khemkaran on mba for 4th sem

7/29/2019 khemkaran on mba for 4th sem

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A

Project ReportOn

FINANCIAL ANALYSIS

OF HMT MTL AJMER

Submitted in Partial Fulfillment for the Degree ofMASTER OF BUSINESS ADMINISTRATION

(M.B.A.)

acme

institute of technology of management

Under the Supervision of: Submitted by:

Bharat Bhooshan KHEM KARAN

General Training Manager M.B.A. 2nd Semester


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HMT Machine Tools Ltd.AJMER

AjMER

FINANCIAL ANALYSIS OF HMT- MTL

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Certificate

I here by that the training repot which is submitted by khemkaran student of

MBA semester III has been supervised by me as per my best knowledge the report

fulfill all the norms and guidelines prescribed by the RTU

Date signature

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PERFACE

The industrial revolution in the 18-century brought about the enlistment of

science & technology. The revival of learning showed a new way of life he world in

various spheres. Since then the industries have made a lot of progress. The

industries have made a history in the world and since then they are progressing with

leaps and bounds. in India, industries during that time were small ones. The British

were afraid that in case the India come to know The Know How of variousindustries then the British economy, would have lessened there by bringing about the

decline of the British Empire in India.

After independence India has made such a remarkable progress in industries

that it becomes necessary to mention that the India intelligence has proved its worth

and the labors has also contributed a lot towards the progress. The Indian Industries

can now compete in the world. The industries have helped India to have good trade

with the other countries and have earned a good amount of foreign exchange there

by raising the economic standards and making way of India to become self sufficient

and self reliant.

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ACKNOWLEDGENT

I express my sincere thanks to my project guide, Mr.P.C VERMA (G.M.,

H.M.T.,MTL Aimer) Designation _ Mr. R.C. Maheshwari (A.G.M.Finance) for guiding

me right form the inception till the successful completion of the project. I sincerely

acknowledge him/her/them for extending their valuable guidance, support forliterature, critical reviews of project and the report and above all the moral support

he/she/they had provided to me with all stages of this project.

I would also like to thank the supporting staff _ Mr. Vijay Kumar Inani &

Department, for their help and cooperation throughout our project.

(Signature of Student)

KHEM KARAN

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Table of Content

1) Company Profile

2) Introduction

3) Corporate vision & Mission

4) Objective & goals

5) Human resource development

6) Strength of HMT

7) Different business of HMT

8) Business groups

9) Aimer unit profile

10) Product basket

11) Background history of aimer unit

12) Awards Won

13) Organization structure and personnel classification

14) Different department of HMT Aimer

15) Quality concept

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16) Project Profile

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HMT Machine Tools Limited

CHAIRMAN Shri A. V. Kamat

MANAGING DIRECTOR Shri V. Hemachandra Babu

BIRTH OF HMT Pt. Jawahar Lal Nehru

Inaugurated HMTs

First manufacturing unit

(MT, Bangalore on June 10, 1955)

.

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ABOUT THE ORGANISATION

INTRODUCTION OF HMT LIMITED

When India achieved independence in 1947, there was hardly any industrial

base in the country. Right form the prior H.M.T. has played an important role in

providing the much needed industrial base as well as a launching pad for the growth

& development of the country.

HMT was conceived by the Government of India in 1949, and was

incorporated in 1953, with the objective of producing a limited range of machine tools,

required for building an industrial edifice for the country.

HMT Limited was established in 1953 in technical collaboration with M/s

Orleikon of Switzerland. Over the years, new products have been added to its

manufacturing range. It has technical collaboration with over 30 leading International

Engineering Companies for manufacture of various products HMTs diversified

product range includes Machine Tools, Watches, Tractors, Printing Machine Press,

Di-Casting and Plastic Injection,

Today, HMT is a Multi-Product, Multi Technology Engineering Complex with

strengths comprising of:

16 Manufacturing Units / 22 Product Division

Assets Worth over US$ 250 Million

ISO-9000 accreditation

The widest range of machine tools, ranging from General- purpose lathes

to CNC turning machine centers.

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Source of qualified and experienced Manpower.

HMT Corporate Vision

HMT Corporate Mission:

To establish ourselves as one of the Worlds companies in the engineering field

having strong international competitiveness.

To achieve market leadership in India through ensuring customer satisfaction

by supplying internationally competitive products and services.

To achieve sustained growth in the earnings of the group on behalf of

shareholders.

HMT CORPORATE OBJECTIVES AND GOALS:

To achieve market leadership by ensuring customer satisfaction through

products and services of world class excellence.

To achieve sustainable competitive advantage through value edge and

technological leadership in product and services of the company.

To achieve sustained business growth through generation of adequate internal

resources.

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To globalize the companies operations developing a mix of International

markets and businesses to enable the company to be a net. foreign exchange

earner.

To develop and retain human skills and talents necessary for corporate growth

and performance excellence in all functions.

To improve the quality of work life of the employees of the company.

GROWTH:

To maintain a minimum annual growth of 155 in sales turnover

To achieve an average growth of 5% in market share

To maintain an annual growth in earnings before interest and tax subject to an

average return of 20% on capital employed over plan

To achieve 30% of increment return of incremental investments within thethree years after achieving commercial production in case of verification of

expansion of the existing unit.

To generate sufficient cash surpluses to pay a dividend of at least 65 to the

shareholders and also to enable capital expenditure financing

OUR CORNERSTONES

QUALITY

CUSTOMER

SERVICES

TECHNOLOGY

and R & D

INFRASTRUCTURE

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http://www.hmtindia.com/html/cornerstones.htm#qualityhttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#infrastructurehttp://www.hmtindia.com/html/cornerstones.htm#qualityhttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#customerserviceshttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#technologyhttp://www.hmtindia.com/html/cornerstones.htm#infrastructure


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R&D TECHNOLOGY :

HMT has imbibed a wide range of technologies as a result of its diversification

strategies, to be a truly multi-technology company. The list includes, though not

limited to, the following technologies:

High Speed Machining

Precision Machining

Computer Numeric Controls

Computer Integrated Manufacture

Flexible Manufacturing Systems/ Modules/ Cells

Metal Forming including Die casting & Plastic processing

Horology Farm Mechanization ( Tractors & Implements)

R&D efforts: in the above technology areas are a continuous and ongoing

process at the Design & Development Centers of all HMTs manufacturing units. In

each area of HMTs business domain, well-established research & testing facilities

with experienced engineers to man them are in position. Extensive use is made of in-

house CAD facilities for designing products.The R & D efforts include the design and development of

Over a 100 new types / variants of machine tools

Over a 1000 new watch models

Several variants of tractors to suit farmers needs

HMTs R&D is committed to provide the best to the customer in terms of

contemporary technology and contemporary designs at competitive prices.

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To promote technology development and R&D both in product and processes

by setting aside 3% of sales turnover

To achieve a growth of 5% per annum in the Novelty Ratio

To achieve a growth of 10% per annum in CNC/Quartz Ratio To achieve a growth of 10% per annum in the development Ratio

INFRASTRUCTURE: In the Manufacture of Machine Tools

CNC Machines for Metal Cutting & Metal Forming

CNC Coordinate Measuring Machines

Heat Treatment Facilities

Precision Measuring & Inspection Facilities

Facilities for calibration of Measuring & Testing equipments

MODERNIZATION :

To invest the extent of minimum 5% of turnover per annum on replacement

and modernization of production facilities

To achieve a 10% increase per annum in lant health ratio.

To achieve production of 10% in terms of costs to turnover during the plan

period. To achieve growth in performance index per capital output by 5% per

annum

EXPORTS:

To achieve exports of 10% of turnover on an average during the plan period.

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To set apart a minimum 0.5% of annual export turnover towards development

of export markets of HMTs product

HUMAN RESOURCE DEVELOPMENT :

To ensure a minimum of two potential executives as replacement for each

osition at levels PS VII and above.

To achieve a manning level 120% of the need in key areas like R&D time

available per year is spent in training & development exposing each person at

least for two years in such programmess.

To ensure an average of 2% of supervisory and managerial executives CNC,

Quartz and exports in frontier technologies giving due consideration to the lead

time needed for training and development such personnel.

To train, retrain and develop other category of employees continually tune with

the changing environment and organizational requirement.

