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Transcript of Finance(MBA) 95
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A STUDY AN Analysis of Karnataka Silk Marketing Board
in Karnataka Silk
LIST OF TABLES
TABLE Page no
Table: 1
CURRENT RATIO 44
Table: 2
LIUI! RATIO 4"
Table: #
ABSOLUTE LIUI! RATIO 4$
Table: 4
!EBT EUIT% RATIO 4&
Table: '
PROPRIETAR% or EUIT% RATIO '(
Table: "
FI)E! ASSETS to NET *ORT+ RATIO '2
Table $
FI)E! ASSETS RATIO '#
Table: &
!EBT SER,ICE OR INTEREST CO,ERA-E RATIO '4
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Table: .
TOTAL ASSETS TURNO,ER RATIOS '"
Table: 1(
FI)E! ASSETS TURNO,ER RATIO '$
Table: 11
CURRENT ASSETS TURNO,ER RATIO '&
Table: 12
-ROSS PROFIT RATIO "(
Table: 1#
OPERATIN- RATIO OR OPERATIN- COST RATIO "1
Table: 14
OPERATIN- PROFIT RATIO "2
Table: 1'
NET PROFIT RATIO "#
Table: 1"
-ROSS PROFIT RATIO "'
Table: 1$
OPERATIN- PROFIT RATIO "$
Table: 1&
NET PROFIT RATIO "&Table: 1.
RETURN ON S+ARE+OL!ERS IN,EST/ENTS ".
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LIST OF C+ARTS
C+ART Page no
C0art: 1
CURRENT RATIO 4'
C0art: 2
LIUI! RATIO 4"
C0art: #
ABSOLUTE LIUI! RATIO 4$
C0art: 4
!EBT EUIT% RATIO 4.
C0art: '
PROPRIETAR% or EUIT% RATIO '1
C0art: "
FI)E! ASSETS to NET *ORT+ RATIO '2
C0art: $
FI)E! ASSETS RATIO '#
C0art: &
!EBT SER,ICE OR INTEREST CO,ERA-E RATIO ''
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C0art: .
TOTAL ASSETS TURNO,ER RATIOS '"
C0art: 1(
FI)E! ASSETS TURNO,ER RATIO '$
C0art: 11
CURRENT ASSETS TURNO,ER RATIO '&
C0art: 12
-ROSS PROFIT RATIO "(
C0art: 1#
OPERATIN- RATIO OR OPERATIN- COST RATIO "1
C0art: 14
OPERATIN- PROFIT RATIO "2
C0art: 1'
NET PROFIT RATIO "4
C0art: 1"
-ROSS PROFIT RATIO ""
C0art: 1$
OPERATIN- PROFIT RATIO "$
C0art: 1&
NET PROFIT RATIO "&
C0art: 1.
RETURN ON S+ARE+OL!ERS IN,EST/ENTS $(
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Chapter 1.
INTRO!UCTION
The dimensions of business finance have undergone a phenomenal
transformation during the last few decades. Until the recent past business
finance was considered as an economic activity, primarily concerned with the
enterprises. Procurement of funds for business purposes and the finance
manager was considered as keeper of books of accounts and provider of
capital needed by the enterprise.
owever, today the finance manager has become an integral part of the
enterprise and is involved in the problems and decisions pertaining to the
management of the assets of the enterprises. !n fact finance is considered so
indispensable today that it is rightly said that "it is the lifeblood of anenterprise. #ithout ade$uate financial management, no enterprise can
possibly accomplish its ob%ectives.
&inance is a body of facts, principles and theories concerned with rising and
use of money by individuals, firms and companies. !t also deals with how
individuals and companies divide their income between consumption, savings
and investments.
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'ne of the most widely $uoted definitions of business finance is by (uthmann
and )ougall who consider as "an activity concerned with planning, raising,
administering and controlling of funds used in the business.
!n other words, business finance or the finance function of management is the
process of rising, providing and managing of the funds or money used in the
business. Thus it deals with the ac$uisition of funds and their effective
utili*ation.
OVERVIEW OF FINANCE FUNCTION
MODERN FINANCE FUNCTION
+odern finance functions can be categori*ed into two broad groups
namely recurring finance functions and nonrecurring or episodic finance
functions.
A Re3rring inane 3ntion:
-ecurring finance function encompasses all such financial
activities as are carried out regularly for the efficient cont of a
firm.
1. Planning o inane: The initial task of finance manager is to formulatethe financial plan of the company. The finance plan is the act of deciding
in advance the $uantity of funds re$uired and their duration and the make
up of such investment to achieve the primary goals of the enterprises. The
main aim of t his eercise is to synchroni*e the cash inflows with cash
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outflows so that the firm does not have any idle funds nor suffers from
want of funds.
/. Rai5ing o 3n65: The procurement of the desired amount of funds is
another important responsibilities of the finance manager. The re$uired
amount can be raised by issue of securities like shares or debentures or by
borrowing frofinancial institutions like !)0, !C!C, 2tate financial
corporations etc. !t is the responsibility of the finance manager to fulfill the
formalities re$uired for this purpose on behalf of the company.
3. Alloation o 3n654 5nother ma%or responsibility of the finance manager
is to allocate the fund among the different assets. !n allocation of funds
consideration should be given to such factors like competing use,
immediate re$uirement, profit prospects, overall management plans and
ability to accomplish the enterprise ob%ectives, in managing cash the
finance manager must strike a goal between two conflicting goals of
profitability and li$uidity of the company. !n managing receivables he
must try to minimi*e the level of receivables without affecting the sales. !n
addition, the finance manager is also responsible for determining the
amount of investment in inventories.
6. Alloation o ann3al ino7e4 5llocating the annual income of the
business is the responsibility of the finance manager. !ncome may be
retained for epansion purpose or it may be distributed in the form of
dividends. This decision should be taken in the light of the financial
position of the company, dividend policy, present and future re$uirements
and market standing of the firm.
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7. Control o 3n65: The finance manager also has to eercise control over
the use of the funds ac$uired by the firm so that the cash flow is as per plan
and there are no deviations between the actual and the estimates. ffective
budgetary control, breakeven analysis, ration analysis are some off the
tools that can be used for this purpose.
