Siyaram Cloth Report
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Transcript of Siyaram Cloth Report
INDEX Pg. No.1. Executive Summary 052. Objective 063. Introduction To Topic 074. Research Methodology 095. Company Profile 10
Product and Services 13
Financial Highlights 17
Graphical Presentation of Operational and Financial Results 18
6. Information Of Ratio Analysis
Financial Statement Analysis 19
History Of Financial Analysis 23
Conceptual Framework Of Ratio Analysis 24
Users of Accounting Information 25
What Did The Users Of Accounts Need To Know? 26
Which ratios will each of these groups be interested in? 27
Information and Analysis 28
Ratio Analysis 30
Classification of Ratios 34
6. EXPORT PROCESS 537. INVOLVEMENT OF FOREIGN EXCHANGE AND RISK MANAGEMENT 608. OBSERVATIONS, FINDINGS AND SUGGESTIONS 739. BIBLIOGRAPHY 7610. BALANCE SHEET 7711. PROFIT & LOSS ACCOUNT 7812. CASH FLOW STATEMENT 79
Page 1
Executive Summary
Project Title: Financial Statement Analysis and Interpretations.
Company Name: Siyaram Silk Mills Ltd.
Introduction:
Siyaram Silk operates through divisions like fabrics, yarn, garments, furnishings,
and exports. It offers textile brands like Siyaram’s, Mistair, J. Hampstead,
Oxemburg, Miniature and Featherz. The company operates four weaving plants, two
yarn plants, and a readymade garment plant spread across Maharashtra and
Gujarat. It has an installed capacity of 367 looms, 439 stitching machines, and
4,500 tons of yarn dyeing capacity, of which 1,500 tons were installed in FY07.
Siyaram Silk has also ventured into retail, opening a few shops where all its brands
will be under one roof. Siyaram Silk exports to countries in Europe, the Middle East,
Africa, Australia, America, and Latin America.
In FY07, the sale of readymade garments grew by around 32%, whereas the sale of
yarn grew by around 28%. For the same period, the company installed 99 looms,
which increased fabric-weaving capacity by 5 MMPA. In FY07, it formed two
subsidiaries namely Siyaram Polycote Ltd and Oxemberg Clothing Ltd.
Page 2
OBJECTIVES
To obtain a true insight into financial position of the company.
To make comparative study of financial statements of different years.
To draw the correct picture of the financial operations of the company in
terms of liquidity, solvency, turnover, profitability etc.
To find out the reasons for unsatisfactory results.
To study the Tata motors cost reduction programme.
Introduction to Topic
Page 3
Every financial manager is involved in financial decision making and financial
planning in order to take right decision at right time, he should be equipped with
sufficient past and present information about the firm and its operations and how it
is changing overtime. Much of this information that is used by financial manager to
take various decisions and to plan for the future is derived from the financial
statements.
The project, Financial Statement Analysis and Interpretations of Siyaram
Silk Mills Ltd. focuses to analyze the financial statements and to study different
ratios over the period of 5 years to determine the financial position of Siyaram Silk
Mills Ltd.
Financial analysis involves the use of various financial statements. These
statements do several things. First, the balance sheet summarizes the assets,
liabilities and owners equity of a business at moment in time, usually the end of a
year or a quarter. Next the income statement summarizes the revenues and
expenses of the firm over a period of time while balance sheet represents a
snapshot of the firm s financial position at a moment in time.
Financial management is planning and controlling of financial resources of a firm
with a specific objective. Since, financial management as a separate discipline is of
recent origin, it is still in a developing stage. It is very crucial for an organization to
manage its funds effectively and efficiently.
Financial management has assumed greater importance today as the financial
strategies required to survive in the competitive environment have become very
important. In the financial markets also new instruments and concepts are coming
and one must say that a finance manager of today is operating in a more complex
environment. A study of theories and concepts of financial management has
therefore become a part of paramount importance for academics as well as for
practitioners but there are many concepts and theories about which controversies
exist as no unanimous opinion is reached as yet.
Page 4
The project, Financial Statement Analysis and Interpretations of Siyaram
Silk Mills Ltd. further aims at discussing and understanding the concepts of
financial management of Alfa Laval (India) Limited; the functions expect to be
performed by the financial management as well as the objectives of financial
managements.
Research Methodology
Page 5
The focus of this chapter is on the methodology used for the collection of data for
research. Data constitutes the subject matter of the analyst. The primary sources of
the collection of sources of the collection of data are observations, Interviews and
the questionnaire technique. The secondary sources are collections of data are from
the printed and annually published materials. A questionnaire form is prepared to
secure responses to certain questions. It is device for securing answers to questions
by using a form.
Primary Data:
Data that is collected for the specific purpose at hand is called as primary Data.
The Primary Data was collected in the following manner:
The history of the Siyaram Silk Mills Ltd.
Other company related information.
Areas of operations.
Secondary Data:
Secondary data highlights the contextual familiarities for primary data collection. It
provides rich insights into the research process.
Secondary data is collected through following sources:
1. Published Sources:
Annual report of Siyaram Silk Mills Ltd. from the year from 2004 to 2008.
Profit and Loss accounts statements.
Balance sheet (assets and liabilities).
COMPANY PROFILE
Page 6
SIYARAM SILK MILLS LIMITED is a part of the SIYARAM PODDAR GROUP OF
COMPANIES was incorporated on 29th June 1978. The group, founded in 1954, was
into the textile (yarns, fabrics and garments), paper/paperboards and tyre (rubber
tyres and tubes) businesses. While Govind Rubber Ltd. (GRL) was into the auto and
bicycle tyres and tubes business, Balkrishna Industries Ltd. (BIL) was into the
manufacturing of paperboards, tyres/tubes and synthetics.
Initially, Siyaram Silk Mills Ltd. was engaged in trading activity of suiting and
shirting. Over the period of time, the company has expanded, diversified and
integrated its facilities substantially and presently has facilities for manufacturing
and marketing of suiting, shirting, texturising, dyeing yarn and ready-made
garments.
Its popular brands included Oxemberg (shirts, trousers and jeans), J.Hampstead
(wool fabric), MSD & many more.
Siyaram was incorporated in June 1978 as a private limited company and was
converted into a public limited company in 1980.
Siyaram had a strong presence in the lower and medium segment of the domestic
suitings market. The company had three manufacturing plants situated at Thane
and Raigad in Maharashtra and Silvassa in the union territory of Dadra & Nagar
Haveli, producing over 27.5 million meters of fabrics annually & having a 4%
market share in the Rs 50 billion suitings and shirtings market.
VISION
To be a global leader in fashion fabrics and delight the customer by creating
products that offer unmatched superiority.
MISSION
To Achieve Total Customer Satisfaction
To Remain Globally Competitive by
Page 7
Focussed Attention in Conversion Cost
Attaining International Productivity Levels
Minimizing Wastage
Leveraging Economies of Scale
To continue to invest in technologies to keep ourselves future ready
To continuously invest in Human Resource Development
Twenty years and counting… that’s how long Siyaram’s Suitings has been at it,
coaxing Indians abroad to return home to their roots. Indeed, Siyaram’s tune and
slogan – ‘Coming Home to Siyaram’s’ – has lasted well over two decades and is still
going steady.
The company has shown uninterrupted growth in sales as well as in profitability.
The company enjoys excellent reputation in the fiercely competitive textile market
and it has a proven track record of continuous growth, so far untouched by
recession and intense competition.
Stringent quality norms and an eye for detail is what make Siyaram products
unique. Produced in its eco friendly high-tech plants at Tarapur and Silvassa where
a configuration of Shuttleless Dornier Rapier, Sulzer Projectile & Toyoda Air Jet
weaving machines create the fabric, the world-class processing-cum-finishing plant
at Tarapur is one-of-its-kind with its machinery imported from Japan, Italy, U.K.,
Germany and Switzerland. This is the only plant in India which can process various
blends like polyester-viscose, poly-wool, polyester-cotton, all under one roof.
Having a strong team of qualified chemical, electronics and mechanical engineers,
Siyaram’s put emphasis on talented manpower to ensure timely delivery and skill to
produce tailor-made products. Manpower across functions, have been nurtured over
the years and have remained with the company in a mutually satisfying relationship
and today ,Siyaram’s is one of the few remaining branded textile companies that
can boast of low employee turnover ratios.
