A STUDY ON “RATIO ANALYSIS”

IN

RASTHRIYA ISPATH NIGAM LIMITED

A project report Submitted in partial fulfillment for the award of the

degree of

“BACHELOR OF BUSINESS MANAGEMENT”

Submitted by

Ms. K .Lalitha Annapurneswari(No: 20723039023)

Under the esteemed guidance of

Mr. R. GOPAL RAO

Manager (F&A)

DEPARTMENT OF BUSINESS MANAGEMENT

T.S.R AND T.B.K DEGREE COLLEGE

Visakhapatnam-530013

2007-2010

CERTIFICATE

This is certify that this project report titled the study on Ratio Analysis with reference

to RASTHRIYA ISPATH NIGAM LIMITED VISAKHAPATNAM is a bonafide work

done by K.LALITHA ANNAPURNESWARI with Regd No:20723039023 under my

guidance and supervision and submitted to Andhra University in partial fulfillment for

the award of the degree of BBM.

VISAKHAPATNAM SRI R. GOPAL RAO,

DATE: Manager (F&A),

RINL (Vizag Steel Plant),

Vishakapatnam.

STUDENT’S DECLARATION

I, K.LALITHA ANNAPURNESWARI hereby declare that the Project report

entitled “RATIO ANALYSIS” with regard to RASTHRIYA ISPATH NIGAM LIMITED

VISAKHAPATNAM , submitted by me under the guidance of Mr. R.GOPAL RAO,

Manager (F&A), VSP of my own work and has not been submitted

to any other University or Institute or published earlier.

Signature of the Student

K.LALITHA.

ACKNOWLEDGEMENT

I would like to forward my sincere thanks and gratitude to Mr. T.UMAMAHESHWARA

RAO, correspondent of T.S.R & T.B.K DEGREE AND P.G COLLEGE, Mrs. V.

PADMA, Principal and Mr.K.V.RAMANA MURTHI, Head Of the Department,

Commerce and Management, T.S.R & T.B.K DEGREE & P.G.COLLEGE for allowing me

to do this project work.

My deep gratitude also goes to Mr.G.SRINIVASA RAO, Lecturer -in-charge my

internal guide and faculty in dept. of B.B.M who patiently guided me in completing my

project work.

I would also like to extend my thanks to Mr.R.GOPAL RAO, manager (F&A) who helped

me during my training period. I express my sincere thanks to Mr.KOSIREDDI RAJA,

Junior Manager, HRD for helping me in obtaining permission for doing project work in

RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPATNAM.

I would also like extend my gratitude to my parents and friends without whose help and

advice this project would not have been possible.

Date: LALITHA

(Signature)

CHAPTERISATION

Chapter I Introduction.

Chapter II Steel industry in India.

Chapter III Profile of the Visakha Steel Plant.

Chapter IV Theoretical frame work of Ratio Analysis.

Chapter V Practical aspects of Ratio Analysis in

Visakha Steel Plant.

Chapter VI Summary and suggestions

CHA

INTRODUCTION Steel comprises one of the most important inputs in

all sectors of economy. Economy of any country depends on the strong base of

the iron and steel industry. Steel is a versatile material with multitude of useful

properties, making it indispensable for furthering and achieving continual

growth of the economy- be it construction, manufacturing, infrastructure or

consumables. The level of steel consumption’s has long been regarded as an

index of industrialization and economic maturity attained by country. Keeping

in view the importance of steel, the integrated steel plants with foreign

collaborations were set up in the public sector in the post-independence era.

The growth of any organization depends on the overall performance such

as Production, Marketing, Human resource and Financial performance of the

organization. The financial performance of the any organization reflects the

strength, weakness, opportunities and threats of the organization with respect

to profits earned, investments, sales realization, turnover, return on investment,

net worth of capital. Efficient management of financial resources and deliberate

analysis of financial results are pre requisite for success of an enterprise. For

the achievement of that, Ratio analysis acts as one of the major and important

tool of effective financial management. Every organization requires ratio

analysis for evaluation of the performances of business.

Strengths and weaknesses:

Strengths:

Land and layout for expansion up to 16mt with proximity to port.

Quality producer image.

High standing for customer service.

Committed work force.

Ability to raise funds.

Weaknesses:

No in-in house key raw materials-iron ore/coal..

Lack of level playing field.

Single location company-only long products , expose to cyclic markets.

Major capital repairs and modernization-nor overdue.

High cost of servicing huge equity.

Consumption cooking coal contractor at the higher cost in 2008-09.

Opportunities and threats:

Opportunities:

Potential for growth in domestic steel demand-low per capita consumption in

India.

Huge investment planned in infrastructure in 11th plan.

Ease of imports and exports with adjacent up coming gangvaram port(deep

draft), VSP and VSPL

Threats:

High raw material prices and shift of value chain towards raw materials

Oligopolistic coal supply side

Single iron ore supplier-located in disturbance prone areas

Predominant sec ordinarily sector in long products

VSP-high earning island

NEED FOR THE STUDY:

The study concentrates on the financial state of affairs of the

company. It involves the study of Ratio Analysis. It helps to present a broader

picture of the financial position of the Company through ratios. This helps the

company’s success in meeting its requirements and production of steel in

India, which has been supported eventually.

Visakhapatnam Steel Plant is a multi-product steel-manufacturing unit.

The capital employed in a large organization like VSP is huge; so the effective

management of this capital is required. For which continuos’ monitoring of the

various operations is needed for the organization. So in order to achieve its

objectives the organization with the help of evaluation of ratios should

implement the best course of action.

Ratio Analysis is useful in the following ways:

1.Short-term and long-term planning.

2.Measurement and evaluation of financial performance.

3.Study of financial trends.

4.Decisions making for investments and operations.

5.Diagnosis of financial skills.

Thus a detailed study regarding the Ratio Analysis in Visakhapatnam

Steel Plant is to be done to well understand the performance of various

Operations identify the shortcoming in management and to suggest for

improvement in those areas.

OBJECTIVES OF THE STUDY:

The study is focused with the following objectives:

1. To describe the Organizational Profile of RINL (VSP)

2. To discuss the significance of the management of ratio analysis in RINL (VSP);

3. To evaluate the ratio analysis management in RINL (VSP) and

4. To summarize and to suggest for the better performance of RINL (VSP).

METHODOLOGY:

There are two general types of data primary data and secondary

classified on the basis of purpose of collection or source.

Primary Data:

Primary data are those are collected specifically for the resort

situation at hand. Both exploratory and conclusive research situations

necessitate using a high proportion of primary data. The major sources of

primary data include respondents, analogous and research experiments.

Primary sources usually provide more detailed information than the secondary

source. This is partly because methods of data collection and the tools used

can be tailored more precisely to the informational needs of the researcher.

This also contributes to the flexibility of aliases for the research purpose at

hand.

Secondary Data:

Secondary data are already published data collected for

purposes other than the specific research needs at hand. On the basis of

location of sources, secondary data may again be classified as internal or

external data. The data originating with the or available with the organization

as a by product of the MIS or the routine reporting system is called internal

data of any given marketing research problem initial data collected for

purpose other than that specific problem could be termed internal secondary

data.

Secondary data generated out side the organization is termed secondary data

and can be collected from a multitude of sources like government publication,

trade association publications, official reports, journals and periodicals and

publication of marketing research agencies. Secondary data can also be

though from research an agency through this is a fairly expensive preposition.

For the proposed project the secondary will be collected form annual reports

of the company.

LIMITATIONS OF STUDY:

1. The major limitation is the short span available for the study.

2. Reliability on usage of secondary data is another limitation.

3. Some aspects of financial information are held due to confidentially of the company.

4. There was no scope of gathering current information, as the auditing has not been done by the time of project work.

Industry PROFLE in India

Iron had occupied an important place in the service of mankind, Not only in India but

also abroad. From time immemorial steel is in dispensable to modern civilization in

peace and war. In order to Understand the background of the entry of iron and steel into

the public Sector in India, it would be desirable to trace it briefly, the history of iron And

steel making in India through the centuries.

The development of steel industry in India should be viewed in conjunction

With the type and system of government that had been ruling the country. The

production of steel in significant quantity started after 1900. The growth of steel

Industry can be conveniently studied by dividing the period into pre &post

Independence era (or before 1950 & after 1950). The total installed capacity for

in-got steel production during pre-independence era was 1.5 million tones/year,

which has risen to about 8 million tones of ingot by the seventies. This is the

result of the bold steps taken by the government to develop this sector.

The growth in chronological order is as follows:

1830 - Josiah Marshall Health constructed the first

Manufacturing plant at pot in Madras Presidency

1874 - James Erskin Founded the Bengal Iron Works.

1899 - Jamshedji Tata initiated the scheme for an

Integrated steel plant

1906 - Formation of TISCO

1911 - Tata Iron & Steel Company started production

1916 - TISCO was founded.

1944 - Formation of mysore iron.

1951-56 - First Five-Year Plan

No new Steel Plant came up. The Hindustan Steel Ltd. (HSL) was born on 19th January, 1954, with the decision of setting up three steel plants each with one million tone input steel per year at Rourkela, Bhilai and Durgapur, TISCO stated its expansion programmed.

1956-61 - Second Five-Year Plan

A bold decision was taken up to increase the ingot steel output India to 6 million tones per year and production at Rourkela, Bhilai and Durgapur Steel Plants started.

1961-66 - Third Five-Year Plan

During the Third five-year Plan the three steel plants under HSL, TISCO & HSCO were expanded as shown.

1966-69-Recession period:

The entire expansion programmes was actively executed during the period .

1969-74- Fourth Five-Year Plan Salem Steel Plant started.

Licenses were given for setting up of many mini Steel plants and rerolling mills. Govt.of India accepted setting up two more steel plants in South: One each at Visakhapatnam (Andhra Pradesh) and Hospet (Karnataka). SAIL was formed during the period on 24 th January 1973. The total installed capacity from 6 integrated plants was 106 MT.

Steel Plant

Original(MT/Year)

Expanded(MT/Year)

Rourkela 1.0 1.8

Bhilai 1.1 2.5

Durgapur 1.0 1.6

TISCO 1.0 2.0

HSCO 0.5 1.0

1979 - Annual Plan

The erstwhile Soviet Union agreed to help in setting up the Visakhapatnam Steel Plant.

1980-85 - Fifth-Year Plan

Work on Visakhapatnam Steel Plant was started with a big bang and top priority was accorded to start the plant.

Scheme for modernization of Bhilai Steel Plant, Rourkela, Durgapur Steel Plant and TISCO were initiated.

1985-91 - Seventh Five-Year Plan

Expansion work of Bhilai and Bokaro Steel Plants completed Progress on Visakhapatnam Steel Plant picked-up and the

rationalized concept has been introduced to commission the plant with 3.0MT liquid steel capacity by 1990.

1991-96 - Eighth Five-Year Plan

Visakhapatnam Steel Plant started its production Modernization of other steel plants is also duly envisaged.

1997-2002 - Ninth Five-Year Plan

Visakhapatnam Steel Plant had foreseen a 7%

Growth during the entire plan period.

2002-2007 - Tenth Five-Year Plan

Steel industry registers a growth of 9.9%. Visakhapatnam Steel Plant has

high regime targets and achieved the best of them.

2007-2009 - Eleventh Five-Year Plan

Huge investment plan in infrastructure

Out look:

The Steel companies in India are looking up amidst a tough the global

competition when the market is crisis-crossed with a variety of tariff and non-

tariff barriers. The dexterity with which the Indian exporters diversified their

markets, modified the composition of their export basket to suit the changing

global demands and affected reduced production costs by adopting the state-

of-the-art technologies provides ample testimony to the maturity of this

industry. From a highly protected inward-looking enterprise of the pre-

liberalization years, it has turned into a modern and globally integrated

industry in an astonishingly short span of time. The economic reforms have

brought with it immense opportunities for market-led growth of this industry,

once a symbol of state control.