B Non8re3rring 3ntion:
8onrecurring finance function refers to those financial activities that a
financial eecutive has to perform very infre$uently. Preparation of financial
plan at the time of promotion of the enterprise, financial read%ustment in times
of li$uidity crisis, valuation of he firm at the time of merger or reorgani*ation of
the firm and similar other activities are of episodic character. 2uccessful
handling of such problems re$uires financial skills and understanding of
principles and techni$ues of finance peculiar to nonrecurring situations.
RELATION OF FINANCE WITH OTHER AREAS OF BUSINESS
&inance is omnipresent and it is associated with the plans and results of
every functional department. This is because every proposal and every decision
entails financial problems or has an influence on financial results. !t is
practically impossible to separate finance from any activity or department of an
organi*ation. &urthermore, decisions taken by the financial manager influence
the activities of other functional departments particularly production and
marketing.
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&inance is intimately related with marketing. The financial manager,
while formulating credit and collection policies for the firm, must consult the
marketing manager because these policies affect magnitude of sales of the firm.
#hether to sell for credit, to what etend and on what terms are parts of the
sales strategy of an enterprise. 0ut they have financial implications too because
the funds which will be tied up in receivable must be made available and any
shift in policies tied up a larger or smaller amount in receivables.
Thus, thus aspect of business decisions involves both sales and finance
alongside this, the financial manager will have to draw upon the fundamentals
of marketing while deciding whether to invest funds in a given business
enterprise and in discovering how o market stocks and bonds.
&inance is also closely related with purchase and production functions.
The decisions to determine the level of fied assets and the different types of
such assets for an enterprise is more a task for production engineer than a
financial manager. !n the same way the types of goods to be held in inventory
and the amounts of each are a basic part of the purchase and sales function,
which in turn are related with production function. owever, investment in
fied asset as well as in inventory is of significance because of greater risk
eposure of these assets affecting the financial position of the enterprise for a
long period of time. 2ince the financial manager is primarily responsible for
supplying funds to finance
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!nventory and fied assets, which must earn sufficient return to cover the
cost involved in procuring funds, he has to participate directly in the decisions
pertaining to ac$uisition of assets.
&inance is also connected with accounting. 5ccounting is a staff function,
which supplies data to top management, financial management, sales
management, production management and personnel management. The
financial manager re$uired accurate and scientifically arranged financial records
of the enterprise to guide him in managing the inflow and outflow of funds.
5s a matter of fact, sound financial management is a matter of good
accounting. Particular attention must, therefore, be given to procedures which
the accountant uses in determining the financial condition and income of the
business and to the restrictions which sound accounting imposes upon those in
charge of financial policies.
COMPANY PROFILE
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KARNATAKA SILK /ARKETIN- BOAR! 9KS/B
9arnataka silk marketing board was formed in 1:;:
different types of $uality also. !n terms of market, the same in its sales outlet.
The company has no competitors. The board provides credit to their customers
depending to their securities of fied deposits etc.,
The board provides credit to the customers > foremen?s for := days?.
The main important ob%ective of the board is to help the local dealers, weavers,
and twisters.
Company has been recogni*ed by the 9hadi and @illage !ndustries
Commission A9@!CB as their certified institution for the period from august /==1
to march /==/ for the purchase of mulberry silk yarn and sale to the khadi
institutions.
The $uantity information furnished above includes purchase of 3/1=
kgs amounting to -s.3.17 lakhs Aprevious year nilB and sales of
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The company has no inhouse manufacturing activity and hence
furnishing of particulars relating to licensed capacity, installed capacity and
production does not arise. The company has not purchasedGconsumed any
imported materials or spare during the year.
521; 2egment -eporting, 521< related party disclosures, 52//
accounting for taes on income4 since the company?s e$uity shares are not listed
in any recogni*ed stock echange in !ndia and the annual turnover is not more
than -s.7= crores during the year, the above said accounting standards are not
applicable to the company for the year.
arnings per share computed in accordance with accounting standard
/= issued by institute of chartered accountants of !ndia.
PARTICULARS 2001-02 2000-01
RS RS
ProfitGloss before ta /,
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)ilutative potential e$uity shares 8!I 8!I
)iluted earning per share : 7
Bran0e5 o Karnataka Silk Boar6
*it0in Karnataka:
P3r0a5e 3nit5
9annakapura 0angalore )istrict.
-amanagaram 0angalore )istrict.
+agadi 0angalore )istrict.
5nekal 0angalore )istrict.
2iddlaghatta 0angalore )istrict.
9olar )istrict.
Chickballapura 9olar )istrict.
Chamragnagar.
@i%ayapura 0angalore -ural )istrict.
Sale5 Unit5
0angalore.
)ooddaballapura.
0etageri.
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9ollegal +ysore )istrict.
Ot0er State5
Tamil 8adu
5ndra Pradesh
Uttar Pradesh
1.1 BACK-ROUN! TO T+E RESEARC+
TITLE OF T+E PRO;ECT
&inancial 2tatement 5nalysis of "Karnataka Silk Marketing Board.
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FINANCIAL STATE/ENTS ANAL%SIS
&inancial statements are prepared primarily for decisionmaking. They
play a dominant role in setting the framework of managerial decision. owever,
the information provided in the financial statements is not any end in itself as no
meaningful conclusions can be drawn from these statements alone. ence these
statements need to be analy*ed and interpreted so that suitable decisions can then
be taken on the basis of the information contained in them. The term Jfinancial
analysisK also known as Janalysis and interpretation of financial statementsK refers
to the process of determining the financial strengths and weaknesses of a concern
by establishing strategic relationships between the items of the balance sheet,
profit and loss account and other operative data.
!n the words of +yers, "financial statement analysis is largely a study of
relationship among the various financial factors in a business as disclosed by a
single set of statements, and a study of the trend of these factors as shown in a
series of statements.
!n the words of +etcalf and Titard, "analy*ing financial statements is a
process of evaluating the relationship between component parts of financial
statement to obtain a better understanding of a firmKs position and performance.
The purpose of financial analysis is to diagnose the information contained
in the financial statements so as to %udge the profitability and financial soundness
of the concern. !t is thus an attempt to determine the significance and meaning of
the data contained in the financial statements so that a forecast may be made of
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future earnings, debt servicing ability, repayment of debt upon maturity and
profitability of a sound dividend policy.