The vision is to translate the domestic leadership to global levels by ensuring
customer delight by catering to their every need and be a global leader in the
textile and fashion industry. Growth translates to added responsibility and
Page 8
Siyaram’s have opened its doors to young professionals today to work in a thriving
environment that encourages freedom as well as experimentation. Siyaram’s new
crop of managers have begun laying the foundation for the company to reach
unprecedented heights. Being the leaders, this difficult part of this task is building
inroads into largely unchartered territory and we need enthusiastic individuals with
conviction and passion to join us in this task across all functions.
PRODUCTS
FABRIC & BRANDS
Siyaram's is home to some of the country's leading textile brands. It is one of our
most prestigious brands, and has been leading the fashion revolution for over two
decades.
Page 9
1. OXEMBERG
Oxemberg, a 12 year old brand from the Siyaram Poddar Group and a trusted name
in textiles launches their formal and casual wear at the 48th National Garment Fair
in Mumbai. It is a readymade line of shirts in cottons, rayons, poly-blends, terrycots
and woolen blends. The product range comprises of formal shirts and trousers,
casual shirts and trousers, jeanswear and accessories viz., handkerchiefs and socks.
Oxemberg, has always taken great pride in being the trend setters in men's fashion.
A part of the Siyaram Poddar Group, Oxemberg is a multi - product men's wear
wardrobe brand that offers contemporary clothing options, which exemplify
excellent quality and genuine value. The range is right for the pocket too.
In view of these latest fashion trends, Oxemberg has enabled the common man to
constantly upgrade his look right where he is. Men's wear will never be the same
again. Its only natural, therefore, that Oxemberg epitomizes this single most
quintessential attribute-Style. This is a brand that personifies the modern man
whose wit, versatility and ingenuity make him ready for anything.
Each aspect of Oxemberg garments go through international standards of quality
inspection. Every detail in the fabric is woven to perfection, an end product that
accentuates the style icon in You.
The last 12 years has seen Oxemberg make a successful foray into the global
markets and has received enthusiastic response in Germany, United Kingdom,
Australia, Switzerland, New Zealand, Middle East, Spain and Sri Lanka.
2. J.HAMPSTEAD
J.Hampstead one of India's most premium brands showcases range of wool and
woolen blends for those who seek high quality fabrics.
J.Hampstead was a very popular suiting brand in Europe, renowned for its premium
100% wool suitings woven from rich natural fibers like merino wool, cashmere and
Page 10
woolsilk. In 1995, Siyaram tied up with J.Hampstead for marketing its suitings in
India. The company imported the fabric from Italy. It was priced in the range of Rs
1,500-1,600 per meter. In September 1997, Siyaram decided to begin
manufacturing the brand at its plants with technical assistance from J.Hampstead.
The product was slightly different from the imported version and was priced in the
range of Rs 275-1000 per meter. J.Hampstead also provides interesting blends and
designs.
J.Hampstead had been rated the top Suiting Brand as per the report published in
the Economic Times, Mumbai.
Siyaram earmarked around Rs 50 million for the marketing, sales and promotion of J
Hampstead. The first phase of this promotion was in the form of commercials
featuring Indian tennis superstars Leander Paes and Mahesh Bhupati. These
commercials with the positioning line, ‘The finest fabric in the world,'were aimed at
positioning the brand in the premium segment.
3. MSD – MONDAY to SUNDAY DRESSING
New Ready-to-wear brand: MSD - Monday to Sunday Dressing (For Men Only).
Recognising the increasing role that retail plays in the country and with a clear
focus to tap into this trend, Siyaram's is now getting into the RTW sector with a view
to capture the ever changing fashion trends.
The company is now forward integrating itself from fabric manufacturing to a
designer of readymade garments and accessories for men. The Company plans to
get into the readymade sector with their new brand "Siyaram's MSD" incorporating
the latest design trends.
Page 11
The "Siyaram's MSD" (an acronym of Monday to Sunday Dressing) range is a
complete range of garments and accessories catering to the lifestyle, aspirations
and tastes of the neo-Indian. With a guiding philosophy of - One Man, One Brand,
Many Moods, Many Occasions – the Siyaram’s MSD brand has an offering that is
multi-faceted and diverse.
Targeted at the core target segment of 20-35yr olds, the range will comprise of
formals, semi formals, casuals and club wear. Starting with shirtings in the initial
stages, the brand will offer Complete Wardrobe Solutions to the young Indian male.
The two greatest USPs of the Siyaram's MSD Brand would be the extensive 30,000-
odd retail outlets from where its fabrics are already sold (no other brand in the
country has such a wide penetration) and secondly, the Fabric Expertise that
Siyaram's has, which would ensure that the consumer gets the best quality at an
affordable price.
Siyaram’s MSD is targeted at today’s youth and aims to provide its customers the
best product quality at the most affordable prices. Shirts would priced between Rs.
600-Rs. 1200 and trouser between Rs. 500-Rs. 1400. Every product will carry the
new ‘flarrow’ as the symbol of style, passion, dynamism and timelessness.
The Siyaram’s MSD brand has ambitious plans to become the largest ready-to-wear
men’s brand within the next 5-years and an aggressive marketing plan has been
put in place to achieve the same.
4. MISTAIR
Mistair is the fabric for the new age man who his young at his heart. Innovative
finishes, classic feel and a stamp of luxury is the hallmark of Mistair. Having a range
of fashion fabrics of its own, Mistair has two categories of fabrics one is Work wear
and the other luxury wear. Mistair fabric is for Bickers and Rockers for a young
energetic relaxed look.
Page 12
Mistair has a refreshingly new range of fashion fabrics in speciality weaves, finishes
and textures, created specially for the new generation.
Financial Highlights of Siyaram Silk Mills Ltd. over 5 Years
YEAR 2008 2007 2006 2005 2004Sales & Other Income 629.79 533.27 456.76 339.68 305.04
PBIDT 39.53 45.37 42.64 29.15 24.25
PAT 8.6 17.34 14.83 7.6 7.4
Share Capital 9.37
9.37
6.25
6.25
6.25
Reserves & Surplus 126.99
123.39
111.93
99.31
93.71
Shareholder Funds 136. 132 118. 105. 99
Page 13
36 .76 18 56 .96
Dividends 4.68
4.68
3.12
2.5
2.5
Book value of the Share 145.
53 141
.69 189.
09 16
8.9 159.94
P/E 10.38 7.56 21.6 9.34 8.35
ROE 3.37% 7.14% 6.31% 3.70% 3.62%
Graphical presentation of operational and financial Results
Page 14
Financial Statement Analysis
Introduction:
A Financial Statement is a compilation of data, which is logically and consistently
organized according to accounting principles. Its purpose is to convey an
understanding of some financial aspects of a business firm. It shows a position at a
movement in time, as in the case of balance sheet, or reveals a series of activities
over a given period of time, as in the case of an income statement. Financial
statements are the major means through which firms present their financial
situation to stock holders, creditors and general public. The majority of firms which
include extensive financial statements in their annual reports, which receive wide
distribution.
Page 15
Nature of financial statement Analysis:
Financial Statement Analysis consist of the application of analytical tools and
techniques to the data in financial statements in order to derive from them
measurements and relationships that are significant and useful for decision making.
The process of financial analysis can be described in various ways, depending on
the objectives to be obtained. Financial analysis can be used as a preliminary
screening tool in the selection of stocks in the secondary market. It can be used as
a forecasting tool for future financial conditions and results. It may be used as a
process of evaluation and diagnosis of managerial, operating or other problem
areas. Above all, financial analysis reduces reliance on intuition, guesses and thus
narrows the areas of uncertainty that is present in all decision making processes.
Financial analysis does not lesson the need for judgment but rather establishes a
sound and systematic basis for its rational application.
Sources of Financial Information:
The financial data needed in financial analysis come from many sources. The
primary source is the data provided by the firm itself in its annual report and
required disclosures.
The annual report comprises the income statement, the balance sheet, and the
statement of cash flows, as well as footnote to these statements. Besides this
information such as the market price of securities publicly traded corporations can
be found in the financial press and the electronic media daily. The financial press
also provides information to stock price indices for industries and for market as a
whole.
The Principal Tools of Analysis:
In the analysis of financial statements, the analyst can have a variety of tools
available from which he can choose the best suited to his specific purpose. The
following are the important tools of analysis.
Page 16
The Principles Tools/Techniques of Financial Analysis:
Ratio Analysis
Funds Flow Analysis
Cash Flow Analysis
Trend Analysis
Ratio Analysis:
This is the important tool available to financial analyst for their work. An accounting
ratio shows the relationship in mathematical terms between two interrelated
accounting figures. The figures have to be interrelated, because no useful purpose
will be served if ratios are calculated between two figures, which are not all related
to each other.
