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ANALYSIS OF FINANCIAL STATEMENT

BNMIT 1

1. INDUSTRY PROFILE

Industry Overview

The Indian Dairy Industry has made rapid progress since independence. A large number of

modern milk planes and product factories have since been established. These organize dairies

have been successfully engaged in the routine commercial production of pasteurized milk and

milk products.

India is the worlds largest milk producer certified by the International Dairy Industry.

This is the reason for the recognition of India as a dairy giant by the United Nations Food &Agriculture Organization (FAO).

India has become the worlds No.1 milk producing country, with output in 1999-2000(marketing

year ending March 2000) forecasted at 78 million tones. The annual rate of growth in milk

production in India is between 5-6 percent, against the worlds at 1 percent. Indias annual milk

production has more than trebled in the last 30 years, rising from 21 million tones in 1968 to an

anticipated 80 million tones in 2001. This rapid growth and modernization is largely credited to

the contribution of dairy cooperatives, under the Operation Flood (OF) Project, assisted by the

many multi-lateral agencies, including the European Union, the World Bank and WFP (World

Food Program),In the Indian context of poverty and malnutrition, milk has a special role to play

for its many nutritional advantages as well as providing supplementary income to some 70

million farmers in over 5,00,000 remote villages.

Milk is the raw material of the dairy industry, which cannot be created artificially and stored for

long time. The term Milk Market refers to the fluid whole that is sold to the individuals usually

for direct consumption.The dairy industry has come up to the present stage because of the

National Dairy Development Board and co-operation of the Government.

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2. COMPANY PROFILE

a. Background and inception of the company

Organization Bangalore Milk Union Ltd. (Bamul) is a co-operative organization, which

covers Bangalore Urban &Rural districts. It is a Milk Producers Farmers for dairy

development activities.

On January 1st1958 a pilot scheme under Department of Animal Husbandry, Government

of Karnataka was started to carter, Veterinary Hospitals& Milk process facilities at

National Dairy Research Institute (NDRI). In 1962, The Bangalore Milk Supply Scheme

came into existence as an independent body. Bangalore Dairy, a joint venture of

UNICEF, Government of India & Government of Mysore was dedicated to the people

of Karnataka State on 23rd

January 1965 by then Honble Prime Minister Late Sri Lal

Bahadhur Shastriji. The Bangalore Dairy scattering over an area of Acres of land, the

Dairy had an initial capacity to process 50,000 liters of milk per day. This Dairy was

handed over to Karnataka Dairy Development Corporation (KDDC) in December 1975.

As a part of Rural Milk Scheme of Mysore, Hassan & budgie under Operation Flood-II

and then transferred to Karnataka Milk Federation (KMF) in May 1984 as a successor of

KDDC. To cater to the growing demand for milk by the consumers of Bangalore City,

the capacity was increased to 1.5 lakh liters per day under the operation flood-II during

1981 and later increased to 3.5 lakh liters per day under Operation Flood-III during 1994.

The Bangalore Urban & Rural Districts Milk Producers Co-operatives Societies

Union Ltd., (BAMUL) was established in the year 1975. The milk-shed area of the

Union comprises Bangalore Rural and Bangalore Urban Districts, having 2611 revenue

villages. The Union has organized 1644, Dairy Co-operatives Societies (DCS) in 2055

villages, thereby covering 78% of the total villages in these two districts. In these DCSs,

there are 3,21,238 milk producer members. Among them 96,653 members are women

and 57,938 members belong to Schedule Caste and Schedule Tribes.

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As per the policies of the National Dairy Development Board (NDDB), Bangalore Dairy

was handed over to Bangalore Milk Union (BAMUL) on 1st

September 1988. The Union

is capable of processing the entire milk procured, by timely implementation of several

infrastructure projects like commissioning of Mega Dairy, new chilling centers &

renovation of product block.

Bamul has been registered underMMPO by Central Registration Authority. Today, the

Union has become biggest Milk Co-operative Union in Southern India. Bamul has been

certified forISO 9001-2000 and HACCP (IS-15000) for quality management and Food

Safety Systems.

