Financial 1

VIVEK COLLEGE OF COMMERCE

CHAPTER: 1

INTRODUTION

INDUSTRY PROFILE

TEXTILE INDUSTRY – HOLISTIC APPROACH

A Textile company the purpose of restructuring scheme is defined as “whose business

includes yarn spun on spinning systems, weaving, knitting, processing, texture made-up,

readymade garmenting and composite milling operations in the organized sector”.

US and European markets dominate the global textile trade, accounting for 64% of

clothing and 39% of the textile market. With the dismantling of quotas, global textile

trade is expected to grow to US$ 670 billion by 2011.

The history of development in World Textile Industry was started in Britain as the

spinning and weaving machines were invented in that country. The World Trade

Organization (WTO) has taken so many steps for uplifting this sector. In the year 1995,

WTO had renewed its Multi Fiber Arrangement (MFA) and adopted Agreement on

Textiles and Clothing (ATC), which states that all quotas on textile and clothing will be

removed among WTO member countries. However the level of exports in textiles from

developing countries is increasing even if in the presence of high tariffs and quantitative

restrictions by economically developed countries. Moreover the role of multifunctional

textiles, eco-textiles, e-textiles and customized textiles are considered as the future of

textile industry.

It is worth noting that China, Hong Kong, South Korea and Taiwan have registered their

presence significantly in the world textile market through conscious efforts while they

continued to globalize their textile economy. The Indian textile industry has witnessed

significant growth during the last decade in terms of installed spindleage, production of

yarn (both spun - filament), output of cloth and its per capita availability as also exports.


The Textile Industry is one of the booming industry, of that Asian Countries plays a vital

role in Global Textile Market. US and European countries dominates global textile

market as they import higher.

INDIAN TEXTILE INDUSTRY

Indian Textile Industry is one of the leading textile industries in the world. Though was

predominantly unorganized industry even a few years back, but the scenario started

changing after the economic liberalization of Indian economy in 1991. The opening up of

economy gave the much-needed thrust to the Indian textile industry, which has now

successfully become one of the largest in the world.

India textile industry largely depends upon the textile manufacturing and export. It also

plays a major role in the economy of the country. India earns about 27% of its total

foreign exchange through textile exports. Further, the textile industry of India also

contributes nearly 14% of the total industrial production of the country. It also contributes

around 3% to the GDP of the country.

Textile Industry in India is the second largest employment generator after agriculture. It

holds significant status in India as it provides one of the most fundamental necessities of

the people. Textile industry was one of the earliest industries to come into existence in

India and it accounts for more than 30% of the total exports. In fact Indian textile

industry is the second largest in the world, next to China.

Textile Industry is unique in the terms that it is an independent industry, from the basic

requirement of raw materials to the final products, with huge value-addition at every

stage of processing. Indian textile industry is constituted of the following segments:

Readymade Garments, Cotton Textiles including Handlooms, Man-made Textiles, Silk

Textiles, Woollen Textiles, Handicrafts, Coir, and Jute.

Current Facts of Indian Textile Industry

India holds position as world’s second highest cotton producer.

Acreage under cotton reduced about 1% during 2008-09.


The productivity of cotton which was growing up over the years has decreased in

2008-09.

Substantial increase of Minimum Support Prices (MSPs).

Cotton exports couldn't pick up owing to disparity in domestic and international

cotton prices.

Imports of cotton were limited to shortage in supply of Extra Long staple cottons.

TAMIL NADU

Tirupur known by various names such as knits city, Cotton city is famously called

the Textile city of India. Tirupur has the largest and fastest growing urban

agglomerations in Tamil Nadu. The knitwear industry which is the soul of Tirupur has

created millions of jobs for all class of people. There are nearly about 3000 sewing units,

450 knitting units, hundreds of dyeing units and other ancillary units which are un-

countable. The annual for-ex business for the past year 2008 stands at Rs. 8,000cr. Due to

the climate and availability of raw material and work force Tirupur has had made a large

contribution to the export of knitwear garments. It is called the Knits Capital of India as it

caters to famous brands retailers from all over the world. Nearly every international

knitwear brand in the world has a strong production share from Tirupur. It has a wide

range of factories which export all types of Knits fabrics and supply garments for Kids,

Ladies, Men's garments - both underwear and tops. The city is known for its hosiery

exports and provides employment for about 300,000 people. Tirupur Exporters

Association – popularly known as TEA - was established in the year 1990. This is an

Association exclusively for exporters of cotton knitwear who has production facilities in

Tirupur. From the modest beginning TEA has grown into a strong body of knitwear

exporters. Today, TEA has a membership of 672 Life members and 155 Associate

Members. The members of the Association, from the beginning, have resolved to develop

their organization focusing on:

1. Multilateral growth of knitwear industry and exports

2. Development of infrastructural needs for Tirupur.

3. Implementation of schemes for the benefit of the society and public.


4. Promotion of constructive co-operation with workers with fair division of

rewards.

5. General up-liftment of quality of life in Tirupur.

For foreign buyer TEA:

1. Offers conferencing and secretarial services.

2. Helps in locating suitable suppliers.

3. Helps in resolving disputes.


CHAPTER: 2

COMPANY PROFILE

The Royal Classic Group was founded by three brothers:

Mr.R.Gopalakrishnan

Chairman,

A first Generation Entrepreneur,

29 Years of Experience in the industry.

Mr.R.Shanmugam

Managing Director,

A Diploma Holder in Electrical Engineering

27 Years of rich experience in the industry

In-Charge of export marketing, Innovation of new projects and banking

Mr.R.Sivaram

Executive Director,

A Diploma Holder Civil Engineering,

21years of experience in the industry

In-Charge of all domestic activities & IT System Administration

VISION:

Most Preferred global men’s wear fashion brand in the mid-premium segment. Classic

Polo aims to be and remain the leading retailer of world-class men’s wear in India and

become a compulsory part of men’s wardrobe solution by 2011.