The expenditure for the training, retaining and development programmes and

modernization of training centers is to be around 0.5% of the turnover.

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STRENGTH OF HMT

STRONG

BRAND

EQUITY

TECHNOLOGI

CAL BASE

WELL

ESTABLISHED

ANUFATURIN

G BASE

HIGHLY

SKILLD WORK

FORCE

EXTENSIVEMARKETINGN

ETWORK

UNITS

ACCREDITED

WITH ISO 9000

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DIFFERENT BUSINESS OF H MT

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HMT AJMER UNIT PROFILE

MTA AT A GLANCE:

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Date of Registration 11-01-1967

Commencement of Production 1970-71

Merger with HMT 1-04-1975

Capital Employed (as on 1.4.2007) 201 Lacks.

Land Area Total 178 Acres

Plant Foundry 62 Acres

Township 116 Acres

Covered Area (Plant) 31848 Sq. M.

No. of Quarters 136

Power Required 4.00 Lacs Units/Month

No. of Employees (as on 31.7.2008) 429

No. of Machines 250

ISO-9001 Certified 1994

NOTE: These Data Provided by Sales Department of HMT Ajmer.

PRODUCT BASKET:

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CNC Train Master Machinery Centre

Roll Camber Grinder

Knife Edge Grinding Machine

CNC Crank Shafts

Journal Grinder

CNC Centreless Grinder

CNC Turning Centre

CNC Train Master Lathe

CNC Precision Surface Grinder

CNC Universal Cylindrical Grinder

CNC Double Disk Grinder Machine

(ISO Certified)

Vertical Surface Grinders

Pin Grinding Machine

Key Stone Grinders

Tools & Cutters

CNC Internal Grinder

CNC External Cylindrical Grinder

Super Finishing Machine

Special Purpose Machine

Lens Grinding Polishing Machine

CNC Single Axis Centreless Grinder

CNC Trainee LatheT 70 PC

CNC Crank Shaft grinding machine

(ISO Certified)

CNC Grinding Cente (ISO Certified)

unique complete Grinding in one

BACKGROUND HISTORY OF HMT AJMER

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This Unit was established as Machine Tool Corporation of India limited in

January 1964 keeping in view the Government Policy of differing new industries in

under developed areas of the country and achieving self reliance in production of

Grinding Machine Tools which were imported.

This Unit was started 1970-71 with a production of Rs. 8.64 Lack faces with

difficulty in procurement of quality Machine Tool Casings a captive Foundry Plant was

installed in 193 with a capital of about Rs. 2 Crore.

This Unit was subsequently merged with HMT Ltd. On 1 st April 1975 as sixth

Machine Tool Plant with this merger; the Unit got backup support of HMT. The basic

plant was established with the collaboration of the Czechoslovakian firms, M/s Skoda

Export, Praha and German firm WMW, then in East Germany.

FACTORY LAY-OUT

Unit has two workshop Buildings-Building 1-1 Houses assembly, Painting,

heavy Parts, High technology centre and test floor.

Building1-2 houses small parts, medium parts, tool room and special

accessories, tool crib, tractor hydraulics, heat treatment shop and plant

maintenance departments.

Annexi houses civil maintenance, vendor development and sub- contracts,

electrical generation or distribution and conservation.

Stores building houses central stores, material planning and training centre.

Pattern shop Building houses pattern shop and machine shop of training

centre.

Foundry shed houses moulding, machining, sand-plant, core making, knock

out, short lasting areas.

Store foundry block houses personnel, engineering, designing, IT centre,

industrial engineering, servicing and G.M.s office.

Administrative building houses purchase, sales and finance department

AWARDS WON

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YEAR AWARD INSTITUTED BY

1960-61 Outstanding Performance President of India

1970-71Excellence Performance in

ExportsGovt. of Mysore

1975-76National Award for Outstanding

Export PerformanceMinistry of Commerce

1978-79 Best Product at IMTEX 79 PMT & FIE

1981-82 Best Export Performance EEPC

1982-83Meritorious Performance in the

field of ExportMinistry of Commerce

1983-84 Export Excellence EEPC

1984-85 Best Productivity National Productivity Council

1985-86 Best Product at IMTEX 86 FIE Foundation

1986-87 Excellence in Productivity CEI

1987-88 Export Excellence EEPC

1988-89 Best Product at IMTEX 89 CMTI - PMT Trust

1991-92 Best Productivity National Productivity Council

1992 National Safety National Safety Council

1995 Best Products at IMTEX 95 CMTI - PMT Trust Award

1998 Best Product at IMTEX 98 FIE Foundation


2001 Best Product at IMTEX 2001 FIE Foundation


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ORGANISATION STRUCTURE AND PERSONNEL CLASSIFICATION

Organization

HMT Limited (Subsidiaries)

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1. The Organization Structure: The organization structure of HMT Machine

Tools Ltd., Aimer is based on functions performed by various employees. General

Technical Manager is on the top of the organization structure, assisted by Joint

General Manager. Department of prime importance is a department of production.

DGM production activities control not only the production but also planning,

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The organizational structure consists of following management leaves in all (in

descending order)

2. Personnel Classification:

(i) HMT Machine Tools Ltd., Ajmer has 457 Employees including personnel

employed at Foundry, these includes Officers as well as Workers.

(ii) These have been broadly classified into two categories- Officers & Workmen,

further Officers include Supervisory Staff and Managerial Staff. Workmen includeIndirect Workmen, Technicians, Administration Staff & Direct Workmen.

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GENERAL TECHNICAL MANAGER

JOINT GENERAL MANAGER

DEPUTTY GENERAL MANAGER

ASST.GENERAL MANAGER

MANAGER

DY. MANAGER

FOREMAN

CHIEF CONSULTANT TECHNOLOGY


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DIFFERENT DEPARTMENTS OF HMT, AJMER

A. Brief resume of different departments: -

1. Human Resource Department: Headed by Joint General Manager (HRM)

this department is setup with an aim of conservation and proper utilization of human

resources and is also responsible for maintaining the cordial relations between

employees and management. The other important functions of this department are

performance appraisal and different welfare activities for the employee.

2. Manufacturing and Assembly Department: Headed by JGM

(manufacturing). HMT Ajmers manufacturing environment is highly advanced; this

department also looks after utilizing only the latest production techniques in all

phases of manufacturing maintenance. This assembly of machine is done stages,

much as sub assembly. Group assembly and final assembly of individual

components. There subassemblies after inspection pass on group assembly, which

consists of head stock assembly, saddle, gearbox, tail stock assemblies etc. this

group then reaches to the final assembly to be fitted on the bed. Electrical are also

inter faced and the machine is ready for final testing and printing of plant and

equipment.

3. Service & Inspection Department: Headed by DGM. This department is

responsible for inspection & Servicing of the M/Cs. This department is concerned

with the inspection of various components and machines being manufactured. The

inspection is carried out in various stages, beginning from the inspection of individual

components at different stages of manufacturing followed by the inspection of the

whole machine while included final runs etc. Inspection of incoming material is also

handled.

4. Materials Department: Headed by JGM. It is responsible for all kinds of

purchases made by unit. This department also maintains a Central store and looks

after appropriate levels.

5. Planning Department: Headed by Chief Engineer Planning. The main

functions of the planning department are as under: -

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Technology or process sheet of each component, group assembly and

assembly.

Time calculations for each operation. Job card booking of workers in shifts.

To prepare monthly progress reports for the production activities carried out inshop.

To calculate manpower and machines available, accordingly new machines

are ordered and component.

Counting of products and components.

Prepare machines and sectional layouts

6. Design Department: Headed by JGM. Its functions are: - Design & development of products.

Vendor development for new items.

Drawing of component, group assembly, special assembly etc. along with

master part list (BOM) for machines.

Deciding the type of material required for each component grade such as

casting alloy etc.

Testing & trials of machines.

Marketing of special purpose machine.

7. Foundry Department: Headed by JGM Foundry. This department is

administratively under HMT Aimer, but functionally under executive director.

8. Finance Department: Headed by AGM Finance. The functions of this

department include maintenance of all accounts of the Company. The balance sheetis finally prepared which is sent to the head office for the preparation of combined

balance sheet.