12 STATE/ENT OF T+E PROBLE/
The topic is selected to analy*e changes in the financial position of the
company for the past four years, which have increased its capital, turnover and
profits. The study is conducted to know the changes in the various items in the
balance sheet and income statement and to analy*e their impact on the
profitability, li$uidity and the other overall financial position of the company.
1# NEE! AN! I/PORTANCE OF T+E STU!%
The purpose of financial analysis is to diagnose the information contained
in the financial statements so as to %udge the profitability and financial
soundness of 9arnataka 2ilk +arketing 0oard.
The analysis attempts to determine the significance and meaning of the
data contained in the financial statements so that a forecast may be made of
future earnings, debt servicing ability, repayment of debt upon maturity
and profitability of a sound dividend policy of 9arnataka 2ilk +arketing
0oard.
The analysis will help determine the financial strengths and weaknesses of
9arnataka 2ilk +arketing 0oard by establishing strategic relationships
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between the items of the balance sheet, profit and loss account and other
operative data.
The analysis will help the process of evaluating the relationship between
component parts of financial statement to obtain a better understanding of
a firmKs position and performance.
14 OB;ECTI,ES OF T+E RESEARC+
To study all the financial statements for the past four years and to
identify the changes in the various items present in them.
To eamine the impact of the changes in the financial statements on the
financial position and profitability of the board.
Preparation of comparative statements to know the changes in the
absolute figures as well as the percentages.
Preparation of trend analysis statement to know the trend for the past
four years.
Preparation of common si*e statements to understand the Composition
of the various assets and liabilities in the balance 2heet, the composition
of the various epenses and the proportion of the profits Agross,
operating and netB to sales in the income statements.
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Calculation of li$uidity ratios, solvency ratios, general profitability
ratios, turnover ratios and overall profitability ratios in order to
ascertain financial significance of the figures contained in the financial
statements by establishing relationships between them.
To analyses the financial risk the company is eposed to and eamine
the shortterm li$uidity and longterm solvency position of the
company.
To eamine the increase in the various cost items in relation to
the sales and the past years figures and analyses whether the
increase is giving %ustifiable returns or not.
C0a
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1POSITION STATE/ENT OR BALANCE S+EET:
The 5merican institute of certified public accountants defines balance
sheet as "a tabular statement of summary of balances Ndebits and creditsO carried
forward after an actual and constructive closing of books of accounts kept
according to principles of accounting. The purpose of the balance sheet is to
show the resources that the company has i.e. its assets and from where those
resources come from i.e. its liabilities and the investment made by the owners
and outsiders.
The balance sheet is one of the important statements depicting the
financial strength of the concern. !t shows on one hand the resources that it
utili*es and on the other hand the sources of all those resources. The balance
sheet is always prepared as on a particular date.
5ll concerns registered under the companies act, 1:7 have to adopt a
prescribed format for showing the assets and liabilities in the balance sheet and
are also re$uired to give the figures of the previous year along with the current
year figures.
2INCO/E STATE/ENT OR PROFIT = LOSS ACCOUNT:
!ncome statement is prepared to determine the operational position of the
concern. !t is a statement of revenues. !f there is an ecess of revenues over
ependiture the income statement will show a profit and if the ependitures are
more than the income then there will be a loss. The income statement is
prepared for a particular period, generally a year. !t includes all revenues and
ependitures falling due in that year, irrespective of their receipt or payment.
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#STATE/ENT OF RETAINE! EARNIN-S OR PROFIT = LOSS
APPROPRIATION ACCOUNT:
5 profit and loss appropriation account is a connecting link between
profit and loss account and balance sheet. 'nly %oint stock companies prepare it.
5 profit and loss appropriation account is a statement prepared to show
how the profits earned by a company during a year have been appropriated Ni.e.,
distributed or utili*edO as dividends on shares, transfer to general reserve,
sinking fund or any other reserve, and how much of the earnings or profits are
retained as surplus profits.
22 FINANCIAL STATE/ENTS ANAL%SIS
&inancial statements are prepared primarily for decisionmaking. They
play a dominant role in setting the framework of managerial decision. owever,
the information provided in the financial statements is not any end in itself as no
meaningful conclusions can be drawn from these statements alone. ence these
statements need to be analy*ed and interpreted so that suitable decisions can then
be taken on the basis of the information contained in them.
The term Jfinancial analysisK also known as Janalysis and interpretation of
financial statementsK refers to the process of determining the financial strengths
and weaknesses of a concern by establishing strategic relationships between the
items of the balance sheet, profit and loss account and other operative data.
!n the words of +yers, "financial statement analysis is largely a study of
relationship among the various financial factors in a business as disclosed by a
single set of statements, and a study of the trend of these factors as shown in a
series of statements.
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!n the words of +etcalf and Titard, " analy*ing financial statements is a
process of evaluating the relationship between component parts of financial
statement to obtain a better understanding of a firmKs position and performance.
The purpose of financial analysis is to diagnose the information contained
in the financial statements so as to %udge the profitability and financial soundness
of the concern. !t is thus an attempt to determine the significance and meaning of
the data contained in the financial statements so that a forecast may be made of
future earnings, debt servicing ability, repayment of debt upon maturity and
profitability of a sound dividend policy.
TYPES OF FINANCIAL ANALYSIS
&inancial analysis may be classified into different categories depending
upon
5. The materials used for the analysis or the persons interested in
the analysis and
0. The modus operandi or method of operation followed in the analysis.
A Cla55iiation on t0e ba5i5 o t0e 7aterial 35e6 or t0e anal>5i5 or t0e
5i5
1 E?ternal anal>5i5:
ternal analysis is done by outsiders who do not have access to the
detailed internal accounting records of the business firm. These outsiders include
investors and creditors, both eisting and potential as well as government
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agencies, credit agencies and the general public. These eternal parties depend
almost entirely on the published financial statements. ternal analysis thus
serves only limited purposes.
2 Internal anal>5i5:
The analysis conducted by persons who have access to the internal
accounting records of a business firm is known as internal analysis. 2uch an
analysis can therefore by performed by the eecutives and employees of the
organi*ation as well as government agencies which have statutory powers vested
in them. 0ut, generally, the personnel of the finance and accounting departments
and the eecutives for management purposes do internal analysis.
5s the persons who have access to the books of accounts and the infernal
records of the concern do the internal analysis, internal analysis is more detailed
than eternal analysis and thus serves a broader purpose.