MISSION:

To grow horizontally and vertically in all formats (MBO, EBO, Chain Stores) through

continuous innovation by offering unparallel value to create customer delight.

The Royal Classic Group (RCG) began in 1991 as an exporter and gradually grew into an

Rs.425cr textile giant with brands under it wings through its 100% vertical integration


state-of-the-art in-house production. In February 2001, the company launches its maiden

T-Shirt brand Classic Polo, making its foray into the domestic market. Within a short

time, this brand figured among the top casual T-Shirt brands in India. RCG acquired

Smash, another T-Shirt brand, in September 2004 and launched its exclusive premium

men’s intimate wear under the brand name smash in April 2005.

Classic Polo was awarded as the brand for the year 2005-06 for men’s casual. Although,

Classic Polo is primarily a T-Shirt brand, the range also offers a complete

lifestyle/wardrobe like exclusive T-Shirts, Shirts, Trousers, Denims, Sweaters, Jackets,

Loungewear etc.,

Royal Classic Group has production capacity of 15000 T-Shirts, 4000 Shirts and 4000

Trousers per day with consistent quality 0.01% defective percentage. Hand picked cotton

is used for production. RCG jointly has covered about 5000 acres of wet land on contract

farming. By providing the best seeds and timely manure, RCG is getting an average

productivity of 10Quintals/hectare, which is much higher from conventional Cotton

Farming.

INFRASTRUCTURE :

Innovations in manufacturing programs of garment occur in our production facilities very

often. Our specialization reflects in the quality of the goods delivered, as the workers,

executives and machinery are trained and tuned for that purpose.

Cotton farming

Ginning and Pressing

Spinning

Yarn

Knitting

Dyeing and finishing

Garmenting

Captive Power Plant


COTTON FARMING:RCG has jointly covered about 5000 acres of wet land on contract farming. By providing

the best seeds and timely manure, RCG is getting an average productivity of 10

Quintals/Hectare which is much higher from conventional cotton farming

RCG is ensuring about minimum guaranteed price for the farmers and hence apart from

its finest quality produce harvested, RCG enjoys a corporate social responsibility by

enlightening about 2000 families involved in cotton /farming. Constant workshops and

seminars are conducted at fields to educate and safe transportation methods. The present

area is planned to go up to 70000 acres in next 3 years.

MODERN GINNING AND PRESSING:From kappa’s cotton, this unit segregates the cotton seeds and good quality cotton (lint)

and this operation is done with least number of workers and totally under a pneumatic

drive system ensuring least human contacts. Ginning has capacity of 200 bales per day

with an average weight of 170 Kgs/bale and as the cultivation improves can reach up to

400 bales per day.

SPINNING :- The ginned cotton is covered into spun yarn in this unit with the following state-of-the-art

machineries.

YARN:-The company deals in 100% cotton yarn, 100% polyester yarn, all types blended yarns,

100% gassed mercerized yarn, twisted yarn, various mélange yarn, etc… Our spacious

stock yard stores every type of yarn for supply to the regional factories, apart from our

own knitwear factories.

Advanced yarn testing facility is an added advantage. Yarn can be tested both at the

source point of the spinning mill and locally, which ensures best quality of yarn.


KNITTING :- Knitting dept has an array of latest computer controlled knitting machines from reputed

international brands. The in-house facility, which includes a knitting design studio, is one

of the best in the knitting industry. There are 46 circular knitting machines that can knit

jacquards, interlocks, ribs, and jerseys, in any pattern or structure as needed. The capacity

is 10 tons per day. There are 9 flat knitting machines and that knit jacquards, plain, strips,

and self designs with a capacity of 8500 pieces per day. Our circular machinery includes:

(All Brand new MAYER and CIE machines)

DYEING AND FINISHING:-Our modern soft flow dyeing plant with Effluent Treatment Plant (ETP) has a processing

capacity of 10 tons per day. The soft flow dyeing plant has 7 vessels imported from

Taiwan. Supported by computerized color prediction, measurement and matching

systems from Data Color International, USA (Spectra Flash SF 600) the plant can deliver

evenly color fabrics, streaks free.

Dyed Fabrics are processed through balloon paddler from stretch plus, Switzerland to

remove the moisture neat and to give the fabric a better feeling and finish. Fabrics are

further processed through relax imported from Calator Ruckh, Germany.

GARMENTING:The completely integrated facilities is topped by our garmenting division with skilled

pattern masters, cutting masters, tailors, and supporting workmen who are well trained.

The product specialization gives an excellent finish to the garment s they make.

The entire production wing is housed under one roof with scientific work systems and

quality control systems,

CAPTIVE POWER PLANT:-Presently they have installed 4 windmills of total 3.0 MW capacities which are currently

taking care of the entire requirements of the group. The company is planning to add

couple of more machines to take care of the future needs.


SOLAR PANELThe new solar heating Plant has been deployed at our dyeing division as the replacement

of exiting Fire Wood with the capacity of 10000 Liters per Day at 90D and 20000 liters at

80. It has replaced the usage of 10 tons of Firewood/Day. In turn we are saving almost

1000 trees a day.

DEPLOYMENT OF STP (SEWAGE TREATMENT PLANT)With the help of STP, RCG is purifying 1 Lac Liter of sewage water every day and it is

used for agriculture purposes

OBJECTIVE:

The main objective of the study is to understand the financial position of the

company, refers to the development of long-term strategic financial plans that guide

the preparation of short-term operating plans and budgets, which focus on

analyzing the pro forma statements and preparing the cash budget.


CHAPTER: 3

FINANCIAL PLANNING AND FORECASTING

Financial Planning and Forecasting is the estimation of value of a variable or set of

variables at some future point. A Forecasting exercise is usually carried out in order to

provide an aid to decision – making and planning in the future. Business Forecasting is an

estimate or prediction of future developments in business such as Sales, Expenditures and

profits. Given the wide swings in economic activity and the drastic effects these

fluctuations can have on profit margins, business forecasting has emerged as one of the

most important aspects of corporate planning.