The costing section of this dept. is responsible for the computing of each product of

that the selling price may be determined accordingly.

9. Sales Department: is headed by DGM. This dept. is divided into 3 sections

viz. Sales, Spares and Reconditioning. These functions of sales sections are theexecution of sales order and to bid for contracts through tenders. The function of

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service section is to provide after sales & also looks after customers complaints and

supply of spares.

10. Security Department: This is headed by Asst. Security office. Main function of

this dept. is preventions of theft, sabotage and maintenance of industrial security

within the HMT compound including Township.

11. Quality Assurance Department: Dy. General Manager heads this department.

This department also looks after the feedback received from marketing division so as

to make improvement accordingly.

Concept of Quality:

To maintain quality leadership in all our products and services.

Total Customer satisfaction through quality goods and services.

Commitment of management to quality

To create a culture amongst all employees towards total quality concept.

Total quality through performance leadership

HMT has adopted 5 S for Good House Keeping, which are :

Seiri

Seition

Seiso

Seiketsu

Shitsuke

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FINANCIAL ANALYSIS OF HMT AJMER

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Like lines in the plams or horoschope financial statement can be studied,

puzzles overand scrutinieds. The analysis of such statement can provided valuables

information for managerial decision .analysis of fincial statement is the other to

measure the profitibility, opreation effciency and the growth potenionof the business.

Thus the analysis of finciaal statement is basically a study of the relationship

among varios financial facts and figures as given in a set of these statements.

The basic fincialcial statement i.e. Balance sheet and income statement,

contain a whole lot of historical data . The complex figure , as given in these financial

statement , areb broken into simple and valuble element and significant relationship

are estibished between the elements of the same statement or different fincial

statements.

In the words of metcaff and titard:- analyzing financial statement is a process

of evaluating the relationship between component parts of financial statement to

obtain a better understanding of a firms position and performance.

During the process of analysis, the following steps are reqired by a financial

analyst;

1.selection or information :

The first is to select the information relevant to the decision under

consideration from the total information contained in the financial statements.IT is

because a specific aspect of financial position or operation may be more significant

for one group than other. for example , short term creditors are interested in the

liquidity of current assets while perspective investors are interested in the future

income of the firm.

2.Establishment or Relationship:

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The second step involved is the classification or grouping of the information in

such a way that significant between relationship is establish , for example , to know

the relationship between current assets and current liabilities, both should be

arranged in such a way that firm capacity to pay its short term obligation is known.

3.Evaluation :

The Third and final step is interpretation and drawing of inferences and

conclusion by study in these relationships. Thus in brief , financial analysis is the

process of selection , relation and evaluation.

OBJECTIVES OF ANALYSIS AND INTERPRETATION

A NUMBER OF GROUP (SHAREHOLDERS,CREDITERS, Debenture

holders, management , government etc.) have interest in the financial statement of a

business firm . This interest differs with the objective among various groups .

For instance, the shareholders are interested in the earnings per share and

divided payout ratio that have an important bearing on the market price of the shares.

The short term creditors are mainly interested in the firms ability to repay current

liabilities, which involve the analysis of composition of current assets and current

liabilities . The debenture holders on the other hand , are mainly concerned with the

composition of capital structure and the firms projected earnings.

The management of the firm requires the financial statement for the purpose of

evaluation and decision making .

But there are certain common objectives as Dr. Suryakant Das have said; lithe

main objective of the analysis of financial statement is to ascertain the solvency of a

business concern through its balance sheet , determination of profitability or

operational efficiency from income statement and evaluation of financial statement in

comparision to the firm of the same status A few most specific common objective s

of financial statement analysis are discussed below:

1.MEASURING FINANCIAL SOUNDNESS:

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The business must known its financial soundness ,which can be measured by

calculating different ratio s like proprietary and fixed assets ratios. If it is found

adverse, then corrective steps can be taken.

2.judging solvency:

creditors are always interested in knowing the solwency i.e. capacity of the

business top repay their loans . This can be ascertained by looking into facts

such as:

whether current assets sre sufficient to meet current liabilities;

proportion of current asssets to liquid assets;

future prospectus of the business ; whether debenture or other loans are sercured or not;and

managerial efficiency of the firm.

3.Measuring profitability :

Financial statement show the gross profit, net profit and other expenses . The

relationships of theses items can be established with sales. To ascertain portability

,gross profit ,net profit expenses and operating ratio may be calcite. In case ofperformance can be evaluated.

4.Judging Operation efficiency :

It is vary significant to know the operation efficiency of the management . the

operational efficiency of the , business can be assessed by matching the amount of

manufacturing , selling, distribution and financial expenses of the current year with

the corresponding profitability ratios.

5.Indicating trends of achievements:

Financial statement of the previeous years can be compared and the trends

regarding various expenses .purchase ,sales, gross profit and net profit can be

ascertained .the values of asseta and liabilities can be compared and the future

prospectes of the business can also be indicated.

6.Assending the growth portential :

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The trend or dynamic analysis of the business provides sufficient informatioinn

indicating the growth potential of the business . If the treand predicat gloomy picture ,

effective measures can be taken to correct it . If the cost of product ion is rising

without selling prtices increase.

7. Inter firm and intra firm comparison:

Analysis of the financial statement can be made with previous years

performance of the same firm and with the predominance of the other firms in the

industry

8. Deciding future line of action:

Analysis of financial statement indicates growth potencial of the business.

Comparison of actual performance with the standard shows.

9. SYSTEMENT PRESENTATION OF DATA:

Analysis of financial statement is aneffective tool for simplification

systematizing and summarizing the monotonous data .an average person ,

As Helfert Erich has observed the main purpose of financial analysis s to

provide reasonable clues and answers to specific questions

According to spicer and pengler , the opbjective of analysis is to know and

draw inferances about

1. .PRotibility

2. Solvency

3. Ownership

4. 4.Financial strength

5. 5.Trend

6. 6.gearing and cover

TYPES OF FINANCIAL ANALYSIS

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Financial Analysis can be classified into different categories on the basis of

modus operandi as follows:

1. HORIZONTAL OR DYNAMIC ANALYSIS

2.VERTICLE OR STATIC ANALYSIS

1.HORIZONTAL OR DYNAMIC ANALYSIS:-

When financial statement for a certain number of years or different firms are

examined analytically , the analysis is called horizontal or dynamic analysis. In such

analysis, fluctuations in the various items of the balance sheet and profit loss account

of different years or firms are studied.

It is called dynamic analysis as it measures the challenge in various items of

one years as compared to previous years or years .This method is useful in

measuring the progress of the business from year to year. In such types of analysis

the changes are expressed in the following ways.

EXPRESSIING INCREASE OR DECRESACE IN ABSOULUTE AMOUNTS:

The amount of change in items of the statement of two years is expressed by

the sign of plus (+1or -1) . Plus amount indicates increase while minus amount

indicates increase while minus amount indicates decrease.

EXPRESSING INCREASE OR DECREASE IN PERCANTAGE:

In this method percentage increase or decrease is calculated in comparison to

the previous years by dividing the amount of increase or decrease obtained in

(1above , by the absolute figures of the previous year and multiplied by 100)

EXPRESSIMG THE CHANGES BY INDEX NUMBERS:

When the financial; statement are available for more than two years, the

changes are expressed in the form of index numbers. In this method a normal years ,

generally the earliest past year is chosen as the base year and this base year is taken

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as 100. Then, index number for the current years amount and multiplied by 10. When

index numbers of different years are presented simultaneously, these are called trend

%.

EXPESSING THE CHANGES BY RATIOS:

In this method , ratios are calculated to compare the items of current year

With the items of the previous years .

Example :- 4,000 then 16,000 ratio 1:4

Comparative balance sheet and profit and loss account or income statement .

Trend analysis.

2. VERTCAL OR STATIC ANALYSIS

Vertical or stick analysis is the study of mutual relationship between different

components or their total of the financial statements for a definite period of time. For

instance, to know the share of each asset in the total assets of the business at a

specific date , the total assets would be assumed equal to 100 and for each asset %

shall be calculated . This types of analysis expresses relationship at a specific date

and not the fluctuations. Knows as static analysis .

Common size balance sheet and profit and loss account or income statement

Stuctural rastio established realaonships betwwen variuos iteams of balance

sheet and profit and loss account.