BCla55iiation on t0e ba5i5 o t0e 7o635 o5i5 or 5tr3t3ral anal>5i5:
#hen a single set of financial statements relating to %ust one accounting
year are analy*ed, the analysis is known as vertical analysis. !n the vertical
analysis, the figures of the financial statements are analy*ed columnwise i.e. a
figure from one years financial statement is compared with a base figure selected
from the same years financial statement. &or instance, the different items of costs
of a particular year may be compared with the sales for that year.
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@ertical analysis is also known as static analysis, as it depends upon the
data as on one date or for one accounting ear and measures the state of affair as
on a particular date or for a particular year. @ertical analysis is useful to compare
the performance of several companies in the same group or the various divisions
or departments in the same company.
owever vertical analysis is not very helpful for a proper analysis of the
state of affairs of a concern as it depends on the data relating to %ust one date or
one accounting year. Commonsi*e statements and financial ratios are the two
main tools employed in vertical analysis.
2 +ori@ontal Anal>5i5 or Tren6 Anal>5i5:
#hen the financial statements of a number of years are analy*ed, the
analysis is called hori*ontal analysis. !n other words, hori*ontal analysis is a type
of analysis in which there is comparison of the trend of each item. !n the financial
statements over a number of years.
The figures of the current year are compared with the figures of the
standard or the base year, and the changes in each of the element or items from
the base year are shown, usually, in the form of percentage. ori*ontal analysis
is also known as dynamic analysis, as it is based on the data from year to year
and measures the changes of position or trend of the business over a period of
time.
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ori*ontal analysis is more useful than vertical analysis as it provides
considerable inside into the areas of strength and weakness of an enterprise. !t
also focuses attention on those items that had changed significantly during the
period under review.
Comparative statements and trend percentages are two tools employed in
hori*ontal analysis.
STEPS IN,OL,E! IN ANAL%SIS OF FINANCIAL STATE/ENT
&rom a study of the meaning of analysis of the financial statements, it clear
that the work of analysis of financial statements involves three steps or processes.
They are4
1.5nalysis
/.Comparison
3.!nterpretation.
1.Anal>5i5: 5nalysis of financial statements means splitting up or regrouping of
the figures found in the financial statements into the desired homogeneous and
comparable component parts. !n other words, it means methodical classification
of the data given in the financial statements into homogeneous and comparable
parts. !n short, it is the reclassification and rearrangement of the data found in
the financial statements into groups of a few principal elements according to their
resemblances and affinities and presenting them in the form most convenient fro
interpretation.
Thus, an analysis of the financial statements is the process of regrouping or
reclassifying the figures found in the financial statements into the desired
homogeneous and comparable component parts.
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2Co7
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6.To ascertain the future prospects of the concern.
2# TEC+NIUES OR /ET+O!S OF FINANCIAL ANAL%SIS
The techni$ues or methods of financial statements analysis adopted for the
purposes of this study are as follows
I CO/PARITI,E FINANCIAL STATE/ENT ANAL%SIS
II CO//ON SIE FINANCIAL STATE/ENTS ANAL%SIS
III TREN! PERCENTA-ES OR TREN! RATIOS
I, RATIO ANAL%SIS
I CO/PARITI,E FINANCIAL STATE/ENT ANAL%SIS
The comparative financial statements are statements of the financial
position at different periods of time. The elements of financial position are shown
in a comparative form so as to give an idea of financial position at two or more
periods. These financial statements summari*e and present relative accounting
data for a number of years, incorporating there in the changes in individual items.
Thus they provide time perspective to the various elements contained in the
financial statements.
Comparative financial statements facilitate comparison between two or
more accounting years by presenting the relevant figures for those years side by
side. The trends in a number of accounting items relating to the performance,
efficiency and financial position of a business can be understood through the use
of comparative financial statements.
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!mportant comparative financial statements are the comparative balance
sheet and the comparative income statement.
1Co7
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mere reading of the comparative income statement helps one to device
meaningful conclusion about the performance of the business from year to year.
II CO//ON SIE FINANCIAL STATE/ENTS ANAL%SIS
Commonsi*e financial statements are those statements in which the data
or figures reported in the financial statements are converted into percentages,
taking some common base. They are the tools for vertical analysis of financial
statements.
Commonsi*e financial statements are also known as component
percentage statements or 1== percent statements because each statement is
reduced to the total of 1==F and each individual item is epressed as a
percentage of the total of 1==. Commonsi*e financial statements mainly include
N1O commonsi*e income statement and N/O commonsi*e balance sheet.
1Co77on85i@e ino7e 5tate7ent:
5 commonsi*e income statement is statement in which the net sales is
taken a 1==F and all the other items of the income statement are epressed as a
percentage of net sales.
5 significant relationship can be established between items of the income
statement and the volume of sales. This is because certain epenses are largely
fied in nature where as certain epenses tend to vary in proportion to sales. &ro
instance, the increase in sales will be certainly increase selling epenses and not
administrative or financial epenses by the same etant however, in case the
volume of sales increases by a considerable etent, the administrative and
epenses may go up. Conversely, if the sales are declining the selling epenses
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should be reduced at once. 2o a relationship is established which is helpful in
evaluating the operational activities of the enterprise.
2Co77on85i@e Balane S0eet
5 statement in which each asset is epressed as a ratio to the total assets
and each liability is epressed as a ratio of total of liabilities is called common
si*e balance sheet. Thus the total assets or the total liabilities and capital is taken
as 1==F and all the items of the balance sheet Ai.e. each of the assets and each of
the liabilitiesB are epressed as a percentage of the total assets or the total
liabilities and capital.
The commonsi*e balance sheet throws light on the structure of the balance
sheet and can be used to observe the trend of the ratio of each of the items of the
balance sheet to the total of all assets or liabilities. They can also be used to
compare companies of differing si*es.
III TREN! PERCENTA-ES OR TREN! RATIOS
Comparison of past data over a period of time with base year is known as
trend analysis. !t is a hori*ontal analysis of financial statements. ere financial
statements. ere financial statements of more than one year are analy*ed. !t is a
dynamic analysis depicting the changes over a period of years.