Forecasting has become an invaluable tool for business to anticipate economic trends and

prepare themselves either to benefit from or to counteract them. Good business forecasts

can help business owners and managers adapt to a changing economy.

Financial planning and forecasting represents a blueprint of what a firm proposes to do in

the future. So, naturally planning over such horizon tends to be fairly in aggregative

terms. While there are considerable variations in the scope, degree of formality and level

of sophistication in financial planning across firms, we need to focus on common

elements which include Economic assumptions, Sales forecast, Pro forma statements,

Asset requirements and the mode of financing the investments.

In general usage, a financial plan can be a budget, a plan for spending and saving future

income. This plan allocates future income to various types of expenses, such as rent or

utilities, and also reserves some income for short-term and long-term savings. A financial

plan can also be an investment plan, which allocates savings to various assets or projects

expected to produce future income, such as a new business or product line, shares in an

existing business, or real estate.

Financial forecast or financial plan can also refer to an annual projection of income and

expenses for a company, division or department. A financial plan can also be an

estimation of cash needs and a decision on how to raise the cash, such as through

borrowing or issuing additional shares in a company.


While a financial plan refers to estimating future income, expenses and assets, a

financing plan or finance plan usually refers to the means by which cash will be

acquired to cover future expenses, for instance through earning, borrowing or using saved

cash.

Corporations use forecasting to do financial planning, which includes an assessment of

their future financial needs. Forecasting is also used by outsiders to value companies and

their securities. This is the aggregative perspective of the whole firm, rather than looking

at individual projects. Growth is a key theme behind financial forecasting, so growth

should not be the underlying goal of corporation – creating shareholder value is enabled

through corporate growth.

THE BENEFITS OF FINANCIAL PLANNING FOR THE ORGANIZATION ARE

Identifies advance actions to be taken in various areas.

Seeks to develop number of options in various areas that can be exercised

under different conditions.

Facilitates a systematic exploration of interaction between investment and

financing decisions.

Clarifies the links between present and future decisions.

Forecasts what is likely to happen in future and hence helps in avoiding

surprises.

Ensures that the strategic plan of the firm is financially viable.

Provides benchmarks against which future performance may be measured.

THERE ARE THREE COMMONLY USED METHODS FOR PREPARING THE

PRO FORMA FINANCIAL STATEMENTS. THEY ARE:

1. Percent of Sales Method

2. Budgeted Expense Method.

3. Variation Method.

4. Combination Method.

PERCENT OF SALES METHOD


The percent of sales method for preparing pro forma financial statement are fairly simple.

Basically this method assumes that the future relationship between various elements of

costs to sales will be similar to their historical relationship. When using this method, a

decision has to be taken about which historical cost ratios to be used.

BUDGETED EXPENSE METHOD

The percent of sales method, though simple, is too rigid and mechanistic. For deriving the

pro forma financial statements, we assume that all elements of costs and expenses bore a

strictly proportional relationship to sales. The budgeted expense method, on the other

hand calls for estimating the value of each item on the basis of expected developments in

the future period for which the pro forma financial statements are prepared. This method

requires greater effort on the part of management because it calls for defining likely

developments.

VARIATION METHOD

Variation method on the other hand, calls for estimating the items on the basis of

percentage increase or decrease of comparing with the same item of base year. It is quite

flexible throughout the future period. This method is not like budgeted method, the value

estimating for an item under this method is entirely dependent on the historical data.

COMBINATION METHOD

It appears that a combination of above explained three methods works best. For certain

items, which have a fairly stable relationship with sales, the percent of sales method is

quite adequate. For other items, where future is likely to be very different from the past,

the budgeted expense method or variation method is eminently suitable. A combination

method of this kind is neither overly simplistic as the percent of sales method nor unduly

onerous as the budgeted expense method or variation method.


ASSUMPTIONS

The method used for this study is combination method which eminently works best for an

organization.

The assumptions made for forecasting are as follows:

1. The sales are expected to increase by 20% every year.

2. All expenses are estimated under percentage of sales method.

3. Tax is estimated on the basis of profit.

4. Proposed Dividend to be increased by Rs. 5,000,000 every year.

5. Dividend tax is payable on the basis of proposed dividend.

6. Secured and unsecured loans to be decreased by 5% every year.

7. Tax liability on percentage of sales method.

8. Fixed assets are expected to increase by 2% every year.

9. Work-in-progress of capital is expected to decrease by 10% every year.

10. Investments are expected to increase by 5%.

11. Current assets like inventories and sundry debtors are expected to increase by 2%

every year.

12. Cash and it equivalents on the basis of percentage of sales method.

13. Loans and advances are estimated to increase by 5% every year.

14. Current liabilities are expected to increase by 5% every year.

15. Provisions are expected to increase by 10% every year.


ANALYSIS OF PROFIT & LOSS ACCOUNT

Income

Sales

The firm has sales as Exports as well as Domestic. The total sales include 59.8% of

Export sales, 39.7% of Domestic sales and 0.4% of second sales. The sales are

forecasted to increase by 20%p.a in the coming three years taking 2008-09 as base year.

This shows that company is more Export oriented than the Domestic Sales.

Expenditure

Raw Materials Consumed

Raw materials on which company spend most of its working capital consists of 39.3% of

Total Sales Value. This shows that there is a heavy expenditure on raw materials. It is

forecasted to increase by 20% in the coming three years.

The company should try to optimize the expense on raw material, as in the inflationary

economy capital blocked with raw material will lose its value in the subsequent year

which can be utilized in other profitable investments.

Cost of Human Resources

The cost of Human Resources for the firm is 11.1% of the Total Sales Value which is

quite satisfactory. This is expected to increase by 20% which means that company is

expected to give an increment in wages as well as recruit more employees.

