

sometimes called liquidity measures.The primary concern is

the firms ability to pay its bills over the short run without

undue stress.One advantages of looking at current assets andliabilities is that their book values and market values are likely

to be similar.

1.What is the level of current assets relative to current

liabilities?Is it reasonable given the nature of the

companys business?

Current RatioFormulae:-

Current Ratio=Current Asset/Current

Liabilities

Meaning- The current ratio is the measure the Short Term solvency of the firm.

Current Ratio indicates the availability of current assets in rupees for every 1

rupee of current liability. Current ratio explains the firms ability to pay off its current liability

out of current assets..it determines the liquidity position of the company.it is a measure of short term

solvency.it represents a margin of safety for creditors.it is the crude and quick measure of

liquidity.Current ratio measures only total rupees worth of current assets and total rupees worth of

current liabilities.it does not measure the quality of assets.

Caution- It is believed that the higher the Current ratio the greater the Margin of

Safety. But Current Ratio is only a test of Quantity but not Quality. The Current

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Ratio measures Current assets in terms of Quantity but current assets are subject

to decrease in value, debtors are subject to turn bad debts.

Interpretation:- In Our Digjam Company Current Ratio as

follows

PARTICULARS 2010200

9 2008 2007 2006

CURRENT RATIO=CURRENTASSETS/CURRENT LIABILITIES 1.411493

1.564719

1.613104

1.793977

1.443212951

It implies that for every one rupee of current liabilities, current assets of one and

half rupees are available to meet them.The interpretation is : in interfirm

comparision the firm with the higher current ratio has better liquidity /short term

solvency.The current ratio though superior to NWC in measuring short term

financial solvency is a rather crude measure of the liquidity of a firm .The

limitation of current ratio arises from the fact that it is a quantitative rather than a

qualitative index of liquidity.The term quantitative refers to the fact that it takes

into account the total current assets without making any distinction between

various types of current assets such as cash inventories and so on.A qualitative

measures takes into account the proportion of various type of current assets to

the total current assets.

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The above graph implies that in 2006 the current ratio of Digjam was 1.44which means the company

had 1.44 of current asset for every one rupee of current liability.this was not satisfactory because

companys quality of debtors and stock was good. In 2007 it went up to 1.79 and after next yea again r

it came down respectively,which means investment in CA reduced after there was a slight increase in

investment in CA which increased the liquidity position of the company.in 2010 companys investment

in CA reduced and affected the liquidity position. When CL increases it will inturn increases the total

liabilities as a result operating cycle goes up which in turn reduces asset use efficiency and other

variable remaining equal will result in decrease in RONA and ROE and there will be no wealth

maximization of share holders. In 2010 again the company failed to maximize its share holders wealth

because of increase in CL.

2.What is the mix of Current Assets? Is the

proportion of slow moving nventories high?

Quick Ratio:-

Formulae:-Quick Assets/Current Liabilities

Meaning: Quick ratio is also called also acid test ratio.It is the ratio between quick current assets which

can be coverted into cash immediately or at a short notice without diminution of value. Current assets

are 1)Cash and Bank balances 2.)Short term marketable securities 3.)Debtors/receivables.A relatively

severe test of a company's liquidity and its ability to meet short-term obligations. The quick ratio is

calculated by dividing all current assets with the exception of inventory by current liabilities. Inventory

is excluded on the basis that it is the least liquid current asset. A relatively high quick ratio indicates

conservative management and the ability to satisfy short-term obligations.

Caution- A quick Ratio of 1:1or more does not merely imply sound liquid position. As all debtors may

not be liquid and cash may be needed to pay operating expenses and it should be noted that inventories

are not absolutely non liquid. So even if the firm has good quantity of current assets it may not be

qualitative when needed.

Interpretation:-

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:- In Our Digjam Company Quick Ratio as follows

PARTICULARS 2010 2009 2008 2007 2006

QUICK RATIO=CURRENTASSET- INVENTORY/CURRENTLIABILITIES

78.84328

85.15396

87.24303

85.38682

115.2534802

It is a rigorous measure of a firms ability to service short term liabilities.The usefulness of the ratio lies

in the fact that it is a widely accepted as the best available test of the liquidity position of a firm.