!t is a method of analysis under which the percentage relationship that each
financial statement item of each year bears to the same item in the base year is
calculated. ach item of the base year is taken as 1==F and on the basis of that
the trend analysis for the corresponding items in the other years are calculated.
Trend percentages are immensely helpful to the management in knowing the
present position and the direction in which the enterprise is moving. Through a
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/. As a rate that is so any ties o!er a period of tiee. The fied assets
turnover ratio is 3 times a year.
3.As a percentage. . The profitability ratios such as the net profit ratio are
usually epressed as a percentage like say 67F. ach modes of epression as
illustrated above has its own advantages. !t is the responsibility of the analyst
to select that method of epression that best serves the purpose of each
particular ratio. . The purpose of the debte$uity ratio is to show the
$uantum of the borrowed funds to the ownerKs funds. !t is hence epressed as
a pure ratio like 34/.
PROCE!URE FOR RATIO ANAL%SIS:
The following four steps are involved in the ratio analysis, vi*.
1. 2election of the relevant data from the financial statement depending
upon the ob%ective of the analysis.
/. Calculation of appropriate ratios from the selected data.
3. Comparison of the ratios so calculated with past ratios from the same
firm or similar firms or with pro%ected ratio or with the standards ratio.
6. !nterpretation of the ratios.
INTERPRETATION OF RATIOS
5 single ratio in itself does not serve much purpose. !n order to utili*e the
ratio so calculated as an input for decisionmaking, it has to be further
interpreted. This step of interpretation is the most crucial in the entire process of
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future earnings, debt servicing ability, repayment of debt upon maturity and
profitability of a sound dividend policy.
C0a
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/ET+O!S OF !ATA COLLECTION
The data for this research has been collected from primary sources. The
primary sources being the 5ccountant > Chairman of 9arnataka 2ilk +arketing
0oard. The data regarding the financial aspect has been collected from the
5ccountant of the board who has prepared the balance sheet and profit and loss
account since its inception.
The data regarding the managerial aspects and the operations of the
company has been collected from the Chairman.
The theoretical aspects have been adapted fromL
&inancial +anagement by 2harma and (upta
0usiness &inance by -eddy, 5ppannaihh and 2rivastava
&inancial +anagement by 9han and Main
+anagement 5ccounting by 0.2. -aman and
&inancial 5ccounting by -. 8arayanaswamy.
#4 RESEARC+ INSTRU/ENT
1. Common si*e balance sheet.
/. Commonsi*e income statement.
3. Trend analysis.
6. -atio analysis.
a. Ii$uidity ratio.
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b. 2olvency ratio.
c. (eneral profitability ratio
d. Turn over ratio.
e. 'ver all profitability ratio.
C0aear5
Parti3lar5 A5 on #15t
7ar0 ('
A5 on #15t
7ar0 (4
A5 on #15t
7ar0 (#
A5 on #15t
7ar0 (2
.Share Capital
5uthori*ed
6.==.=== $uity shares of
rs.1=== each
!ssued, subscribed and paid
up
3.16.7== e$uity shares of
-s.1=== each.
2 Re5ere an6 53r
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PROFIT AN! LOSS ACCOUNT OF T+E CO/PAN%
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ParticularsA5 on #15t
7ar0 ('
A5 on #15t7ar0
(4
A5 on #15t7ar0
(#
A5 on #15t7ar0
(2
INCOME
Sales
'ther income
TOTAL
EXPENDITURE
Cst ! sales
A"#i$istrati%ee&'e$ses
2elling, )istKn > 'ther
epenses
&inance charges
)epreciation
Provision for bad debts
)onation
TOTAL
Profit before ta
TOTAL
Profit before ta
98 Provision for ta
Pr!it a!ter ta&
I$c#e ta& ! earl((ear
TOTAL
Profit as per balance sheet
3=,;=,;3,;/
1,:1,3:,
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S0e63le5 or7ing ear5
S0
No
PARTICULARS AS AT #18(#8
2((2
RS
AS AT #18(#8
2((#
RS
AS AT #18(#8
2((4
RS
AS AT #18#8
2(('
RS
1.=1 S+ARE CAPITAL
5uthori*ed4
!ssued, subscribed > paid up
4((((((((
#14'(((((
4((((((((
#14'(((((
4((((((((
#14'(((((
4((((((((
#14'(((((
1.=/ RESER,ES = SURPLUS5s per profit > loss 5GC
&$('"41 1('1&'"# 12##.#$( .&'4&14
1.=3La$ !u$"s
Unsecured loans!nterest accrued and due To
govtGP2&5
4(.'((( 4(.'((( 4(.'((( 4#(1$#&
1.=6FIXED ASSETS
I58)&U-8!TU- > &!TU-2
P5-T!T!'8 > &!TT!8(2
PI58) > +5C!8-Q
@C!CI
'&&!C RU!P+8T2
TOTAL
16,==,=6=
,;=,=
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)ebts outstanding for a
period eceeding si months
'ther debts
Ttal
Iess4 provision for doubtful
debts
Ttal
'ut of the above
aB )ebts considered
good and in respect
of which thecompany is fully
secured
1. 0y deposit of title
deedsG&)-/. 0y bank guarantee
bB )ebts considered
good for which the
company holds no
security other than
debtorsK personal
security
cB )ebts considered
doubtful and
provided for
TOTAL
3,7=,3
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advancesvechicle
accured but not due
dB 5dvance recoverable
in cash or in kind or for
value to be received.
AUn secured considered
goodB1.other advances > prepaid
epenses
/. 5dvance income ta >
T.).2
TOTAL
:,=//
6,1,677
;3,73,1
provisions
Current liabilities
aB 2undry creditors
bB Trade advancescB 2ecurity deposits
dB 'ther liabilities
TOTAL
1,=;,3=/
6,1=,7
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Co7
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42 ANAL%SIS AN! INTERPRETATION OF CO/PARATI,E
TREN! BALANCE S+EET
1. The percentage of share capital is stagnant for all the four years as it is
(overnment concern firm and it is stagnant to 1==F for all the four years.
/. The -eserves and 2urplus has improved in /==3 i.e. 161.;3 when comparing
it to the years /==/ > /==6 i.e. 1/=.< > 11=.:. This increase in the year
/==3 is due to entirely on account of undistributed profit transferred to it.