On the supply side, deregulation meant access to domestic private capital

and low-cost overseas funds, advanced technology and cheap inputs. On the

demand side, the new policy regime meant opportunities to sell steel in an

expanding domestic market and, most importantly, in the large international

marts.

The Indian steel industry is at an important juncture today. The global

strengthening of the market, the potential growth in domestic steel

consumption and the global shortage of critical raw materials like iron ore and

scrap have raised issues like the need to further boost in the production

capacities of the plants by modernization, creation of a strong base of raw

materials and industry-specific development of the infrastructure.

The Government has been fostering a harmonious growth of the industry

on the principles of competitiveness and economic efficiency. It has also paid

the highest attention to help the industry in overcoming structural rigidities

within the sector, remove scarcities of essential inputs, develop infrastructure

and remove the market-distorting forces commonly experienced by the

developing countries in the course of industrialization. The industry is being

protected from unfair competition from domestic and overseas sources.

Innovation:

The Government proposes to bring in a new steel policy. It would define the

framework of government action in each relevant area as also to create ground

conditions for private sector initiative wherever possible. The Ministry of Steel has

strive to provide an effective interface between he industry and the various

economic agencies like government departments, financial institutions, providers of

input materials and essential services and multilateral agencies.

The steel industry’s growth and development trajectory will be heavily

dependent on its ability t mobilize the necessary resources for investment in the

coming years. Till recently, when the steel industry was passing through one of the

most turbulent phases, even the strong companies in the industry would have

encountered difficulty in mobilizing financial resources from the capital market. The

perceived risks that hindered the industry’s resource mobilization efforts are now

being replaced by a general feel good factor. This will help the industry significantly.

The turn-around in the industry has come at a very Opportune time

The Indian steel industries continue to remain focused on the emerging

opportunities in the world market. China is offering great opportunities to the Indian

industry. Despite the massive growth in steel output in China, there will always be

opportunities for the Indian exporters. The international business has to be carried

out consistently. Else the market will be lost at the first sign of a downturn.

The Indian steel industry has come a long way from the days of control and

strives to remain globally competitive. This is the age of technology and we have

the requisite resources to the lead in take the steel sector.

PROFILE OF VISAKHAPATNAM STEEL PLANT

Introduction:

Steel occupies the foremost place among the materials in use today and

pervades all walks of life. All key discoveries of human genius, for instance,

Steam Engine, Railway, means of Communication and Connection, Automobile,

Aero Plane and Computers are in one way or other, fastened together with Steel

and its sagacious and Multifaceted applications.

Steel is versatile material with multitude of useful properties, making it

indispensable for furthering and achieving continual growth of economy be it

Construction, manufacturing, infrastructure or consumables. The level of steel

consumption has long been regarded as an index of industrialization and

economic maturity attained by a country.

Keeping in view of the importance of steel, the following integrated steel

plants with foreign collaborations were set up in public sector in post

independence era (Table 2.0)

INTEGRATED STEEL PLANTS IN INDIA

STEEL PLANT COLLABORATION

1. Durgapur Steel Plant Britain

2. Bhilai Steel Plant Erstwhile USSR

3. Bokaro Steel Plant Erstwhile USSR

4. Rourkela Steel Plant Germany

Background of Visakhapatnam Steel Plant:

To meet growing domestic needs of steel, Government of India decided to set

up an Integrated Steel Plant at Visakhapatnam. An agreement was signed with

erstwhile USSR in 1979 for co-operation in setting up 3.4 MT integrated steel

plant at Visakhapatnam.

The project profile of 3 MT Stage in Table 2.1

Description 3 MT STAGE

Original

Sanction

First

Revision

Second

Revision

Third

Revision

Implementing Agency SAIL RINL RINL RINL

Date of sanction by GOI 19.6.79 30.07.82 24.06.88 12.07.95

Zero Date Not specified 01.02.82 01.02.82 01.02.82

Gestation period 6 years 6 years 8 ½ years 10 ½ yrs

Anticipated Date of Commissioning Not specified Dec 87 June 90 July 92

Capital Cost (Rs crores) 2256.00 3897.28 6849.70 8593.29

Base Date 1 qtr 79 4 qtr 81 4 qtr 87 Jan 94

FE Component (Rs. Crores) 500.20 679.59 1214.86 1521.55

Cost Escalation Rs. Crores -- 1641.28 2952.42 1743.59

Capacity (MT liquid steel per annum) 3.40 3.40 3.00 3.00

The Company started its commercial production in 1990-91 and its financial results in

Table 2.2

Z Gross Sales Operating

Profit

Interest Depreciation Net Profit

90-91 245 -88 192 197 -478

91-92 772 -101 437 449 -987

92-93 1185 -31 198 340 -568

93-94 1751 114 346 340 -573

94-95 2209 416 366 415 -364

95-96 3039 633 407 430 -204

96-97 3135 606 430 422 -246

97-98 3071 460 198 439 -177

98-99 2761 15 361 111 -457

99-00 2973 252 382 432 -562

00-01 3436 504 351 445 -291

01-02 4081 690 290 475 -75

02-03 5058 1162 187 455 521

03-04 6169 2053 49 457 1547

04-05 8181 3271 11 1006 2254

05-06 8482 2336 31 416 1890

06-07 9151 2054.34 49 362 1363

07-08 10433 2790 32 488 1943

08-09 10411 1552 88 240 1336

It can be seen from the above table, during the year 2002-03, the

company turned around by earning a net profit of Rs. 521 Crores. In

the same year, it bagged the PRIME MINISTER TROPHY for its excellent

performance in the Steel Industry. In September 2003, RINL became a

DEBT FREE COMPANY.

TECHNOLOGY:

VSP was equipped with state of the art technology of steel making,

large scale computerization and automation was incorporated in the plant to

achieve International Level of Efficiency and Productivity, the organizational

manpower has been rationalized.

The following are some of the important technologies used in the plant.

7 meter tall coke over batteries with coke dry quenching plant

3200 cubic meter blast furnace, biggest in the country.

Bell-less top charging system in blast furnace

100% slag granulation at BF cast house

Suppressed combustion LD gas recovery

100% continuous casting of liquid steel

“TEMPCORE” and “STELMORE” cooling process

Extensive Waste Heat Recovery System

Comprehensive Pollution Control Measures

Major

Sources

of Inputs:

Water Supply:

Operational water requirement of 36 MGD is being met from Yeleru Water

Supply Scheme.

Power Supply:

Operational power requirement of 180-200 MW is being met through

captive power plant. The capacity of captive power plant is 286.5 MW. The

plant is selling around 60 MW of power to APSEB (Andhra Pradesh State

Electricity Board).

Raw Material Source

Iron Ore lumps and fines Bailadilla, MP

BF Limestone Jaggayyapeta, AP

BF Dolomite Madharam, Andhra Pradesh

SMS Dolomite Madharam, Andhra Pradesh

Manganese Ore Chipurupalli, Andhra Pradesh

Boiler Coal Talcher, Orissa

Coking Coal Australia

Medium Coking coal (MCC) Gidi/swang/rajarappa/kargali

Major Units of VSP

PROCESSES

COKE OVENS SINTER PLANT

BLAST FURANCE STEEL MELTING SHOP

DEPARTMENTS ANNUAL CAPACITY (‘000T) UNITS (0. 3 MT STAGE)

COKE OVENS 2261 3 batteries each of 67 ovens of 7

Meters heights.

BLAST FURNACE 3400 2 furnaces of 3200 m3 each

SINTER PLANT 5256 2 sinter machines of 312 sq meter

grate area each

STEEL MELTING SHOP 3000 3 LD converters each of 150 M3

volume and six four strand bloom

caster.

LMMM 710 Four strand finishing mill

WRM 850 2x10 strand finishing mill

MMSM 850 6 strand finishing mill

CONTINUOUS CASTING ROLLING MILLS

PRODUCT MIX OF VSP

Main Products:

1. PIG IRON Low Silicon basic grades

2. BLOOMS 245x245 mm 5.5 6.08 meters

315x245 mm 5.8 6.40 meters

3. BILLETS 125x125 mm 9.8 10.4 meters

90x90 mm 6.0 12 meters

75x75 mm 6.0 12 meters

65x65 mm 6.0 12 meters

4. WIRE RODS 5.5 mm, 6 mm, 6.5 mm, 7 mm, 7.5 mm,

8 mm, 9 mm, 10 mm, 11 mm, 12 mm,

12.7 mm, 13 mm & 14 mm

5. REINFORCEMENT BAR

BRAND: VIZAG TMT 8 mm, 10 mm, 12 mm, 16 mm, 18 mm,

(In straightened or coil form) 20 mm, 22 mm, 25 mm, 28 mm, 32 mm,

36 mm & 40 mm

6. ROUNDS 16 mm, 16.5 mm, 18 mm, 20 mm, 20.64 mm,

22 mm, 25 mm, 28 mm, 32 mm, 33.5 mm,

34 mm, 36 mm, 40 mm, 42 mm, 45 mm,

46.5 mm, 50 mm, 53 mm, 56 mm, 60 mm,

63 mm, 65 mm, 71 mm, 75 mm, 77 mm

& 80 mm

7. EQUAL ANGLES 50x50 x 5/6 mm, 60x60 x 6 mm,

65x65 x 6mm, 75x75 x 6/8 mm,

90x90 x 6/8mm, 100x100 x 8/10mm

& 110x110 x 8/10 mm

8. CHANNELS ISMC- 40x32x5 mm, 75x40x4.8mm,

100x50x5mm, 125x65x5.3mm,

150x75x5.7mm & 150x76x6.5mm

9. BEAMS IPE – 175x85 mm, 150x75 mm &180x91 mm

120x114 mm (HE-BEAMS)

10. FLATS 150x10 mm & 150x12 mm

By-Products

1. FERTILIZER “PUSKALA” Brand Ammonium Sulphate

2. COALCHEMICALS & Coal Tar Pitch (Soft)

TAR PRODUCTS Coal Tar Pitch (Hard)

Anthracene Oil

HP Naphthalene

Pitch Cresote Mixture

Coal Tar Wash Oil

Phenol fractions

3. COKE FRACTIONS Nut Coke (15-25 mm)

Coke Dust (Coke Breeze)

4. BENZOL PRODUCTS Caprolactum grade Benzene

NG Toluene/IG Toluene

Light Solvent Naphtha (LSN)

5. MISCELLANEOUS PRODUCTS Granulated BF Slag

Calcined Lime Fines

Fly ash, Liquid Argon

Liquid Oxygen

Liquid Nitrogen

Boiler Coat Dust

SMS Slag

FUTURE PLANS:

1.0 VISION:

To be a continuously growing world-class company.

Harness our growth potential & sustain profitable growth

Deliver high quality and cost competitive products and be the first choice of customers

Create an inspiring work environment to unleash the creative energy of people

Achieve excellence in enterprise management

Be a respected corporate citizen, ensure clean and green environment and develop vibrant communities

around us

2.0 MISSION

To attain 16 million ton liquid steel capacity through technological up gradation, operational

efficiency and expansion to produce steel at international standards of cost and quality, and to meet

the aspirations of stakeholders.

3.0 OBJECTIVES:

Expand plant capacity to

6.3 Mt by 2008-09

8.5 Mt by 2010-11

13.0 Mt by 2014-15

16.0 Mt by 2017-18

With the mission to expand further in subsequent phases as per the

Corporate Plan.

Sustain gross margin to turnover ration >25%

Be amongst the top five lowest cost liquid steel producers in the world by 09-10

Achieve higher levels of customer satisfaction than competitors

Instill right attitude amongst employees and facilitate them to excel in their professional, personal and

social

Be recognized as a excellent business organization by 2008-09

Be proactive in conserving environment, maintaining high levels of safety and addressing social concerns.