Funds Flow analysis:
Funds flow analysis has become an important tool in the analytical kit of financial
analysis, credit granting institutions and financial managers. This is because the
balance sheet of the business reveals its financial status at a particular point of
time. It reveals the changes in working capital position. It tells about the sources
from which the working capital was obtained and the purpose for which it was used.
It brings out the changes, which have taken place behind the balance sheet.
The information it contains in the selection, reclassification and summarization of
the data contained in profit and loss account and balance sheet, it is no way
replacement of either these statements. To provide a comparative view of
movement of funds by the statement of changes in financial position is prepared for
the period covered by the profit and loss account as well as the corresponding
previous period.
Cash Flow Analysis:
Cash flow analysis is a statement, which measures inflows and outflows of cash on
Page 17
account of any type of business activity. The cash flow statement also explains
reasons for such inflows and outflows of cash. Cash flow statement maybe prepared
on the basis of actual or estimated data. A projected cash are the where came part
of the statement.
Sources of cash can be both internal as well as external. A proper planning of cash
resources will enable the management to have cash available when ever resources
will enable the management to have cash available whenever needed and put it to
some profitable or productive use in case there is surplus cash available.
Trend Analysis:
Analysts make a trend analysis of performance over the past five to ten years to get
an overall picture. Trend analysis is made in respect of sales, cost of sales, gross
profit, net profit (before tax), net profit (after tax), net worth, debt, dividend policy,
bonus and Rights issues, return on net worth, earnings per share, etc.
Page 18
History of financial Analysis
Analysis of financial statements has had its greatest growth since 1990 s. A major
impetus came from increasing need from increasing need on the part of grantors of
commercial credit such as bankers, financial institutions etc, to understand the
condition of their customer. At the same time businessman need to understand
their own conditions of their own enterprise in order to assure its survival in stress
of competition. Satisfaction of these needs has been assisted by the continuous
development of accounting as a science and passing of income tax law in1993. This
required preparation of balance sheets and income statements, as they are the
basic statements required for the income tax purpose. Thus a reasonably reliable
data from which typical financial ratios could be calculated has become increasingly
available.
Between 1919 and 1929 four men pioneered in development of financial ratios.
These where James bliss who published a book on this subject in 1923. Alexander
wall, head of Robert Morris associates and Raymond W Dunning, published a work
Page 19
on this subject in 1928 and Roy Foulke, who made some of the first detailed
compilations and studies between 1925 and 1928.
Conceptual Framework of Ratio Analysis
Financial ratios are always fascinating because they convey the impression of
precision in analyzing the financial position of the company. Financial ratios are only
tools of analysis. However their effectiveness depends upon the know how of using
them for specific purpose. The ratio is relationship between two variables. Any
number of relationships that is ratio can construct provided we first identify the
variables to be studied. Therefore there is nothing like standard set of ratios which
can be used at any time for any purpose. New ratio can be developed specifically
for the purpose or the mechanics of constructing the given ratio can be suitably
adjusted to suit the purpose. Intact a resourceful financial analyst can develop novel
and fascinating ratios which can serve his purpose better than the pedestrian stock.
Having established the point that ratios should be constructed and used keeping in
view the purpose, we shall examine generally the purpose for which the ratio
analysis could be employed. Ratios are used as tools of appraising financial
performance of the company.
Page 20
There two distinct viewpoints in such analysis; the managements viewpoint and the
investors viewpoint. The interests of both these groups are not mutually exclusive;
they are complimentary to each other. Both these groups are interested in key
areas that compromise the financial performance of the company.
Users of Accounting Information
The list of categories of readers and users of accounts includes the following people
and groups of people:
Investors
Lenders
Managers of the organization
Employees
Suppliers and other trade creditors
Customers
Governments and their agencies
Public
Financial analysts
Environmental groups
Researchers: both academic and professional
Page 21
What do the Users of Accounts Need to Know?
Investors - To help them determine whether they should buy shares in the
business, hold on to the shares they already own or sell the shares they
already own. They also want to assess the ability of the business to pay
dividends.
Lenders - To determine whether their loans and interest will be paid when
due.
Managers - Might need segmental and total information to see how they fit
into the overall picture
Employees - Information about the stability and profitability of their
employers to assess the ability of the business to provide remuneration,
retirement benefits and employment opportunities
Suppliers and other trade creditors - Businesses supplying goods and
materials to other businesses will read their accounts to see that they don't
have problems: after all, any supplier wants to know if his customers are
going to pay their bills!
Customers - The continuance of a business, especially when they have a
long term involvement with, or are dependent on, the business
Page 22
Governments and their agencies - The allocation of resources and,
therefore, the activities of business. To regulate the activities of business,
determine taxation policies and as the basis for national income and similar
statistics
Local community - Financial statements may assist the public by providing
information about the trends and recent developments in the prosperity of
the business and the range of its activities as they affect their area
Financial analysts - They need to know, for example, the accounting
concepts employed for inventories, depreciation, bad debts and so on
Environmental groups - Many organizations now publish reports
specifically aimed at informing us about how they are working to keep their
environment clean.
Researchers - Researchers demands cover a very wide range of lines of
enquiry ranging from detailed statistical analysis of the income statement
and balance sheet data extending over many years to the qualitative analysis
of the wording of the statements
Which ratios will each of these groups be interested in?
Investors Return on Capital Employed
Lenders Gearing ratios
Managers Profitability ratios
Employees Return on Capital Employed
Suppliers and other trade creditors Liquidity
Customers Profitability
Governments and their agencies Profitability
Local Community This could be a long list
Financial analysts Possibly all ratios
Researchers Depends on the nature of their study.
Page 23
Information and Analysis
Financial analysis is the process of identifying the financial strength and
weaknesses of the firm by properly establishing relationships between the items of
the balance sheet and the profit and loss account.
Analysis and Interpretation of Financial Statements:
Financial statement comprises the following:
Trading and Profit and Loss Account which give the results of a year s
working.
Profit and loss appropriation account, which gives details about the disposal
of the retained income.
Balance sheet which gives the financial position of the undertaking as on the
accounting date.
The meaning of Analysis and Interpretation:
The financial statements are of much interest to a number of groups of persons.
Apart from management, there are other interested parties like shareholders,
debenture holders, potential investors, large and small bankers, trade creditors,
journalists etc. who are increasingly getting interested in the analysis and
interpretation of financial statements.
Page 24
According to F Wood business accounting to interpret means, to put the meaning of
a statement into simple terms for the benefit of person . This is essentially done
through the tools of analysis such as comparative statements, common size
statements and ratio analysis.
The tools of analysis only help in establishing relationship between one accounting
figure and another in the financial statements and go no far. It is the expert who
has to grasp the significance of related figures and from an opinion as to whether
the ratio calculated indicates the favorable or adverse state of affairs. Therefore,
while analysis comprises resolving the statement by breaking them in to simpler
statements by a process of understanding the terms of such statement and forming
opinions or inferences about the financial health, profitability, efficiency and such
other aspects of the under taking.
Page 25
Ratio Analysis
Introduction:
Ratio analysis is a powerful tool of financial analysis. A ratio analysis is defined as
the indicated quotient of two mathematical expressions and as the relationship
between two or more things . In financial analysis, a ratio is used as an index or
yardstick for figures reported in the financial statements do not provide a
meaningful understanding of the performance and financial position of the firm. An
accounting figure conveys meaning when it is a related to some other relevant
information. The relationship between two accounting figures expressed
mathematically is known as a financial data and to make a qualitative judgment
about the firm s financial performance.
Standard of Comparison:
The ratio analysis involves comparison for a useful interpretation of the financial
statements. A single ratio in itself does not indicate favorable or unfavorable
condition. It should be compared with some standard. Standard of comparison may
consist of:
Ratios calculated from the past financial statements of the same firm.
Ratios developed using the projected or pro forma, financial statements of
the same firm.
Ratios of some selected banks, especially the most progressive and
successful at the same point in time.
Ratios of the industry to which firms belongs.
Page 26
To evaluate the performance of a firm, compare its current ratios with the past
ratios.
When financial ratios over a period of time are compared, it is known as time series
or trend analysis. It gives an indication of the direction of change and reflects
whether the firm s financial performance has improved or deteriorated or remained
same over time.