Both these techniques, horizontal& vertical , of financial analysis are

complemental=ry to each other as john n. Myer has said.

On the basis of material ussed finaqncial analysis may be two types , as

follows :

1. EXTERNAL ANALYSIS

2. INTERNAL ANALYSIS

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1. EXTERNAL ANALYSIS

An analysis made by person not internally Related to the enterprise and meant

for external users of the financial statement is called external analysis . The analysis

has no to all the documents of the concern . So, he has to depend on the printed and

published statement only .

Such types of analysiss made by blanks, investing agencies, creditors ,

research scholar and the Government.

2. INTERNAL ANASLYSIS

When analysis of financial statement is made by somebody internally, related

to the enterprise such as executives, employees etc. it is said to be Internal analysis .

such persons have access to all the documrent and record of the concern . hence, it

is done on the basis of information n ,obtained from the internal and unpublished

record and books.

SIGNIFICANNCE OF FINANCIAL STATEMENT ANALYSIS

Every person who has interest in the business entity liked to take decision

based on analysis and interpreted financial statements.

1.DISCLOSURE OF FACTS :

With the help of analysis , all fact reating to liquidity position , financing of fixed

assets , credit policy , quantum of working capital , solvency , valuation of assets are

made available . Thusas s result of analysis , all undisclosed facts come to light for

the benefit of all concerned parties.

2. Effective decision making ;

Decision based on intuition are of personal natures and carry either no

meaning or of negligible value to other persons , such decision are not effective and

impartial , nut are defective and baseless. On the other hand , analysis and

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interpretation is based , some logical and scientific of the decision taken on the basis

of intuition , analysis and interpretation is essential.

3. EFFECTIVE PLANNING ANDF CONTROL:

The analysis and interpretation of fincisal statement provides adequate

information for planning and controlling the of the business. Future forecasting casn

easily be made by ananlyzing the pat data help of this information .The management

can take corractinve action by drawing inference about routine activities.

4. MEASUERE OPRATIONAL EFFICIENCY :

The management and the owner are interested inknowing about the opretion

efffiency different activity of the concern the=is can bvbe judged by calculating

different activity of the concern . this can be judged by calculating different activitity

and profitability ratios.

5. comparative study :

With the help of financial analysis , business information and fact can de

presented caopraratively. Such presentation is made either In the form of last few

years position of the business or comparision of operating activities with other

business units engaged in the same industry . Thus, financial analysis is helpful in

the comparative study of business efficiency.

6. SERVING the need of interested arties:

As explained in the previeus chapter, different parties (management, Creditors

,investors etc.) have varied interest in the performance of the business . They search

for information relating to their interest in the financial statements.

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LIMITATION OF FINANCIAL STATEMENTS ANALYSIS

Despite the significance of analysis and interpretation of financial statement as

discussed above. It has certain limitations, which an analyst and the user should keepin view. These limitations are indentified as

follows:

1. 1.suffer from limitation of financial statements:

2. Absence of universally accepted standard terminology :

3. Ignores qualitative aspect:

4. Ingnore price level changes :

5. It steps the symptoms but not diagnose:

Techniques of financial statement analysis

COMPARATIVE FINANCIAL STATEMENTS

COMMON SIZE FINANCIAL STATEMENT

TREND ANALYSIS

RATIO ANALYSIS

FUNDS FLOW ANALYSIS

CASHFLOW ANALYSIS

BREAK-EVEN ANALYSIS

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COMPARATIVE FINANCIAL STATEMEENT ANALYSIS

Comparative fincial statement are those statement which summaries and

present realed accounting data for a number of years incorrasting therein the

changes (Absolute or relative or doth) In Individual iteams. In these statement , The

Finanacial Data for two or more years are placed and presented inorder to facilitate

periodic comparison. The preparation of comparative financial statement is based on

this logic that a statement covering a period of a number of years is more meaningful

and significant than for a single year only , because financial data for one year

represent only one phase of the long and continuos history of the firm . The

comparative financial statement are designed to disclose the following:

Absolute figures ( In rupees amount)

Increase or decrease i.e. changes in absolute fingers .

Absolute data in terms of percentages.

Increase or dec. in terms of %

The objective of comparative financial statement is to ascertain the changes

occurring years by years in yeas in each items of assets , liabilities and net worth

shown in the financial statement of a business firm and whether such changes are

favorable or adverse

.

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ADVANTAGES:

1.EASY EVALUTION:

Comparative fincial statement disclose trends in sales , production casts and

profits through which the financial position , efficiency and performance of a

firm can be eveluted .

2.COMNPARATIVE EVALUTION:

In these statement , Figures of two or more period are placed side by side ;

Hence inter period comparison of various items becomes easy. With these

statement ,Financial position of the firm can be compared with average of the

specific industry or other firm comparison is possible

3.IDENTIFIES WEAKNESSES:

WITh the help of comparative statement , weakness in the oprating cycle

financial health etc.can easily be indentified and suitale remedial steps may be

taken.

COMPARATIVE BALANCE SHEET

Normally any increase or decrease in thevalue of vsrious assets , liabilities as

weel a in owners equity or capital resulting from the operational activities of the

business can be easily

Advantages of comparative balance sheet :

1. EMPHASIS ON CHANGES :

Comparative balance sheet nopt onl;y disclose balance of account at different

dates but also discloses changes in such balance between the two different

dates.

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1. EFFECT OF ACTIVITIES:

Balance sheet serves as a links between the balance sheet and profit and loss

account . profit and loss account discloses the oprating result of the firm.

2. Future forecasts :

The comparative balancea sheet not only reflects the changes in the book

value the assets and liabilities ,but indicates treands visibale in them over a

period of time.

INTRODUCTIONTO THE BALANCESHEET

The balance sheet is one of the fincial statement that limited companies and

PLCs produce every year for their shareholders. It is like a financial snapshot of the

companys financial situation at the moment in time.

ANALYSIS OF BALANMCE SHEET

SHAREHOLDER FUND

This is the initial soures to the business i.e. share capital provided by

shareholders. The capital has been provided by head office, BANGLORE. The

share capital may be made up of both ordinary and preference shares , Though

preference shares are much less popular thes days for tax reasons .

RESERVE &SURPULS

Another term for erned equity ; repensents the profits of a company which

have been reinvested within the business. The reservewill incude retained profit from

the past .

This situation can occur particularly with property companies such as hotel

operators where the value of the properties rises with a booming property market.

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HMT MTL DONT HAVE ANY RESERVE AND SURPLUDE THEY CAPITALIZED

THEIR PROFIT &LOSS TO HEAD OFFICE , BENGLORE.

MACHIONE TOOLS DIRECTORATE HMT MTB, BANGALORE

DIE CASTIINGS, BANGALORE

HMT MTP, PINJORE

HMT MTK, KALAMASSERY

HMT MTH,HYDERABAD

HMT PRESS,HYDERABAD

HMT M/C TOOLS MKTG.

HMT CNC DIV, BANGALORE

HMT CRB DIV, BANGALORE

HMT PRECISION M/C DIVISION

HMT MACHINE TOOLS DIRECTORATE

PROFIT OR LOSS FOR THE YEAR

LOAN FUND SECURE LOANS

A LIABILITY IS SOMETHINF which a firm owes t a person or another firm. It

may be in the form of creditors people or firms who have sold you goods which you

have not yet paid for, or it may be money borrowed form a financial institution loans.

As the title of the variable suggests, we are looking in this case for liabilities

that are owed in the long term. This is generally taken line accounting terms to be

more than a year. This therefore tends to mean that most trade creditors ( except in

exceptional circumstances ) are not long term but current liabilities. Long term

liabilities thus tend to be bank loans.

They are usually shown on the top half of the balance sheet , and are

subtracted from the fixed assets and the net current assets to show net assets,

Cash is an assest to the business and is usually considered to be one of the

current assets. Under the heading cash on the balance sheet may be included anumber of items of varying liquidity.

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HMT MTL AJMER HAS CREDIT FROM-

UCO BANK, PURANI MANDI BRANCH, AJMER by hypothecathion of

inventories, sundry debtors and other receivables.