Other Manufacturing Expenses

Other Manufacturing Expenses include Electricity Charges, Processing Charges,

Consumables and Repair & Maintenance which constitutes 20.1% of Total Sales Value.

It is expected to increase by 20% in coming three years. The other manufacturing

expenses of the company are quite high which is needed to be controlled.


Administrative Overheads

This includes Rent, Repairs and Maintenance, Insurance Charges, Legal and Consultancy

Fees and Audit Fees. Administrative Overheads constitutes about 5.5% which is quite

satisfactory. It is also expected to increase by 20% in the coming three years.

Selling and Distribution Overheads

The Selling and Distribution overheads include Advertisement Charges, Salary for sales

executives, Carriage Outwards, Commission, Discount and Incentives. These expenses

constitute 7.5% of Total Sales Value. Out of the total selling and distribution expenses,

the expense on commission discount and carriage is quite high which should be

minimized and the same amount can be used for Advertisement to promote brands of the

company.

Finance Charges

Finance charges which mainly includes interest on loans from Banking and Non-Banking

Corporations. It constitutes 11.2% of Total Sales Value which is quite high, which shows

that, company has high value of debt in comparison to its equity.

Dividend

The trend for the dividend shows that it is increasing by Rs50 Lakhs Every Year which

means company is able to attract its investor by announcing dividend timely. This also

shows that the company has a reasonable operating profit. This is good indication for the

company


ANALYSIS OF BALANCE SHEET

Sources of Funds

Share Capital

A share is the unit into which the capital of the company is divided. The promoters take

futuristic look and decide on the maximum capital i.e. Authorized Capital which is about

Rs7.5Cr for the firm. The amount actually paid by the shareholders is called paid-up-

capital of the company which is Rs5 Cr for the firm. The company has issued 2062650

Equity shares and 2937350 Preference shares.

Reserves and Surplus

The Net Profit is increasing by 20% for the forecasted three years out of which the

retained amount after paying dividend is carried to Balance sheet under Reserves and

Surplus head. In ultimate analysis reserves belong to shareholders. Therefore, the total

amount due to the shareholders constitutes the capital and reserves. The presence of

sizeable reserves in a balance sheet is an advantage as it adds to the financial strength of

the company.

Secured Loans

Secured Loans represent borrowings by the company against charging of its specific

assets. It is expected to decrease by 5% in coming three years. This shows the firm is

expected to utilize its Reserves and Surplus for its operations and its dependence on

secured loans has decreased.

Unsecured Loans

These include borrowings of the company without creation of any charge on its assets. It

is expected to decrease by 5% in coming three years. This shows that the firm is expected

to finance its short term needs by utilizing own funds for its operations.

Deferred Tax Liability


According to the data, the company seems to postpone a huge amount of taxes to the

future years and the company is utilizing the same amount as a source of fund for itself.

As the Net Profit is increasing by 20% every year it is also expected to increase by 20%

in the future years.

Current Liabilities and Provisions

Current Liabilities include short-term liabilities of the company and the provisions. The

short-term liabilities include sundry creditors for Trade, Expenses, and Capital Goods. It

is expected to increase by 5% as the operations of the company are growing but at the

same time company is able to pay its liabilities on time. The company is making the

provisions appropriate to the taxing policy of the company.

Application of Funds

Fixed Assets

As the company is expanding its business, the fixed assets like Land and Buildings, plant

and machinery of the company is expected to increase by 2%. The company has their

own power plant which includes four windmills. The company has separate production

plants for yarn, knitting, compacting, stitching and packaging. They have their own

logistics for domestic distribution.

Investment

The company is investing its surplus amount from retained earnings in shares of

Corporation Bank and South Indian Bank Ltd. The company has 200 Equity shares of

Corporation Bank and 360 Equity shares of South Indian Bank Ltd. The company has

also invested in Tirupur Infrastructure Bonds and Win Win Enterprises Pvt Ltd.

The company is expected to increase its investment by 5% p.a. for the coming three

years.

Current Assets


Inventories

Inventories constitute more than 50% of the total current assets. As the Textile Industries

has longer production cycles the firm needs to maintain inventories but the management

of inventories should be efficiently carried out so that this investment does not become

too large as it result in blocked capital which could be put to productive use elsewhere.

This is of greatest significance in the inflationary economy because of the depreciation in

the value of money. The inventories of the company are expected to increase by 2% p.a.

which is satisfactory with respect to sales.

Sundry Debtors

Investment in receivables involves both benefits and costs. The extension of trade credit

has a major impact on sales, cost and profitability. Liberal policy leads to larger debtors

at the same time increase in sales. So the company needs to have a standard credit policy

to maintain a balance between receivables and sales. The sundry debtors are expected to

increase by 2% which is quite satisfactory with respect to sales which are increasing by

20%.

Cash and Bank Balances

According to the data, the cash and bank balances has increased by 20%, which is a good

indication in aspect of liquidity of the company. This is a good sign for the creditors as it

means company is able to meet its current obligations.

Loans and Advances

According to the data, the cash and bank has increased by 20%, which means company’s

liquidity position is good enough and it is able to give loans and advances to its

subsidiary company for carrying its operations.


CHAPTER: 4

DEBTORS MANAGEMENT

Royal Classic Group has a large proportion of the sales in cash and a small amount of

sales on credit. Although there is credit sales the credit policies are very aggressive in

nature and the company follows restrictive measures. The sales of the firm are both

domestic sales and international sales. The total debtors are classified into 4 main

segments:

Exporters

MBO-Distributors

Urban Retail Division

Others

There are 132 debtors for the financial year ending 31st march 2010, which includes both

MBO & EBO. There are 26 debtors with an outstanding amount of Rs 4.047cr for classic

fashion division (MBO Distributors). The total debtors are classified into 4 main regions:

East

North

South

West

Analysis:

East: East region has second highest sales which amount to Rs 6.777 cr but at the same

time debtors turnover is low i.e. 2.91 times in a year with a collection period of 125.4

days which is just twice of the credit period given by the firm. There is a need of some

aggressive policy at the same time maintaining high sales.