The philosophy of this co-operatives milk producers organization is to eliminate

middlemen and organize institutions owned and managed by milk producers, by

employing professionals. Achieve economies of scale of rural milk producers by ensuring

maximum returns and at the same time providing wholesome milk at reasonable price to

urban consumers. Ultimately, the complex network of co-operative organization should

build a strong bridge between masses of rural producers and millions of urban consumers

& achieve a socio-economic revolution in the village community.

Bangalore Milk Union is offering most remunerative purchase price, which is considered

as one among the best prices in the country, to its producers. Even though the Union is

offering the best prices to the milk procured, the selling price of milk and milk products

to consumers is the lowest in the country. Hence, the margin between the procurement

price and sales price is one among the least in the country. This cost competitiveness was

achieved due to large-scale milk procurement, processing and marketing, supported by

effective and efficient management systems. In recognition to these efforts and

achievements, the National Productivity Council (NPC) of Government of India has

conferred Best Productivity Awardfive times and Energy Conservation Award

by Bureau of Energy Efficiency (BEE) to the Union.

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b. Nature of the business carried

The organizations core operation is in the milk industry. The company main

concentrates on producing milk products. The company is having at present 13 milk

products manufacturing organizations, among that BAMUL which is located in

Bangalore.

The Bangalore Milk Union Limited is a typical example of a successful family owned

and managed business house, which constitutes the bulk of number of business houses

prevalent in the country.

MILK PROCUREMENT:

Bamuls annual average Milk Procurement for the year 2007-08 has been 7.5 lakh liters

per day. During the flush season it has procured to the peak of 8.9 lakh liters per day. The

average milk procurement price paid during the year is Rs.12.50 for every liter of milk

supplied to the union.

TECHNICAL INPUT SERVICES:

Bangalore Milk Union is providing various technical services to the producer memberand their cattle through eleven camp offices one in each taluk i.e., ANEKAL,

YELAHANKA, CHANNAPATNA, DEVANAHALLI, DODDABALLAPUR,

HOSAKOTE, KANAKAPURA, SOLUR, NELAMANGALA AND RAMANAGAR.

From these camps the technical inputs like weekly mobile veterinary service, emergency

veterinary service, artificial insemination service, periodical vaccinations, balance cattle

feed sales, mineral mixtures sales, fodder development and fodder seed production, clean

milk production practices, extension services fodder cattle feeding, breeding and milk

production, etc., will be carried over.

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sold.

4. Nandini Curd Nandini Curd made from pure

milk. It's thick and

delicious. Giving you all the

goodness of homemade

curds. Available in 200 Gms

and 500 grams &

1 Kg packs. Rich taste,

smooth texture and the

rich purity of cow's milk,

makes any preparation a

delicious treat. Available in

100 Gms, 200 Gms and

500gms cartons both salted

and unsalted.

5. Nandini GheeA taste of purity. Nandini

Ghee made from pure butter.

It is fresh and pure with a

delicious flavour.

Hygienically manufactured

and packed in a special pack

to retain the goodness of pure

ghee. Shelf life of 6 months at

ambient temperatures.

Available in 200ml, 500ml,

1000ml sachets & 15.0 kg

tins.

6. Nandini Butter Rich, smooth and delicious.

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Nandini Butter is made out of

fresh pasteurized cream. Rich

taste, smooth texture and the

rich purity of cow's milk,

makes any preparation a

delicious treat. Available in

100 gms(salted), 200 gms and

500gms cartons both salted

and unsalted.

7. Nandini Butter Milk Nandini spiced Butter Milk is

a refreshing health drink. It is

made from quality curds and

is blended with fresh green

chilies, green coriander leaves,

asafetida and fresh ginger.

Nandini spiced butter

promotes health and easy

digestion. It is available in200ml packs and is priced at

most competitive rates, so that

it is affordable to all sections

of people.