The above graph implies that in 2006 the quick ratio of Digjam was 115.25which means the company

had 115.25 of current asset for every one rupee of current liability. In 2007 again came down to 85.38

but in 2008 went up to 87.24 and after next year again r it came down respectively,which means

investment in CA reduced after there was a slight increase in investment in CA which increased the

liquidity position of the company.

3. )How Promptly does the company pay its creditors?

Creditors Velocity- This ratio measures the number of days in which company is in a position to payoff its creditors.In Creditors velocity not given here

4.How far can it stretch payment to creditors without

jeoparadising its relation with them?

Cash Ratio

Formulae:-

Cash Ratio=Cash/Current Liabilities

Meaning- The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some

reason immediate payment were demanded. Trade Investments or marketable securities which are

equivalent to cash are also considered along with cash while calculating Cash ratio. The cash ratio is

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the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash

equivalents.

Caution- As the cash ratio contains marketable securities. These marketable securities are subject to

market fluctuations and in time of payment they may not be earn same amount. And in case of cash, it

may be needed to pay operating expenses in the firm so one cannot rely fully on cash and marketable

securities.

Interpretation:-

PARTICULARS 2010 2009 2008 2007 2006

CASH RATIO=CASH/CURRENTLIABILITIES

0.040548

0.012185

0.044041

0.098614

0.457669478

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5)How efficiently and frequently does the company convert

its current assets into cash?

Leverage RatiosFinancial leverage ratios provide an indication of the long-term solvency of thefirm. Unlike liquidity ratios that are concerned with short-term assets andliabilities, financial leverage ratios measure the extent to which the firm is usinglong term debt. As a general rule, there should be an appropriate mix of debt and owners equity in

financing the firms assets. Leverage ratios include various types of Debt ratios, cap ital equity ratio andinterest coverage ratio.

Total Debt Ratio & Debt Equity ratioMeaning- Total debt ratio indicates the proportion of interest bearing debt ( also called as funded

debt) in the capital structure of the firm. It is calculated by dividing total debt by capital employed or

Net assets. Total debt includes short term and long term borrowing from financial institutions,

debenture/ bonds bank borrowings.

Meaning- Debt-Equity ratio describes the lenders contribution for each rupee of the owners

contribution. This ratio is calculated directly by dividing total debt by net worth. This ratio shows therelative proportions of debt and equity in financing the assets of a firm.

Formulae:- Debt equity Ratio=Tottal Debt/Total equity

Interpretation:-

Particulars 2010 2009 2008 2007 2006Debt-Equity Ratio= totaldebt/net asset 0.97 1.49 1.54 1.42 1.27

The first of these indicates what proportion of the permanent capital of a firm long consists of

long term debt.Also its measures the share of the total assets financed by outside funds.A low

ratio of debt to total assets is desirable from the point of the creditors/lenders as there is

sufficient margin of safety available to them.

Capital employed to net worth ratio

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Meaning- This ratio is alternative way of expressing relationship between debt and equity. Capital

employed to net worth calculates the amount of funds contributed by both lenders and owners for each

rupee of the owners contribution.

Caution- If the D/E ratio is high the owners are putting relatively lesser amount of money of their own.

This is a danger signal to creditors. From the point of view of firm as the high proportion of capital

structure will be financed by debt, there would be pressure and interference in management by

creditors. Further it can borrow funds on restrictions, on high interest payments which will ultimately

lead to profits declining. A low D/E is also not favourable, as it will have just opposite implications.

Interest Coverage Ratio:-These ratios are computed frominformation available I the profit and loss account.For a normal firm in the

ordinary course of business the claims of creditors are not met out of thesale proceeds of the permanent assets of the firm.The obligations of a firm

are normally met out of the earnings or operating profits.Claims consists of

interest on loans,preference dividend ,amortisation of principal or

repayment.

Formulae:-

Interest Coverage ratios=EBIT/InterestPARTICULARS 2010 2009 2008 2007 2006

inTEREST Coverage=PBIT/INTERESR

3.305723

-

0.97177

-

0.85358

-

2.32132

0.089219331

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Asset Utilisation

The measures in this section are sometimes called asset management or utilization ratios.The specificratios are sometimes called asset management or utilization ratios.An indicator of how rapidly a firmconverts various accounts into cash or sales.In general, the sooner management can convert assets intosales or cash, themore effectively the firm is being run. Activity ratio can be calculated with help ofInventory turnover ratio, debtor turnover ratio, Asset turnover ratio and collection period

1.)How effectively does a company utilise it assets in generating Sales?