North: Here the firm has started the business recently, so it is too early to know the

exact debtors turnover and the firm will have flexible policy. The firm should aim at a

trade-off between profit (benefit) and risk (cost).


South: This is the region with highest sales, debtors turnover is also very good i.e.10

times in a year with the collection period of 36.4 days which is less than the credit period

given by the company.

West: This region also has high debtor’s turnover of 7.57 times in year, with collection

period of 48 days which is less than the credit period given by the firm. The company

should go for flexible credit policy aiming at higher sale.

Credit Policy

Discounting (or) Receivable purchase: The customers to whom the goods are sold on

credit, many of those receivables are discounted with the banks. In other words the banks

agree to purchase the company receivables and later on the due date the company collects

the amounts from the debtors and pay them to the bank. This facilitates the company with

the earlier realization of funds and no default risk.

Partly Credit policies: Under some circumstances the company also sells goods on

credit to its cash customers. It is purely a business call and this happens rarely .It happens

in the case of second sale. Under the following circumstances the goods are offered on

credit:

To clear period ending stocks which require the customer some period to sell

To sell old goods which are 180 days or more older

Sometimes in case an old customer is in some temporary financial trouble, then

the relation with customer forces to sell goods on credit.


CHAPTER: 5RATIO ANALYSIS

Ratio analysis is a widely-used tool of financial analysis. It is the process of the

determining of the items and group of items in the statements. It can be used to compare

the risk and return relationships of firm of different sizes. Ratio can assists management

in its basics function of forecasting, planning, coordination, control and communication.

Benefits of ratio analysis:-

Helpful in analysis of financial statements.

Helpful in comparative study.

Helpful in locating the weak spots.

Helpful in forecasting.

Estimate about the trend of the business.

Fixation of ideal standards.

Effective control.

Study of financial soundness.

Types of ratios

Ratios can be classified into four broad groups.

Liquidity Ratios

Leverage ratios

Profitability Ratios

Activity Ratios

Liquidity Ratios

They indicate the firm’s ability to meet its current obligation out of current resources and

reflect the short - term financial strengths/solvency of a firm. Liquidity implies from the

viewpoint of utilization of the funds of the firm that funds are idle or they earn very little.

The proper balance between the two contradictory requirements that is liquidity and


profitability is required for efficient financial management. The ratios which indicate the

liquidity of the firms are

Current Ratio

Quick Ratio/ Acid test Ratio

Current Ratio

The current ratio of the firm measures its short – term solvency that is its availability to

meet short – term obligations. As a measure of short – term or current term financial

liquidity, it indicates the rupees of current assets available for each rupee of current

liabilities obligation payable. The higher the current ratio the larger is the amount of

rupees available per rupee of current liability, the more is the firm’s ability to meet

current obligations and greater is the safety of funds of short – term creditors. Thus,

current ratio is a measure of margin of safety to the creditors.

YearTotal Current

Assets

Total Current

Liabilities

Current

Ratio

2010-11 1616102521 1254990145 1.29

2011-12 1669271632 1217053762 1.37

2012-13 1726349950 1181591804 1.46

2010-11 2011-12 2012-131.201.251.301.351.401.451.50

1.29

1.37

1.46

Current Ratio

The industrial standard norms for current ratio are 1.33:1. The expected current ratio

for the year 2010-11 is 1.29, for 2011-12 is 1.37, for 2012-13 is 1.46. The company is


expected to meet the standard norms from the financial year 2011-12 onwards. It

shows that the liquidity position of the company is expected to improve in the coming

years. In the year 2010-11 it is expected to have Rs.1.29 for each rupee of current

liabilities. It is expected to increase 1.37 and 1.46 for every rupee of current liabilities

in the year 2010-11 and 2011-12 respectively.

Quick Ratio

The quick ratio is a measure of firm’s ability to convert its current assets quickly into

cash in order to meet its current liabilities. It refers to the amount which is readily

available with the company to meet its current liabilities. The quick ratio is the ratio

between quick current assets and current liabilities. The quick current assets do not

include stock and prepaid expenses. But, now a day’s majority of the companies assume

that prepaid expenses are also quick assets by considering it is recoverable.

Year Total Quick Assets Total Current Liabilities Quick Ratio

2010-11 762888147 1254990145 0.61

2011-12 798826193 1217053762 0.66

2012-13 838320485 1181591804 0.71

2010-11 2011-12 2012-130.55

0.60

0.65

0.70

0.75

0.61

0.66

0.71

Quick Ratio

The industrial standard norms for quick ratio are 1:1. The expected quick ratio for the

year 2010-10, 2011-12 and 2012-13 is 0.61, 0.66 and 0.71 respectively. Of these, the

quick ratio is expected to increase by 0.05 every year. It is expected that in the financial


year 2012-13 (0.71) is satisfactory. It means most of the current assets are blocked with

unsalable inventories. This needs to be managed aggressively.

Leverage Ratios

Leverage Ratios measures the financial strength of the company. The long – term

solvency of a firm can be examined by using leverage ratios. The leverage ratio may be

defined as financial ratios which throw light on the long – term solvency of a firm as

reflected in its ability to assure the long – term lenders with regard to periodic payment of

interest during the period of the loan and repayment of principal on maturity or in

predetermined installments at due dates. These ratios are based on relationship between

borrowed funds and owners capital. These ratios computed from balance sheet. The ratios

which indicate the leverage position of the firm are

Debt – Equity Ratio

Debt – Assets Ratio


The relationship between borrowed funds and owner’s capital is a measure of the long –

term financial solvency of a firm. This ratio reflects the relative claims of creditors and

shareholders against the assets of the firm. Alternatively, this ratio indicates the relative

proportions of debt and equity in financing the assets of a firm.