8. Nandini PedaNo matter what you are

celebrating! Made from pure

milk, Nandini Peda is a

delicious treat for the family.

Store at room temperature

approximately 7 days.

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Available in 250gms pack

containing 10 pieces each.

e. Area of OperationGlobal / National / Regional

Anekal

Yelahanka

Channapatna

Devanahalli

Doddaballapur

Hosakote

Kanakapura

Solur

Ramanagar

Nelamangala

f. Ownership Pattern

Bamul is mainly a co-operative society. The (DCS) dairy co-operative societies at the village

level are the members of the bamul. Each dairy co-operative society elects one member and they

are the owners. The member producers and their Dairy Co-operative Societies (DCS) are the

vital constituents of the Union and their progress is the judging yardstick on the efficiency of the

unions operation. Hence the maximum importance has been given to their development.

As on March 2007 in these DCS, there are 3, 21,238 milk producer members are enrolled and out

of which 96,653 are women and 57,938 members belong to schedule caste and schedule tribes.Finally to conclude farmers and the producers including the members of the bamul.

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g. Competitors Information

The success of each and every business unit mainly depends on how brilliantly it faces the

competition. Bamul is not out of competition, it has almost 65% market share in Bangalore and

presently it is the brand leader for milk products.

The main competitors to bamul are:

Swastika

Gomata

Thirumala

Nilgiris

Heritage

Arogya

Good Morning

h. Infrastructural Facilities

The strategy of Bangalore Milk Union is Procure More, Sell More & Serve More and reaping

the benefits of economies of scale. In order to realize this strategy, the Union has implemented

the following projects so that more and more milk can be procured and processed. This will help

us to serve our producer members by passing on the maximum benefits; we are consciously

adopting the growth-oriented strategy of helping our producers to grow by ourselves growing

constantly.

At the heart of the system is a reputed Allen-Bradley PLC-5/80C platform, which communicates

to analog and digital I/O on control net a producer-consumer communication network.

Customers are also seeking significant benefits. Milk now reaches market faster, at a better

quality and with a longer self-life.

Apart from the existing seven chilling centers Bamul is also going to commission one more

chilling center at Kanakapura from 1st

October 2004 with a chilling capacity of 50,000 liters per

day.

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Mega Dairy with a capacity to process 6 lakh liters of milk per day expandable to10 IIpd has

been built by investing Rs.38.70 crores obtained as term loan from National Dairy Development

Board. The Mega Dairy has latest state-of-the-art technological facilities in dairy processing and

the union will have the ability to manufacture milk and milk products to world class standards.

Although Bamul sets high standards for its products and customer serve, its prior reliance on

manual operations made it impossible to keep with surging demand. In designing mega dairy,

Bamul looked towards an automated system that would allow it to achieve consistent quality

parameters for each product. Energy and manpower would also be more effectively optimized

and controlled and all plant equipment would be integrated.

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i. Awards and Achievements of BamulLtd.

MMPO-1992 Registration No. 42/R.MMPO/93 dated 7th June 1993 renewed on 13th May

1999.

Bangalore Dairy ISO 9001-2000 certified by SAI GLOBAL a reputed Australian based

company on 19th

February 2003.

Bangalore Dairy HACCP IS-15000 Certified by SAI GLOBAL a reputed Australian based

company on 19th

February 2003.

Milk Processing capacity of 6,00,000 liters per day (LPD) fully automated Mega Dairy

started functioning from 17th

December 2000.

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j. Workflow model (End to End)

Raw Milk 32 C C

Raw Milk Milk Inlet 4 C

Milk StorageTanks

Cream

Cream Tank

Butter SectionButter Cheese

Ghee

PACKING

Pasturiese

Processing

section

Cooling System

Milk Inlet 4

Milk Inlet 4 C

ChilledWaterInlet 2

0

C

Chilled Water Inlet 4 C

Chilled Water Inlet

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k. Future growth and prospects

The company wants to become not only the largest union, but also become one amongst the best-

run milk unions in the country. The union is aware of the challenges of the new private entrants,

who are mainly thriving on unfair trade practices. They procure milk at least cost, without

bothering about the welfare of the producers and without extending any technical inputs for

improving milk production. They market milk by resorting to unhealthy and unethical practices

deceiving the unsuspecting consumers. The union wants to counter this in a positive manner by

trying to improve its efficiency of operation and market promotion. It wants to follow the

strategy of cost-competitiveness, which is hard to match by the competitors.