3. The loan funds are decreased sharply to 1=7F in /==3/==6 after having
stagnant from past years. These funds have been used to finance and
purchase of silk and fied assets and thus will result in better trading on
e$uity.
6. The percentage of fied assets is 16=.3 in /==3/==6 in comparison to :
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1. The sales have increased in the year /==3/==6 i.e. ;;./ when it is
compared to year /==//==3 i.e. .:/ and in the year /==6/==7 i.e.
;6./.
/. The administrative epenses have increased in the year /==6/==7
A11.11B when it is compared to the years /==//==3 A136.
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4# RATIO ANAL%SIS: !ATA ANAL%SIS AN!
INTERPRETATION
The data which is seen in the below tables has been collected from the
annual reports of 9arnataka 2ilk +arketing 0oard and with the help of +r. (upta
who is the C.5., who is the auditor of the company and has prepared the balance
sheet and profit and loss account since its inception.
LIUI!IT% RATIO
1 CURRENT RATIO
The current ratio or working capital ratio gives the relationship between the
current assets and the current liabilities. !t is a measure of general li$uidity
and most widely used to make the analysis of the shortterm financial position
or li$uidity of the firm.
&'-+UI54 CU--8T 522T2
CU--8T I!50!I!T!2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' 1;.6 1
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!8T-P-T5T!'84
The standard current ratio re$uired is /41 however an observation of the
above graph reveals a very high current ratio. The deeper look at the
composition reveals that it is due to ecessive stocking and maintaining
huge Vcash and bank balances.
5n interaction with the officials revealed that purchase of silk is done at
when prices are attractive and materials in stocked, resulting in high amount
of inventory.
2 UICK or ACI! TEST or LIUI! RATIO
The $uick or acid test ratio is a measure of li$uidity taking into consideration the
composition of current assets. !t is referred to as $uick ratio as it is a measure of
the companyKs ability to convert its current assets into cash $uickly in order to
meet its current liabilities without any diminution in value. Ruick assets are all
current assets ecluding stock and prepaid epenses.
&'-+UI54 RU!C9 or I!RU!) 522T2
CU--8T I5!0!I!T!2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' 17.1 13.1 11 .3
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!8T-P-T5T!'8
The standard or ideal ratio is =4741. owever the company has a higher ratio.
This, again is due to high cash balance it can also be observed that the company
is trying to reduce the balance.
LON- TER/ SOL,ENC% or LE,ERA-E RATIO
Ieverage ratio can be defined as financial ratios, which throw light on the long
term solvency of the company as reflected in its ability to assure longterm
creditors with regards to4 aB Periodic payments on the interest during the currency
of the loans
bB -epayment of principle on maturity or in predetermined installments at their
due dates.
1 !EBT EUIT% RATIO
The debt e$uity ratio gives the relation between the borrowed funds and the
ownerKs fund and is the most popular measure if the long term solvency of the
10)1!7)%
0)%
%)1#
0
2
#
!
10
12
rati
2001-02 2002-0% 200%-0 200-0"
(ears
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firm. This ratio reflects the relative claims of the creditors and the shareholders
against the assets of the firm.
&'-+UI54 I'8( T-+ )0T225- 'I)-2 RU!TQ
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' =.=13 =.=13 =.=13 =.=13
,.,1*,.,1* ,.,1* ,.,1*
0
0)002
0)00
0)00#
0)00!
0)01
0)012
0)01
rati
2001-02 2002-0% 200%-0 200-0"
(ears
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!8T-P-T5T!'84 The lender prefers debt e$uity of /41. owever it seems
that the company has a very low debt proportion in the capital structure. This is
because the government holds a ma%or stake in companiesK shareholding. This
indicates that the company has ample debt capacity.
2 PROPRIETAR% or EUIT% RATIO:
This is the variant of the debt e$uity ratio and is also known as 8et #orth to
Total 5ssets -atio as is establishes the relationship between the shareholders
fund and the total assets of the company. This ratio indicates the etent to
which the assets of the company can be lost without affecting the interest of
the creditors. ence the higher the ratio, the better is the longterm solvency
position of the company.
&'-+UI54 25-'I)-2 &U8)2 1==
T'T5I 522T2
The two main components of this ratio are shareholders funds and total assets.
2hareholders funds are $uity 2hare Capital, Preference 2hare Capital,
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undistributed profits reserves and surpluses less any accumulated losses. Total
assets denote the total resources of the company.
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' :=F :=F
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!8T-P-T5T!'8
The proportion ratio, which is a high as :=F, indicates that shareholders
money has been utili*e to finance the companiesK assets.
The ideal ratio is 7=F. 5s the actual ratio eceeds the ideal ratio, it indicates
the strong financial position of the company. &urther, the ratios for threeyear
period show a constant in the proportion of the total assets financed by the
shareholders funds with each successive year. cept for the year /==/=3 the
ratio is decreased, but again for the year /==3=6 the companies financial
position attained its old proportion i.e. :=F. The total assets financed by the
shareholders funds have increased compared to last year /==/=3.
# FI)E! ASSETS to NET *ORT+ RATIO:
The ratio establishes the relationship between the fied assets and the
shareholders funds i.e. share capital plus retained earning and reserves. !t
indicates the etend to which the shareholders funds are invested in the fied
assets. !f the ratio is less than 1==F, it implies that the ownerKs funds are more
than the fied assets and shareholders provide the part of the working capital.
&'-+UI54 &!) 522T2 1==
25-'I)-2 &U8)2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' 1.3F 1.3F /.=F 1.:F
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The satisfactory ratio is ;F. The company is not a manufacturing concern
and is basically into trading of silk and cocoons. This attributes to such a low
fied assets G net worth ratio.
4 FI)E! ASSETS RATIO
This ratio is a variant to the fied assets to net worth ratio and gives the
relationship between the fied assets and the total longterm funds of the
company. The ratio indicates the etent to which the total fied assets are
financed by the longterm funds. The fied assets are taken net block i.e. after
depreciation.
&'-+UI54 &!) 522T2
I'8( T-+ &U8)2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' 1./;F 1./7F 1.
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(enerally, a concern should finance its fied assets entirely from longterm
funds and hence this ratio should be maimum 1==F. 5s this ratio is less than
1==F for all the four years, it indicates that the longterm funds have been
used to finance the current assets in addition to the fied assets of the
company. This reflects a conservative working capital financing policy on the
part of the company, as it is desirable that some part of the current assets,
which constitute the core working capital, should be financed from longterm
funds.