The analyst should not simply determine the change, but more importantly he
should understand why ratios have changed. The change may be affected by
changes in the accounting polices without material change in the firm s
performance.
Sometimes future ratios are used as the standard of comparison. Future ratios can
be developed from the projected or Performa financial statements. The comparison
of past ratios with future shows the firms relative strength and weaknesses in the
past corrective actions should be initiated. Another way of comparison is to
compare ratios of one firm with some selected firm in the same industry at the
same point in time. This kind of comparison is known as the cross sectional analysis.
In most cases it is more useful to compare the firm s ratios of carefully selected
competitor, which have similar operations.
This kind of comparison indicates the relative financial position and performance of
the firm. A firm can easily resort to such a comparison, as it is not difficult to get the
published financial statements of similar firms.
To determine the financial condition and performance of a firm, its ratios may be
compared with average ratios of industry to which the firm belongs. This sort of
analysis, known as the industry analysis helps to ascertain the financial standing
and capability of the firm in the industry to which it belongs. Industry ratios are
Page 27
important standards in view of the fact that each industry has its characteristics,
which influence the financial and operating relationships. But there are certain
practical difficulties in using the industry ratios. First it is difficult to get average
ratios for the industries. Second, even if industry ratios are available, they are the
averages of the strong and weak firms.
Sometimes spread may be so wide that the average may belittle utility. Third, the
average may be meaningless and the comparison futile if the firms with in the same
industry widely differ in their accounting polices and practices. If it is possible to
standardize the accounting data for companies in the industry and eliminate
extremely strong and extremely weak firms. The industry ratios will prove to be
very useful in evaluating the relative financial condition and performance of the
firm.
Ratios are generally expressed in various forms. They are:
1. Pure ratios which are arrived at by the simple division of one number by
other e.g. Current assets to current Liabilities ratio are 2:1.
2. Rate, which is the ratio between two numerical facts usually over a period of
time e.g. stock turnover, is three times a year.
3. Percentage, which is special type of rate expressing the relation in hundredth
e.g. gross profit, is 25% on sales.
Ratio analysis when rightly used offers the following advantages:
i. It facilitates the compression of financial statements and evaluation of
several aspects such as financial health, profitability and operational
efficiency of the undertaking.
ii. It provides inter firm comparison to measure the efficiency and help the
management to take remedial measures.
iii. It is also helpful in forecasting corporate sickness and help the management
to take corrective actions.
iv. Investment decisions can at times be based on the conditions revealed by certain ratios.
Page 28
We can simply make a list of the ratios we can use here but it's much better to put
them into different categories. If we look at the questions in the previous section,
we can see that we talked about profits, having enough cash, efficiently using
assets - we can put our ratios into categories that are designed exactly to help us to
answer these questions. The categories we want to use, section by section, are:
a) Profitability: has the business made a good profit compared to its turnover?
b) Return Ratios: compared to its assets and capital employed, has the business
made a good profit?
c) Liquidity: does the business have enough money to pay its bills?
d) Asset Usage or Activity: how has the business used its fixed and current
assets?
e) Gearing: does the company have a lot of debt or is it financed mainly by
shares?
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Classification of Ratios
Several ratios calculated from the accounting data can be grouped in to various
classes according to financial activities or functions to be evaluated. The parties,
which generally undertake financial analysis, are short term and long term
creditors, owners and management.
Short term creditors main interest is in the liquidity position or the short term
solvency and profitability of the firm. Similarly owners concentrate on firms
profitability and analysis of the firms financial positions.
Management is interested in evaluating every aspect of the firms performance.
They have to protect the interest of the parties and see that the firm grows
profitably.
One of the ways of classification according to the following basis is more effective
for analyzing and interpreting the financial statements:
Profitability Ratio
Turnover Ratio
Financial Ratio
Leverage Ratio
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YEAR 2008 2007 2006 2005 2004Current Ratio 1.9243 1.5709 1.9201 1.9768 2.6091Acid Test Ratio 1.1621 1.0456 1.1730 1.1080 1.484
Debt-equity Ratio 1.9835 1.4582 1.0993 1.1808 1.1805Debt-assets Ratio 0.6648 0.5932 0.5236 0.5414 0.5414Interest Coverage Ratio 2.1436 4.4375 6.8837 2.7244 4.5399
Inventory turnover 6.8466 7.1888 6.6466 5.3274 4.8136Debtors turnover 4.5303 4.6192 5.3800 4.8473 4.2263Fixed assets turnover 3.0676 3.4479 3.6059 2.9417 2.1135 Gross Profit Margin Ratio 0.0488 0.0736 0.0856 0.0683 0.0713EBITDA Margin 1.0680 1.0166 1.0164 1.0177 1.0309Net Profit Margin 0.0161 0.0372 0.0347 0.0243 0.0252Return on Assets 0.0259 0.0679 0.0652 0.0362 0.03427Earning Power 0.0626 0.1038 0.1188 0.0772 0.0651Return on Equity 0.0630 0.1306 0.1254 0.0719 0.0740
PE Ratio 146.494624 129.341842 142.036465 167.219542 100.9042Market Value to Book Value 9.3616 18.2387 12.1537 8.2075 4.8136
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Profitability Ratios:
Profitability is an indication of the efficiency with which the operations of the
business are carried on. The primary objective of a business undertaking is to earn
profits. Profit earning is considered essential for the survival of the business.
Profit is the engine that drives the business enterprise . A business needs profits not
only for its existence but also for its expansion and diversification. The investors
want an adequate return on their investments, workers want higher wages,
creditors want higher security for interest and loan and so on.
The following ratios are included in this category:
Gross Profit Margin – It measures the efficiency of production as well as pricing. It
basically shows the margin left after meeting the manufacturing costs.
Gross Profit / Net Sales
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Significance:
This ratio indicates the degree to which the selling price of goods per unit may
decline without resulting in losses from operations to the firm. It also helps in
ascertaining whether the average percentage mark up on the goods is maintained.
In this case increase in the percentage of gross profit as compared to previous year,
it is indicator of following factors:
1. Selling price of goods has gone up without corresponding increase in cost of
goods sold.
2. The cost of goods sold has gone down without corresponding decrease in the
selling price of goods.
Interpretations:
A lower gross profit ratio, generally indicates high cost of goods sold due to the
unfavorable purchasing polices, lesser sales, lower selling prices, excessive
competition, over investment in plant and machinery.
Gross profit ratio is decreasing, which means the profitability of the company is
decreasing. Gross profit ratio is decreasing due to more increase in sales as
compared to gross profit for the year 2006-2007. but for the year 200-2006 gross
profit is increasing which shows that profitability of the company is good and
healthy for this year. This ratio is increasing due to more increase in gross profit as
compared to increase in sales.
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Net Profit Margin – It shows the earnings left for shareholders as a percentage of
sales & also reflects the overall efficiency of the firm.
Net Profit / Net Sales
Significance:
This ratio helps in determining the efficiency with which the affairs of the business
are being managed. As increase in the ratio over the previous period indicates
improvement in the operational efficiency of the business provided the gross profit
is constant.
Interpretations:
This ratio indicates the firm s capacity to face adverse economic conditions such as
price competition, low demand etc. obviously, higher the ratio, the better is the
profitability.
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Net profit ratio is increasing for the year 2006-2007. This exhibit that the
profitability of the company is good. The shareholders of the company are happy as
their earnings are getting better day by day.
But for the year 2007-2008 the net profit ratio is decreasing, which indicates that
profitability of the company is decreasing. Net profit ratio is decreasing as increase
in sales is much more than the increase in net profit.
Overall Profitability Ratios:
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Profits are the measures of overall efficiency of a business. Overall profitability or
efficiency of a business can be measured in terms of profits related to investments
made in the business. Higher the profits, the more efficient is the business
considered.
Return on Equity – It measures the profitability of the equity funds invested in the
form.
PAT / Total Shareholder funds
Significance:
This ratio indicates percentage of net profit available for equity share holders to
equity shareholder s fund. It indicates the productivity of the ownership capital
employed in the firm.
Interpretations:
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This ratio is one of the most important ratios used in overall efficiency of the firm.
This ratio is of great importance to the present and prospective shareholders as well
as the management of the company. As this ratio reveals how well the resources of
the firm are being used, higher the ratio, better are the results. The inter-firm
comparison of this ratio determines whether investments in the firm are attractive
or not as the investors would like to invest where the returns are higher. The return
on shareholders fund ratio has seen a relative decrease.