PNB RAMGANJ, AJMER

UNSECURED LOANS

Other long term loans may, unlike the mortgages, be unsecured loans. This

mean that the bank or financial institution that lent the money does not have any title

over any of the firms assets, janddd they would have to go through the courts to get

any money back. This can prove to be a lengthy and expensive process. An

unsecured loan will therefore ten to attract a higher rate of interest then a secured

one where the lender is more certain of recovering their money in the event of a

problem.

They have unsecured loan from HMT-MTL, HOLDING COMPANY, In this

quarter they paid of f unsecured loan worth ,60,40,10 ,378.00.This is the good sings

for the company .

DEFERRED CREDIT

Amount due to supplied who have provided inventory to the company they

cant have any deferred credit.

FIXED ASSETS

1. used singly or in combination with other assets in the production of goods or ser

vices to be sold by the enterprise.

2. Exchange other assets

3. used to settle a liability

4. Owner of the enterprise These represent fixed assets 1,79,25,605.48

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DEPRECIATION

In accounting process of allocating in a systematic and rational manner the

cost of a capital asset the period of its useful life The company act 1956 pro data with

reference to the data of addition or deletion except assets coasting less than Rs 5,00

per asset which is written off to rs 1\- in the year of purchases

NET BLOCK =GROSS BLOCK DEPRECIATION

CAPITAL WORK IN PROGRESS MACHINARY &EQUIPMENT UNDER ERECTION

Till last year there was no w.i.p in this year they have Rs 3,20,108 in this particular

head.

INVESTMENT

Investment is the portfolio investment, product ,direct investment investment have

been considered by head office BANGLORE.

INVENTORIES

Stock are oftan known as inventories. They are anything which a firm has

which is not currently.Bening used for one of the firms functions.

Most department in the company will have stock of something The factory may

have stock of raw mareials ready to produce, the office may have stock of stationery

and the warehouse may have stock of finished goods.

Stock are vital toa company to help function smoothly . IF production had be

stopped every time ran out ofraw materials, the time wasted would soon derests

them . the same is treu of most areas the firm opretes in I am sure you can

appreciate the importance of planning ahead and having suitable of stocks.

The other current are assets debtors and cash.

HMT-MTL has

1. Raw material and component s2. Stores an spare parts

3. Tools and instruments

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4. Work-in-progress

5. Finished stock

6. Stock of scrap , in inventory category

In the year 2007-08 they reduced their inventory cost by Rs2,86,700 it

is better indication towards profit making policy.

SUNDRY DEBTORS

Debtors are people or other firms who owe money to the firm .This will uasally

happen where the firm has sold allows the purchaser a period of credit the firm sells

the good or service but allows the purchaser a period of credit to pay usually a

month . During this month the purchaser ows the firm the money and is therefore a

debtor

In HMT MTL sundry debtors include both secured and unsecured debtors .

They are considered as good& doubtful Debtors .In the year 2007-08 They reduced

debtors by 3,67,61,140.16

CASH & BANK

IN much the same way it is important to a business . However , in a business

the term cash may have a broader meaning than it does to ypou as an individual.

Cash is an asset to the business and is usually considered to be one of the current

assets.

As with the debtors , the amount of cash required will vary accourding to the

line of business the firm is in . Retail firms may have higher levels of liquid cash

thamn business that business that oprate mostly on a credit basis and therefore

rarely handle notes and coins

Current assets

The current assets asre therefore ones that can be quickly realized and change

frequently . The main current assets are stock , debtors and cash.

CERRENT ASSETS =STOCK + DEBTORS +CASH

LOAN & ADVANCES

Secured considered good

Unsecured considered good

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CURRENT LIABILITIES

A liability is something which a firm owes to a person or another firm.It may be in the

form of creditors people or firms who have sold you goods which you have not yet paid for,

or it may be money borrowed form a financial institution-loans or overdrafts.

NET CURRENT ASSTES

NET ASSETS = TOTAL ASSETS TOTAL LIABILITIES

HMT-MTL RS 18,50,197,36.00

DEFERRED REVENUE EXPENDITURE

Technical assistance fees including fees technical documentation

And exchange fluctuation difference.

GRATUITY

Expenses inclured in respect ofbond issued for raising to meet payament

Under the VRS.

Profit and loss account or income statement The balance sheet,as discussed

above, indicates firms financial position at a specific date. Hence, it is considered as

a very significant statement by bankers and lenders. But, it fails to indicate whether a

firm is making or losing money. Therefore, creditors and financial analysts have

recently started paying more attention to the earning capacity of the firm as a

measure of financial strength.

According to guthman H.G.,the statement of profit and loss is the considered

and classified record of the gains and losses causing change in the owners interest

for a period of time.

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FUNCTIONS OF INCOME STATEMENT

Profit and loss account or income statement reveals the flow revenues and expenses

during a period of time. It also reveals the changes occurred in the balance sheet

form the end of one period of time. It also reveals the changes occurred in the

balance sheet form the end of one period to the end of another period.the important

functions of the profit and loss account are as follows;

MEASUREMENT OF NET INCOME COMMUNICATION

Form and contents of profit and loss account The profit and loss account is

prepared in defferent forms due to diversity in the nature of industry and business

interests. In case of porprientary and partnership firms, there is no prescribed form of

profit and loss account. Even for companies, the Indian companies act, 1956 has not

prescribed any legal proforma for profit and loss account as it has prescribed for

balance sheet. Generally, profit and loss account is prepared in account lform, which

is divided into two parts

1 profit and loss account, and profit and losss appropriation account

Such a profit and loss account is not useful from analysis point of view.

Therefore, the profit and loss account should be prepared in such proforma where the

items of revenues and expenses of the firm could be shown classified under

appropriate heads. This will prove 100% useful to the management in analyzing the

results. Such profit and losss account should incorporate the following items sources

of income from business oerationsl

Sales after deducting sales returns and trade discount.

Cost of goods sold. Operation expenses of the business, administration ( sellin

and distribution expenses,) depreciation etc.

All other incomes and expenses ( optating and non-operation ) such as

interest, income form investments, profit or loss on sale of fixed assets etx.

Recorded facts

The term recorded facts means that data used for preparing financial

statemen6s are taken out form the accounting records. For example, figures relating

to cash in hand, cash at bank, debtors, bills receivables, xost of fixed assets, bills

payable, creditor sales , purchases, wages, salaries, rent etc. are recorded facts. Thefinancial statements do not disclose such facts which are not recorded in the

accounting books whether such facts are significance or not .

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Accounting conventions and postulates

The financial statements are affected to a very grant extent by accounting principles,

concepts and conventions. On the going concern concept assets are shown at cost

after deducting depreciation instead of their market value, on the assumption that

these assets will not be sold. On money measurement concept, non- monetary

factors such as managerial efficiency and interity that affect firms profit to a great

extent are not shown in the financial statements.

Personal judgments

Although accounting concepts an conventions provide good guidelines to the

accountant, yet the application of these concepts and conventions depends upon the

personal judgments of the accountant.

For example, depreciation on fixed assets is charged on cost, but which method

(fixed installment, written down value or unit of service ) and rate of depreciation arte

to be used, depend upon the personal judgments of the accountant.

ESSSENTIAL QUALITIES OF FINANCIAL STATEMENTS

As stated earlier, the basic objective of financial statements is to provide information

useful to the users of these satatements. Different users like shareholders, investors,

financial institutions, workers etc,are interested in financial statements with varying

objectives.

Relevance

Only that information should be disclosed in financial statements which are relevant to

the objectives of the firm. The information is said to be relevant only when it

influences decisions of the users while evaluating any levent jor correcting past

evaluation. The conclusions drawn on the basis of irrrelevnt information would be

misleading and of no use.

Understandability

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The main objective of financial statements is to provide necessary information about

the firms resources and performance. to fulfill this objective, the information

contained in these statement should be clear, simple so that a person who is not well

versed with the accounting terminology shall be able to understand without much

sifficulty. Therefore, as far as possible, the form of financial statements should not be

complex and the terms used in these statements should should be simple, in common

language and non technical.

Reliability and accuracy

The information incorporated in financial statements shou,lld be reliable. Information

has the quality of reliability when it is free from material error and bias and can be

depended upon by users. Reliability changes with the nature of information contained

in lthe subject matter.