' !EBT SER,ICE OR INTEREST CO,ERA-E RATIO
The debt service ratio is a measure if the debt servicing capacity of a
company. !t indicates the number of times interest is covered by the profits
1)27 1)2"
1)!$ 1)7!
0
0)"
1
1)"
2
rati
2001-02 2002-0% 200%-0 200-0"
(ears
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available to pay the interest charges. (enerally, higher the ratio, the more safe are
the long term creditors because ever if the earnings of the company will still be in
a position to meet its commitments of fied interest charges.
&'-+UI54 8T P-'&!T2 0&'- !8T-2T 58) T52
&!) !8T-2T C5-(2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' /.
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make some contribution towards its sales. ence the etent of the contribution
made by the various activities and the resources used needs to be known in order
to determine their significance to the organi*ation. !t is for this purpose that the
activity or performance ratios are calculated as they indicate the etent of
effective utili*ation of the various assets of the concern. 5s these ratios are
calculated on the basis of turnover i.e.net sales, they are also called turnover
ratios.
1 TOTAL ASSETS TURNO,ER RATIOS
Total assets turnover ratio is the ratio between the total assets and turnover or
sales. This ratio indicates efficiency or inefficiency in the use of the total assets or
resources of the concern. !t is thus a measure of the overall performance of the
business.
&'-+UI54 8T 25I2
T'T5I 522T2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' AtimesB 1.1< =.< =.: =.:
1)1!0)!
0)$ 0)$
0
0)2
0)
0)#
0)!
1
1)2
rati
2001-02 2002-0% 200%-0 200-0"
(ears
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!8T-P-T5T!'84 The ideal total assets turnover ratio is that the sales
should be at least twotime the value of the total assets. 5s the actual
ratio is less than the standard ratio for all the four years Under study, itindicates that the assets of the company has been under utili*e and that
the proportion of productive assets and the total assets of the company is
low.
2 FI)E! ASSETS TURNO,ER RATIO
&ied assets turnover ratio gives the relationship between the fied assets
and the turnover. &ied assets here mean the net fied assets i.e. the fied
assets less depreciation. Turnover refers to the total sales less any returns. This
ratio indicates as to what etent the fied assets of a concern have contributed
to sales. Thus it indicates the etent of effective utili*ation of the fied assets
of a concern.
&'-+UI54 8et 2ales
&ied assets
Q5- /==1=/ /==/=3 /==3=6 /==6=7-atio AtimesB :;.;; .6= 7=.3 71.:/
$7)77##)
"0)#% "1)$2
0
20
0
#0
!0
100
rati
2001-02 2002-0% 200%-0 200-0"
(ears
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! 8T-P-T5T!'84
The standard fied assets turnover ratio is 7 and according to the Jrule of
the thumbK the fied of the concern can be considered as over utili*e this islargely because the company has higher current assets, which is a characteristics
of a nonmanufacturing company.
3.CURRENT ASSETS TURNO,ER RATIO
Current asset turnover ratio is the proportion of the current assets to the net
sales of a concern. 5s this ratio gives the contribution of the current assets to the
turnover, a high current asserts turnover ratio is an indication of better utili*ation
of the current assets and a low ratio is indicative of inefficient utili*ation of the
current assets.
&'-+UI54 8T 25I2
CU--8T 522T2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!'2 1./= =.
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!8T-P-T5T!'84
There is no standard current assets turnover ratio. This ratio has remained
largely stable over past three years ecept to a constant changes in /===/==1
which is $uite high. owever as the ratio is not very high it indicates that the
current assets have not been utili*e effectively. This is largely because bank
balances constitute a substantial portion of the total current assets and do not givemany yields.
-ENERAL PROFITABILIT% RATIOS
The primary ob%ective of any business enterprise is to earn profits. !n the
words of Iord 9eynes Dprofit is the engine that drives the business enterpriseD. 5
business enterprise can discharge its obligation to the ratios are hence calculated
to measure the overall efficiency of the business. They are calculated either in
relation to sales or in relation to investment.
1)20)!
0)$20)!$
0
0)2
0)
0)#
0)!
1
1)2
rati
2001-02 2002-0% 200%-0 200-0"
(ears
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1.-ROSS PROFIT RATIO
(ross profit ratio measures the relationship of gross profit to net sales and is
usually represented as a percentage. There s no standard norm for the gross profit
ratio and it may vary from business to business. owever the ratio should be
ade$uate to cover the pertaining epenses like office, administration selling etc.
also to provide or fied charges, dividends and accumulation of reserves.
The two basis components of this ratio are sales and cost of goods sold since
gross profit is simply the ecess of net sales over cost of goods sold. 8et sales
refer to the total sales less any returns.
&'-+UI54 25I2C'2T '& ('')2 2'I)
8T 25I2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' AFB 7./7F 7.63F ./;F 7.3:F
")2"
")% #)27
")%$
)#
)!"
")2
")
")#
")!
#
#)2
#)
rati
2001-02 2002-0% 200%-0 200-0"
(ears
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!8T-P-T5T!'84
This ratio has been mostly stable for all the four years under study thereby
impaling that the portion of stock to sales as remained mostly unchanged for the
period. &urther, this ratio is very high as the company is in the trading industry
where in the cost of manufacturing epenses are nil in proportion to the total cost.
ence the operating profit ratio will give a better picture of the profitability
position os a company.
/.OPERATIN- RATIO OR OPERATIN- COST RATIO
'perating ratio establishes the relationship between operating cost and the
net sales. The ratio is calculated by dividing the operating costs with the net sales
and is usually represented as a percentage. 'perating cost refers to all the
epenses incurred in operating or running of the business. They comprise thecost of goods sold plus operating epenses such as office, administration, selling
and distribution. Thus this ratio measures the cost of operations per rupee of
sales.
&'-+UI54 'P-5T!8( C'2T
8T 25I2
Q5- /==1=/ /==/=3 /==3=6 /==6=7
-5T!' AFB =.:7 =.:7 =.:6 =.:7
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&'-+UI54 8T P-'&!T Aafter taB
8T 25I2
Qear /==1=/ /==/=3 /==3=6 /==6=7
-atioAFB 1.7 =.6 =.6 =. taesB
2hareholders funds
Qear /==1=/ /==/=3 /==3=6 /==6=7
-atioAFB 1.;; =.3/ =.66 =.63
1)77
0)%2 0) 0)%
0
0)2
0)
0)#
0)!