Future plans:

Gasifier System at all the chilling centers

Utilization of Methane gas generated from ETP.

Rain water harvesting

Installation of continuous evaporator of condensing milk

Appointing external agency to identify and adopt the more efficient energy savings system.

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3. McKENSYS 7S FRAME WORK

The 7S model is better known as McKinseys 7S. This is because the two persons who

developed this model, Tom Peters and Robert Waterman, have been consultants at McKinsey &

Co at that time. They published their 7S Model in their article Structure Is Not Organization

(1980) and in their books The Art of Japanese Management (1981) and In Search of

Excellence (1982). The model starts on the premise that an organization is not just structure, but

consists of seven elements:

Those seven elements are distinguished in so called hard Ss and soft Ss. The hard elements are

feasible and easy to identify. They can be found in strategy statements, corporate plans,

organizational charts and other documentation

The four soft Ss however, are hardly feasible. They are difficult to describe since capabilities,

values and elements of corporate culture are continuously developing and changing. They are

highly determined by the people at work in the organization. Therefore it is much more difficult

to plan or to influence the characteristics of the soft elements. Although the soft factors are

below the surface, they can have a great impact of the hard structures, strategies and systems of

the organization.

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THE HARD Ss

1. STRUCTURE:

The term structure in 7s framework model refers to the organizational structure of the company.

The designs of the organizational structure is critical task to the management of an organization,

it is the skeleton of the whole organization. Organization structure refers to relatively more

durable organizational arrangements and relationship.

It prescribes the formal relationship among various positions and activities. Arrangement about

reporting how an organizational member is to communicate with other members, the various

activities performed by members is all the part of organizational structure.

Organizational structure performs four major functions:

It reduces internal uncertainty arising out of variable unpredictable, random human behavior

within the organization through control mechanisms.

It reduces external uncertainty through forecasting, research and planning in the organization.

It undertakes a wide variety of activities through devices such as departmentation,

specialization and division of labor and delegation of authority.

It enables the organization to keep its activities coordinated and to have a focus in the midst of

diversity in the pursuit of its objectives.

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Door to Door campaigning is taken to educate consumers about quality of

NANDINI milk compared with the other existing private brands of milk

Every year agents orientation programme to encourage, understand the problems

and to solve

Milk is made available throughout the day opening anytime milk counters in

Bangalore city area by providing VISI coolers/deep freezers

Presently private branches like heritage have captured institutional market by

supplying homogenized milk. Hence it has introduced homogenized milk to capture

institutional market.

Promotional Strategies

The main promotional techniques adopted by the Bangalore milk union Ltd (BAMUL) are

1. School children will be brought to dairy for visit to create awareness.

2. Arrangements have been made for the visit of women group association to dairy.

3. Advertisement campaign by way of putting holders, providing display materials to

retailers are undertaken.

4. All through the day advertisement are given to cable operators for telecast and

placing in local papers.

3. SYSTEM:

The term systems in the 7s framework refers to all the rules, regulation, procedures and process

both formal and informal, that compliment the organization structure to work successfully.

System and process of controlling is the measurement and correction of performance in order to

make sure that enterprise objective and the plans devised to attach them are being accomplished.

BAMUL is an organization, which is systematic in doing its day-to-day work and any work for

that matter is done in a very systematic and sophisticated manner. The various systems that exist

at Bamul are as follows:

MIS System

Billing System

Quality control system

Purchase System

Procurement system(milk)

Recruitment System

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THE SOFT Ss

1. SKILL:

Waterman considers skills as one of the most crucial attributes or capabilities of an

organization. Organizations have strengths in number of areas but their key strength dominant

skills are few. These are developed over a period of time and are as result of the interaction of

number trips performing certain tasks.