FINANCIAL STAATEMENTS AND Utility

MANAGEMENT

First of all financial statement are used by those persons who direct and control the

business. These persons are known as management desires such information from

these statement by which the efficiency and earning power of the firm can be

measured and rational decision for its efficient operation can be taken.

Other macro level decisions

Employees and their representative biddies are interested in the financial statement

to ascertain the ability of the enterprises to maintain the existing staff and serve them

through appropriate rumination and retirement benefits . On the basis of these

statements, employees come to known about the profit earning capacity and

productivity of the company

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INTERPRETATION OF INCOME STATEMENT

.

The income statement of Hmt Mtl is not complicates , it is very simple o

understand.

1 ERNINGS:-

SALES

Machine tools

Accessories

Sundry jobs and miscellaneous sales

Packing /forwarding charges Include excise duty

2 .OTHER INCOME

Servicing income recoveries from staff/other

Royalties

Profit on sale of assets

Credit relating to previous provisions withdrawn

Settlement allowance

Earned leave encashment

Warranty

Doubtful debts /advances

Obsolescence

Interest liability-other miscellaneous income

1. OUT GOINGS

MATERIALS

Raw materials and components

Purchases

Consumption of raw materials and componants

Consumptionof stors, spares tools &pkg. materials

Repairs to buildings

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Repairs to machinery

PERSONNEL

Salaries, wages and bonus

HOUSE RENT ALLOWANCE

GRETUITY CONTRIBUTION TO P E & FPS

DEPOSIT LINKED INSURANCE

CONTRIBUTION TO ESI

WELFARE EXPENCSES

WAGWS FORREPIARS TO BUILDINGS

WAGES FOR REPAIS TO MACHINERY

MANAGEMENT REMUNERATION

REMUNERSATION TO MANAGING DIRECTOR

SALARIES

ALLOWANCES

PERQUISIOTES MADICAL REIMBURSEMENT

CONTIBUUTION TO PROVIDENT FUNDTOTALREMUNATION

Other expenses

Power and fuel

Rent

Rates and taxes

Excise duty

Insurance

Water and electricity

Repairs t building

Repairs to machinery

Printing and stationery

Travelling expenses Rebate on sales

Advertisement and publicity

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Training

Auditors remuneration

Other agents commission

Loss/obsolescence of linventory and materials

Bad debts/loans &advances written off

Provision for doubtful debts, loans and advances

Warranty claims

Special tools

VRS bonds issue expenses share of holding company expenses

Loss on exchange variation

Miscellaneous expenses

In respect of taxation matters

In any ljother manner

Reimbursement of expenses

Service tax

Directors

Directors sitting fees

Jobs done for internal use

Capital works

Shop manufactured special tools

Interest

Government loans

Loan from holding company VRS bonds

Term loans form banks /financial institutions

Cash credits from banks

Bonds

others

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prior period adjustments

material

personnel

other expenses

other income

extra ordinary itemsincome from sale of land &building

cash flow

fund is a broad term that means transfer of economic values whether such values

relate to cash or not cash as well as other transactions such as purchase of fixedassets on credit, payment of creditors by issue of debentures or preference shares

etc. which do not affect cash are included. Thus , it do not reveal the sources from

which cash was obtained or in flowed in the business and the specific uses to which

cash was utilized or out flowed. In any jbusiness, it is important to know about the

sources and uses of cash.

Cash flow statement

While discussing funds flow statement, we hve observed that in a narrow

sense. Funds means only cash .it is shown in the balance sheet as cash in hand ,

cash at bank etc. data given date, but it does not disclose how the cash was obtained

and how the same was used in the given accounting period.

The profit and loss account or income statement is also of no help in thisregard. For this purpose, a new statement, called cash flow statement is required. A

statement of cash flow reveals the movements of cash of a business enterprise for

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the given accounting period indication specifically how the cash was generated i.e.

when the cash has come from and how the cash was used i.e. what has been done

with cash during the given accounting period.

Thus, cash flow statement is a statement of inflows (sources) and outflows

(uses0 of cash and equivalents in an enterprise during a specified period of time.

Such a statements disclose the net effect of operating, investing and financing

activities of an enterprise during a period on cash and its equivalents and taken into

account receipts and disbursements of cash.

Cash means not only cash in hand but it also comprises demand deposits with

banks .

Cash equivalents are short term highly liquid investments that are all readily

convertible into known amounts of cash.

Cash flows are inflows and out flows of cash and cash equivalents.

Cash flows exclude movements between items that constitute cash or cash

equivalents because these components are part of the cash management of and

enterprise rather than part its operating, investing an financing activities. Cash

management includes the investment of excess cash in cash equivalents.

Classification of cash flows

As explained earlier, cash flow statement indicates the cash inflows (sources)

and cash outflows (uses or application ) of cash during an accounting period. Hence,

it is essential to know about the various items of source of cash or inflows of cash and

uses of cash or outflows of cash. As per accounting standard-3 (revised) the changes

resulting in cash inflows and cash outflows arise on account of three types of

activities i.e. operating , investing and financing as discussed below

1. Cash flows from operating activities

2. Cash flows from investing activities

3. cash flows from financing activities

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Ratio analysis

Has emerged as the principal of technique of analysis of financial statements.

It is an attempt to present the information of the financial statements in simplified,

systematized and summarized form by establishing the quantitative relationship of the

items or group of items of financial statements.

Financial ratio analysis is a fascinating topic to study because it can teach us

so much about accounts and businesses .ratio analysis can also help us to check

whether a businesses is doing better this year than it was last year; and it can tell us if

our business is doing better or worse than other businesses doing and selling the

same things.

WHAT ARE WE TRYING TO FIND OUT?

1. Is Profitable.

2. Has enough money to pay its bills.

3. Could be paying its employees hire wages.

4. Is paying its share of taxes.

5. Is using its assets efficiently.

6. Has a gearing problem.

7. Is a candidate for being bought by another company or investor.

And more, once we have decided what we want to know then we can decide

which ratios we need to use to answer the question or solve the problem facing

us.

Lets look at the ratios we can use to answer these questions.

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THE RATIOS:-

We can simply make a list of a ratios .we can use here but its much better to put

them into different categories. If we look at the question in the previous section,

we can see that we talked about profits, having enough cash, efficiently using

asset-we can put over ratio into categories that are design exactly to help us to

answer this questions. The categories we want to use, section by section are:

1. Profitability : has the business made a good profit compare to its turnover?

2. Return ratio : compare to its assets and capital employed, has the business

made a good profit?

3. Liquidity: does the business have enough money to pay its bills?

4. Assets usage or activity: how is the business used its fixed and current

assets.

5. Gearing: does the company have a lot of depth or is it financed mainly by

shares?

6. Investor or share holder: not every one needs to use all of the ratios we can

put in this categories so the table that we present at the start of each

section is in two column: basic and additional.

The basic ratio are those every one should use in this categories whenever we are

asked a question about them .we can use the additional ratio when we have to

analyzed a business in more detail or when we want to show someone that we

have really though carefully about a problem .

Ratio Analysis is the process of determining and presenting the relationship fitems or group of items in the financial statements. the relationship may be of two

types:

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1. Associate Relationship and

2. Cause/Effect relationship

For example there is an associate relationship between costs of goods sold and

cost of raw material, whereas there is cause/effect relationship between sales and

profits .Both the relationships are expressed in terms of ratios. Ratios may be

expressed in following ways-

Expression of Ratios:-

1. Ratio as Proportion: in this form, the relationship between two figures is

expressed in common denominator. It is obtained by the simple division of

one number by another so that the proportionate relationships become

clear. For example, if current assets are Rs.16000 and current liabilities are

Rs.4000,the ratio between current assets and current liabilities i.e. current

ratio will be 4:1 (16000/4000).

2. Ratio as Turnover: in this form a ratio is calculated between two numerical

facts for which one item is divided by another and the quotient so obtained

is taken as unit of expression. When ratio is expressed in this form, it is

called as turnover and is written in times. For example, sale for the year

are Rs.80000 and fixed assets are Rs.20000; it indicates that sales are

4(80000/20000) times of fixed assets.