4.0 CORE VALUES

# Commitment

# Customer Satisfaction

# Continuous improvement

# Concern for Environment

# Creativity & Innovation

Achievements and Awards:

ISO 9002 for SMS and all the down stream units – it is a unique distinction in the Indian

steel industry.

Received Indira Priya Darshini Vriskha Mitra Award: 1992-1993.

Nehru Memorial National Award for Pollution Control: 1992=93 &1993-94

EEPC Export Excellence Award: 1994-1995 CII (Southern Region) Energy Conservation

Award: 1995-1996.

Golden Peacock (1st prize) “National Quality Award –1996”

Steel Ministers Trophy for “Best Safety Performance” in 1996.

Selected for “ World Quality Commitment Award –1997” of J*BAN, Spain.

Udyog Excellence Gold Medal Award for Excellence in Steel Industry.

Ispat Suraksha Puraskar (1st prize) for longest accident free period, 1991-1994.

Best Labour Management Award from the Government of AP.

SCOPE Award for the best turnaround for 2001.

Environment Excellence Award from Greentech Foundation for energy conservation in

2002.

Best Enterprise award from SCOPE, WIPS for 2001-2002.

“ SAIL chairman`s silver plaque” for No Fatal Accident for the year 1999.

PRIM MINISTER`S award for the best performance in 2002-2003.

ISTD Award for “Best HR Practices” – 2002.

“World Quality Commitment International Star Award” in the Gold category conferred

by Business Initiative Directions, Paris

“Organizational Excellence Award” for 2003-04 conferred by INSSAN

National Energy Conservation Award, 2004 and Special Prize from Ministry of Power,

Govt. of India.

QCFI-NMDC Award for best quality circle implementatiom in PSU category in 2007-08.

RINL has been awarded “Enterprise excellence award –2007” in 2008-09.

The above awards are besides a number of awards at the local,

regional & national level competitions in the area of Quality Circles, Suggestion

Schemes etc.

HALLMARK OF VIZAG STEEL AS AN ORGANISATION

Today, VSP is moving forward with aura of confidence and with pride

amongst its employees who are determined to give their best for the company to

enable it to reach new heights in organizational excellence.

At the same time, no single advantage accruing from a knowledge society

if found wanting by the neighborhood community with the growth & development

of a phenomenon called VIZAG STEEL existing so close to its proximity. Futuristic

enterprises, academic activity, planned & progressive residential localities but few

of the plentiful ripple effects of this transformation and each one of us take

immense pride to uphold the philosophy of mutual (i.e., individual and societal)

progress.

As a “NET POSITIVE COMPANY” in January, 2006 by wiping out all it’s

accumulated losses during 2008-09.

STATISTICAI INFORMATIONPRODUCTION PERFORMANCE – (‘000 TONS)

2007-2008 3913 3322 3074 420

2008-2009 3546 3145 2701 423

COMMERCIAL

PERFORMANCE – (Rupees in

Crores)

YEAR HOT METAL

LIQUID STEEL

SALEABLESTEEL

LABOUR PRODUCTIVITY(Tones/man year)

1999-2000 2943 2656 2382 192

2000-2001 3165 2909 2507 211

2001-2002 3485 3083 2757 228

2002-2003 3941 3356 3056 253

2003-2004 4055 3508 3169 262

2004-2005 3920 3560 3173 398

2005-2006 4153 3603 3237 414 2006-2007 4046 3606 3290 413

Year Sales Turnover Domestic Sales Exports

2000-01 3436 3122 322

2001-02 4081 3710 371

2002-03 5059 4433 626

2003-04 6174 5406 768

2004-05 8181 7933 248

2005-06 8469 8026 443

2006-07 9126 8702 425

2007-08 10433 9878 555

2008-09 10411 9733 767

FINANCIAL

PERFORMANCE

(RUPEES IN

CRORES)

Year Gross Margin Cash Profit Net profit

2000-01 504 153 (-) 291

2001-02 690 400 (-) 75

2002-03 1049 915 521

2003-04 2073 2024 1547

2004-05 3271 3260 2008

2005-06 2383 2355 1251

2006-07 2633 2584 9363

2007-08 3515 3483 1943

2008-09 2355 2267 1336

INTRODUCTION TO FINANCIAL MANAGEMENT

About three decades ago, the scope of financial management was confined to

raising of funds, whenever needed and little significance used to be attached to

financial decision-making and problem solving. As a consequence, the

traditional finance texts were structured around this theme and contained

description of the instruments and institutions of raising funds and of the major

events, such as promotion, reorganization, readjustment, merger, consolidation

etc., when funds were raised. In the mid-fifties, the emphasis shifted to the

judicious utilization of funds. The modern thinking in financial management

accords a far managers do not perform the passive role of scorekeepers of

financial data and top management areas and play a dynamic rote in solving

complex management problems. They are now responsible for shaping the

fortunes of the enterprise and are involved in the most vital management

decision of allocation of capital. It is their duty to ensure that the funds are

raised most economically and used in the most efficient and effective manner.

Because of this change in emphasis, the descriptive treatment of the subject of

financial management is being replaced by growing treatment of the subject of

financial management is being replaced by growing analytical content and sound

theoretical underpinnings.

Financial management is that managerial activity which is concerned with the

planning and controlling of the firm`s financial resources. Though it was a

branch of economics till 1890, as a separate activity or discipline it is of recent

origin. Still, it has no unique body of knowledge of its own, and draws heavily on

economics for its theoretical concepts even today.

SCOPE OF FINANCE:

What is Finance? What are a firm’s activities? How are they

related to the firm’s other activities? Firms create manufacturing capacities for

production of goods; some provide services to customers. They sell their goods

or services to earn profits. They raise funds to acquire manufacturing and other

facilities.

Financing decision is an important function to be performed by the financial

manager. Broadly, he or she must decide when, where and how to acquire funds

to meet the firm’s investment needs. The central issue before him or her is to

determine the proportion of equity and debt. The mix of debt and equity is

known as the firm’s capital structure. The financial manager must strive to

obtain the best financing mix of the optimum capital structure for his of her firm.

Once the financial manager is able to determine the best combination of debt and

equity, he or she must raise the appropriate amount through the best available

sources. In practice, a firm considers many other factors such as control,

flexibility, loan convenience, legal aspects etc., in deciding its capital structure.

FINANCIAL RATIO ANALYSIS

INTRODUCTION:

As observed, a basic limitation of the traditional financial statement comprising

the balance sheet and the profit and loss account is that they do not give all the

information related to the financial operation of the firm. Nevertheless, they

provide some extremely useful information to the extent that the Balance Sheet

mirrors the financial position on a particular date in terms of the structure of

assets, liabilities and owner’s equity and so on. The profit and loss account shows

the results of operations during a certain period of time in terms of the revenues

obtained and the cost incurred during the year. Therefore, much can be learnt

about a firm from a careful examination of its financial statements as invaluable

documents/performance analysis. Users of financial statements can get further

insight about financial strengths and weaknesses of the firm if they properly

analyze information reported in these statements. Management should be

particularly interested in knowing financial weakness of the firm to take suitable

corrective actions. The future plans of the firm should be laid down in view of the

firm’s financial strengths and weaknesses. Thus, financial analysis is the starting

point for making plans, before using any sophisticated forecasting and planning

procedures. Understanding the past is a pre-requisite for anticipating the future.

MEANING AND RATIONALE:

Ration analysis is a widely – used tool of financial analysis. It is defined as the

systematic use of ration to interpret the financial statements so that the strengths

and weaknesses of the firm as well as its historical performance and current

financial condition can be determined. Ratio analysis is a powerful tool of financial

analysis. A ratio is defined as “the indicated quotient of two mathematical

expressions” and as the “the relationship between two or more things”.

In financial analysis, a ratio is used as a benchmark for evaluating the financial

position and performance of a firm.

The term ratio refers to the numerical or quantitative relationship between two

items/variables. This relationship can be expressed as:

Percentages, say, Net Profits are 25% of Sales (assuming Net Profit of Rs.25,000

and Sales of Rs.1,00,000),

1. Fraction (Net profit is 1/4th of Sales) and

2. Proportion of numbers (the relationship between Net profits and Sales is 1:4).

These alternative methods of expressing items, which are related to each other,

are, for purpose of financial analysis, referred to as ratio analysis. It should be

noted that computing the ratios does not add any information already inherent in

the above figures of profits and sales. What the ratios do is that they reveal the

relationship in a more meaningful way so as to enable us to draw conclusions from

them. The rationale of ratio analysis lies in the fact that it makes related

information comparable. A single figure by itself has no meaning but when

expressed in terms of a related figure, it yields significant inferences. For

instance, the fact that the Net profits of a firm amount to, say Rs. Ten Lakhs

throws no light on its adequacy or otherwise.

The figure of Net profit has to be considered in relation to other variables. How

does it stand in relation to sales? If, therefore, Net profits are shown in terms of

their relationship with items such as Sales, Assets,Capital employed, Equity capital

and so on, meaningful conclusions can be drawn regarding their adequacy.

To carry the above example further, assuming the capital employed to be

Rs.50 lakh and Rs.100 lakh, the Net profit are 20% and 10% each respectively.

Ratio analysis, thus, as a quantitative tool, enables analysts to draw

quantitative answers to questions such as; are the Net profits adequate? Are

the assets being used efficiently? Is the firm solvent? Can the firm meet its

current obligations and so on?

IMPORTANCE AND LIMITATIONS OF RATIO ANALYSIS

Importance:

As a tool of financial management, ratios are of crucial significance. The

importance of ratio analysis lies in the fact that is presents facts on a

comparative basis and enables the drawing inference regarding the

performance of a firm. Ratio analysis is relevant in assessing the

performance of a firm in respect to the following aspects.

i. Liquidity position

ii. Long-term solvency

iii. Operational efficiency

iv. Overall profitability

v. Inter-firm comparison, and

vi. Trend analysis

Liquidity position: - With the help of ratio analysis conclusions can

be regarding the liquidity position of a firm. The liquidity position of a firm

would be satisfactory if it is able to meet its current obligations when they

become due. A firm can be said to have the ability to meet its short-term

liabilities if it has sufficient liquid funds to pay the interest on its short-

maturing debt usually within a year as well as to repay the principal. This

ability is reflected in the liquidity ratio of a firm. The liquidity ratios are

particularly useful in credit analysis by banks and other suppliers of short-

term loans.

Long-term solvency: - Ratio analysis is equally useful for assessing the

long-term financial viability of a firm. This aspect of the financial position of a

borrower is of concern to the long-term creditors, security analysts and the

present and potential owners of a business. The long-term solvency is

measured by the leverage/capital structure and profitability ratios, which focus

on earning power and operating efficiency. Ratio analysis reveals the strength

and weaknesses of a firm in this respect. The leverage ratios, for instance, will

indicate whether a firm has a reasonable proportion of various sources of

finance or if it is heavily loaded proportion of various sources of finance or if it is

heavily loaded with debt in which case its solvency is exposed to serious strain.

Similarly the various profitability ratios would reveal whether or not the firm is

able to offer adequate return to its consistent with the risk involved.

Operating Efficiency: - Another dimension of the usefulness of the

ratio analysis, relevant from the view point of management, is that it

throws light on the degree of efficiency in the management and utilization

of its assets. The various activity ratios measure this kind of operational

efficiency.

Overall Profitability: - Unlike the outside parties, which are interested in

one aspect of financial position of a firm, the management is constantly

concerned about the over-all profitability of the enterprise. That is, they are

concerned about the ability of the firm to meet its short-term as well as long-

term obligations to its creditors, to ensure a reasonable return to its owners and

secure optimum utilization of the assets of the firm. This is possible if an

integrated view is taken and all the ratios are considered together.