Skills in the Mckinsey framework are equivalent of Seizeniks - distinctive competencies to

dominant skills or distinctive competencies of organization are part to the organizational

character.

BAMUL is the company well known for its quality products and services which is evident

through state-of-the-art design and technology. It is the company which is bench marked for its

quality and customer service.

The training steps followed in BAMUL is explained below:

The training needs of the employees are monitored by the HRD head in accordance with the

functional head. Head of HRD shall be responsible for organizing relevant training and

development program. Training needs for all personal are identified once in a year and are

recorded in training needs record format. The training will divide into two categories:

Core Programs: To each level of officers as soon as are promoted to the responsible levels.

Specialized Programs: provided as per the training requirements mentioned in the performance

appraisal report of the officers.

The training methods used are;

On- The-Job-training: It includes imparting skills by exposing the employee to the work

environment. It include job rotations and under study assignments.

Off- The-Job-training: It involves learning skills through simulations exercises such as case

analysis, role playing, group interaction etc.

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2. STYLE:

Participative not Authoritative:

Participative of every one is hallmark of BAMULBAMUL work force is participative by nature. Each employee, workers are contributing

themselves at their level best towards the companies policies, procedures, programs and growth.In every perspective the company considered all employees, workers in decision making

planning and the company respects the suggestions, opinions, ideas of its human resources.

Employees can be participative in plans but cannot change any acts made by the co-operative

society. No superior does have the individuals decision making unlike that of private sector

companies.

3. STAFF:

Classification of staff:

Technical staff:

Technical staff comprised of the engineers, diploma holders, etc are directly involved in

production. Maintenance of machines, operating of CNC machines, repairing of machines are

look forward by the technical staff. Even some times job rotation policy of the company indulges

the technical staff to carry non-technical work.

Non technical staff:

The main objective of non-technical staff is to carry the business of management. Post graduates,

graduates and highly qualified peoples constitute non-technical staff. The main function of non-

technical staff is to maintain paper works, computer works, planning, decision-making, etc., the

non-technical staff indirectly involved in production process.

Duties and responsibilities of the technical and non-technical staff are as follows:

To conserve and safeguard the company premises.

To respect the right of peers, sub-ordinates, superiors, etc.,

To maintain discipline in the working hours and at work place.

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4. SWOT ANALYSIS

SWOT analysis is an auditing of an organization and its environment. It is the analysis of the

strength, weakness, opportunity and threats of the organization. Strength and weakness are

internal; while opportunities and threats are external to the company.

Strengths

Biggest milk Co-operative union in Southern India.

Automated computerized plant.

Market leader with brand identity

Wide product range

An ISO, HACCP, EMS certified COMPANY.

Winner of Best productivity Award by National Productivity Council (NPC) for five

times and Energy Conservation Award by Bureau of Energy Efficiency (BEE)

Maintaining Uniform Quality.

Well-organized distribution channel.

Reasonable price.

Weakness

Inflexible traditional governmental structure.

Slow decision making process.

High manpower overheads.

Less advertisement.

Promotion is based on seniority.

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Opportunities

Ever expanding market for milk and milk products.

Favorable export environment of milk products to foreign countries at higher profit

margin, with the liberalization of global economy.

New markets can be created and captured through innovative products

Existing brand Nandini can be used to expand its product line. Need not to invest on

brand awareness.

The existing infrastructure can be used to meet the considerable rise in demand in future,

with little or no change.

Threats

Liberalization of milk industry

Irregular power shutdowns.

Entering of MNCs into dairy industry.

Entry of loose milk providers at cheaper rates.

Inter dairy completion.

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6. LEARNING EXPERIENCE

The project helped me to know the various departments in detail, and I got the knowledge

about the organization from different aspects and to study the function of different

departments.