Activity ratios-Ratios of activity are calculated to measure how effectively the firms assets are beingmanaged or in other words how effectively assets are converted into cash through sales. In general, thesooner management can convert assets into sales or cash, the more effectively the firm is being runAsset Turnover-The relationship between sales and assets is called as assets turnover ratio. One can calculate Totalassets turnover, Net asset turnover and Fixed and current asset turnover. The above query can beanswered through Net Asset Turnover. The firm can calculate net asset turnover by dividing sales by

Net asset were, Net assets is Current Assets minus Current liabilities. This ratio is also called as CapitalEmployed Ratio.

Net Asset Turnover:-The firm may wish to know its

efficiency of utilising assets separately

Formulae:-Sales/Net Assets Turnover

Caution:-

The problem in interpreting this ratio is that firm tries to maximize its ratio by using older assets

because their accounting value is lower than newer assets. Firms with relative small

investments in fixed assets like retail &wholesale trade firms, tend to have high ratios of total

asset turnover when compared to large firms as manufacturing firms.The Net asset turnover

should be interpreted cautiously. The net asset in the denominator includes fixed assets net of

depreciation, thus older assets with lower book (depreciated) values may create a mislead

impression on higher turnover without any improvement in sales.

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Formulae:-

Inventory Turnover Ratio=Cost Of Goods Sold/Inventory

The COGS means sales-gross profit .The average inventory refers to the simple aveage of the openingand closing inventory.

Caution- A low inventory turnover implies excessive inventory levels than warranted by productionand sales activities, or a slow moving or obsolete inventory. A high level of sluggish inventory amountsto unnecessary tie up of funds, reduced profit & increased cost. If the obsolete inventory is written off itwill adversely affect to working capital and liquidity of firm.

An indicator of how rapidly a firm converts various accounts into cash or sales.In general, the sooner management can convert assets into sales or cash, themore effectively the firm is being run. Activity ratio can be calculated with help of Inventory turnover

ratio, debtor turnover ratio, Asset turnover ratio and collection period.

Interpretation:-

PARTICULARS 2010 2009 2008 2007 2006

Inventory TurnoverRatio=COGS/Avg Inv

179.7577

137.0591

107.8433

106.1605

29.29723926

Debt Turnover Ratio:-

Meaning- Debtors Turnover indicates the number of times debtors turnover each year. It is calculated

by dividing credit sales by average debtors. Generally the higher value refers more efficient

management of credit. This ratio reveals the firms credit policy of firm.

DTO is calculated by dividing the net credit sales by average debtors outstanding during the year. This ratio showshow rapidly debts are collected. The higher the DTO, the better it is for the organization.

Formulae:-

Debt Turnover Ratio=Net Credit Sales/Avg Debtors

Interpretation:-

Debtors turnover indicates the number of times debtors turnover each year. Higher the value more

efficient is the management of credit.

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This graph implies that debtors were 1.93? of sales in 2006.in 2007 debtors increased to 4.3% whichmeans the company was facing the risk of bad debts. But from the DCP we can infer that even though

the debtors increased the quality of debtors was good.in the year 2008 debtors were 4.9 % of sales

which means company was very efficient in its credit management.but when we compare the collection

period of 2008 the quality of debtors was low compared to previous year. In 2009 and 2010 the debtors

were 4.33% and 7.27% repectively, which means debtors were significant part of companys sales.

So to conclude when compared to debtors turnover ratio of over 5 years we can argue that company had

a good credit management policy. The companys debtors were relative to sales in almost all the fiveyears

3.What are the trends in collection period inventory turnover and fixed assets turnover?

Inventory Turnover Ratio:-

Inventory turnoverMeaning- A measure indicating the number of times a firm sells and replaces its inventory during a

given period and calculated by dividing the cost of goods sold by the average inventory level.

Formulae:-Inventory Turnover Ratio=Cost Of Goods Sold/Inventory

The COGS means sales-gross profit .The average inventory refers to the simple aveage of the openingand closing inventory.

Caution- A low inventory turnover implies excessive inventory levels than warranted by productionand sales activities, or a slow moving or obsolete inventory. A high level of sluggish inventory amountsto unnecessary tie up of funds, reduced profit & increased cost. If the obsolete inventory is written off it

will adversely affect to working capital and liquidity of firm.