Inter-firm Comparison: - Ratio analysis not only throws light on the

financial position of a firm but also serves as a stepping stone to remedial

measures. This is made possible due to inter-firm comparison and comparison

with industry averages. A single figure of a particular ratio is meaningless

unless it is related to some standard or norm. One of the popular techniques is

to compare the ratios of a firm with the industry average. An inter-firm

comparison would demonstrate the firm’s position vis-à-vis its competitors.

Trend Analysis: - Finally, ratio analysis enables a firm to take the time

dimension into account. In other words, whether the financial position of a firm is

improving or deteriorating over the years. This is made possible by the use of

trend analysis. The significance of a trend analysis of ratios lies in the fact that

the analysis can know the direction of movement, the is, whether the movement

is favorable or unfavorable. For example, the ratio may be low as compared to

the norm but the trend may be upward. On the other hand, though the present

level may be satisfactory but the trend may be a declining one.

Limitations:

Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from

various limitations. The operational implication of this is that while using ratios,

the conclusions should not be taken on their face value. Some of the limitations,

which characterize ratio analysis, are

i. Difficulty in comparison.

ii. Impact of Inflation, and

iii. Conceptual Diversity

Difficulty in comparison: - One serious limitation of ratio analysis arises

out of the difficulty associated with there comparability. One technique that is

employed is inter-firm comparison. But such comparison is vitiated by different

procedures adopted by various firms.

Differences in basis of inventory valuation (e.g.:- last in first out, average cost

and cost);

Different depreciation methods (i.e. straight line Vs. written down basis);

Estimated working life of assets, particularly of plant and equipment;

Amortization of deferred revenue expenditure such as preliminary expenditure

and discount on issue of shares;

Capitalization of lease;

Treatment of extraordinary items of income and expenditure; and so on.

Secondly, apart from different accounting procedures, companies may have

different accounting procedures, implying differences in the composition of

assets, particularly current assets. For these reasons, the ratios of two firms may

not be strictly comparable.

Impact of Inflation: - The second major limitation of the ratio analysis is

a tool of financial analysis is associated with price level changes. This infact is a

weakness of the traditional financial statements, which are based on historical

cost. An implication of this feature of the financial statements as regards ratio

analysis is that assets acquired at different periods are, in effect, shown at

different prices in the balance sheet, as they are not adjusted for changes in the

price level. As a result, ratio analysis will not yield strictly comparable and

therefore, dependable results.

Conceptual Diversity: -

The factor that influences the usefulness of ratios is that there is

difference of opinion regarding the various concepts used to compute the ratios.

There is always room for diversity of opinion as to what constitutes

shareholder`s equity, debt, assets, profit and so on.

Finally, ratios are only a post-mortem analysis of what has happened

between two balance sheet dates. For one thing the position in the interim

period is not revealed by ratio analysis. Moreover, they give no clue about the

future.

In brief, ratio analysis suffers from serious limitations. The analyst should

not be carried away by its over simplified nature, easy computation with high

degree of precision. The reliability and significance attached to ratios will

largely depend upon the quality of data on which they are based. They are as

good as the data itself. Nevertheless, they are an important tool of financial

analysis.

Precautions for use of ratios:

The calculation of ratios may not be a difficult task but their use is not easy.

The information on which these are based, the constraints of financial

statements, objectives for using them, the caliber of the analyst, etc, are

important factors, which influence the use of ratios. Following guidelines/factors

may be kept in mind interpreting various ratios.

The reliability of ratio is linked to the accuracy of information in financial statements.

Before calculating ratios one should see whether proper concepts and conventions are

used for preparing financial statements of not. Competent auditors should properly

audit the statements.

The purpose of the user is also important for the analysis of ratios. A creditor, a

banker, an investor, a shareholder, all has different objects for studying ratios.

The purpose (or) object for which ratios are required to be studied should

always be kept in mind for studying various ratios. Different objects may

require the study of different ratios.

Another precaution in ratio analysis is the proper selection of appropriate ratios. The

ratios should match the purpose for which these are required.

Calculating a large number of ratios without determining their need in the

present context may confuse the things instead of solving them. Only those

ratios should be selected which can throw proper light on the matter to be

discussed.

Unless otherwise the ratios calculated are compared with certain standards one

will not be reach at conclusions. These standards may be a rule of thumb as in

current ratio (2:1), may be industry standards, may be projected ratios etc. The

comparison of calculated ratios with the standards will help the analyst in

forming his opinion about financial situation of the concern.

The ratios are only the tools of analysis but their interpretation will depend upon

the caliber and competence of the analyst. He should be familiar with various

financial statements and the significance of changes etc.

A wrong interpretation may create havoc for the concern since wrong

conclusions may bad to wrong decisions. The utility of ratios is linked with

expertise of the analyst.

The ratios are only guidelines for the analyst; he should not base his decisions

entirely on them. He should study any other relevant information, situation in

the concern, general economic environment etc., before reaching final

conclusions.

The study of ratios in isolation may not always prove useful. The interpretation

should use the ratios as guide and may try to solicit any other relevant

information which helps is reaching a correct decision.

Users of financial analysis:

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm by properly establishing relationships between the items

of balance sheet and profit and loss account. Financial analysis can be

undertaken by management of the firm, or by parties outside the firm, viz.,

owners, investors and others.

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

Trade creditors are interested in firm’s ability to meet their claims over a very short

period of time. Their analysis will, therefore, confine to the evaluation of the firm’s

liquidity position.

Suppliers of long-term debt on the other hand are concerned with the firm’s long-term

solvency and survival. They analyze the firm’s profitability over time, its ability to

generate cash to be able to pay interest and repay principle and the relationship

between various sources of funds. (Capital structure relationship).

Investors, who have invested their money in the firm’s share, are most concerned

about the firm’s earnings. They restore more confidence in those firms that show

steady growth in earnings. As such, they concentrate on the analysis of the firm’s

present and future profitability. They are also interested in the firm’s financial

structure to the extent it influences the firm’s earnings ability and risk.

Management of the firm would be interested in every aspect of the financial analysis. It

is their overall responsibility to see that the resources of the firm are used most

effectively and efficiently, and that the firm`s financial condition is sound.

Types of Ratios

Several ratios, calculated from the accounting data, can be grouped into various

classes according to financial activity or function to be evaluated. As stated

earlier, the parties interested in financial analysis are short-term and long-term

creditors, owners and management. Short-term creditors` main interest is in

the liquidity position or the short-term solvency of the firm. Long-term

creditors`, on the other hand, are more interested in the long-term solvency and

profitability of the firm. Similarly, owners concentrate on the firm’s profitability

and financial condition. Management is interested in evaluating every aspect of

the firm’s performance. They have to protect the interests of all parties and see

that the firm grows profitably. In view of the requirements of the various users

of ratios, we may classify them into the following four important categories:

LIQUIDITY RATIOS

LEVERAGE RATIOS

ACTIVITY RATIOS

PROFITABILITY RATIOS

LIQUIDITY RATIOS

It is extremely essential for a firm to be able to meet its obligations as they

become due. Liquidity ratios measure the firm’s ability to meet current

obligations.

In fact, analysis of liquidity needs the preparation of cash budgets and

cash and Fund Flow statements; but liquidity ratios, by establishing a

relationship between cash and other current assets to current obligations

provided a quick measure of liquidity. A firm should ensure that it does not

suffer from lack of liquidity, and also that it does not have excess liquidity. The

failure of a company to meet its obligations due to lack of sufficient liquidity, will

result in a poor creditworthiness, loss of creditors` confidence, or even in legal

tangles resulting in the closure of the company. A very high degree of liquidity

is also bad; idle assets earn nothing. The firm’s funds will be unnecessarily tied

up in current assets. Therefore, it is necessary to strike a proper balance

between high liquidity and lack of liquidity. The most common ratios, which

indicate the extent of liquidity or lack of it, are:

1. CURRENT RATIO

2. QUICK RATIO

3. CASH RATIO

CURRENT RATIO:

The current ratio is calculated by dividing current assets by current

liabilities.

Current assets

CURRENT RATIO =

Current liabilities

Current assets include cash and those assets, which can be converted into

cash within a year, such as Marketable Securities, Debtors and Inventories.

Prepaid expenses are also include in current assets as they represent the

payments that will not be made by the firm in future. Current Liabilities include

Creditors, Bill payable, Accrued expenses, Short-term bank loan, and Income

Tax Liability and Long-term debt maturing in the current year.

The current ratio is a measure of the firms` short-term solvency. The higher the

current ratio, the larger is the amount of rupees available per Rupee of current

liability, the more is the firms` ability to meet current obligations and the

greater is the safety of funds of short-term creditors.

QUICK RATIO:

The Quick ratio is calculated by dividing quick assets by quick liabilities.

Quick assets

QUICK RATIO =

Quick liabilities

Quick assets or Liquid assets means those assets which are immediately

convertible into cash without much loss. All current assets except prepaid

expenses and inventories are categorized in liquid assets. Quick liabilities

means those liabilities, which are payable within a short period. Normally, Bank

overdraft and Cash credit facility, if they become permanent mode of financing

are in quick liabilities.

As this ratio concentrates on cash, marketable securities and receivables in

relation to current obligation, it provides a more penetrating measure of

liquidity than current ratio.

CASH RATIO:

The cash ratio is calculated by dividing cash + marketable securities by

current liabilities.

Cash + Marketable Securities

CASH RATIO = Current liabilities

Since cash is most liquid asset, a financial analyst may examine cash ratio and

its equivalent to current liabilities. Trade investment or marketable securities

are equivalent of cash; therefore, they may be included in the computation of

cash ratio.

LEVERAGE RATIOS

The short-term creditors like bankers and suppliers of raw material are more

concerned with the firms` current debt-paying ability. On the other hand, long-

term creditors like debenture holders, financial institutions etc., are more

concerned with the firms` long-term financial strength. In fact, a firm should

have strong short-as well as long-term financial position. To judge the long-

term financial position of the firm, financial leverage, or Capital structure, ratios

are calculated. These ratios indicate mix of funds provided by owners and

lenders. As a general rule, there should be an approximate mix of debt and

owner’s equity in financing the firms` assets.

The manner in which assets are financed has a number of implications. First,

between debt and equity, debt is more risky from the firms` point of view. The

firm has a legal obligation to pay interest on debt holders, irrespective of the

profits made or losses incurred by the firm. If the firm fails to debt holders in

time, they can take legal action against it to get payment and in extreme cases,

can force the firm into liquidation.

Secondly, use of debt is advantageous for shareholders in two ways:

a. They can retain control of the firm with a limited stake and

b. Their earnings will be magnified, when the firm earns a rat of return on the total

capital employed higher than the interest rate on the borrowing funds. The process of

magnifying the shareholders return through the use of debt is called “financial

leverage” or “financial gearing” or “trading on equity”.

Leverage ratios may be calculated from the balance sheet to determine the

proportion of debt in total financing. Many variations of these ratios exist; but

all these ratios indicate the same thing-the extent to which the firm has relied

on debt in financing assets. Leverage ratios are also computed from the profit

and loss items by determining the extent to which operating profits are

sufficient to cover the fixed charges.

DEBT – EQUITY RATIO

The relationship describing the lender contribution for each rupee of the owner’s

contribution is called DEBT-EQUITY RATIO. DEBT – EQUITY RATIO is directly

computed by the following formula.

DEBT

DEBT-EQUITY RATIO =

EQUITY

Proprietary Ratio:

This ratio states relationship between share capital and total assets.

Proprietors equity represents equity share capital, preference share capital and

reserves and surplus. The latter ratio is also called capital employed to total

assets.