1
1)2
1)
1)#
1)!
Rati
2001-02 2002-0% 200%-0 200-0"
0ears
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!8T-P-T5T!'84
The company earnings are very low as compared to the total assets that it
holds. cept for the /==1/==/ the return on investment is less than 1F but
for the year /==3/==6 it is stable, which needs to be worked on.
44 CONCLUSIONS FRO/ T+E ANAL%SIS
FINANCIAL STATE/ENTS ANAL%SIS OF KARNATAKA SILK
/ARKETIN- BOAR!
The data collected was analy*ed using financial ratios and has been
presented in the form of graphs and tables and interpreted accordingly.
The standard current ratio re$uired is /41 however an observation of the
above graph reveals a very high current ratio. The deeper look at the
composition reveals that it is due to ecessive stocking and maintaining
huge Vcash and bank balances.
The $uick ratio as compared to the current ratio is still high this can be
attributed to large cash and bank balances, however it can be seen that it is
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The $uick ratio as compared to the current ratio is still high this can be
attributed to large cash and bank balances, however it can be seen that it is
on a decreasing trend however compared to the standard li$uid ratio of 141,
the company li$uidity provision is ecessive.
The standard or ideal ratio is =4741. owever the company has a higher
ratio. This, again is due to high cash balance it can also be observed that
the company is trying to reduce the balance.
The lender prefers debt e$uity of /41. owever itKs seemed that thecompany has a very low debt proportion in the capital structure. This is
because the government holds a ma%or stake in companiesK shareholding.
This indicates that the company has ample debt capacity.
The proportion ratio, which is a high as :=F, indicates that shareholders
money has been utili*e to finance the companiesK assets.
(enerally, a concern should finance its fied assets entirely from longterm
funds and hence this ratio should be maimum 1==F. 5s this ratio is less
than 1==F for all the four years, it indicates that the longterm funds have
been used to finance the current assets in addition to the fied assets of the
company. This reflects a conservative working capital financing policy on
the part of the company, as it is desirable that some part of the current
assets, which constitute the core working capital, should be financed from
longterm funds.
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The ideal total assets turnover ratio is that the sales should be at least two
time the value of the total assets. 5s the actual ratio is less than the
standard ratio for all the four years Under study, it indicates that the assets
of the company has been under utili*e and that the proportion of productive
assets and the total assets of the company is low.
There is no standard current assets turnover ratio. This ratio has remained
largely stable over past three years ecept to a constant changes in /==1
/==/ which is $uite high. owever as the ratio is not very high it indicates
that the current assets have not been utili*e effectively. This is largelybecause bank balances constitute a substantial portion of the total current
assets and do not give many yields.
This ratio has been mostly stable for all the four years under study thereby
impaling that the portion of stock to sales as remained mostly unchanged
for the period. &urther, this ratio is very high as the company is in the
trading industry where in the cost of manufacturing epenses are nil in
proportion to the total cost. ence the operating profit ratio will give a
better picture of the profitability position of a company.
'perating ratio is very high as the company is not a manufacturing
industry and as such operating cost constitute a greater proportion of its
total cost.
The operating profit ratio is on a decreasing trend, having declined
considerably in /==6/==7. This reflects a need for an improvement in the
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operating efficiency of the concern. !t also shows that the management has
been unable to control the operating inefficiencies. &urther, the decrease in
this ratio implies that the company has not sufficient funds available to
meet nonoperating epenses.
The net profit ratio has increased in /==//==3 and has eceeded the drop
incurred in further two years, this is caused due to the increase in the
operating epenses this shows the current and the future profitability
position of the concern is average.
This ratio has been mostly stable for all the four years under study thereby
impaling that the portion of stock to sales as remained mostly unchanged
for the period. &urther, this ratio is very high as the company is in the
trading industry where in the cost of manufacturing epenses is nil in
proportion to the totals cost. ence the operating profit ratio will give a
better picture of the profitability position of a company.
The operating profit ratio is on a decreasing trend, having declined
considerably in /==6/==7. This reflects a need for an improvement in the
operating efficiency of the concern. !t also shows that the management has
been unable to control the operating inefficiencies. &urther, the decrease in
this ratio implies that the company has not sufficient funds available to
meet nonoperating epenses.
The net profit ratio has increased in /==//==3 and has eceeded the drop
incurred in further two years, this is caused due to the increase in the
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operating epenses this shows the current and the future profitability
position of the concern is average.
The company earnings are very low as compared to the total assets that it
holds. cept for the /==//==3 the return on investment is less than 1F
but for the year /==//==3 it is stable, which needs to be worked on.
'2 RECO//EN!ATIONS
'ver stocking to drive benefits of purchasing at lower prices should be
more carefully evaluated keeping into consideration the cost of holding
inventory and locked up capital.
@endorKs relations need to be strengthened to avoid overstocking.
The reducing cash ratio indicates that the company has reali*ed thatecessive cash balances are not actually recovered this should be
encouraged further.
The return for the government stake in the company can be increased if
the debt capital is introduce to a larger etent to derive the benefit of
leverage.
The return on total assets as well as total capital employed in eternally
!2 low which the company has to look into.
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The company can encourage arrival of silk at silk echange.
The company can try to arrival of silk from foreign countries.
The company can start its own manufacturing unit, which will result in
good profit and employment opportunities.
The company can try to enter international market, which results good
rate of revenue.
The ecessive li$uidity can be reduced.
The turnover ratio indicates a very low turnover of the current assets. The
company being a trading concern should more so have a higher turnover.fficient inventory management combined with better purchasing and
marketing policies would unable achieving a higher activity level.
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BIBLIO-RAP+%
Book Title: 0usiness -esearch +ethods
A3t0or: )onald.2.Cooper > Pamela.2.
Book Title: &inancial +anagement
A3t0or: 2harma and (upta.
Book Title: 0usiness &inance
A3t0or: -eddy, 5ppannaihh and 2rivastava
Book Title: &inancial +anagement
A3t0or: 9han and Main
Book Title: &inancial 5ccounting
A3t0or: -. 8arayanaswamy.