Year Total Debt Equity Debt - Equity Ratio

2010-11 1183019942 860746887 1.37

2011-12 1171920382 943142093 1.24

2012-13 1141029961 1040846391 1.10

The industry standard norms for debt – equity ratio are less than 1.65. The firm is

expected to have 1.37, 1.24 and 1.10 for the year 2010-11, 2011-12 and 2012-13

respectively. It shows that the firm is expected to utilize its own funds more for


investments. This also shows that the firm is quite confident about the returns on its

investment and it is also going to attract creditors as they have less risk.


Debt – assets ratio is the relationship between creditors’ funds and total assets of the

company. Here, the outside liabilities are related to the total capitalization of the firm

and not merely to the shareholder equity. This ratio indicates the total assets financed by

outsiders of the company.

Year Total Debt Total Assets Debt - Assets Ratio

2010-11 2082161858 3151042611 0.66

2011-12 1978053765 3203129538 0.62

2012-13 1879151077 3258926145 0.58

The industry standard norms for debt – assets ratio are 0.50-1.00. It is expected to have

debt – assets ratio of 0.66, 0.62 and 0.58 for the 2010-11, 2011-12 and 2012-13

respectively. This shows that the company is expected to utilize its own funds for future

investments. The firm is taking its own risk by being confident about the returns on its

investment. This also shows that the company is trying to reduce its borrowings to

finance the assets.

Turnover Ratios

Turnover ratios determine how quickly certain current assets are converted into cash. It

measured in times. The three relevant turnover ratios are

Debtors Turnover

Creditors Turnover

Inventory Turnover

Fixed Assets Turnover

Debtors Turnover Ratio


The debtor’s turnover ratio supplements the information regarding the liquidity of one

item of current assets of the firm. The ratio measures hoe rapidly receivables are

collected. A high ratio is an indicative of shorter time – lag between credit sales and cash

collection. A low ratio shows that debts are not being collected rapidly.

Year Net Sales Avg Debtors

Debtors

Turnover

2010-11 3514686561 403526275 8.71

2011-12 4217623874 411596800 10.25

2012-13 5061148649 419828736 12.06

The industry standard norms for debtors turnover ratio is 6times. The expected debtor

turnover ratio for the year 2010-11, 2011-12 and 2012-13 is 8.71, 10.25 and 12.06

respectively. It is expected to increase every year rapidly. It shows that the company is

quite prompt over its collection and the credit policy of the firm quite aggressive.

Creditors Turnover Ratio

The creditor’s turnover ratio is an important tool of analysis as a firm can reduce its

requirement of current assets by relying on supplier’s credit. The extent to which trade

creditors are willing to wait for payment can be approximated by creditor’s turnover

ratio. A low turnover ratio reflects liberal credit terms granted by suppliers, while a high

ratio shows that accounts are settled rapidly.

Year

Net Credit

Purchase Avg Creditors

Creditors

Turnover

2010-11 2392973673 371676164.7 6.44

2011-12 2868576684 390259972.9 7.35

2012-13 3439240462 409772971.6 8.39


The industrial standard norms for creditors turnover ratio is 6 times. The expected

creditor’s turnover ratio for the year 2010-11, 2011-12 and 2012-13 are 6.44, 7.35 and

8.39 respectively. It is expected to increase by every year rapidly. It shows that the

company is quite prompt over its payments and policy adopted by the company seems to

be aggressive.

Inventory Turnover Ratio

Inventory turnover ratio indicates how fast inventory is sold. A high ratio is good from

the viewpoint of liquidity and vice versa. A low ratio would signify that inventory does

not sell fast and stays on the shelf or in the warehouse for a long time.

Year Net Sales Closing Stock

Inventory Turnover

Ratio

2010-11 3514686561 847655111 4.15

2011-12 4217623874 864608214 4.88

2012-13 5061148649 881900378 5.74

The industry standard norms for inventory turnover ratio are 6 times. The expected

inventory turnover ratios for 2010-11, 2011-12 and 2012-13 are 4.15, 4.88, and 5.74

respectively. This shows that the inventories will stored in shelf and sales will not happen

fast. As it increasing rapidly it may be able to turnover the inventories more in the

upcoming years.

Fixed Assets Turnover Ratio

Fixed assets turnover ratio indicates the efficiency with which firm uses its fixed assets to

generate sales. It is the relationship between costs of goods sold and fixed assets. The

higher the turnover ratio, the more efficient is the management and utilization of the

assets while lower turnover ratios are indicative of underutilization of available resources

and presence of idle capacity


Year Net Sales Net Fixed Assets

Fixed Assets Turnover

Ratio

2010-11 3514686561 1956741440 1.80

2011-12 4217623874 1995876269 2.11

2012-13 5061148649 2035793794 2.49

The fixed assets turnover ratios are expected to increase rapidly in the upcoming years. It

shows that the firm is trying to utilize maximum of available resources as the value of

fixed assets are also increasing.

Return on Assets

The return on assets measures the profitability of the total funds or investments of a firm.

It is relationship between Profit after Tax before Interest and Average Total Assets.

Year PBIT Total Assets

Return on

Assets

2010-11 535977572 3151042611 0.17

2011-12 643173086 3203129538 0.20

2012-13 771807703 3258926145 0.24

The industry standard norms for return on assets are 14%. It is expected return on assets

for the year 2010-11, 2011-12 and 2012-13 are 17%, 20% and 24% respectively. It shows

that the company is expected to get good returns on assets. It also shows that the

operating efficiency is good.

Return on Capital Employed


The return on capital employed provides a test of profitability related to sources of long –

term funds. It also provides sufficient insight into how efficiently the long – term funds of

owners and lenders are being used. The higher the ratio, the more efficient is the use of

capital employed.

Year PBIT

Total Capital

Employed

Return on Capital

Employed

2010-11 535977572 2718308097 0.20

2011-12 643173086 2748758299 0.23

2012-13 771807703 2781836344 0.28

The industry standard norms for Return on capital employed are 14%. The expected

return on capital employed for the year 2010-11, 2011-12 and 2012-13 are 20%, 23% and

28% respectively. It shows that the firm will able to use its capital fund efficiently on its

operations.