3. Ratio as percentage: in this form, the relationship between two items is

expressed in percentage for which one item is divided by another and the

quotient is multiplied by 100.for example, if sales i.e. gross profit ratio will

be 25% (20,000/80,000 x 100).

in financial analysis ,these ratios highlights the financial position of the business,

and hence known as Financial ratios .these are also called accounting ratios,because they are based on the data taken from financial accounts. similarly they

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measure the relative importance of the items expressed in financial statements,

hence called structural ratios.

OBJECTIVES OR SIGNIFICANCE OF RATIO ANALYSIS:

Ratios are guides or short-cuts that are useful in evaluating the financial position

and operations of a company and in comparing them to previous years or to other

companies. In accounting and financial management, ratios are regarded as the

real test of earning capacity, financial soundness and operating efficiency of a

business concern. Ratio can also assist management in its basic functions of

forecasting, planning, co-ordination, control and communication..

IMPORTANCE OF RATIO ANALYSIS:

1. Simplifies Accounting Figures: Accounting figures in many cases fail to

provide information in a desired way. Ratio simplify, summaries and

systematic accounting figures which can easily be understood by those

who do not know the language of accounting.

2. Measure s liquidity position: liquidity position of a firm is set to be

satisfactory if it is able to meet its current obligation as and when they

mature .a firm is set to be capable of meeting its current obligations only. If

it has sufficient liquid funds to pay its short-term obligation with interest

within a period. Hence this ratio is used for the purpose of credit analysis by

banks and other short-term lenders.

3. Measure Long term solvency : ratio analysis is equally important in

evaluating the long-term solvency of the firm. it is measured by capital

structure of leverage ratio. This ratio are helpful to long term creditors

,security analyzed and present and prospective investor because the reveal

the financial soundness and weakness of the firm.

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4. Operational Efficiency: ratios are useful tools in the hands of management

to evaluate the firms performance over a periods of a time by comparing

the present ratios with the past ratios. various activity or turnover ratios

measure the operational efficiency of the firm. this ratio are used, in

general, by banker, investor and other supplier of credit.

5. Facilities inter firm and intra firm comparison: ratio analysis is the basis for

comparing the efficiency of various firms in the industry and various division

of a business firm. absolute figures are not suitable for this purpose, but

accounting ratios are the best tools to compare the firms and divisions of a

firm.

6. Trend Analysis: ratio analysis enables a firm to take the time dimension into

account. trend analysis of ratios reveals whether financial of a firm is

improving or deteriorating over years .with the help of such analysis one

can ascertain whether the trend is favorable or adverse.

7. Managerial Usage: ratio analysis is an in valuable aid to management in

this charging its basic functions such as planning, communication, control

and decision making as discussed below:

Aid in Planning and Forecasting: ratios ,derived after analyzing the

past result, help the management to prepare budgets and formulate

future policy and plan of action, what is to be done in immediate

future is decided on the basis of trend analysis.

Aid in Control: trend ratio are compared with standard ratios to

measure the degree of variance with the actual if comparison shows

and adverse variance, it is reported to the management to take

corrective action and exercise effective control.

Aid in Communication: ratio are effective means of communication.

they plan an important role in informing about the progress made by

the firm to the owners and other parties interested there in.

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Aid in Decision Making: ratio analysis highlights on the degree of

efficiency of the management and utilization of assets. this helps

management in decision making.

USERS OF ACCOUNTING INFORMATION:

Now we know the kinds of questions we need to ask and ewe know the ratios

available to us, we need to know who might ask all of these questions. This is an

important issue because the person asking the question will normally need to know

something particular.

Of course, anyone can read and ask questions about the accounts of a business; but

in the same way that we can put the ratios into groups, we should put readers and

users of accounts into convenient groups, too. Lets look at that now.

The List of Categories of Readers and Users of Accounts include the following people

and groups of people:

Investors

Lenders

Managers of the organization

Employees

Suppliers & other Trade Creditors

Customer and Governments and there agencies.

Public.

Financial Analyst

Environmental Groups

Researchers: both academic and professional

LIMITATION OF RATIO ANALYSIS:

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1. Need for comparative analysis: a single ratio would not be able to convey

anything, is the single ratio in itself is meaningless; it can not furnished a

complete picture.

2. False Results : ratios are based upon the financial statements. in case financial

ratio is incorrect or the data upon which ratio are based in is incorrect ratio

calculated will also be false and defective.

3. Ignore Qualitative Factors : ratio analysis is the quantitative measurement of

the performance of the business. it ignores the qualitative aspects of the firm. It

shows that ratios Is only one sided to measure the efficiency of the business.

4. Ignoring Price level changes : the comparability of ratios suffers if the prices of

the commodities in two different years are not the same change in price affects

the cost of production, sales and also the value of assets it means that will not

be meaning full for comparison if the price of the commodities is different.

5. Personal Bias: Ratios are only means of financial analysis and not an end in

itself. Ratios have to be interpreted in different people May interpreter the

same ratio in different ways.

WHICH RATIOS WILL EACH OF THESE GROUPS BE INTERESTED IN?

In the left hand column there is a list of interested one by one. your job is to be

completed the right hand column by giving two or three example of ratios they might

be interested in .

INTEREST GROUPS RATIOS TO WHICH

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INVESTORS RETURN ON CAPITAL EMPLOYED

LENDERS GEARING RATIOS

MANAGERS PROFITABILITY RATIOS

EMPLOYEES RETURN ON CAPITAL EMPLOYED

SUPPLIER AND OTHER LIQIDITY

TRADE CREDITORS

CUSTOMERS PROFITABILITY

GOVERNMENT AND PROFITABILITY

THERE AGENCIES

FINANCIAL ANALYSTS POSSIBLE ALL RATIOS

RESEARCHERS DEPENDS ON THE NATURE OF

THERE STUDY

LOCAL COMMUNITY HIS COULD BE A LONG AND

INTERSTING LISTS

ENVIORMENTAL GROUPS EXPENDITURE OR ANTI-POLLUTION

MEASURES

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RATIO ANALYSIS IN THE CONTEXT OF HMT, MACHINE TOOLS AJMER

As discussed earlier ratios are very useful for very person who has been related to

the organization. HMT-MTL IS AN UNIT OF HOLDING COMPANY WHICH IS

SITUTED AT BANGLORE. In HMT-MTL AJMER, they calculate ratio in order to

find out the efficiency turnover etc

CURRENT RATIO:-

MEANING:-

Current ratio may be defined as the relationship between current assets and

current liabilities. It is also known as working capital ratio or 2:1 ratio. It is

calculated by dividing the current assets by current liabilities. :

FORMULA:-

CURRENT RATIO = CURRENT ASSETS/CURRENT

LIABILITIES

COMPONENTS:-

Current assets of a firm represent those assets, which can be, in the ordinary

course of business, converted into cash within a period not exceeding one year.Assets are anything, which the firm owns or has title to (other words ownership

of). Firms may have fixed assets which are long-term assets-plant, machinery and

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equipment, but they will also have assets which cab be realized (cashed-in) in the

short-term. This is generally taken in accounting terms to be less than a year.

The current assets are therefore ones that can be quickly realized and change

frequently. The main current assets are stock, debtors, cash. And etc.

CURRENT ASSETS= STOCK +DEBTORS+CASH+B/R+PREPAID EXP.

+OTHER CURRENT ASSETS

They are usually shown on the top half of the balance sheet, and the current

liabilities are subtracted from them to show net current assets.

Current liabilities mean those obligations which are to be paid within a period of

one year out of current or by creation of current liabilities.

A liability is something, which a firm owns to a person or another firm. It may be in

the form of creditors people or firms who have sold you goods which you have

not yet paid for, or it may be money borrowed from financial institution-loans or

overdrafts.

As the title of the variable suggests, we are looking in this case for liabilities that

are owed in the short-term. This is generally taken in accounting terms to be a

less than a year. Any money that is owed in more than a years time is considered

to be a long- term liability. Short-term liabilities thus tend to be trade creditors and

short-term borrowing such as overdrafts.

CURRENT LIABILITIES=CREADITOR+B/P+BANK OVERDRAFT+OUT

STANDING EXP.

values related to current ratio for five years are as follows

2004-05 2005-06 2006-07 2007-08 2008-091.03 1.09 1.53 1.69 1.65

This graph depicted these values, given below:-

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0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2004-05 2005-06 2006-07 2007-08 2008-09

CURRENT RATIO

CURRENT RATIO

INTERPRETATION OF CURRENT RATIO:-

The above graph shows the values of current ratio of past 5 years.