EQUITY SHARE CAPITAL

PROPRIETORY RATIO =

TOTAL TANGIBLE ASSETS

PROPRIETORS EQUITY

(OR)

TOTAL TANGIBLE ASSETS

INTEREST COVERAGE RATIO:

This ratio indicates the extent to which earnings can decline without resultant

financial hardship to the firm because of its inability to meet annual interest cost.

For example, coverage of 5 times means that a fall in earnings unto (1/5 th ) level

would be tolerable, as earnings to service interest on debt capital would be

sufficiently available. This ratio is measured ad follows:

EARNINGS BEFORE INTEREST &

TAXES (EBIT)

INTEREST COVERAGE RATIO =

INTEREST CHARGES

FIXED ASSETS TO NET WORTH:

This ratio indicates the extent to which Equity capital is invested in the net fixed

assets. It is expressed as follows:

FIXED ASSETS

FIXED ASSETS TO NET WORTH =

NET WORTH

NET WORTH is represented by Equity Share Capital plus Reserves and Surpluses.

If the fixed assets are more than the Net Worth, difficulties may arise, as the

depreciation will reduce profit. This also means that creditors have contributed

to fixed assets. The higher this ratio, the less will be the protection to creditors.

If this ratio is too high, the firm may find itself handicapped, as too much capital

is tied up in fixed assets but not circulating

ACITIVITY RATIOS

Funds creditors and owners are invested in various assets to generate sales and

profits. The better the management of assets, the larger the amount of sales.

Activity ratios are employed to evaluate the efficiency with which the firm

managers and utilizes its assets. These ratios are also called Turnover Ratios

because they indicate the speed with which assets are being converted or turned

over into sales. Activity ratios, thus, involve a relationship between sales and

assets. A proper balance between sales and assets generally reflects that assets

are managed well. Several activity ratios can be calculated to judge the

effectiveness of asset utilization.

INVENTORY TURNOVER RATIO:

Inventory turnover ratio indicates the efficiency of the firm in producing and

selling its products. It is calculated by dividing the cost of goods sold by the

average inventory.

The average inventory is the average of opening and closing balance of

inventory.

In a manufacturing company inventory of finished goods is used to calculate

inventory turnover.

Cost of goods sold

INVENTORY TURNOVER RATIO =

Average inventory

DEBTORS TURNOVER RATIO:

A firm sells goods for cash and credit. Credit is used marketing tool by a

number of companies. When the firm extends credits to its customers, debtors

(accounts receivables) are created in the firms` accounts. The debtors are

expected to be converted into cash over a short period and, therefore, are

included in current assets. The liquidity position of the firm depends on the

quality of debtors to a greater extent. Financial analysts apply three ratios to

judge the quality or liquidity of debtors:

a. Debtors turnover,

b. Collection period and

c. Aging schedule of debtors

Credit Sales

DEBTORS COLLECTION PERIOD RATIO =

Avg.Accounts Receivable

DEBTORS COLLECTION PERIOD RATIO:

This ratio indicates the extent to which the debts have been collected in time.

The debt collection period indicates the average debt collection period. This ratio

is a good indicator to the lenders of the firm, because it explains to them whether

their borrower is collecting from its debt in time. An increase in this period

indicates blockage of funds in debtors.

Months/Days (in a year)DEBTORS COLLECTION PERIOD RATIO =

Debtors turn over

Debtors X Months/Days(in a year)

(or) Sales

FIXED ASSETS TURNOVER RATIO:

The fixed assets turnover ratio measures the efficiency with which the firm is

utilizing its investments in fixed assets, such as land, building, plant and

machinery, furniture, etc. It also indicates the adequacy of sales in relation to

the investment in fixed assets. The fixed assets turnover ratio is sales divided by

net fixed assets. The firm assets turnover ratio should be compared with past

and future ratios and also with ratio of similar firms and the industry average.

The high fixed assets turnover ratio indicates efficient utilization of fixed assets in

generating sales, while low ratio indicates inefficient management and utilization

of fixed assets.

SalesFIXED ASSETS TURNOVER RATIO =

Net fixed assets

WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio indicates the velocity of the utilization of net

working capital. This ratio indicates the number of times the working capital is

turned over in the course of a year. This ratio measures the efficiency with which

the working capital is being used by a firm. A higher ratio indicates efficient

utilization of working capital and low ratio indicates otherwise. But a very high

working capital turnover ratio is not a good situation for any firm and hence care

must be taken while interpreting the ratio. Making of comparative and Trend

Analysis can at best use this ratio for different firms in the same industry and for

various periods. This can be calculated as follows:

Sales

WORKING CAPITAL TURNOVER RATIO =

Net Working Capital

NET WORKING CAPITAL = Current Assets - Current Liabilities

(Excluding short-term bank borrowings)

PROFITABILITY RATIOS

A company should earn profits to Survive and Grow over a long period of time.

Profits are essential, but it would be wrong to assume that every action initiated

by management of a company should be aimed at maximizing profits, irrespective

of social consequences.

Profit is the difference between revenues and expenses over a period of time

(usually a year). Profit is the ultimate “Output” of a company, and it will have no

future if it fails to make sufficient profits. Therefore, the financial manager should

continuously evaluate to the efficiency of the company in term of profits. The

profitability ratios are calculated to measure the operating efficiency of the

company. Besides management of the company, creditors and owners are also

interested in the profitability of the firm. Creditors want to get interest and

repayment of principle regularly. Owners want to get a required rate of return on

their investment. This is possible only when the company earns enough profits.

Generally two major types of profitability ratios are calculated.

PROFITABILITY IN RELATION TO SALES

PROFITABILITY IN RELATION TO INVESTMENT

PROFITABILITY RATIOS IN RELATION TO SALES

1. GROSS PROFIT MARGIN

2. CASH MARGIN

3. OPERATING MARGIN

4. NET PROFIT RATIO

GROSS PROFIT MARGIN:

Gross profit margin reflects the efficiency with which the management

produces each unit of product. This ratio indicates the average spread between

the cost of goods sold and the sales revenue. When we subtract the gross profit

margin from 100%, we obtain the ratio of Cost of goods to Sales.

Both this shows profits relative to sales after the deduction of production costs,

and indicates the relation between Production costs and Selling price. A high

gross profit margin relative to the industry average implies that the firm is able

to produce at relatively lower cost.

A high gross profit margin ratio is a sign of good management. A gross margin

ratio may increase due to any of the following factors.

Higher sales prices, cost of goods sold remaining constant,

i. Lower cost of goods sold, sales prices remaining constant,

ii. A combination of variations in sales prices and costs, the margin widening, and

iii. Increases in the proportionate volume of higher margin items.

The analysis of these factors will reveal to the management that how a

depressed gross profit margin can be improved.

A low gross profit margin may reflect higher cost of goods sold due to the firms`

inability to purchase raw materials at favorable terms, inefficient utilization of

plant and machinery, resulting in higher cost of production. The ratio will also be

low due to fall in prices in the market, or market reduction in selling price by the

firm in an attempt to obtain large sales volume, the cost of goods sold remaining

unchanged. The financial manager must be able to detect the causes of a falling

gross margin and initiate action to improve the situation.

Sales – Cost of goods sold

(or) Gross profit

GROSS PROFIT MARGIN RATIO =

Sales

NET PROFIT MARGIN RATIO:

Net profit is obtained when operation expenses, interest and taxes are

subtracted from the gross profit.

If the non-operating income figure is substantial, it may be excluded from PAT to

see profitability arising directly from sales. Net profit margin ratio establishes a

relationship between net profit and sales and indicated management’s efficiency

in manufacturing, administering and selling the products. This ratio is the overall

measure of the firms` ability to turn each rupee sales into net profit. If the net

margin is inadequate, the firm will fail to achieve satisfactory return on

shareholder`s funds.

This ratio also indicates the firms` capacity to withstand adverse economic

conditions. A firm with a high net margin ratio would be in an advantageous

position to survive in the face of falling selling prices, rising costs of production or

declining demand for the product. It would really be difficult for a low net margin

firm to withstand these adversities. Similarly, a firm higher net profit margin can

make better use of favorable condition, such as rising selling prices; fall in costs of

production or increasing demand for the product. Such a firm will be able to

accelerate its profits at a faster rate than a firm with a low net profit margin will.

An analyst will be able to interpret the firm’s profitability more meaningfully if

he/she evaluates both the ratios-gross margin and net margin-jointly. To

illustrate, if the gross profit margin has increased over years, but the net profit

margin has either remained constant or declined, or has not increased as fast as

the gross margin, this implies that the operating expenses relative to sales have

been increasing. The increasing expenses should be identified and controlled.

Gross profit margin may decline due to fall in sales price or increase in the cost of

production.

Profit after tax

NET PROFIT MARGIN RATIO = Sales

CASH MARGIN RATIO:

Cash profit excludes depreciation. It means Net profit after interests and taxes

but before depreciation. This ratio indicates the relationship between the profit,

which accrues in cash and sales. Greater percentage indicates better position

and Vice-Versa as it shows the correct profit earned by the firm.

This ratio is expressed as cash profit to sales.

Cash profit

CASH MARGIN RATIO = X 100

Sales

OPERATING MARGIN RATIO:

Operating margin ratio is also known as Operating Net profit ratio. It is the ratio

of operating profit to sales. This ratio establishes the relationship between the

total cost incurred and sales. Operating profit is the Net profit after depreciation

but Before Interests and Taxes. The purpose of computing this ratio is to find out

the overall operational efficiency of the business concern. It measures the const

of operations per rupee of sales.

This ratio is expressed as operating profit to sales.

Operating profit

OPERATING MARGIN RATIO = X 100 Sales

PROFITABILITY RATIOS IN RELATION TO INVESTMENT

1. RETURN ON INVESTMENT

2. RETURN ON NET WORTH

3. RETURN ON CAPITAL

4. RETURN ON GROSS BLOCK

RETURN ON INVESTMENT:

The term investment refers to Total Assets. The funds employed in Net assets

are known as Capital Employed. Net assets equal net fixed assets plus current

assets minus Current liabilities excluding Bank loans. Alternatively, Capital

employed in equal to Net worth plus total debt.

The conventional approach of calculating return on investment (ROI) is to divide

PAT by Investment. Investment represents pool of funds supplied by

shareholders and lenders, while PAT represents residual income of shareholders;

therefore, it is conceptually unsound to use PAT in the calculation of ROI. Also, as

discussed earlier, PAT is affected by capital structure. It is, therefore more

appropriate to use one of the following measures of ROI for comparing the

operating efficiency of firms.

EBIT (1-T)

ROI = ROTA =

Total Assets

EBIT (1-T)

ROI = RONA =

NET Assets

Where ROTA and RONA respectively Return on Total assets and Return on Net

assets.RONA is equivalent of Return on Capital Employed.

RETURN ON NET WORTH:

NET Worth is also known proprietors Net Capital Employed. The Return should

be calculated with reference to profits belonging to shareholders, and therefore,

profit shall be Net profit after interest and tax. The profit for this purpose will

include even non-trading profit. This is given as follows:

Net profit after interest & tax

RETURN ON NET WORTH = X 100

Shareholders funds

RETURN ON CAPITAL:

The ROCE is the second type of ROI. The term capital employed refers to long-

term funds supplied by the creditors and owners of the fund. It can be computed

in two ways. First, it is equal to non-current liabilities (long-term liabilities) plus

owner’s equity. Alternatively, it is equivalent to Net Working Capital plus Fixed

Assets. Thus, the Capital Employed provides a basis to test the profitability

related to the sources of long-term funds. A comparison of this ratio with similar

firms, with the industry average and overtime would provide sufficient insight

into how efficiency the long-term funds of owners and creditors are being used.

The higher the ratio, the more efficient is the use of Capital Employed.