This shows that company needs to work on utilizing its resources better year by
year, which would then indicates that overall efficiency of the company is
increasing. As the returns are higher, the investments in the company are
attractive.
Return on Capital Employed - It measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital
base.
Significance - By comparing net income to the sum of a company's debt and equity capital, investors can get a clear picture of how the use of leverage impacts a company's profitability. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management's ability to generate earnings from a company's total pool of capital.
The return on capital employed is an important measure of a company's profitability. Many investment analysts think that factoring debt into a company's total capital provides a more comprehensive evaluation of how well management is using the debt and equity it has at its disposal. Investors would be well served by focusing on ROCE as a key, if not the key, factor to gauge a company's profitability. An ROCE ratio, as a very general rule of thumb, should be at or above a company's average borrowing rate.
Liquid Ratios:
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Liquidity refers to the ability of a concern to meet its current obligations as and
when they become due. The short term obligations are met by realizing amounts
from current, floating or circulating assets. The current assets should either be
liquid or near liquidity.
If current assets can pay off current liabilities, then liquidity position will be
satisfactory.
On the other hand, if current liabilities may not be easily met out of current assets
then liquidity position will be bad. The bankers, suppliers of goods and short term
creditors are interested in liquidity position of the concern.
Current Ratio - This ratio indicates the margin of safety available with the
company.
Current Assets / Current Liabilities
Significance:
The current ratio indicates the margin of safety available with the company to meet
short term liability. i.e. higher the current ratio, the larger the amount of rupees
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available per rupee of current liability, the more is the firms ability to meet current
obligations and the greater is the safety of funds of short term creditors. Thus
current ratio, in a way is the measure of margin of safety to the creditors.
Interpretations:
Current ratio 2:1 shows excellent liquidity position of the firm.
Current ratio between 1:1 to 2:1 shows satisfactory position of the company.
Ratio less than 1:1 shows no liquidity at all.
For SSI it should be at least 1.33:1.
Current ratio of any company may be 2:1. But according to USA accounting
standards any company should maintain ratio of 1.33:1. As the current ratio
of Siyaram Silk Mills Ltd. is more than 1.33:1 for the year 2004-2008 this
shows that current ratio is favorable from the company`s as well as
shareholders point of view. Thus company is in position to meet its current
liabilities out of its current assets.
Quick Ratio - Quick ratio, also known as Acid Test Ratio, is a more rigorous test of
liquidity than the current ratio. The term liquidity refers to ability of the firm to pay
its short term obligations as and when they become due.
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Current Assets – Inventories / Current Liabilities
Significance:
Usually, a high acid test ratio is an indication that the firm is liquid and has the
ability to meet its current or liquid liabilities in time and so on the other hand a low
quick ratio represents that the firms liquidity position is not good. Quick ratio may
be defined as the relationship between liquid assets and current or liquid liabilities.
As a thumb rule or as a convention quick ratio 1:1 is considered as satisfactory.
Interpretations:
The standard of liquid ratio is 1:1. The company s liquidity ratio for the last five
years is more than 1, which indicates the liquidity position of the company is good.
Thus liquid assets are more than current liabilities. So company is in position to pay
its obligations.
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CASH RATIO:.
The cash ratio is an indicator of a company's liquidity that further refines both the
current ratio and the quick ratio by measuring the amount of cash, cash equivalents
or invested funds there are in current assets to cover current liabilities. It is the
most stringent measure of liquidity. It only looks at the most liquid short-term
assets of the company, which are those that can be most easily used to pay off
current obligations. It also ignores inventory and receivables, as there are no
assurances that these two accounts can be converted to cash in a timely matter to
meet current liabilities
Cash & Bank balances + Current Investments / Current Liabilities
Significance:
The cash ratio is the most stringent and conservative of the three short-
term liquidity ratios (current, quick and cash). It only looks at the most liquid short-
term assets of the company, which are those that can be most easily used to pay
off current obligations. It also ignores inventory and receivables, as there are no
assurances that these two accounts can be converted to cash in a timely matter to
meet current liabilities
Interpretations:
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Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn't necessarily a bad thing, so don't focus on this ratio being above 1:1.
The cash ratio is seldom used in financial reporting or by analysts in the fundamental analysis of a company. It is not realistic for a company to purposefully maintain high levels of cash assets to cover current liabilities. The ratio is seen to decrease in case of siyaram silk mills ltd. The reason could be that it's often seen as poor asset utilization for a company to hold large amounts of cash on its balance sheet, as this money could be returned to shareholders or used elsewhere to generate higher returns.
CAPITALIZATION RATIO - The capitalization ratio measures the debt component of a company's capital structure, or capitalization (i.e., the sum of long-term debt liabilities and shareholders' equity) to support a company's operations and growth.
Significance:
A company's capitalization (not to be confused with its market capitalization) is the
term used to describe the makeup of a company's permanent or long-term capital,
which consists of both long-term debt and shareholders' equity. A low level of debt
and a healthy proportion of equity in a company's capital structure is an indication
of financial fitness.
Prudent use of leverage (debt) increases the financial resources available to a
company for growth and expansion. It assumes that management can earn more on
borrowed funds than it pays in interest expense and fees on these funds. However
successful this formula may seem, it does require a company to maintain a solid
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record of complying with its various borrowing commitments.
A company considered too highly leveraged (too much debt) may find its freedom of
action restricted by its creditors and/or have its profitability hurt by high interest
costs. Of course, the worst of all scenarios is having trouble meeting operating and
debt liabilities on time and surviving adverse economic conditions. Lastly, a
company in a highly competitive business, if hobbled by high debt, will find its
competitors taking advantage of its problems to grab more market share.
As mentioned previously, the capitalization ratio is one of the more meaningful debt
ratios because it focuses on the relationship of debt liabilities as a component of a
company's total capital base, which is the capital raised by shareholders and
lenders.
Turnover Ratio:Funds are invested in various assets in business to make sales and earn profits. The
efficiency with which assets are managed directly affects the volume of sales. The
better the management of assets, the larger is the amount of sales and the profits.
Activity ratio measures the efficiency with which a firm manages the assets. These
ratios are called as turnover ratios because they indicate the speed with which
assets are converted or turned over in to sales.
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Inventory Turnover Ratio - This ratio indicates whether investment in inventory is
efficiently used or not. It therefore explains whether the investment in inventories is
with in proper limits or not.
COGS / Average Inventory
Significance:
Average inventory is calculated by taking stock levels of raw materials work in
process, finished goods at the end of each month, adding them up and dividing by
twelve. The inventory turnover ratio indicates the liquidity of the inventory. A high
inventory turnover ratio indicates the brisk sales. The ratio is therefore, a measure
to discover the possible trouble in the form of over stocking and overvaluation.
It is difficult to establish the standard ratio of inventory because it will differ from
industry to industry.
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Interpretations:
Provision for obsolete stock, slow moving items is deducted from the inventory.
Faster the production, fewer product lines, just in time ordering will reduce overall
inventory.
The ratio is sticky and not showing improvement during the last 5 years. It is nearly
around 5, which indicates, for sale of Rs. 100/- the company has to keep inventory
of Rs. 20/- in stores. There is scope of improvement.
Debtors Turnover Ratio - Debtors constitute an important constituent of current
assets and therefore the quality of debtors to a great extent determines a firm s
liquidity.
Net Sales / Average Sundry Debtors
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Significance:
Sales to account receivables ratio indicates the efficiency of the staff entrusted with
collection of book debts. The higher the ratio, the better it is, since it would indicate
that debts are being collected more promptly. For measuring the efficiency, it is
necessary to set up a standard figure. A ratio lower than a standard will indicate
inefficiency.
The ratio helps in cash budgeting since the flow of cash from customers can be
worked out on the basis of sales.
Interpretations:
Since the ratio of debts is declining in comparison to preceding years and the debt
collection period is increasing. This also shows that company s sales are increasing
to preceding year. But to maintain profitability and sales the company has to
decrease the debt collection period. Thus, to decrease the debt collection period the
company has to adopt certain policy s to attract the customers to pay debts.
Policies like trade credit, cash credit.
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Export Process in Brief
To understand the function of the foreign exchange of the company it is necessary
to first understand the function of export. To be very precise I had made a block
diagram of the export process which will tell us the procedure in very short manner.