2003-04 was very difficult for HMT-MACHINE TOOL due to more liabilities over

their current assets.

But in the next two years they perform their duty over the management of currentassets and current liabilities very well.

If the current ratio is high, the larger amount of rupees available per rupee of

current liabilities, the more firms ability to meet current obligation and the greater

safety of funds to short- term creditors

LIQUIDITY OR QUICK RATIO:-

MEANING:-

Liquidity ratio is the measure of the instant debt paying ability of the business

enterprise,. Hence it is, also called QUICK RATIO OR ACID TEST RATIO. This

ratio establishes the relationship between quick/liquid current assets and current

liabilities. The formula used is:-

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FORMULA:-

LIQUIDITY/QUICK RATIO = LIQUID OR QUICK ASSETS/CURRENT LIABILITIES

OR

= CURRENT ASSETS-(STOCK + PREPAID EXP.)/CURRENT LIABILITIES

COMPONENTS:-

Liquid or quick assets refers to all the current assets except inventory and prepaid

exp. the exclusion of inventory is based on the fact that it cannot be easily and readily

converted into cash.

Prepaid exp. by their very nature do not provide cash, they merely reduce the

demand for cash required in one period because of payment in a prior period.

According to them, Bank overdraft is not included in liquid liabilities i.e. deducted from

the amount of total current liabilities on the plea that firm avails this facility more or

less on a regular basis. But, if the bank overdraft is to be withdrawn on demand, it

should be a part of liquid liabilities. In this book, it has been included in liquid/current

liabilities.

Liquid ratio is considered to be superior to current ratio in evaluating the liquidity

position of the firm.

IN OTHER WORDSQUICK ASSETS ARE HIGHLY LIQUID AND ARE

IMMEDIATELY CONVERTIABLE TO CASH

A liquid ratio of 1:1 is considered satisfactory.

values related to quick ratio for five years as follows:-

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2004-05 2005-06 2006-07 2007-08 2008-09.33 .45 .28 .53 .50

This graph depicted these values given below:-

0

0.1

0.2

0.3

0.4

0.5

0.6

2004-05 2005-06 2006-07 2007-08 2008-09

LIQUID RATIO

LIQUID RATIO

INTERPRETATION OF QUICK RATIO:-

A quick ratio of 1:1 is considered as an ideal ratio. If the liquid ratio is more than

1:1, the financial position of the firm seems to be sound and good. On the other

hand, if the ratio is less than 1:1, the financial position of the firm is unsound.

A high quick ratio compared to current ratio may indicate under-stocking while a

low liquid ratio indicates over stocking.

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STOCK/INVENTORY TURNOVER RATIO:-

MEANING:-

Generally, a firm must have reasonable stock in comparison to sales. The quantity of

stock should be sufficient to meet the demand of the business, but it should not be

too large to indicate unnecessary locking-up of capital in stock, danger of stock-items

becoming obsolete and resulting in waste by passing of time.

The stock turnover ratio is calculated to consider the adequacy of the quantum of

capital and its justification for investing in inventory.

Inventory turnover ratio normally establishes the relationship between cost of sales

and average inventory.

The stock turnover ratio can be calculated by applying the following formula:-

FORMULA:-

INVENTORY TURNOVER RATIO= COST OF GOODS SOLD OR SALES/AVERAGE

INVENTORY

AVERAGE INVENTORY=OPENING STOCK+CLOSING STOCK/ 2

COST OF GOODS SOLD= SALES GROSS PROFIT

OR=OPENING STOCK +PURCHASE-CLOSING STOCK

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Values related to inventory turnover ratio for five years as follows-

2004-05 2005-06 2006-07 2007-08 2008-091.36 1.75 1.52 2 1.88


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

INVENTORY TURNOVER RATIO

INVENTORY TURNOVER

RATIO

INTERPRETATION OF INVENTORY TURNOVER RATIO:

This ratio reveals the number of times finish stock is tuned over during a given

accounting period in relation to sales. it also indicates whether investment in

inventory is within proper limit or not.

A high inventory turnover ratio is better than a low ratio. a high ratio reflects

efficient business activities and is an indication of under investment in inventory.

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A low ratio reflects:1(dull business ) 2.(over investment in inventory) 3.(wrong

valuation of stock) 4.(stock of unassailable and obsolete goods.)

The inventory turnover ratio is also an index of profitability as a high ratio indicatesmore profits

DEBTOR TURNOVER RATIO:-

MEANING:-

Receivable normally include debtor and bills receivable and represent the uncollected

portion of credit sale. This ratio establishes the relationship between net credit sales

and average receivable of the years.

The Formula used for its calculation is as follows:

FORMULA:-

DEBTOR TURNOVER RATIO=NET CREDIT SALES /AVERAGE RECEIVABLES

AVERAGE RECEIVABLE=OPENING DEBTOR & B/R+CLOSING DEBTOR &

B/R/2

COMPONENTS:

CREDIT SALES=TOTAL SALES CASH SALES SALES RETURN

If information about credit sales is not available, the figure of total sale may be

assumed to be the credit sale.

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Debtors and B/R which arise out of credit sale should only be considered

.while calculating this ratio, the full amount of bills discounted, which creates

liabilities, should be included of provision for bad and doubtful debts should not

be detected because it may give an impression that some amount ofreceivable has been collected.

if the data relating to opening and closing balances of debtors and receivable

are not available, the receivable at the end of the year may be considered for

computing this ratio.

Values related to debtors ratio for five years are as follows

2004-05 2005-06 2006-07 2007-08 2008-0955 38 32 4.67 4.82

This graph depicted these values given below:

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0

10

20

30

40

50

60

2004-05 2005-06 2006-07 2007-08 2008-09

DEBTORS TURNOVER RATIO

DEBTORS TURNOVER

RATIO

INTERPRETATION OF DEBTORS TURNOVER RATIO:

This ratio indicates the number of times the receivables are turned over in a

year in relation to sales. It shows how quickly debtors are converted into cash.

Ahigher debtors turnover ratio shows the efficiency in collection from debtors

i.e. debtors are being collected more promptly.

A lower ratio indicates efficiency of management in collection of payment

against credit sales in time or payments by debtors are delayed.

FIXED ASSETS TURNOVER RATIO:-

MEANING:-

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This ratio expresses the relationship between fixed assets (less depreciation) and net

sales or cost of goods sold.

It is calculated by using the following formula:-

FORMULA:-

FIXED TURNOVER RATIO = SALES OR COST OF GOODS SOLD/FIXED

ASSETS(less depreciation)

values related to fixed assets turnover ratio for five years are as follows:-

2004-05 2005-06 2006-07 2007-08 2008-0914.35 21.26 15.68 22.43 5.56


0

5

10

15

20

25

2004-05 2005-06 2006-07 2007-08 2008-09

FIXED ASSETS TURNOVER RATIO

FIXED ASSETS

TURNOVER RATIO

INTERPRETATIO FIXED TURNOVER RATIO:-

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This ratio measures the efficiency and profit earning capacity of the firm.

Thehigher the ratio, the greater is the intensive utilization of fixed assets.

Lower ratio means under utilization of fixed assets and excessive investment in

these assets.

As volume of sales depends on a variety of factors such as price, quality of good,

salesmanship, marketing etc. it is argued that no direct relationship can be

established between sales and fixed assets.

WORKING CAPITAL TURNOVER RATIO:

MEANING:-

This ratio establishes the relationship between net working capital and net sales or

cost of goods sold. It is calculates by dividing the net sales or cost of goods sold by

net working capital Expressed as a

FORMULA:-

WORKING CAPITALTURNOVER RATIO = COST OF GOOGS SOLD OR

SALES/NET WORKING CAPITAL

NET WORKING CAPITAL=CURRENT ASSETS CURRENT LIABILITIES

Table showing data related to NET WORKINGCAPITAL

2004-05 2005-06 2006-07 2007-08 2008-0929.37 6.98 8.56 3.35 3.54

This graph depicted these values, given below:

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0

5

10

15

20

khemkaran on mba for 4th sem

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