NET PROFIT AFTER TAX/EBIT

ROCE = X 100

Average Total Capital Employee

RETURN ON GROSS BLOCK:

This ratio establishes a relationship between net profit and gross fixed assets.

This ratio emphasizes the profit on investment in Fixed Assets. This ratio is

expressed as follows:

Net profit

RETURN ON GROSS BLOCK = X 100

Gross Block

NET PROFIT is profit before Tax. Gross Block means Gross fixed assets i.e.,

Fixed assets before deducting depreciation.

RATIO ANALYSIS IN VSP/RINL

LIQUIDITY RATIOS

Liquidity ratios judge the firm’s ability to meet short-term obligations. These

ratios give a good insight into a firm’s ability to remain solvent in the events of

adversities. For this purpose, short-term resources are compared with short-term

obligations.

CURRENT RATIO:

CURRENT ASSETS

CURRENT RATIO =

CURRENT LIABILITIES

This ratio relates current assets to current liabilities. It is found out dividing

current assets by current liabilities. It is the most commonly used measure of

short-term solvency.

Table 4.1: Year wise current assets and current liabilities.(Rs. in Crore)

S.

N

o. PARTS01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09

A Inventory 1111.37 857.55 706.34 1255.311216.45

1203.24 17613215

BSundry Debtors

212.49 217.57 85.6249.30

165.65 216.8093.41 191.27

CCash & Bank

161.12 541.57 1359.713932.60

5621.70 7194.687699.1

6624.17

DOther assets

5.41 5.26 24.32100.17

184.36 314.48292.44 258.91

ELoans & advances

223.38 241.63 550.90 710.12 1063.84 1518.901958.49

1569.69

FCURRENT ASSETS

1713.76 1863.58 2726.88 6047.50 8252.00 10448.1011804.59

11859.32

G

Current liabilities & provision

1220.99 1229.74 1235.35 1424.15 1587.86 2104.303191.62

4181.52

HCURRENT RATIO

1.40

1.52

2.21 4.25 5.20 4.97 3.69 2.83

Interpretation:

The Current ratio for the year 2008-09 was 2.83. That is, for every rupee of

Current Liability the firm is holding 2.83 of Current Assets. It shows that the firm

was able to meet its obligations.

Observations:

1. There is a decrease in the Current Liabilities until 2009.

2. The company’s Current Liabilities were more or less the same in comparison with the

previous year.

3. The company’s Current assets have been increasing every year.

4. There is a constant increase in sales, which was responsible for increase in debtors.

5. Also the company was maintaining more cash balances when compared to previous

years which could be due to increase in turnover.

The Current Ratio for the year 1.40 in 2001-02 and then to 1.52 in 2002-03 and

then to 2.21 in 2003-04 and then to 4.25 in 2004-05 and then to 5.20 in 2005-06

and then 4.97 in 2006-07 and then to 3.69 in 2007-08 and then to 2.83 in 2008-

09. It means that the company was improving its short-term solvency position

despite increase in its competition from all around.

QUICK RATIO:

LIQUID ASSETS

QUICK RATIO/LIQUID RATIO =

CURRENT LIABILITIES

LIQUID ASSETS = CURRENT ASSETS – INVENTORY

This is a narrow measure of liquidity. This ratio concentrates on cash,

marketable receivables in relation to current obligation. So, it provides a more

penetrating measure of liquidity than current ratio.

Table 4.2: Year wise liquid assets and current liabilities.

(Rs. in Crore)

PARTICULARS 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09

Sundry Debtors 212.49 217.58 85.62 49.30 165.65 216.80 93.41 191.27

Cash & Bank 161.12 541.57 1359.71 3932.61 5621.7 7194.68 7669.11 6624.17

Other assets 5.40 5.26 24.31 100.18 184.36 314.48 292.43 258.91

LIQUID ASSETS

379.01 764.11 1469.64 4082.09 5971.71 7725.96 8084.95 7074.35

CURRENT LIABILITIES 1220.99 1229.74 1235.35 1424.15 1587.86 2104.3 3191.62 4181.32

QUICK RATIO

0.31 0.62 1.19 2.87 3.76 3.67

2.53 1.69

Interpretation:

The Quick ratio for the year 2008-2009 was 1.69. That is, for every one

rupee of Quick Liabilities the firm is holding 1.69 RS of Quick Assets.

Observations:

1. There is a decrease in the total liquid assets.

2. There is a decrease in the quick liabilities until 2009.

3. There is a decrease of Quick liabilities in the last two years.

4. There is a constant increase in sales, which was responsible for increase in

debtors.

5. Also the company was maintaining low cash balances when compared to

previous years, which could be due to decrease in turnover.

The Quick Ratio has gradually increased from 0.310 to 0.621 in 2003, and then

to 1.19 in 2004, and then to 2.87 in 2005 and then to 3.76 in 2006 and then to

3.67 in 2007 and then to 2.53 in 2008 and then to 1.69 in 2009. It means that

the company has not recovered its short-term solvency position despite all

around increased competition.

CASH RATIO:

Cash & Marketable Securities

CASH RATIO =

Current Liabilities

This ratio is also known as super quick ratio. It reflects only the absolute

liquidity available with the firm.

Table 4.3: Year wise Cash position and current liabilities.

(Rs. in Crores)

PARTICULARS

01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09

Cash &

Bank161.12 541.57 1359.71 3932.60 5621.70 7194.66 7699.11 6624.17

Current

Liabilities1172.25 1173.02 1116.25 1335.55 1587.86 2104.30 3191.62 4181.32

CASH RATIO

0.13 0.44 1.10 2.76 3.54 3.42 2.41 1.58

Interpretation:

The Cash ratio for the year 2008-2009 was 1.58. That is, for every one rupee of

Current Liabilities the firm is holding 1.58. Cash in its Current Assets. That is,

the firm is able to maintain nearly 50% of Cash reserves in its current assets.

This could be obtained due to increase in its turnover.

Also, the ratio was almost satisfying the ideal Cash Ratio i.e., 1:2. This indicates

that the firm’s Cash position is satisfactory.

Observations:

1. There is an increase in the total Current Assets.

2. There is a decrease in the Current Liabilities until 2009.

3. There is a constant maintenance of the Current liabilities in the last couple of years.

4. There is constant increase in sales, which was responsible for increase in debtors.

5. Also the company was maintaining low cash balances when compared to previous

years, which could be due to decrease in turnover.

The Cash Ratio which was low during the year 2001-02 and increased from 0.13

to 0.44 in 2003, and then to 1.10 in 2004, and then to 2.76 in 2005 and then to

3.54 in 2006 and then to 3.42 in 2007 and then to 2.41 in 2008 and then to 1.58

in 2009. It means that the company has not recovered its Cash reserves position

to a greater extent. This is due to decrease in cash reserve rather due to

increase in its Current liabilities.

LEVERAGE RATIOS

Leverage ratios indicate to what extent the firm has financed its

investments by borrowing. Use of debt financing increases the risk of the firm.

Leverage ratios reflect the financial risk exposure of the firm.

DEBT – EQUITY RATIO:

DEBT

DEBT – EQUITY RATIO =

EQUITY

Debt-equity ratio is the ratio of the total debt in the firm (both long-term

and short-term) to equity; where equity is the sum of ordinary share capital

and preferential share capital.

Table 4.4: Year wise Debt and Equity position. (Rs. in Crore)

PARTICULARS 2001-02 2002-03 2003-

042004-05

2005-06

2006-07

2007-08

2008-09

Secured Loans

1373.48 711.07 37.17 88.94 88.15 604.45 332.78 907.95

Unsecured Loans

615.89 474.83 - 442.42 369.44 312.51 107.95 100.04

Deferred Loans

1.21 1.33 - - - - - -

DEBT 1990.58 1187.23 37.17 531.36 457.59 916.96 440.73 1007.76

EQUITY 7827.31 7827.31 7827.31

7827.31

7827.31

7827.31

7827.31

7827.31

DEBT-EQUITY RATIO

0.254 0.152 0.005 0.067 0.059 0.117 0.056 0.128

Interpretation:

The Debt-Equity ratio for the year 2008-09 was 0.128. It is clear that from debt-

equity ratio that VSP`s lenders have contributed fewer funds than owners have.

Lender’s contribution is times of owner’s contribution for 2008-09. This

relationship describes the lender’s contribution for each rupee of the owner’s

contribution.

Public sector companies are expected to maintain 1:1 ratio. Under unfavorable

conditions, firms desire to use a low debt-equity ratio. This ratio shows that debt

is of the equity. This less debt indicates less risk to shareholders.

Observations:

1. There is a constant increase in the debt level.

2. The equity level is constant.

The debt-equity ratio has increased from 0.254 in 2001, but it decreased to 0.152

in the year 2002 and to 0.005 in 2003 and to 0.067 in 2004 and to 0.059 in 2005-

06 and 0.117 in 2006-07 and to 0.056 in 2008 and to 0.128 in 2009. This increase

in the ratio is due to increase in the debt level. This shows that the firm is able to

decrease its interest burden by clearing its debt.

PROPRIETORY RATIO:

EQUITY SHARE CAPITAL

PROPRIETORY RATIO =

TOTAL TANGIBLE ASSETS

This ratio states relationship between share capital and total assets.

Proprietary equity represents equity share capital, preference share capital and

reserves and surplus. The latter ratio is also called Capital employed to total

assets.

Table 4.5: Year wise shareholders fund (Net Worth) and total Net Assets.(Rs. in

Crore)

PARTICULARS 2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

SHAREHOLDERS FUND

7827.31

7827.31 7827.31

7827.31

7827.31 7827.31 7827.1 7827.31

TOTAL NET ASSETS

5956.03

5702.99 6124.24

8549.89

1051.99 12836.6 - -

PROPRIETARY RATIO

131.41 137.24 127.8 91.54 744.04 60.97 - -

Interpretation:

The Proprietary ratio for the year 2006-2007 was 60.97. This relation describes

shareholders contribution for each rupee of the total net assets. This ratio

reflects that the shareholder’s contribution was 60.97 of the total net assets.

This shows that the firm has increased its contribute to the assets.

Observations:

1. There is a constant decrease in the Total Net Assets.

2. There is significant improvement in shareholder’s fund when compared to the previous

years.

Earlier the proprietary ratio was in a declining trend. That is, in 2001-02 it was

131% in 2002-03 it was 137%. Later it improved in the year 2003-04 to 127%

and to 91% in 2004-05 and to 744% in 2005-06 and to 60% in 2006-07. This

shows that the firm improved its proprietary fund, by way of earning profits.

EBITINTEREST COVERAGE RATIO =

INTEREST CHARGES

EBIT = (+/-) Net Profit/Loss + InterestInterest = Interest and Finance charges

Interest coverage ratio indicates the extent to which earnings can decline

without resultant financial hardship to the company because of its inability to

meet annual interest cost.

Table 4.6: Year wise Interest Coverage Ratio.

(Rs. in Crores)

PARTICULARS 2001-02 2002-03 2003-04 2004-05 2005-06

EBIT 215.31 706.51 1596.07 2019.20 1283.43

INTEREST CHARGES

290.46 185.83 48.89 11.11 31.06

INTEREST COVERAGE RATIO

0.741 3.80 32.65 181.75 41.32

Interpretation:

The interest coverage ratio for the year 2006-07 was 29.18. It shows that the

profits of the firm are nearly 29 times of its interest liability. The higher the ratio,

better it is both for the firm and for the lenders. Also, it shows the firm’s ability to

handle fixed charge liabilities. This is obtained due to two reasons that is increase in

the earnings of the firm and also due to decrease of the interest charges; which is

due to decrease in the debt level.