Export procedure consists of many things like Pre-Shipment procedure, Post-
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Shipment procedure, Documentation, Foreign Exchange Management, etc However
the export procedure is vey lengthy, but in this project we will study the function
Foreign Exchange Management in detail and Export procedure briefly
The process consists of:
1. Procurement of Order
2. Application for LC
3. Production
4. Shipment of Goods
5. Foreign Client Makes a Payment
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1. PROCUREMENT OF ORDER
This is the first stage where the Siyaram’s get an order from the foreign client. It is
one of the most difficult stages. Talented marketing executives of Siyaram work too
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hard to get through this. Once the order is confirmed the procedure of export starts.
2. APPLICATION FOR LETTER OF CREDIT
A standard, commercial letter of credit is a document issued mostly by a financial
institution, used primarily in trade finance, which usually provides an irrevocable
payment undertaking. The LC can also be the source of payment for a transaction,
meaning that redeeming the letter of credit will pay an exporter. Letters of credit
are used primarily in international trade transactions of significant value, for deals
between a supplier in one country and a customer in another. The parties to a letter
of credit are usually a beneficiary who is to receive the money, the issuing bank of
whom the applicant is a client, and the advising bank of whom the beneficiary is a
client.
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Issuing
Bank
Issuing
Bank
Foreign
Client
Foreign
Client
Siyaram
Siyaram
Advising
Bank
Advising
Bank
1. Demand for LC
Example:
Siyaram’s (Beneficiary) gets order of export from Dubai party named “Dubai
Garments Ltd. (DGL) (Foreign Client or Importer). So Siyaram’s will request DGL to
open an LC in favor of Siyaram’s. DGL will approach to their bank (Issuing Bank), to
open an LC and transfer the same to the bankers of the Siyaram’s (Advising Bank).
Bankers of Siyaram’s will in return pass the LC to Siyaram’s.
3. PRODUCTION PHASE
Once the order is confirmed from the client, Siyaram will start its production as per
the requirement of the client. Usually the export order is huge and requires lot of
capital. So here corporate houses take Working capital loan from bank in the form
of EPC or PCFC. These loans are quite cheaper as compare to normal working
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2. R
eq
uest
for L
C
3. LC Issuance Instructions
4.
Issu
es
LC
capital loan; it is because of great demand of export in a country. Indian
government is always in a favor to boost export. So they provide exporters loans at
a cheaper rate.
Export Packing Credit: The loan is disbursed in INR at an interest rate charged as
per RBI directives, which is erased through lodging export bills as and when they
are realized. However if repayment is overdue, the banks can charge interest rates
at their discretion. Currently the rate is Prime Lending rate (PLR) minus 2.5% for
corporate and PLR minus 4.5% for textile sector. Under this facility the exporter has
the option of booking a forward contract for the export proceeds.
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Packing Credit in Foreign Currency: Commonly known as PCFC, packing credit
in foreign currency is an extension of packing credit, wherein credit, provided for
raw materials/inputs from both domestic and foreign markets, is granted in foreign
currency. Banks have their own line of credit with the foreign banks and interest is
charged at LIBOR (London Interbank Offered Rate) plus an interest spread that is
agreed upon by the bankers and exporter subject to a minimum of 1% till the due
date. Under this facility the exporter does not have the option of booking a forward
contract or profit from any dollar appreciation against the rupee
4. SHIPMENT OF GOODS:
Once the goods are manufactured proper packaging and branding is done, as per
the requirements of the client. After all this procedure the export department of the
company starts the shipment of goods. Shipment of the goods is not easy it requires
lots of documentation.
For carrying out the procedures related to shipment of goods, selection of a freight
forwarding agent is very important.
Freight Forwarder: An international freight forwarder is an agent for the
Siyaram’s in moving the export goods to an overseas destination. Freight
forwarders assist Siyaram’s in preparing price quotations by advising on freight
costs, port charges, consular fees, costs of special documentation, insurance costs,
and their handling fees. Once the order is ready for shipment, freight forwarders
should review all documents to ensure that everything is in order.
Largely, the following procedure may be followed for shipment of goods:
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Submit documents to Freight Forwarder, instructing him to book space on the
steamer/ airline. The Siyaram’s is expected to provide the following documents to
the Clearing & Forwarding Agents, who are entrusted with the task of shipping he
consignments, either by air or by sea.
Invoice
Packing List
Declaration in form SDF (to meet the requirements as per FEMA) in duplicate.
A.R.E. - From 1 and 2 copy
Any other declarations, as required by Customs
On account of the introduction of Electronic Data Interchange (EDI) system for
processing shipping bills electronically at most of the locations - both for air or sea
consignments - the C&F (Clearing & Forwarding) Agents are required to file with
Customs the shipping documents, through a particular format, which will vary
depending on the nature of the shipment. The C&F agents are also charged with the
task of getting Shipping Bill/ Bill of Export passed by Custom Authorities (obtaining
customs authorities’ ‘LET EXPORT’ (LEO) endorsement on the shipping bill).
After completing the shipment formalities, the C & F Agents are expected to
forward to the Siyaram’s the following documents:
Customs endorsed Export Invoice & Packing List
Duplicate of Form SDF
Exchange control copy of the Shipping Bill, processed electronically
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A.R.E. (original & duplicate) duly endorsed by Customs
Bill of Lading or Airway bill, as the case may be
Once the goods have been shipped, Siyaram’s is required to send a “Shipment
Advice” in aligned format to the importer intimating the date of shipment of the
consignment by a named vessel and its expected time of arrival at the destination
port.
5. FOREIGN CLIENT MAKES A PAYMENT
Client makes the payment as per the agreement between the Siyaram’s and the
client. If suppose Siyaram’s has taken a loan for this export order, the repayment of
the loan is done immediately once the client disburse the amount in our bank.
INVOLVEMENT OF FOREIGN EXCHANGE AND
RISK MANAGEMENT
Risk is central to all business. Modern day business operates under various Risks of
varying degrees, which not only has the potential to affect profitability but also the
very survival of the Company. As the Company grows work and decisions making
gets delegated and decentralized. Officers at various levels while performing their
duties are required take decisions which have far reaching implications and involve
a high degree of risk. Volatile business conditions only add to the risk involved.
Taking reasonable and well understood risks is required to earn returns. On one
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hand adequate return on money invested has to be ensured while on the other
hand risk has to be effectively managed. More often than not, higher the risk, higher
the returns. Hence an effective Risk Management Policy is the need of the hour.
In view of the importance of Risk Management, the Listing Agreement requires the
Company to identify the risk, measure and access the risk, monitor and control the
risk and frame Policy to mitigate the risk. In order to have an effective Risk
Management Policy, the Company will have to examine risk at the macro as well as
micro levels of its operations. To enable the Company to reap the benefits of Risk
Management Policy, it should be reviewed on a continuous basis in the light of
changing business environment and improved upon at regular intervals to cover
newer areas of risk affecting the Company.
Accordingly, the Company has made an attempt to identify risk that affect the
business and framed a Policy to mitigate the Risk.
Imports without natural hedging by way of export earnings will cause substantial
hardships in the event of violent foreign exchange fluctuations as the company has
a Imports and Borrowings in Foreign Currency.
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FOREIGN EXCHANGE EXPOSURE:
Exchange exposure is defined as the extent to which transactions of Siyaram’s
denominated in currencies other than the home currency. Exposure arises because
Siyaram’s denominates transactions in a foreign currency or it operates in a foreign
market. The exposure is measured by the value of the transactions in the foreign
currency.
Basically, there are three types of exposure that I studied in Siyaram’s
Transaction OR Conversion Risk
Translation OR Accounting Risk
Operating OR Economic Exposure
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Transaction Exposure
The risk, faced by companies involved in international trade, that currency
exchange rates will change after the companies have already entered into financial
obligations. Such exposure to fluctuating exchange rates can lead to major losses
for firms.
Often, when a company identifies such exposure to changing exchange rates, it
will choose to implement a hedging strategy, using forward rates to lock in an
exchange rate and thus eliminate the exposure to the risk.
Siyaram’s is mostly exposed to transactional risk, and they use hedging mechanism
to minimize their risk.
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Translation Exposure
The risk that a company's equities, assets, liabilities or income will change in value
as a result of exchange rate changes. This occurs when a firm denominates a
portion of its equities, assets, liabilities or income in a foreign currency.
Accountants use various methods to insulate firms from these types of risks, such
as consolidation techniques for the firm's financial statements and the use of
the most effective cost accounting evaluation procedures. In many cases, this
exposure will be recorded in the financial statements as an exchange rate gain (or
loss).