This training was very useful as it manifolds our confidence apart from the theoretical

knowledge.

To know the various departments effectively contribution towards the fulfillment of

organization goal.

To know about the partial aspects of the functioning of an organization.

It helped to know the relation between various departments and co-relation of them.

To know the activities of the different staff.

To know about welfare facilities adopted by company.

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PART B

1 a. GENERAL INTRODUCTION

Meaning of Financial Statement

The term financial statement refers to two basic statements which an accountant prepares at the

end of an accounting period for a business enterprise. These are:

Balance Sheet (or Statement of Financial Position) which reflects the assets, liabilities

and capital as on a certain date, and

Profit and Loss Account (or Income Statement) which shows the results of operations i.e.,

profit or loss during a certain period.

Other statements Apart from the Balance Sheet and Profit and Loss Account, the followingfinancial statements are also prepared.

Profit and Loss Appropriation Accountit shows how profit of a business is utililsed for

declaring dividends, transfer to general reserve or other reserves.

Funds Flow Statement this shows increase or decrease in working capital during the

accounting period.

Cash Flow Statement this shows changes in cash position between the beginning and

end of the accounting period.

Nature of Financial Statements

The financial statements provide a summary of the accounts of a business enterprises. According

to The American Institute of Accountants, financial statements reflect a combination of

recorded facts, accounting conventions and personal judgements and the judgements and

conventions applied affect them materially.

Thus, the data exhibited in financial statements are the results of the combined effect of:

a) Recorded factsThe financial statements show the factual data drawn from the financial

accounts. Example: items like cash in hand and at bank, cost of fixed assets, salaries paid

etc., are the facts recorded in the books

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Procedure for financial statements analysis

The analyst should acquaint himself with the principles and postulates of accounting. One

should know the plans and policies of the management so that he may be able to find out

whether these plans are properly executed or not.

The extent of analysis should be determined so that the sphere of work may be decided.

The financial data given in the statements should be re-organized and re-arranged.

A relationship is established among financial statements with the help of tools and

techniques of analysis such as ratios, trends, common size, funds flow etc.

The information is interpreted in a simple and understandable way.

The conclusions drawn from interpretation are presented to the management in the form

of reports.

Parties involved in Financial Statement Analysis

Information contained in financial statements is useful to different categories of users of

financial data. These are managers, shareholders, creditors, Government, auditors and other

interested groups. Uses of financial data for each of these are explained in detail below.

1. Management:

Management of a company is interested in its financial condition, profitability and

progress. It uses a number of methods, tools and techniques available to analyse the

financial data. Such analysis is used by the management to exercise control over the

business and to make decisions to run it more efficiently.

2. Shareholders:Shareholders are the suppliers of basic capital to run the business. Such capital is

exposed to all the risks of ownership. Shareholders are interested in the profitability,

dividends declared and market value of their holdings. The current earnings of the

company determine both dividends and market value of the shares.

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Significance and purposes of financial statement analysis

Financial statement analysis performs the essential function of converting mass data into useful

information. Such analyzed financial information serves many and varied purposes as described

below:

1. Judging profitability:

Profitabililty is the measure of the efficiency and success of business enterprise. A

company which earns profit at a higher rate is definitely considered a good company

by the potential investors. The potential investors analyze the financial statement to

judge the profitability and earnings capacity of a company so as to decide whether to

invest in a company or not.

2. Judging liquidity:

Liquidity of a business refers to its ability to pay off its short term liabilities when

these become due. Short term creditors like trade creditors and bankers make an

assessment of liquidity before granting credit to the company.

3. Judging Solvency:

Solvency refers to the ability of a company to meet its long term debts. Long term

creditors like debenture-holders and financial institutions judge the solvency of a

company before any lending decisions. They analyze companys profitability over a

number of years and its ability to generate sufficient cash to be able to repay their

claims.