Observations:

1. There is almost 29-fold increase in the Earnings before Interest and Taxes (EBIT).

2. There is significant improvement in declining of the interest charges.

The ratio has increased to 0.74 in 2001-02, and then to 3.80 in 2002-03, and then

there was a increase in the ratio to 32.65 in 2003-04 and to 181.75 in 2004-05 and

decreased to 41.32 and 29.16 in the year of 2006-07. This shows that the firm is

increasing its efficiency by increasing its EBIT and decreasing its interest burden.

FIXED ASSETSFIXED ASSETS TO NETWORTH =

NET WORTH

FIXED ASSETS = GROSS BLOCK – DEPRICIATION

NET WORTH = SHAREHOLDERS FUND (PAIDUP CAPITAL)

(+/-) NET PROFIT/LOSS (+/-) RESERVES &SURPLUS/

MISCELLANEOUS EXPENDITURE

Fixed assets to Net Worth indicate the extent to which equity capital is invested in

net fixed assets.

Table 4.7:Year wise fixed assets to net worth position.

(Rs. in Crore)

PARTICULARS

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

FIXED

ASSETS

4235.03 3827.57 3372.12 2441.30 2078.26

1790.46

NET

WORTH

2744.47 3286.02 4851.79 6878.32 7546.33

7533.54

FIXED

ASSETS

TO NET

WORTH

1.54 1.16 0.69 0.35 0.27 0.24

Interpretation:

The Fixed Assets to Net worth ratio for the year 2006-07 was 0.24. It shows that

the ratio is more than one. It means that fixed assets are part financed from

outsiders` funds. Higher this ratio, the less will be the protection to creditors.

So, the current year ratio could be identified as improvement in its position.

Observations:

1. There is increase in the Fixed Assets.

2. There is improvement in the Net worth when compared to the previous years.

The ratio was 1.5 in 2001-02 and to 1.16 in 2002-03 and 0.69 in 2003-04 and

0.35 in 2004-05 and 0.27 in 2005-06 and 0.24 in 2006-07. The higher this ratio,

the less will be the protection to creditors. But in the current year ratio there is

decrease in the ratio it is due to increase in the Net worth which could not be

depicted as improvement in the ratio.

ACTIVITY RATIOS

Activity ratios indicate how well the firm is managing various classes of assets

such as inventory or fixed assets. These ratios also referred to as turnover ratio;

because they show how quickly assets are being converted into sales. It is very

difficult to make a general statement in this regard. Still, high turnover ratios are

usually associated with good assets management and low turnover ratios are

associated with bad assets management.

SALES

INVENTORY TURNOVER RATIO =

INVENTORIES

This ratio indicates how efficiently the firm is managing its inventory. This ratio

roughly indicates how many times per year the inventory is replaced.

Table 4.8: Year wise inventory turnover ratio.

(Rs. in Crore)

Interpretation:

PARTICULARS

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

SALES 4080.94

5058.25

5462.90

7359.84

7305.71

7932.66

1088.37

9128.38

INVENTORIES

1159.42

984.46 781.95

980.82

1236.99

1210.80

1761.50

3215.38

INVENTORY TURNOVER RATIO

3.52 5.14 6.99 7.50 5.91

6.55 5.16 2.83

The Inventory turnover ratio for the year 2008-09 was 2.83 times. That is, the

firm is able to convert its inventory for nearly 2 times within a year.

Normally, higher the ratio indicates the better inventory management. Though

the ratio is not so high it is reasonably high. It shows that there is a rapid turning

of the inventory into receivables through sales. Hence, it is evident that the

decrease in the ratio is obtained due to decrease in its turnover.

Observations:

1. There is an increase in the sales year after year.

2. There are fluctuations in the inventory. The inventory has decreased during the

last couple of years.

This indicated that more sales are generated with high investment in inventory.

This shows bad signs. Also, this is even identified from non-improvement in the

Ratio year after year. That is, 4.28 times in 2003, and from 6.98 times in 2004,

and then to 7.50 times in 2005, and then to 5.91 times in 2006 and 6.55 in 2007,

and then to 5.1 times in 2008, and then to 2.83 in 2009.

DEBTORS TURNOVER RATIO:

SALES DEBTORS TURNOVER RATIO =

DEBTORS

Debtors constitute an important constituent of current assets. Quality of

debtors determines to a great extent a firm’s liquidity. Debtor’s turnover ratio is

very important as it depicts the efficiency of the staff entrusted with the task of

collection from debtors.

Table 4.9: Year wise debtors turnover ratio. (Rs. in Crore)

Interpretation:

The Debtors turnover ratio for the year 2008-09 was 47.72 times. That is, the

firm is able to convert Credit Sales (Debtors) into Cash in 47 times in a year.

It shows that the debtors are collected soon.

Observation:

1. There is an increase in the sales in all the years.

2. There is constant increase in debtors.

The Debtors Turnover Ratio was fluctuating all the years` i.e. 23.52 in 2002,

36.04 in 2003, 109.10 in 2004, 67.97 in 2005, 44.42 in 2006-07, 97.29 in 2008,

47.72 in 2009

PARTICUL-ARS

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

SALES 4080.94 5058.25

5462.90

7359.84

7305.71 7932.66 9088.37 9128.38

SUNDRY DEBTORS

193.16 215.03 151.59

67.46

107.48

191.54 93.41 191.27

DEBTORS TURNOVER RATIO

21.13 23.52

36.04

109.10

67.97 44.42 97.27 47.72

.

DEBTORS COLLECTION PERIOD RATIO :

365

DEBTORS COLLECTION PERIOD RATIO = Debtors Turnover Ratio

This ratio indicates the extent to which the debts have been collected in time.

The debt collection period indicates the average debt collection period. This ratio is

a good indicator to the lenders of the firm, because it explains to them whether their

borrower is collection from its debt in time. An increase in this period indicates

blockage of funds in debtors.

Table 4.10: Year wise fixed assets to net worth position.

(Rs. in Crore)

PARTICULARS2001-

022002-

032003-

042004-

052005-

062006-

072007-

082008-

09

DAYS 365 365 365 365 365 365 365 365

DEBTORS TURNOVER RATIO

21.13 23.52 36.04 109.10 67.97 44.42 97.39 47.72

DEBTORS

COLLECTION

PERIOD

17.27 5.52 10.133.35 5.37 8.22 3.75 7.64

Interpretation:

The firm is able to turnover its Debtors for 47.72 times in a year. This shows

that the debt from the debtors is collected very soon. Increasing the sales with

less credit period is said to be a very good position. . So, it is clear that the firm is

managing its debtors efficiently.

Observations:

1. There is an increase in the sales in all the years.

2. There is an decrease in debtors before but there is a increased ratio in current year.

The Debtors collection period was varying for every year but it was less in all the

years. That is, it has varied from 15 days to 10 in 2003, to 3 days in 2004, to 5

days in 2005, and then to 8 days in 2006, to 3 days in 2007, to 7 days in 2008.

But the credit period maintained was low and it has improved its performance by

decreasing the credit period from the last couple of years. This shows that the

firm improved its position further by increasing its turnover.

Table that though the sales has shown substantial increase, the company was

able to maintain the debtors at more or less the same level, which indicates

efficient management of debtors/credit sales.

FIXED ASSETS TURNOVER RATIO :

SALESFIXED ASSETS TURNOVER RATIO =

NET FIXED ASSETS

This ratio depicts the turnover of fixed assets during the course of business.

The ratio indicates, whether capitalization is proper. If disproportionate amount has

been invested in assets, this ratio will communicate this message.

Table 4.11: Year wise fixed assets turnover ratio.

(Rs. in Crore)

PARTICULARS

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

SALES

4080.94

5058.25

5462.90

7359.84

7305.71

7932.66 9088.37 9128.38

NET FIXED ASSETS

4235.03 3827.57 3372.12 2441.30 2078.26

1790.46 1384.64 1256.25

FIXED ASSETS TURNOVER RATIO

0.96 1.32

1.62

3.01

3.52

4.43 6.56 7.26

Interpretation:

The ratio for the year 2008-09 was 7.26 times. Interpreting the reciprocal of

this ratio, one may say that for generating a sale of one rupee, the company needs

0.26 times investment in fixed assets.

Observations:

1. There is an increase in the sales in all the years.

2. There is an increase in the Fixed Assets.

There is an increase in the ratio in all the years. That is, the Ratio has increased

from 1.32 in 2002, 1.62 in 2003, 3.01 in 2004, 3.52 in 2005, and 4.43 in 2006, 6.56 in

2007, 7.26 in 2008. This indicates that the company had improved its performance

in managing its fixed assets.

WORKING CAPITAL TURNOVER RATIO:

SALES

WORKING CAPITAL TURNOVER RATIO = NET WORKING CAPITAL

The Working Capital Turnover Ratio studies the velocity or utilization of the

working capital of the firm during a year.

NET WORKING CAPITAL [CURRENT ASSETS – SHORT TERM = BANK BORROWINGS] - CURRENT

(OR) WORKING CAPITAL LIABILITES

Table 4.12: Year wise Working Capital Turnover Ratio

(Rs. in Crore)

PARTICULARS

2001-02

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

SALES4080.95

5058.25 5462.90

7359.84

7305.71

7932.66 9088.37 9128.38

NET WORKING CAPITAL

492.79

633.86

1491.33

4623.37 6664.14

8343.80 8612.97 7678.00

WORKING CAPITAL TURNOVER RATIO

8.28

7.98

3.66

1.59

1.10

0.95 1.05 1.18

Interpretation:

The ratio for the year 2008-09 was 1.18 times. Interpreting the reciprocal for

the year 2006-07 only 0.95 of net current assets are used to generate 1 rupee of

sales.

Observations:

1. There is an increase in the sales in all the years.

2. There is a constant increase in the Net Working Capital.

The Ratio has decreased from 8.28 to 7.98 in 2003, to 3.66 in 2004, to 1.59 in 2005, and then to 1.10 in

2006 and then to 0.95 in 2007,and then to 1.05 in 2008, and then to 1.18 in 2009. From the table we can

say that there is an increase in the capital invested in working capital but this increase is corresponding the

increase in sales, which has increased about 24%

PROFITABILITY RATIOS

Profits are the ultimate test of management effectiveness. These ratios

communicate the profitability of events that have already taken place.

BASED ON SALES

GROSS PROFIT RATIO :

GROSS PROFITGROSS PROFIT RATIO = X 100

SALES

Gross profit is considered to be a reliable guide as regards adequacy of selling

prices. Further is acts as an indicator of the efficiency of inventory control.

Table 4.13: Year wise Gross profit ratio.

(Rs. in Crore)

PARTICULARS

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

GROSS PROFIT

-47.43 518.121500.76

2811.20

1882.69

2271 3027 2116

SALES4080.94

5058.25

5462.90

7359.84

7305.71

8343.80

9088.37

9128.38

GROSS PROFIT RATIO

-1.16 10.24 27.47 38.20 25.77 27.21 33.30 23.18

Interpretation:

The Gross profit margin reflects the efficiency with which management

produces each unit of product. The Gross profit margin for the year 2008-09

was 23.18%. It shows that for every 1 rupee of sales of the Gross profit

obtained to 0.27. The decrease in the ratio is due to increase sales and also

decrease in the Gross profit.

Observation:

1. There is an increase in the Sales year after year.

2. There is in-consistent growth in the Gross profit.

The ratio has been increasing every year. It has increased from 10.24% in 2002-

03, and then to 27.47% in 2003-04, and then to 38.20% in 2004-05 and then

25.77% in 2005-06 and then to 27.98% in 2006-07 and then 33.30% in 2008 and

then to 23.18% in 2009.. This decrease in the ratio is due to decrease in the

Gross profit. It shows that the firm has not improved its efficiency in managing

and utilizing the plant and machinery.

OPERATING MARGIN:

OPERATING PROFITOPERATING MARGIN = X 100

SALES

The Operating margin establishes the relationship between the total cost incurred

excluding interest and sales. This ratio is used to find out the overall operational

efficiency of the business concern.