An indicator of how rapidly a firm converts various accounts into cash or sales.In general, the sooner management can convert assets into sales or cash, themore effectively the firm is being run. Activity ratio can be calculated with help of Inventory turnover

ratio, debtor turnover ratio, Asset turnover ratio and collection period.

Interpretation:-

PARTICULARS 2010 2009 2008 2007 2006

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Inventory TurnoverRatio=COGS/Avg Inv

179.7577

137.0591

107.8433

106.1605

29.29723926

Fixed Asset Turnover:-

Meaning:-

The FAT ratio measures the net sales per rupee of investment in fixed assets. This ratio measures the efficiency with

which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low

ratio reflects an inefficient use of assets.

Caution : When the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends

to be high (because the denominator of the ratio is very low).

Interpretation:-

Overall trend in Fixed asset turnover was affected by accumulated depreciation only very small amountof investment was made in Fixed assets and variation in sales.

From the above graph we can infer that company generated 122.29 rupees of sale for one rupee

investment in fixed assets in 2006 which consistently increased till 2010 also. When we look at a

current asset turnover ratio there was inconsistency in the sales generated from these assets all 5 years.

This indicates that the ability of current assets to generate sale has declined.when we come to net asset

turnover it firm generated 122.29 rupee of sale from one rupee investment in NA and even it declined

over years.

So we can imply that Digjam turns over its fixed assets faster than current asssets and net assets. Also

fixed asssets are more effectively utilized to generate sales when compared to current assets. So thecompany should concentrate on utilising its current assets to generate higher sales.

Collection Period:-

Meaning- The average collection period measures the quality of debtors since it indicates the speed of

Debtors collection. The shorter the average collection period the better the quality of the debtors, since

average collection period implies prompt payment.

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Caution- The firm should take utmost care while deciding the Collection period. An excessively long

collection period implies a very liberal & inefficient credit & collection period, which delays the

collection of cash and will impair firms liquidity. This also increases chances of Bad debt losses. Onother hand, a low collection period is not favourable. Itindicates restrictive credit policy which will lead

to decrease in sales and overall profits.

The average collection period represents the number of day's worth of credit sales that is blocked with the debtors

(accounts receivable). The ACP can be compared with the firm's credit terms to judge the efficiency of credit

management.

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4.)Is the improvement in the fixed assets turnover due to

depreciated book value of fixed asset?

Sale of some fixed asset?

If high accumulated then depreciation also be high .If fixed asset same then also deprecation

value will be high then turnover will increase automatically.

Fixed Asset Turnover:-

Meaning:-

The FAT ratio measures the net sales per rupee of investment in fixed assets. This ratio measures the efficiency with

which fixed assets are employed. A high ratio indicates a high degree of efficiency in asset utilization while a low

ratio reflects an inefficient use of assets.

Caution : When the fixed assets of a firm are old and substantially depreciated, the fixed assets turnover ratio tends

to be high (because the denominator of the ratio is very low).

Interpretation:-

Overall trend in Fixed asset turnover was affected by accumulated depreciation only very small amountof investment was made in Fixed assets and variation in sales.

From the above graph we can infer that company generated 122.29 rupees of sale for one rupee

investment in fixed assets in 2006 which consistently increased till 2010 also. When we look at a

current asset turnover ratio there was inconsistency in the sales generated from these assets all 5 years.

This indicates that the ability of current assets to generate sale has declined.when we come to net asset

turnover it firm generated 122.29 rupee of sale from one rupee investment in NA and even it declined

over years.

So we can imply that Digjam turns over its fixed assets faster than current asssets and net assets. Also

fixed asssets are more effectively utilized to generate sales when compared to current assets. So the

company should concentrate on utilising its current assets to generate higher sales.

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Profitability32


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AnalysisProfitability Analysis

1.How Profitable is the Company?What accounting policies and practises followed by the

company?Are they Stable?

Profitability analysis of Digjam Textiles

The efficiency of the company in term of profits can be calculated with the help of Profitability Ratios.The ratios are as follows Gross Margin, Net Margin, PAT to EBIT ratio, ROE & ROI.Profitability Ratio - Profitability Ratios show how successful a company is in terms of generating

returns or profits on the Investment that it has made in the business. If a business is liquid and efficient

it should also be Profitable.