4. Judging the efficiency of management:

Performance and efficiency of management of a company can be easily judged by

analyzing its financila statments. Profitability of a company is not the only measure of

companys managerial efficiency. There are number of other ways to judge the

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are qualitative in nature and cannot be expressed in monetary terms. These non-

monetary factors do not find any place in the financial statement.

4. Historical in nature:

Financial statements disclose data which is basically historical in nature i.e., it tells

what has happened in the past. These statements do not give future projections.

5. Ignores human resources:

No business can prosper without an efficient work force, but financial statements do

not include human resources which is a very important asset for a business.

6. Ignores social costs:

Apart from earning a fair return on investments, a business has certain social

responsibilities. Financial statements do not make any attempt to show the social

cost of its activities.

Principal tools of analysis

In the analysis of financial statements, the analyst has number of tools from which he has to

choose best suited for his specific purpose. The following are the principal tools of analysis of

financial statements.

1. Comparative Financial Statements.

Comparison of financial statements is one of the very important tool of analysis of

financial statements. It has been seen that Balance Sheet and Profit and Loss Account

are the two most important financial statements. Information obtained in these

financial statements for a particular year is extremely important and useful. However,

such information becomes still more useful if it is compared with the data shown in

the financial statements of the previous few years. Such comparison of financial

statements is accomplished by setting up Balance Sheet and Profit and Loss Account

of two or more years side by side and studying the changes that have occurred in the

individual figures therein from year to year and over the years. Thus, comparison of

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the causes of changes in cash position of a business enterprise between dates of two

balance sheets.

Classification of cash flows

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

Uses of cash flow statement

It helps in evaluation of cash position of the firm

It helps in knowing the future cash position of a concern

To find the variations and deficiency or other wise in the performance so as to

enable the firm to take immediate and effective action

It helps in planning the repayment of loans, replacement of fixed assets and other

similar long-term planning of cash.

Limitations of cash flow statement:

i. It ignore we the basic accounting concept of accrual basis.

ii. It helps in the analysis of financial operations

iii. It throws light on many perplexing questions of general interest

iv. It helps in the formation of a realistic dividend policy

v. It helps in the proper allocation of resources

vi. It acts as a future guide

vii. It helps in apprising the use of working capital

viii. It helps in knowing overall credit worthiness of a firm

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BNMIT 39

6. Ratio analysis

It is the technique of analysis and interpretation of financial statements. It is the

process of establishing and interpreting various ratios for helping in making certain

decisions.

Ratio analysis is widely used tool in financial performance evaluation. It is defined as

the systematic use of ratios to interpret the financial statements so that the strength and

weaknesses of a firm as well as its historical performance and current financial

condition can be determined.

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BNMIT 41

Uses and significance of ratio analysis

The ratio analysis is one of the most powerful tools of financial analysis. It is used as a

device to analyze and interpret the financial health of enterprise. The use of ratios is not confined to financial managers only. The ratios have wide

applications and are of immense use today.

Managerial uses of ratio analysis

Utility to shareholders

Utility to creditors

Utility to employees

Utility to government

Utility to tax audit requirement

Limitations of Ratio Analysis

The ratio analysis is one of the most powerful tools of financial management. Though ratios are

simple to calculate and easy to understand, they suffer from some serious limitations.

Limited use of a single ratio

Lack of adequate standards

Inherent limitations of accounting

Change of accounting procedure

Window dressing

Personal bias

Uncomparable

Absolute figures distortive

Price level changes

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Debtors Turnover Ratio = Credit Sales

Average Debtors

The term debtors include trade debtors and bills receivables. Doubtful debts are

not deducted from debtors. A higher DTR indicates that debts are being collected

more quickly.

c. Fixed Assets Turnover Ratio:

This ratio indicates the efficiency with which the firm is utilizing its investments

in fixed assets such as plant and machinery, land and building etc.

Fixed assets Turnover = Sales (or Cost of Sales)

Net Fixed Assets

The term net fixed assets means depreciated value of fixed assets. A high ratio

indicates efficient utilization of fixed assets in generating sales and a low ratio

may signify that the firm has an excessive investment in fixed assets.

d. Working Capital Turnover Ratio:

This ratio indicates the efficiency or inefficiency in the utilization of working

capital in making sales.