Return on Investment

The purpose of this ratio is to ascertain how much percentage of income is generated by

the use of capital. It measures the overall effectiveness of management in generating

profits with its available assets.

Year PBIT

Net Fixed Assets& Working

Capital

Return on

investment

2010-11 535977572 3046143391 0.18

2011-12 643173086 3107691963 0.21

2012-13 771807703 3171952635 0.24


The industry standard norms for return in investment are 14%. The expected return on

investment for the year 2010-11, 2011-12 and 2012-13 are 0.18, 0.21 and 0.24

respectively. It shows that the firm earns good returns on their investment and it is

expected to increase rapidly.


CHAPTER: 6

RATIO ANALYSIS BREAKEVEN

The break even analysis of ratios is calculated by considering the industrial standard

norms for Ratios. This is an analysis which helps the management to know current

financial position of the company. This is used to find the appropriate amount of financial

items needed to satisfy the Industrial standard norms for ratios.

Current Ratio

Year

Total

Current

Assets

Total

Current

Liabilities

Current

Ratio

Std

Norms

BE Current

Assets

BE Current

Liabilities

2010-

111616102521 1254990145 1.29

1.33

1669136892 1215114677

2011-

121669271632 1217053762 1.37 1618681503 1255091452

2012-

131726349950 1181591804 1.46 1571517099 1298007481

The industry standard norms for current ratio are 1.33:1. The expected value of break

even current assets is high and break even current liabilities are low in the year 2010-11.

This shows that the current ratio for the year 2010-11 is not up to the mark, it is back by

0.04. So, the company has to adopt some necessary policies to increase the current assets

or to reduce the current liabilities.

The firm can take decisions to reduce the current liabilities rather than increasing the

current assets because for increasing the current assets either the company has to reduce

their investments on fixed assets or to convert inventories into debtors or cash. The


conversion of inventories to debtors or cash depends on sales, which depends on market

position. So, the firm can have a control on current assets like Sundry Creditors.

As the firm is expected to have the current ratio better in comparison with industry

standard norms for the year 2011-12 and 2012-13 it shows that the routine is expected to

increase by 0.04 and 0.13 for the year 2011-12 and 2012-13 respectively.

Quick Ratio

Year

Total

Quick

Assets

Total Current

Liabilities

Quick

Ratio

Std

Norm

s

BE Quick

Assets

BE Current

Liabilities

2010-

11762888147 1254990145 0.61

0.8 - 1

100399211

6953610184

2011-

12798826193 1217053762 0.66 973643009 998532741

2012-

13838320485 1181591804 0.71 945273443 1047900606

The industry standard norms for quick ratio is 0.8 – 1. The expected break even quick

assets are high and break current liabilities are low. The data shows that the firm is not

expected to meet its industry standard norms till the year 2012-13. It is back by 0.19, 0.14

and 0.09 for the year 2010-11, 2011-12 and 2012-13 respectively. The firm has to adopt

necessary policies to make the quick ratio as a standard one as it represents the ready cash

available to its liabilities.

The current ratio is expected to meet its standards by the year 2011-12 whereas in case of

quick assets it is not so. It shows that the majority of its current assets are held by

inventories. So the firm has to convert its inventories to either cash or sundry debtors. At


the same time the firm has to reduce its current liabilities like sundry creditors to meet its

standard norms.

As per the above breakeven analysis, there are two different breakeven current liabilities

figure which has very high difference. This is because of value of current assets and

quick assets in which inventories hold larger amount.


Year Total Debt Equity

Debt -

Equity

Ratio

Std

NormsBE Debt BE Equity

2010-11118301994

2860746887 1.37

< 1.65

1420232364 716981783

2011-12117192038

2943142093 1.24 1556184454 710254777

2012-13114102996

11040846391 1.10 1717396545 691533310

The industry standard for debt – equity ratio is less than 1.65. The expected breakeven

debt is high and break even equity is low. The data shows that the firm is expected to

have good ratio between debt and equity which is back by 0.28, 0.41 and 0.55 for the

year 2010-11, 2011-12 and 2012-13 respectively.

From the data two observations can be made, (i) Firm is expected to utilize its own funds

for its investments or (ii) Firm is expected to reduce its investments.

If the firm is expected to utilize its funds for investments, it is quite confident about its

returns on its investment and it also attracts the creditors as they have less risk.


If the firm is expected to reduce its investments either the firm has got enough

investments or the firm may not be confident about their returns on investments.


Year Total DebtTotal

Assets

Debt -

Assets

Ratio

Std

NormsBE Debt BE Assets

2010-11 2082161858 3151042611 0.66

0.5 - 1

1575521305 4164323716

2011-12 1978053765 3203129538 0.62 1601564769 3956107530

2012-13 1879151077 3258926145 0.58 1629463073 3758302153

The industry standard norms for debt to assets ratio is 0.5 – 1. The expected breakeven

debt is low and breakeven asset is high which shows that the firm satisfies the standard

norms in upcoming years. The firm is expected to have good ratio between debt – assets

which is back by 0.34, 0.38 and 0.42 for the year 2010-10, 2011-12 and 2012-2013

respectively when compared with maximum value.

It also shows that the firm is expected to utilize its own funds for financing its own assets

as the debt decreases correspondingly assets increases.

As per the above breakeven analysis, there are two different breakeven debt values with

slight difference. From this analysis it is better to consider the breakeven debt of debt to

assets figure because the firm goes for borrowings to finance its assets and not maintain

the standard for debt to equity ratio. Anyway it also satisfies the standards of debt –

equity too.