Table 4.15: Year wise Operating profit ratio. (Rs. in Crore)

PARTICULARS

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

OPERATING PROFIT

215.37 703.98 1549.72 2822.43

1913.93

2268.17 2790.25 1552.57

SALES 4080.94 5058.25 5462.90 7359.84 7305.71 7932.66 9088.37 9128.88

OPERATING MARGIN RATIO

5.27 13.92 28.36 38.40 26.20 28.59 30.70 17.00

Interpretation:

The Operating margin is the profit before interest and taxes. This ratio shows

the operating efficiency of the company. The ratio for the year 2008-09 was

17.00%. This ratio reflects that there is consistent growth in the operating ratio

though there is involvement of more operating expenses.

Observations:

1. There is an increase in the Sales year after year.

2. There is in-consistent growth in the Operating Profit.

3. There is also decrease in expenses.

There was decrease from 2008-09 to substantial from year after

year. This shows the non-efficient management of the business affairs.

NET PROFIT RATIO :

NET PROFIT NET PROFIT RATIO = X 100

SALES

The Net Profit ratio reveals the overall profitability of the concern. It reveals

the efficiency of management in manufacturing, selling and administrative and other

activities of the firm.

Table 4.16: Year wise Net Profit ratio.

(Rs. in Crore)

PARTICULARS

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

NET PROFIT

-75.15 520.68 1547.18 2008.09 1252.37 1363.43 1942.74 1335.75

SALES 4080.94 5058.25 55462.90

7359.84 7305.71 7932.66 9088.37 9128.88

NET PROFIT RATIO -1.84 10.29 28.32 27.28 17.14 17.19 21.37 14.63

Interpretation:

The Net profit is the final profit of the company after deducting all the

expenditures. The profit percentage for the year 2008-09 was 14.63%. Though

there is heavy amount levied on Depreciation and Deferred Revenue

Expenditure. So, this could be further improved by in decreasing the expenditure

or increasing the sales.

Observations:

1. There is positive Net profit in the current year.

2. There is decrease in the interest charges.

The firm was running with negative results before one year, but

turned to maximized level last year and maintained the same strategy of

maximizing in the current year also. This is due to increase in sales and decrease

in the interest burden. So, it could be said that the firm not improved its overall

performance level by decreasing its efficiency levels.

BASED ON INVESTMENT:

PROFIT BEFORE TAXRETURN ON INVESTMENT = X 100

CAPITAL EMPLOYED

The Return on investment states the efficiency or otherwise with which the firm

is operated.

Table 4.17: Year wise Return on Investment.

(Rs. in Crore)

PROFIT BEFORE

TAX

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

PROFIT BEFORE

TAX

-75.15 520.68 1547.18 2105.15 1889.51 2222.34

CAPITAL

EMPLOYED

4727.82 4461.42 4942.67 7064.66 8742.40 10134.26

RETURN ON

INVESTMENT -1.59 11.67 31.81 31.90 21.61 21.93

Interpretation:

The Return on Investment for the year 2006-07 was 21.93%. This shows the

earning capacity of the capital employed by the firm. That is, the firm is able to

generate 21.93% of profit for the capital employed by the firm.

Observations:

1. There is increase in Sales every year.

2. There is improvement in the profitability (EBT).

3. There is increase in the Capital Employed.

The ratios, which were negative before last year i.e., till the year 2002, have

improved there after i.e., from 2003. That is, from –1.57 to 11.67 in 2001-02, then

to 31.81 in 2003-04 and then to 31.90 in 2005 and then to 21.61 in 2006 has been

decreased.. This shows that there is improvement in the ratio. The improvement

in the ratio is due to increase in profitability (EBT), which is due to increase in

sales and decrease in interest charges. This shows that the firm improved a lot in

its profitability with less capital employment. This shows that the firm has

improved its efficiency.

PROFIT AFTER TAXRETURN ON NETWORTH = X 100

NET WORTH

The Return on Net Worth is also known as proprietors` net capital employed.

The return should be calculated with reference to profits belonging to

shareholders, and therefore, profits shall be net profit after interest and tax.

Table 4.18: Year wise Return on Net Worth (Rs. in Crore)

PARTICULARS 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

EARNINGS AFTER TAX

-75.15 520.66 1547.18 2008.09 1252.37 1363.43

NET WORTH 2744.47 3286.02 4851.79 6878.32 7546.33 7533.54

RETURN ON NET WORTH

-2.74 15.85 31.88 29.19 16.59 18.09

Interpretation:

The Return on Net worth ratio for the year 2006-07 was 18.09%. This shows

that the firm is able to generate a return of 15% (app.) on the funds of

shareholders. This indicates that the firm has well the utilized the resources of

owners to generate return on the funds of owners.

Observations:

1. There is increase in Sales every year.

2. There is improvement in the profitability (EAT).

3. There is decrease in Net Worth.

The ratio had fallen to –2.74% in 2001-02, and then increased to 15.88% in 2002-

03, and then to 31.88% in 2003-04 and then 29.19% in 2004-05 and then 16.59%

in 2005-06 and then 18.09 in 2006-07. This shows that there is a greater

improvement in the ratio. The improvement in the ratio is due to increase in

profitability.

NET PROFIT AFTER INTERESTBEFORE TAX

RETURN ON CAPITAL = X 100

SHARE CAPITAL

The Return on Capital (Equity) ratio indicates what kind of rate of return was

earned on Book value of owners` equity.

Table 4.19: Year wise Return on capital employed.

(Rs. in Crore)

PARTICULARS 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

PROFIT BEFORE

TAX

-75.15 520.68 1547.18 2253.77 1889.51 2222.34 2995 2027

SHARE CAPITAL

7827.31 7827.31 7827.31 7827.31 7827.31 7827.31 7827.31 7827.31

RETURN ON CAPITAL

EMPLOYED -0.96

6.65

19.77 28.79 24.14 28.39

38.26

25.89

Interpretation:

The Return on capital in the year 2008-09 was 25.89%. This ratio

indicates that the firm is able to generate 29.89% of return earned on the book

value of share capital.

Observations:

1. There is improvement in the firm’s profitability (EAT) when compared to previous years.

2. The share capital was constant in all the years.

The performance of the firm was low in the previous years. But it turned out to

profitability position in the current year. The improvement in the ratio is due to

increase in profitability (EAT) of the firm. This shows that the firm is able to

increase the return of its shareholders.

NET PROFIT BEFORE TAXRETURN ON GROSS BLOCK = X 100

GROSS BLOCK

The Return on Gross Block establishes a relationship between Net profit and

Gross Fixed asset.

Table 4.20: Year wise Return on Gross Block(Rs. in Crore)

PARTICULARS

2001-02

2002-03

2003-04 2004-05

2005-06

2006-07 2007-08 2008-09

PROFIT BEFORE

TAX

-75.15 520.68

1547.18 2253.77

1889.51

2222.34 2995 2027

GROSS BLOCK

8702.79

8730.76

8709.71 8763.49

8832.13

8875.62 8900.83 9005.99

RETURN ON GROSS BLOCK

-0.86 5.96 17.76 25.72 21.39 25.04 33.64 22.50

Interpretation:

The Return on Gross Block for the year 2008-09 was 22.50%. This ratio shows

that a return of 25%(app) earned on the investment of capital in fixed assets.

Observations:

1. There is increase in the Gross Block year after year.

2. There is improvement in the profitability (EBT).

The Return on Gross Block was negative before 2003, but there was a constant

betterment in the ratio every year. It has increase from negative value to 5.96%

in 2003, and then to 17.76 in 2004 and then to 25.72 in 2005 and then 21.39 in

2006 and 25.04 in 2007 and then to 33.64 in 2008 and then to 22.50 in 2009.

This shows that the firm has not been improved its efficiency.

SUMMARY

The Visakhapatnam Steel Plant is the most modern integrated steel plant. It is

the only shore-based plant in India for producing 3 million tones of steel from India.

Visakhapatnam Steel Plant produces a variety of products using the fastest

technology available. Visakhapatnam Steel Plant has only the technology but also

the knowledge of its customer needs. The RINL has also established a dealer

network to effectively serve the growing demand for Vizag Steel.

Financial management is that managerial activity, which is concerned with the

planning and controlling of the firm’s financial resources, its activities, and the mix

of debt and equity which is nothing but its Capital Structure. The financial manager

must strive to obtain the best financing mix or the optimum capital structure for his

or her firm.

The analysis of financial statements is, thus, an important aid to financial

analysis. Users of financial statements can get further insight about financial

strengths and weaknesses of the firm if they properly analyze information reported

in these statements. The future plans of the firm should be laid down in view of the

firm’s financial strengths and weaknesses.

Ratio analysis is a widely – used tool of financial analysis. Ratio is used as a

benchmark for evaluating the financial position and performance of a firm. As a tool

of financial management, ratios are of crucial significance. Ratio analysis is relevant

in assessing the performance of a firm in respect to the following aspects:

Liquidity position

Long – term solvency

Operational efficiency

Overall profitability

Inter – firm comparison, and

Trend analysis

SUMMARY OF RATIOS ANALYSIS IN VSP/RINL:

Ratio analysis is the technique to know the financial position of the company.

Ratio analysis in Visakhapatnam Steel Plant is very important as it indicates the

liquidity, solvency and profitability position of the VSP.

Liquidity ratios i.e., Quick ratio and Cash ratio are up to the conventional ratios. So, it

could be further improved by decreasing its Current liabilities and increasing its Current

assets in par with its requirements.

Although Debt – Equity ratio is low, it is in a satisfactory position. Under unfavorable

conditions lower Debt/Equity is desirable. The increase in the interest coverage ratio shows

that the firm has improved its ability to a greater extent in handling fixed charge liabilities.

Also the Proprietary ratio is in satisfactory state.

Inventory turnover ratio has improved in the current year, shows the operational

efficiency of the firm in managing the inventories. The increase in the Debtors turnover

ratio and decrease in the Debtors collection period shows the effective management of

debtors/credit sales.

There is a Net Profit in the current year. All the profitability ratios basing on investment

like return on investment, net worth, capital and gross block which were negative in the

previous years. But turned positive and has yielded reasonable results in the current year.

The analysis for the purpose of the investing in shares generally concentrates on the

return on equity of VSP, which is increasing; therefore the shares may be purchased.

SUGGESTIONS

Some of the Suggestions drawn from the findings of the ratio analysis for the

better performance of VSP/RINL are as follows.

The liquidity Position of the firm is increasing, which is evident from the findings. Even

though the Current ratio is increasing steadily every year. It is still far from satisfaction.

As against the conventional ratio 2:1. It is still only 1.59:1. The same way the quick ratio

needs to be improved further.

Though the company has recorded very good improvement in managing the

inventories and Debtors. The firm was not able to generate the reasonable turnover over

the fixed assets. So, this calls for further improvement in the ratio, by generating more

sales.

The company has recorded profits in the current year for the last 5 years. It is due to

the fact that vast improvement in Gross profit ratio. The company may put some more

special efforts to further consolidate its position by concentrating on more market share.

Another reason for the company to have the less Net Profit is, due to the increase in its

expenditure and operating expenses. The company may consider by that efficiency can

be improved further by reducing the operating expenses.

The other main area where VSP has tremendous scope for improvement is in

manufacturing of value added products and concentrating on the Exports. This will result

in better sales realization and higher profit.

BIBLOGRAPHY

1. Financial Management: Theory & Practice (4th Edition)

Eugene F. Brigham and Michael C. Ehrhardt

2. Elements of Management Accounting

Leslie Chadwick

3.Principles of Corporate Finance (7th Edition)

Richard Brealey Stewart Myers

4. Accounting & Finance for Managers

Barry J. Cooper

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