Economic Exposure
An exposure to fluctuating exchange rates, which affects a company's earnings,
cash flow and foreign investments. The extent to which a company is affected by
economic exposure depends on the specific characteristics of the company and its
industry.
Most large companies attempt to minimize the risk of fluctuating exchange rates by
hedging with positions in the forex market. Companies that do a lot of business in
many countries, such as import/export companies, are at particular risk for
economic exposure.
FOREIGN EXCHANGE RATES:
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Exchange risk is defined as the net potential gains and losses which can arise from
the exchange rate changes due to the foreign exchange exposure of Siyaram’s
Siyaram’s sell the goods in the international market; we had seen in the above
section how it is exposed to risk (Transaction Exposure).
Exchange rates fluctuate on daily basis Siyaram’s can make profit or make loss in
this fluctuation.
Example:
The company has got an export order of $10,00,000 on June 15, 2009 the profit for
the company behind this deal is 10% and the exchange rate on this date is suppose
Rs. 45. So the total deal is of 4.5 Crores.
Party has agreed for the payment of this order on Aug 15, 2009 and if the rate on
that date is Rs.40 than the calculations goes like that:
Particulars Amt
Goods sold ($10,00,000 X 45) 4,50,00,000
Profit 45,00,000
Payment Received ($10,00,000 X 40) 4,00,00,000
Exchange rate loss. 50,00,000
Profit /Loss (5,00,000)
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In the above case exchange loss exceeds the profit on deal, so here Siyaram’s
should try to hedge their risk. This was just an example to explain how the profit
making deal can be converted into the loss making deal due to the fluctuation and
exposure of exchange rates.
EXPOSURE TO USD/INR
Once the deal is finalized Siyaram’s dispatch the goods to the client, in the whole
process the major point of concern is that, when we are going to receive the
payment. This concern is not only of Siyaram’s but it is of each and every corporate
house who deals in exports, and so the hedging mechanism is used to cover the
losses due to fluctuation in the exchange rates.
It is basically how much Siyaram’s is exposed to currency fluctuation. If price of the
dollar has the fluctuation of 5% in a year, than we can say the exposure is 5%,
appreciation or depreciation
Example:
Siyaram’s gets an order and the payment is expected in different months in part. In
the month of June the deal was finalized and then we are about to receive the
payment in the 3 parts.
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Here the treasury department of the Siyaram’s tries to predict the prices of the
currency, so that they can take necessary action. As we can see in the above figure
there is the treasury department of the Siyaram’s has predicted the prices in the
payment period.
HEDGING MECHANISM :
Whenever the export deal is finalized the Siyaram’s cover their risk, use the
hedging mechanism. This mechanism is used through Forward Booking. To
understand how Siyaram’s undergo the forward booking. So it is very necessary to
understand the concept of forward booking.
Forward Booking
Foreign currency forward contracts are used as a foreign currency hedge when a
organization has an obligation to either make or take a foreign currency payment at
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some point in the future. If the date of the foreign currency payment and the last
trading date of the foreign currency forwards contract are matched up, the investor
has in effect "locked in" the exchange rate payment amount.
By locking into a forward contract to sell a currency, the seller sets a future
exchange rate with no upfront cost. For example, a U.S. exporter signs a contract
today to sell hardware to a French importer. The terms of the contract require the
importer to pay Euros in six months' time. The exporter now has a known euro
receivable. Over the next six months, the dollar value of the euro receivable will rise
or fall depending on fluctuations in the exchange rate. To mitigate his uncertainty
about the direction of the exchange rate, the exporter may elect to lock in the rate
at which he will sell the Euros and buy dollars in six months. To accomplish this, he
hedges the euro receivable by locking in a forward.
This arrangement leaves the exporter fully protected should the currency
depreciate below the contract level. However, he gives up all benefits if the
currency appreciates. In fact, the seller of a forward rate faces unlimited costs
should the currency appreciate. This is a major drawback for many companies that
consider this to be the true cost of a forward contract hedge. For companies that
consider this to be only an opportunity cost, this aspect of a forward is an
acceptable "cost". For this reason, forwards is one of the least forgiving hedging
instruments because they require the buyer to accurately estimate the future value
of the exposure amount.
Like other future and forward contracts, foreign currency futures contracts have
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standard contract sizes, time periods, settlement procedures and are traded on
regulated exchanges throughout the world. Foreign currency forwards contracts
may have different contract sizes, time periods and settlement procedures than
futures contracts. Foreign currency forwards contracts are considered over-the-
counter (OTC) because there is no centralized trading location and transactions are
conducted directly between parties via telephone and online trading platforms at
thousands of locations worldwide.
Key Points:
Developed and grew in the late '70s when governments relaxed their control
over their currencies
Used mainly by banks and corporations to manage foreign exchange risk
Allows the user to "lock in" or set a future exchange rate.
Parties can deliver the currency or settle the difference in rates with cash.
Example: Currency Forward Contracts
Corporation A has a foreign sub in Italy that will be sending it 10 million Euros in six
months. Corp. A will need to swap the euro for the Euros it will be receiving from the
sub. In other words, Corp. A is long Euros and short dollars. It is short dollars
because it will need to purchase them in the near future. Corp. A can wait six
months and see what happens in the currency markets or enter into a currency
forward contract. To accomplish this, Corp. A can short the forward contract, or
euro, and go long the dollar.
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Corp. A goes to Citigroup and receives a quote of .935 in six months. This allows
Corp. A to buy dollars and sell Euros. Now Corp. A will be able to turn its 10 million
Euros into 10 million * .935 = 935,000 dollars in six months.
Six months from now if rates are at .91, Corp. A will be ecstatic because it will have
realized a higher exchange rate. If the rate has increased to .95, Corp. A would still
receive the .935 it originally contracts to receive from Citigroup, but in this case,
Corp. A will not have received the benefit of a more favorable exchange rate.
COMING TO SIYARAM’S
Page 65Actual Realization Because of Forwards = 48.0000
Profit = 45.5000 – 48.0000 = 2.5
Interpretation
Siyaram’s dispatch the goods on 6th June, 2009. At the time of delivery
Siyaram’s Treasury Manager Mr. Shruti Sheel Jahanwar feels that they should
think about the exchange risk and try to mitigate it. The price of the dollar on
6th June, 2009 was 47.00 per dollar.
Mr. Jhanwar is a smart manager, he tries to predict the prices of the dollar at
the time of realization or when they are about to receive the payment. Mr.
Jhanwar use to read newspapers, and try to keep track on the economic
indicators that affect the foreign exchange rates. So after doing the whole
exercise he felt that the price of the dollar will further go down. So his
perception on the price of the dollar is Rs. 45.00 per dollar on September 6,
2009.
Now, Mr. Jhanwar approaches their bankers and asks for the forward booking.
The forward booking at the bank was available at the rate of 48.00 per dollar
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for September 6, 2009. Mr. Jhanwar books the contract.
On 6th September, 2009 client makes the payment. At the time of payment
the price of the dollar was 45.50 per dollar. If he would have not booked the
forwards there would have been a substantial loss due to foreign exchange
fluctuation.
OBSERVATIONS AND FINDINGS
Based on the interpretations and calculations of my project, I can conclude that
though the Siyaram Silk Mills Ltd is earning the consistent profit.
The financial performance of the company for the 5 years reflected a good growth
in sales and though all the market segments sustained or bettered their
performance over the previous years. Cost overrun in a few long term projects
impacted the profitability. However, the company s track record has always been
oriented towards profitable growth and with the strong fundamentals; the company
is well placed to grow continuously on major fronts.
The company has strong short term liquidity position as both the liquidity ratios are
favorable and appreciable which concludes that company has got sufficient assets
to pay off short term debts as and when they fall due.
Sales turnover for the year 2008 under review was at RS. 629.79 Cr registering an
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increase of about 18.1% over the previous year. The turnover for the year 2008
stood at Rs. 629.79 Cr. which crossed five hundred crore rupee mark.
The company has strong solvency position as all the solvency ratios are favorable.
Debt-equity ratio is favorable indicating equal share of owners and creditors.
The book value of the companys shares for the year 2008 has gone down to Rs.
145.53 as compared to other years but has also shown some improvement as
compared to the previous year..
The return on shareholders funds and the return on total capital employed declined
to 6% for the year 2008 respectively, indicating that the company needs to take
care while investing its capital. The company has decreasing overall profitability
ratios indicating ineffective use of funds provided be shareholders and creditors.