Working capital turnover = Sales (or Cost of Sales)

Net Working Capital

The term net working capital means current assets minus current liabilities. A

high working capital turnover ratio shows the efficient utilization of working

capital in generating sales. A low ratio, on the other hand, may indicate excess of

net working capital.

e. Capital Turnover Ratio:

This ratio shows the relationship between cost of sales (or sales) and the total

capital employed.

Capital Turnover Ratio = Cost of Sales (or sales)

Total Capital Employed

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Where, Total capital employed = Equity capital + Preference Capital + Reserves +

Debentures + Long-term LoansFictitious AssetsNon operating Investments

This ratio shows the efficiency with which capital employed in a business is used.

A high capital turnover ratio indicates the possibility of greater profit and a low

capital turnover ratio is a sign of insufficient sales and possibility of lower profits.

f. Creditors Turnover Ratio:

This ratio is also known as Payables Turnover Ratio. It measures the relationship

between credit purchases and average accounts payable.

Creditors turnover ratio = Net Credit Purchases

Average accounts payable

Accounts payable include creditors and bills payable.

4. Profitability Ratios

These ratios are calculated to measure the efficiency of a business. Profitability of a

business may be measured in two ways:

(i) Profitability in relation to sales

(ii) Profitability in relation to investment

Profitability in relation to sales indicates the amount of profit per rupee of sales.

Similarly, profitability in relation to investment indicates the amount of profit per

rupee invested in assets.

(i) Profitability based on sales:

a. Gross Profit Ratio:

This ratio expresses the relationship between gross profit and sales.

Gross profit ratio = Gross Profit x 100

Net Sales

It indicates the average margin on the goods sold. It shows whether the

selling prices are adequate or not. It also indicates the extent to which

selling prices may be reduced without resulting in losses.

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BNMIT 65

7. Proprietory Ratio:

= (Share holders funds / Total Assets) * 100

Table 11 : Table showing proprietory ratio

Particulars 2007-2008 2008-2009 2009-2010

Share

holders

funds

389614656 390728771 423184985

Total

Assets 1129150895 987714708 1104752635

ProprietoryRatio 34.51 39.56 38.31

Graph 7 : Graph showing proprietory ratio

Analysis and Interpretation

As equity ratio represents the relationship of owners funds to total assets, higher the ratio

or the share of the share holders in the total capital of the company, better is the long-

term solvency position of the company. This ratio indicates the extent to which the assets

of the company can be lost without affecting the interest of creditors of the company.

30

32

34

36

38

40

2007-08 2008-09 2009-10

Proprietory Ratio

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BNMIT 67

9. Inventory turnover Ratio:

= Cost of Goods Sold / Average inventory

Table 13 : Table showing Inventory turnover ratio

Particulars 2007-2008 2008-2009 2009-2010

Cost of

Goods Sold

4026538290 4637424719 5117796297

Average

Inventory

66585672 81876666 54395886

InventoryTurnover

Ratio60.47 56.64 94.08

Graph 9 : Graph showing Inventory Turnover ratio

Analysis and Interpretation

This ratio is very high. Generally speaking, a high stock turnover ratio is considered

better, as it indicates that more sales are being produced by each rupee of investment instock, but a higher stock turnover ratio may not always be an indicator of favorable

results.

0

20

4060

80

100

2007-08 2008-09 2009-10

ITR

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d. SUGGESTIONS

The company can improve its profitability by increasing its sales value through the

production level. The company can implement various techniques which increases the overall efficiency of

the firm.

The Inventory turnover can be reduced by adopting various effective and efficient

techniques that can control inventory levels.

The Fixed assets to Long term funds ratio should be 100%.

The claims of outsiders are higher and this has to be reduced.

The liquidity position of the firm has to improve. This can be done by investing more in

current assets and this helps to repay the current liabilities on a timely basis.

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