Net profit margin

Net profit margin ratio establishes a relationship between net profit and sales and indicates

managements efficiency in manufacturing,administering and selling the products.it is the overall

measure of the firms ability to turn each rupee sale into net profit.

If the net margin is inadequate the firm will fail to achieve satisfactory return on shareholders funds.

Particulars 2010 2009 2008 2007 2006

PBDIT 64.84 5.75 7.72 -5.61 4.84

Less Depreciation 7.66 5.42 6.37 7.22 1.91Less others writtenoff 0 0 0 0 0

PBIT 57.18 0.33 1.35-

12.83 2.93

Less Interest 13.28 11.69 9.22 9.71 2.69

PBT 43.9-

11.36 -7.87-

22.54 0.24

Tax -0.22 0 0 0 0

PAT 44.12 -11.36 -7.87 -22.54 0.24

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NET SALES181.0

9136.9

1107.8

1105.8

1 29.35

Net Profit Margin=PAT/Sales

Net Profit Margin=PAT/SALES-

136.97

-148.

27

-115.

68

-128.

35 -29.11

Here Values are negatively.. there was decrease in sales because the amount of expenses were

controlled by the company and it was able to maximize shareholders wealth.

So to conclude even though the company saw fluctuations in its profit margin which was the result of

both external and internal factors,the company was able to uphold the interest of shareholders and

maximize the wealth of shareholders and generate more funds from the public.

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2.Is the Profitability (RONA) of the company high/low/average? Is it due to

Profit/Margin

Assets Utilisation

Non operating Income

Window Dressing

Chaange in Accounting Policy

Inflationary Conditions?

The profitability of the firm can be analysed using DuPont Analysis. DuPont integrates important ratiosto analyse a firms profitability. This can be done in two ways

a) DuPont Identityb) DuPont Chart.

Caution-

The main drawback of DuPont analysis it does not reveal anything about the liquidity of the firm nor itdoes about the expenses of the firm. Therefore the firms take advantage of DuPont to flag potential

problem areas when one or more ratios are out of line.RONA is affected by quality of the assets as it affects Asset turnover. Therefore while InterpretingRONA we should give importance to Asset turnover or in other words asset utilization.

RONA:- RONA is a measure of firms operating performance.it indicates firms earning power.it is

a product of asset turnover,gross profit margin and operating leverage.

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ROE AND ROA here the difference between these two profitability measures reflects the use of debtfinancing or financial leverage.

ROA:-

The profitability ratio is measured in terms of the relationship between net profits and assets.

The ROA may also be called profit to- asset ratio. There are various possible approaches to

define net profits and assets, according to the purpose and intent of the calculation of the ratio.

Depending upon how these two terms and defined many variations of ROA are possible.

RONA Chart:-

The above graph implies that the RONA of the firm saw a consistent increase from 2006 to 2010even

though there was constant gross margin and variating assets turnover Here after year declined slightly

which may be because of the external factor i.e global recission which might have adversely affected

companys performance.

So we can argue that the company that much profitable even during the recission which indicates the

firms ability. RONA increases ROE which inturn will maximize wealth of share holders.

ROE.

ROE

Meaning:- Common or ordinary shareholders are entitled to the residual profits. The rate of

dividend is not fixed. The earning may be distributed to shareholders or retained in the

business. The Return on shareholders equity is calculated to see the profitability of

owners investment.ROE indicates how well firm has used the resource owners.The earning of a

36

Particulars 2010 2009 2008 2007200

6





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satisfactory return is the most desirable objective of a business.this ratio is of great interest to the

present as well as the prospective shareholders and also of great concern to the management,which has

the responsibility of maximizing the owners welfare.

From the above graph we can imply that the companys ROE has seen a consisitent increase from 2006

to 2010,this increase is because of increase in sales which inturn increased profitability which will lead

to increase in RONA which results in increase in ROE and ultimately share holders wealth is

maximized.but in 2010 DIGJAMs ROE saw a decline trend which is because of decline in operating

leverage and financial leverage which inturn resulted for decline in RONA and lead to decline in

ROE.So to conclude we can argue that the company was profitable in 2010 only .