Inventory Turnover Ratio

Year Net SalesClosing

Stock

Inventory

Turnover

Ratio

Std

NormsBE Sales

BE Closing

Stock

2010-11 3514686561 847655111 4.15

6

5085930669 585781094

2011-12 4217623874 864608214 4.88 5187649282 702937312

2012-13 5061148649 881900378 5.74 5291402268 843524775

The industry standard norms for inventory turnover ratio are 6 times. The expected

breakeven sales are high and breakeven closing stock is low. The data shows that the firm

does not meet its standards till the year 2012-13. It is back by 1.85, 1.12 and 0.26 for the

year 2010-11, 2011-12 and 2012-13 respectively. The firm has to adopt necessary

policies to increase the sales or to decrease its inventories. There is also possibility that

the firm may adopt conservative policy on its raw materials like cotton as the price of

cotton fiber is increasing.

At the same time, the firm has to increase its sales by adopting better marketing policies

and promotion strategies or to reduce the inventories by having a control its production

and raw materials.

Debtors Turnover Ratio

Year Net SalesAvg

Debtors

Debtors

TurnoverStd Norms BE Sales

BE

Debtors

2010-11 3514686561 403526275 8.71 6 2421157648 585781094


2011-12 4217623874 411596800 10.25 2469580801 702937312

2012-13 5061148649 419828736 12.06 2518972417 843524775

The industry standard norms for debtors turnover ratio is 6 times. The expected

breakeven sales are low and breakeven debtors are high. The data shows that the

company has very good debtor’s turnover which shows that the firm is able to collect its

receivables from its debtors, which is up by 2.71, 4.25 and 6.06 for the year 2010-11,

2011-12 and 2012-13 respectively.

As per the above breakeven analysis, there are two different breakeven sales figure with

very high differences. From this analysis it is better to consider the debtors turnover ratio

because it is impossible to increase the sales by 200% approximately as per the inventory

turnover data. This shows that the firm holds very huge amount of inventory which can

also be derived from quick ratio. So the firm has to take necessary steps to control its

inventory.

Creditors Turnover Ratio

YearNet Credit

Purchase

Avg

Creditors

Creditor

s

Turnove

r

Std

Norm

s

BE

Purchase

BE

Creditors

2010-11 2392973673 371676165 6.44

6

2230056988 398828945

2011-12 2868576684 390259973 7.35 2341559838 478096114

2012-13 3439240462 409772972 8.39 2458637829 573206744

The industry standard norms for creditors turnover ratio is 6 times. The expected

breakeven purchase is low and breakeven creditors are high. The data shows that the


company is expected to have good creditor’s turnover ratio which means that they are

payables are compensated on fine time interval. It is up by 0.44, 1.35 and 2.39 for the

year 2010-11, 2011-12 and 2012-13 respectively. This policy attracts the creditors to

have business with this company.

Return on Assets

Year PBITTotal

Assets

Return

on Assets

Std

Norm

s

BE PBIT BE Assets

2010-11 535977572 3151042611 0.17

0.14

441145966 3828411226

2011-12 643173086 3203129538 0.20 448438135 4594093471

2012-13 771807703 3258926145 0.24 456249660 5512912165

The industry standard norms for return on assets are 0.14 (14%). The expected breakeven

PBIT is low and breakeven Assets are high. The data shows that the company meets its

standard norms in upcoming years and it is also expected to have better returns when

compared standard norms. It is up by 0.03, 0.06 and 0.10 for the year 2010-11, 2011-12

and 2012-13 respectively. This shows that the assets are used efficiently and the

operating efficiency is also good.

Return on Capital Employed

Year PBITTotal Capital

Employed

Return on

Capital

Employed

Std

Norm

s

BE PBITBE Capital

Employed

2010-11 535977572 2718308097 0.20 0.14 380563134 3828411226

2011-12 643173086 2748758299 0.23 384826162 4594093471


2012-13 771807703 2781836344 0.28 389457088 5512912165

The industry standard norms for Return on Capital Employed (ROCE) are 14%. The

expected breakeven PBIT is low and breakeven Capital Employed is high. The data

indicates that the firm meets its standards in upcoming years. It is up by 0.06, 0.09 and

0.14 for the year 2010-11, 2011-12, 2012-13 respectively. It indicates that the firm has

enhanced returns when compared with standard norms.

As per the above breakeven analysis, there are two different breakeven PBIT figures.

From these it is better to consider the breakeven PBIT from Return on Assets (ROA)

because Capital employed does not include Current Liabilities. So the firm expects return

on the basis of total assets employed for the business as it is the efficient one.


CONCLUSION

The project is executed by considering the financial 2009 – 10 as a base year because the

whole economy was experiencing recession in the previous years. The company is

expected to have good financial position in future as it is expected to have good turnovers

of sales, debtors, creditors and its assets. The firm is also expected to have ratios between

debt, equity and its assets which show the firm uses its own funds for further investments

which are a raising flag for its investors. As, the firm is facing the difficulty on indirect

expenses and its inventories however, the above mentioned are some of the

recommendations that could improve the financial position of the company if

implemented.

Note: The recommendations are brought to the notice of the company after the effective

study on economic conditions and proper analysis of financial statements during the

period of my study. I would like to thank the company, Royal Classic Group for giving

me this great opportunity of doing this project. I would then like to give a great thanks to

my mentor Mr. D.Joshua Chithambaram (Vice President Finance) & Mr. V.

Karthikeyan (Manager-Finance) for their continuous and unending support during my

project study. Finally, I would also like to thank all other senior managers and officials

who were able to spend their valuable time with me in discussion of the subject area of

my project and others for providing me the financial data any other requirements for my

study and successful completion of my project, and thus contributed a great value to my

project.


BIBLIOGRAPHY

Financial Management – Prasanna Chandra

Management Accounting – M.Y. Khan and P.K. Jain

Advanced Accountancy – S.M. Shukla

Financial Statements – Royal Classic Group

www.wikipedia.org

www.rcg.in

www.mapsofindia.com

http://www.rcg.in/

http://www.wikipedia.org/

Financial 1

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