The margins across all business segments for the 5 years were better. The company
has to absorb the extra costs in a long term projects due to which the profitability
was low impacting the overall performance of the company.
The overall performance of the company is good and there is a continuous flow of
project business. The company is continuing its drive for volume with continued
focus on profitability.
In order to forecast the bankruptcy the above multivariate model can be put to use
as it considers all the key factors relevant for credit analysis. Another scientific
multivariate analysis can be done. The widely used one is the Altaman score, it
helps in the prediction of the corporate bankruptcy. The following analysis of the
Altman Z score was done for Siyaram Silk Mills Ltd. & it was interpreted that it is
very much above 2.99 & so Siyaram Silk Mills Ltd. Is a healthy firm & the free of
bankruptcy need not be feared.
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SUGGESTIONSFor assessing the creditworthiness of the potential customer or client, the Credit Scoring Model (the ad hoc multivariate analysis) can be brought to use. In this the client can be rated between 0-15 & then by looking at its total points the credit worthiness of the client can be judged.
POINTSCharacter
Average Past Payment
On time Up to 30 days late
Up to 60 days late
Capacity Profit Margin 0-5% 6-10% More than
10% Quick Ratio Less than
0.750.75-1.25 More than
1.25% Cash Flow Low Average High
Capital Current Ratio Less than 1 1-1.15 Less than 1.5 Debt-equity Ratio Less than 1 1-2 Less than 2 Interest Earned Less than 2X 2X-3X Less than 3X
Collateral Net Worth Low Average High Per cent Assets Free Low Average High Market value to Net
Worth Low Average High
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Conditions Recession Average ProsperityTotal
Bibliography
Books: Financial Management By Satish M. Inamdar
Introduction to Financial Accounting By Horngren
Introduction to Management Accounting By Grey Sundem
Financial Management By M Y Khan/ P K Jain
Financial Management By I M Pandey
Financial Management By S M Inamdar
Management Accounting By M G Patkar
Internet sites: http://en.wikipedia.org/wiki/Financial_statement
http://en.wikipedia.org/wiki/Financial_ratios
http://cpaclass.com/fsa/ratio-01a.htm
http://beginnersinvest.about.com/od/financialratio/Financial_Ratios.htm
http://www.esesv.com
http://www.investopedia.com
http://www.google.com
http://www.fabric2fashion.com
http://www.siyaram.com
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BALANCE SHEET
YEAR 2008 2007 2006 2005 2004 SOURCES OF FUNDS : Share Capital 9.37 9.37 6.25 6.25 6.25 Reserves Total 126.99 123.39 111.93 99.31 93.71 Total Shareholders Funds 136.36 132.76 118.18 105.56 99.96 Secured Loans 185.92 112.52 83.06 77.25 85.04 Unsecured Loans 84.56 81.08 46.86 47.4 32.97 Total Debt 270.48 193.6 129.92 124.65 118.01 Total Liabilities 406.84 326.36 248.1 230.21 217.97 APPLICATION OF FUNDS : Gross Block 302.78 237.3 203.73 197.04 177.84 Less : Accumulated Depreciation 101.31 85.92 82.69 75.1 79.55 Less:Impairment of Assets 0 0 0 0 0 Net Block 201.47 151.38 121.04 121.94 98.29 Lease Adjustment 0 0 0 0 0 Capital Work in Progress 4.83 26.77 5.07 1.19 5.48 Investments 0.24 0.14 0.14 0.14 0.14 Current Assets, Loans & Advances Inventories 108.9 75.07 73.29 64.15 63.37 Sundry Debtors 132.57 127.75 99.36 67.69 70.01 Cash and Bank 1.12 1.4 1.05 0.79 1.92 Loans and Advances 33.48 21.7 15.72 14.13 13.57 Total Current Assets 276.07 225.92 189.42 146.76 148.87 Less : Current Liabilities and Provisions Current Liabilities 44.65 45.85 42.21 21.02 21.04 Provisions 13.67 15.99 9.03 5.42 2.31 Total Current Liabilities 58.32 61.84 51.24 26.44 23.35
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Net Current Assets 217.75 164.08 138.18 120.32 125.52 Miscellaneous Expenses not written off 0 0 0 0 0 Deferred Tax Assets 1.54 1.13 1.04 1.03 1.18 Deferred Tax Liability 18.99 17.14 17.37 14.41 12.64 Net Deferred Tax -17.45 -16.01 -16.33 -13.38 -11.46 Total Assets 406.84 326.36 248.1 230.21 217.97 Contingent Liabilities 3.63 3.56 3.21 2.64 3.28
PROFIT & LOSS ACCOUNT
YEAR 200803 200703 200603 200503 200403 INCOME : Sales Turnover 589.93 524.84 449.77 339.64 317.7 Excise Duty 0.26 0.3 0.4 5.9 21.81 Net Sales 589.67 524.54 449.37 333.74 295.89 Other Income 7.49 7.75 9.88 4.38 5.54 Stock Adjustments 32.63 0.98 -2.49 1.56 3.61 Total Income 629.79 533.27 456.76 339.68 305.04
EXPENDITURE : Raw Materials 273.43 232.83 206.58 153.4 133.77 Power & Fuel Cost 9.25 7.32 5.51 5.45 6.95 Employee Cost 27.33 21.87 14.19 10.23 8.89 Other Manufacturing Expenses 107.95 88.23 82.17 59.54 54.04 Selling and Administration Expenses 163.05 130.34 99.81 77.94 73.74 Miscellaneous Expenses 9.25 7.31 5.86 3.97 3.4 Total Expenditure 590.26 487.9 414.12 310.53 280.79
Operating Profit 39.53 45.37 42.64 29.15 24.25 Interest 10.72 6.72 4.13 6.35 3.13 Gross Profit 28.81 38.65 38.51 22.8 21.12 Depreciation 16.55 15.55 14.21 11.85 10.04 Profit Before Tax 12.26 23.1 24.3 10.95 11.08 Tax 0.71 3.55 5.25 0.9 0.85 Fringe Benefit tax 0.53 0.35 0.5 0 0 Deferred Tax 1.51 -0.32 2.94 1.93 2.76 Reported Net Profit 9.51 19.52 15.61 8.12 7.47 Extraordinary Items 0.91 2.18 0.78 0.52 0.07 Adjusted Net Profit 8.6 17.34 14.83 7.6 7.4
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Adjst. below Net Profit -0.2 0.55 0.57 0.33 -0.12 P & L Balance brought forward 5.04 0.45 2.84 2.24 2.71 Appropriations 9.48 15.48 18.56 7.85 7.82 P & L Balance carried down 4.87 5.04 0.46 2.84 2.24
Dividend 4.68 4.68 3.12 2.5 2.5 Equity Dividend % 50 50 50 40 40
YEAR 2008 2007 2006 2005 2004
CASH FROM OPERATION PAT 9.51 19.52 15.61 8.12 7.47Depreciation 16.55 15.55 14.21 11.85 10.04Deferred tax 1.51 -0.32 2.94 1.93 2.76TOTAL 27.57 34.75 32.76 21.9 20.27Less Working Capital increase or decrease 217.75 164.08 138.18 120.32 125.52 -190.18 -129.33 -105.42 -98.42 -105.25
CASH FROM INVESTING ACTIVITIES Net Block 201.47 151.38 121.04 121.94 98.29Increase or decrease in Net block 50.09 30.34 -0.9 23.65 98.29Add Depreciation 16.55 15.55 14.21 11.85 10.04Purchase or Sale of Fixed Assets 66.64 45.89 13.31 35.5 108.33Increase in investment 0.1 0 0 0 Increase or decrease in Capital WIP -21.94 21.7 3.88 -4.29 44.8 67.59 17.19 31.21 108.33
FREE CASH FLOW -234.98 -196.92 -122.61 -129.63 -213.58
CASH FROM FINANCING ACTIVITIES Increase in Equity Capital 136.36 132.76 118.18 105.56 99.96Increase in Share Premium 0 0 0 0 0Non Convertible Debenture 0 0 0 0 0Debt 270.48 193.6 129.92 124.65 118.01Dividend Paid 4.68 4.68 3.12 2.5 2.5 411.52 331.04 251.22 232.71 220.47
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DIFFERENCE 176.54 134.12 128.61 103.08 6.89Difference of Cash and Cash Equivalent -0.28 0.35 0.26 -1.13 0.56
Difference in Answer 176.82 133.77 128.35 104.21 6.33
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