RONA is affected by quality of the assets as it affects Asset turnover. Therefore while InterpretingRONA we should give importance to Asset turnover or in other words asset utilization. RONA is alsoaffected by operating efficiency of the firm. Return on Net assets in the year 2007 it has comparativelyincreased with respect to 2006. This is because of asset utilization and operating efficiency of the firm.In the subsequent year even sales and assets turnover has increased, RONA has drastically decreased

because of operating inefficiency of the firm. In the year 2009 due to operating efficiency of the firmRONA is increasing. So we can say the profitability (RONA) depends upon operating efficiency.

37

Particulars 2010 2009 2008 2007200

6



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Opening Profit=EBIT/Sales

company recovered from the down fall and again saw a growth in its operating leverage which in turn

increased profitability which will lead to increase in RONA which will result in high ROE and thus

objective of share holders wealth maximization is achieved.

Is the Profitability (RONA) of the company average?RONA:- RONA is a measure of firms operating performance.it indicates firms earning power.it is


of ROA are possible.

RONA Chart:-

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Particulars 2010 2009 2008 2007200

6





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companys performance. Return on Net Assets provides the foundation necessary for a company to

delever a good return on equity. A company without good RONA finds it almost impossible to generate

satisfactory ROE. This ratio measures how well management uses all the assets in the business to

generate operating surplus. It is calculated as follows,PBIT/NA



ROE.

3.)Is the ROE high/low/average?Is it due to ROI,FinanicingMix,Capitalisation of reserves?

ROE







the responsibility of maximizing the owners welfare

Formulae:-

ROE= Assets turnover margin leverage

This equation implies that ROE is affevted by 3 things, i.e. operating efficiency, asset use efficiency andfinancial leverage.It is the most important ratio in business finance. It measures the absolute return

deleveried to share holders. High ROE will result in high share prices and makes it easy to attract new

funds. A good return on equity will keep in place financial framework for a thriving, growing

enterprise.

maximizing the owners welfare.

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ROE indicates how well firm has used. the resource owners. The earning of a

satisfactory return is the most desirable objective of a business .this ratio is of great

interest to the present as well as the prospective shareholders and also of great

concern to the management, which has the responsibility of maximizing the owners

welfare.

Interpretation :-As ROE is affected by financial leverage and debt equity ratio, a firm will try to convert RONA into animpressive ROE through financial efficiency. So even if the ROE is high it may not be because of

profitable investment decision but it may be because of leverage. In the year 2007 ROE has increased

40

Particulars 2010 2009 2008 2007200

6



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when compared to ROE of 2006. But Leverage has decreased and RONA has increased. The increase inRONA has led to the increase in ROE. Further RONA decreased in year 2008which led to same in case

of ROE. In the last year ROE has increased because of both RONA and leverage.

As all the firms try to convert RONA into impressive ROE, analysist should give importance to RONA while

interpreting ROE.

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4.)What is the trend in Profitability? Is it improving because better utilisation of resources or

curtailment ofexpenses of strategic importance?What is the impact of the cyclical factors on

profitability trend?

The trend in profitability can be an be analysed with help of Return on Equity, Return on Net assets,Net-profit margin, Asset efficiency and operating efficiency. We can illustrate these ratios in form ofhistogram as below-

RONA:- RONA is a measure of firms operating performance.it indicates firms earning power.it is


of ROA are possible.

RONA Chart:-




companys performance. Return on Net Assets provides the foundation necessary for a company to

delever a good return on equity. A company without good RONA finds it almost impossible to generate

42

Particulars 2010 2009 2008 2007

200

6RONA=PBIT/Net Asset 0.73 0.00 0.01 -0.11 0.02




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satisfactory ROE. This ratio measures how well management uses all the assets in the business to

generate operating surplus. It is calculated as follows,PBIT/NA



ROE.

ROE







the responsibility of maximizing the owners welfare

Formulae:-

ROE= Assets turnover margin leverageThis equation implies that ROE is affevted by 3 things, i.e. operating efficiency, asset use efficiency and

financial leverage.It is the most important ratio in business finance. It measures the absolute return

deleveried to share holders. High ROE will result in high share prices and makes it easy to attract new

funds. A good return on equity will keep in place financial framework for a thriving, growing

enterprise.

maximizing the owners welfare.

43

Particulars 2010 2009 2008 2007

200

6ROE=PAT/Networth 23.85 0.23 0.14 0.46 0.00ROE=Sales/NA*PBIT/Sales*(PAT/PBIT*NA/Networth 23.85 0.23 0.14 0.00 0.00


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ROE indicates how well firm has used. the resource owners. The earning of a

satisfactory return is the most desirable objective of a business .this ratio is of great

interest to the present as well as the prospective shareholders and also of great

concern to the management, which has the responsibility of maximizing the ownerswelfare.

Net profit margin

Net profit margin ratio establishes a relationship between net profit and sales and indicates

managements efficiency in manufacturing,administering and selling the products.it is the overall

measure of the firms ability to turn each rupee sale into net profit.

If the net margin is inadequate the firm will fail to achieve satisfactory return on shareholders funds.

Particulars 2010 2009 2008 2007 2006

PBDIT 64.84 5.75 7.72 -5.61 4.84

Less Depreciation 7.66 5.42 6.37 7.22 1.91Less others writtenoff 0 0 0 0 0

PBIT 57.18 0.33 1.35-

12.83 2.93

Less Interest 13.28 11.69 9.22 9.71 2.69PBT 43.9 - -7.87 - 0.24

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11.36 22.54

Tax -0.22 0 0 0 0

PAT 44.12 -11.36 -7.87 -22.54 0.24

NET SALES181.0

9136.9

1107.8

1105.8

1 29.35

Net Profit Margin=PAT/Sales

Net Profit Margin=PAT/SALES-

136.97

-148.

27

-115.

68

-128.

35 -29.11

Here Values are negatively.. there was decrease in sales because the amount of expenses were

controlled by the company and it was able to maximize shareholders wealth.So to conclude even

though the company saw fluctuations in its profit margin which was the result of both external and

internal factors,the company was able to uphold the interest of shareholders and maximize the wealth of

shareholders and generate more funds from the public

In the year 2006 Sales was 29.35 cr and in the same year total expenditure amounted 30.31. Incomparison to 2007 in the becoming year sale went to profit. Asset turnover also contributed for theincrease.

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5.) Can the company sustain itsimpressive profitability or improve its profitability given

the companies and other environmental solutions?To answer the above we can analyse the impact of Budget 2011 on Petrochemical Industries.

Post budget impact analysis: textile sectornews

26 February 2010

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Background

Textile industry is one of the biggest employers in the country, with a share of around 4% in the GDP andaround 11.5% in foreign exchange earnings.

Export quota abolition by the US and Europe in January 2005 provided huge export opportunities to India.

Exports grew from US$13.5 billion in FY2004 to US$22.13 billion in FY2008 with a growth of 15.59% in

FY08 alone. However, global economic slowdown translated into a decline in exports in FY09. As per the

provisional data published by the Directorate General of Commercial Intelligence and Statistics, Kolkata,

India's textiles exports declined by 5.45% to US$20.94 billion during FY09 as compared to US$22.15

billion during FY08. Exports amounted to US$9.43 billion during April-September 2009; recording a steep

fall of 15.5% period as compared to same period last year.

Projects worth Rs.557 billion were sanctioned under Technology Up-gradation Fund Scheme (TUFS) in

FY09, significantly higher as compared to Rs.199 billion in FY08. However, in the first six months of

FY10, projects worth only Rs.70 billion were sanctioned under TUFS as compared to Rs.186 billion

sanctioned during the same period last year. Weak demand, high leverage and paucity of funds translated

into slowdown in expansion and modernization projects by the industry.

Improvement in demand from domestic market has, however, led to increase in production across the textile

product categories during April-December 2009 period as compared to the same period in the previous year.

Man-made fibre, man made filament yarn and spun yarn production increased by 22.3 per cent, 10.3 per

cent and 5.1 per cent, respectively while the total cloth production ( excluding Khadi, wool and silk)increased by about 10.1 per cent during the said period.

Budget Proposals

1.Interest subvention of 2% on pre shipment credit extended upto March 31, 2011 from the existing

deadline of March 31, 2010.

2.One-time grant of Rs.200 crore to Government of Tamil Nadu towards the cost of installation of zero

liquid discharge system at Tirupur to sustain knitwear industry.

SUMMARY OF FINANCIAL ACCOUNTING RATIO

SUMMARY OF FINANCIAL ACCOUNTING RATIO

PROFITABILITY RATIO:

Financial Ratio Formula Measurements

Return on Total Operating profit before income Measures rate of return

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Assetstax + interest expense/ Average

total assets

earned through

operating total assets

provided by both

creditors and owners

Return on ordinary

shareholders

equity

Operating profit & extraordinary

items after income tax minus

Preference dividends /

Average ordinary shareholders

equity

Measures rate of return

earned on assets

provided by owners

Gross Profit Margin Gross Profit / Net SalesProfitability of trading

and mark-up

Profit MarginOperating profit after income

tax / Net Sales Revenue

Measures net

profitability of each

dollar of sales

MARKET BASED FINANCIAL RATIO:


Earnings per share

Operating profits after income

tax less Preference dividends /

Weighted average number of

ordinary shares issued

Measures profit earned

on each ordinary share

Price-earnings ratio

Market price per ordinary

share / Earnings per ordinary

share

Measures the amount

investors are paying for

a dollar of earnings

Earning Yield Earnings per ordinary share /

Market price per ordinary share

Measures the return to

an investor purchasing

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shares at the current

market price.

Dividend Yield

Annual dividend per ordinary

share / Market price per

ordinary share

Measures the rate of

return to shareholders

based on current

market price.

Dividend Payout

Total dividend per ordinary

share / Market price per

ordinary share

Measures the

percentage of profits

paid out to ordinary

shareholders

Net Asset Backing

(NTA)

Ordinary shareholders

equity / No of ordinary shares

Measure the assets

backing per share

LIQUIDITY RATIO:


Current RatioCurrent Assets / Current

liabilities

A measure of short-

term liquidity. Indicates

the ability of entity to

meet its short-term

debts from its current

assets

Quick Ratio Current Assets less inventory /

Current liabilities

A more rigorous

measure of short-term

liquidity. Indicates the

ability of the entity to

meet unexpected

demands from liquid

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current asses

ASSET MANAGEMENT/UTILISATION/ACTIVITY RATIOS:


Receivables

turnover

Net sales revenue / Average

receivables balance

Measures the

effectiveness of

collections; used to

evaluate whetherreceivables balance is

excessive

Average collection

period

Average receivables balance x

365 / Net sales revenue

Measures the average

number of days taken

by an entity to collect

its receivables

Inventory turnoverCost of goods sold/ Average

inventory balance

Indicates the liquidity

of inventory. Measures

the number of times

inventory was sold on

the average during the

period

Total Asset

turnoverratio

Net sales revenue / Average

total assets

Measures the

effectiveness of an

entity in using its

assets during the

period.

Turnover of Fixed

Assets

Net Sales / Fixed Assets Measure the efficiency

of the usage of fixed

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assets in generating

sales

GEARING/FINANCIAL STABILITY RATIO:


Debt ratio Total Liabilities / Total assets

Measures percentage

of assets provided by

creditors and extent ofusing gearing

Equity ratio or

Proprietary ratio

Total shareholders equity /

Total assets

Measures percentage

of assets provided by

shareholders and the

extent of using gearing

Capitalization ratioTotal assets / Total

shareholders equity

The reciprocal of the

equity ratio and thus

measures the same

thing

Times interest

earned

Operating profit before income

tax + Interest expense / Interest

expense + Interest capitalized

Measures the ability of

the entity to meet its

interest payments out

of current profits.

CASH SUFFICIENCY RATIO:


Cash flow adequacy Cash from operations /

Long-term debt paid +

Measures the entitys

ability to cover its main

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Assets acquired +

Dividends paidcash requirements

Long-term debt

repayment

Long-term debt

repayments / Cash

from operations


ability to cover its long-

term debt out of cash

from operations

Dividend payment

Dividends paid / Cash

from operations


ability to cover its

dividend payment

Reinvestment

Non-current asset

payments / Cash from

operations


ability to pay for its

non-current assets out

of cash from

operations

Debt coverageTotal long-term debt /

Cash from operations

Measures the payback

period for coverage of

long-term debt.

CASH FLOW EFFICIENCY RATIO:


Cash flow to salesCash from operations /

Net sales revenue

Measures ability to

convert sales revenue

into cash flows

Operation index Cash from operations /

Operating profit after

income tax

An index measuring

the relationship

between profit from

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operations and

operating cash flows

Cash flow return on

assets

Cash from operation +

Tax paid + Interest

paid / Average total

assets

Measures the

operating cash flow

return on assets before

interest and tax

.

ConclusionThis assignment shows how to make the financial decisions for the managers. It shows how important thefinancial ratios are to derive the financial conclusions about the company. .

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