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A Study Of Financial Performance Based On Ratios

At TELCON Dharwad

1

Belgaum Institute of Management Studies (MBA)

CONTENTS

Executive Summary Design of the Study Scope of the Study and Methodology Introduction to the Ratios

EXECUTIVE SUMMARY

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Financial statements provide summarized view of the financial position and operation of

the company. Therefore, now a day it is necessary to all companies to know as well as to

show the financial soundness i.e. position and operation of company to their stakeholders.

It is also necessary to company to know their financial position and operation of the

company.

In this report I made an effort to know the financial position of the Telcon Construction

Equipment Company Limited Dharwad, by using the Annual Reports of the company.

The Financial analysis of this report will show the Strength and weakness of the Telcon

Construction Equipment Company Limited Dharwad. Financial analysis will help the

company to take decision.

Thus, we can say that, Financial Analysis is a starting point for making plans before

using any sophisticated forecasting and planning.

Objectives of the study:

1 Main Objective is to study the different ratios used in TELCON.2 To know the financial performance based on ratios.3 To find out the companies efficiency based on past and present profitability.

ratios

4 To study the liquidity position of the company.5 To improve its future performance by analyzing its financial statements.

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Research Methodology:

Methodology:

The methodology includes the personal interaction with the finance manager. Selection of data: From the Annual Reports of the Company for last three years;

i.e. from

Annual Report for the year 2003-04



Period: The Study covers a period of three years data from 2003-04, 2004-05.and2005-06 to mean an Accounting year of the company consisting of 365 working

days.

Frame work Analysis for the purpose of analyzing the Liquidity Position of thecompany. The study make use of various accounting Ratios

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DESIGN OF THE STUDY

Title of the project:

A Study of Financial Performance Based On Ratios At TECON Dharwad

Statement of the Problem:

As ratios provide a benchmark for companys against their own performance in

industry. The company wants to study the ratios and compare its performance of past

with the present performance with the help of ratio analysis, various items of financial

statement that ensure their existence as well as their future progress.

Research Problem:

To know the Financial Position of the company and its Liquidity Performance

through comparing three years financial performance by applying different financial

Ratios.

Purpose of the study:

As it is very difficult to decide any inference from the mass of figures included infinancial statements. So in order to judge accurately the financial health of the

firm, it is generally regroup and analyze the figures as disclosed by these financial

statement.

The use of Ratio Analysis or Accounting Ratios enables conclusions to be drawnfrom the figures as to know the earning capacity, operational efficiency, and

financial condition etc. of a concern.

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The study includes the calculation of different financial ratios. It compares threeyears financial statements of the company to know its performance in these

different years.

To know whether the company is growing or incurring losses or it is stagnant inits performance.

Objectives of the study:

1 Main Objective is to study the different ratios used in TELCON2 To know the TELCON financial performance based on ratios.3 To find out the companies efficiency based on past and present

profitability ratios

4 To study the liquidity position of the company.5 To improve its future performance by analyzing its financial statements.

Scope of the study:

The scope of the study is conducted is only for organization level. It is done through

Balance Sheet of Company. For a period 2003-04, 2004-05, 2005-06

DATA COLLECTION METHOD:

1 PRIMARY DATA: The information is collected from the personal interactionwith the financial managers of TELCON

2 SECOUNDARY DATA: This is been is collected through TELCON ANNUALREPORTS, & WEBSITES.

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MEASUREMENT TECHNIQUE / STATISTICAL TOOLS:

Accounting Ratios.

Financial Statements of the Company.

ANALYTICAL TECHNIQUE:

Statistical technique used for calculation of ratios is in terms of

percentage.

LIMITATION OF THE STUDY:

The study is done only on the Balance sheet and profit and Loss A/c Study is based on information provided by the company. The limitation of ratio analysis is itself a limitation in achievement the set

objective.

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INTRODUCTION

When we observed the financial statement comprising the balance sheet and profit or loss

account is that they do not give all the information related to financial operations of firm,

they can provide some extremely useful information to the extent that the balance sheet

shows the financial position on a particular date in terms of structure of assets, liabilities

and owners equity and profit or loss account shows the results of operation during the

year. Thus the financial statements will provide a summarized view of the firm.

Therefore in order to learn about the firm the careful examination of a valuable reports

and statements through financial analysis or ratio is required.

Meaning and definition

Financial analysis is the process of identifying the financial strength and weaknesses of

firm by properly establishing relationship between the items of balance sheet and profit

and loss account.

In other words, financial analysis is the process of evaluating the relationship between

components of financial statements to get better understanding of firms position and

performance.

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Financial interpretation means explaining the significance of financial data simplified

by way of financial analysis.

RATIO ANALYSIS / ACCOUNTING RATIOS:

A Ratio 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 benchmark for evaluating the financial position

and performance of a firm.

RATIO ANALYSIS is defined as systematic use of ratio to interpret the financial

statements so that strength and weakness of firm as well as historical performance and

current financial condition can be determined.

This relationship can be expressed as

1 Percentages2 Fractions.

STANDARDS OF COMPARISON:

The ratio analysis involves comparison for a useful interpretation of financial statements.

A single ratio is itself doesnt indicate favorable/unfavorable condition. It should be

compared with some standards of comparison, may consists of;

PAST RATIOS: i.e. ratios are calculated from past financial statements of someof company.

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COMPITITORS RATIOS: i.e. ratios of some selected companies especiallymost successful and progressive competitors.

INDUSTRY RATIOS: i.e. Ratios of the industry to which the firm / Companybelongs.

PROJECTED RATIOS: i.e. Ratios developed using the projected financialstatements of the same Company.

In my project, I am going to make comparison with PAST RATIOS. And which is

easiest way to evaluate the performance of the company. It gives and induction of

direction of change and reflects whether the companies financial performance has

improved, deteriorated or remained constant over time.

PARTIES INTERESTED IN FINANCIAL ANALYSIS:

SHORT TERM CREDITIORS: Interested in liquidity position or short-termsolvency of company.

LONG TERM CREDITORS: Interested in long-term solvency andprofitability of firm / company.

OWNERS/ SHAREHOLDERS: Concentrating on companys profitabilityand financial condition.

MANAGEMENT: Interested in evaluating every aspect of firmsperformance. Because they have to protect the interest of all parties and to see

that companies gross profitability.

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TYPES OF RATIOS:

Several ratios can be calculated from the accounting data can be grouped in to variety

classes according to activity or function to be evaluated. Therefore, in view of the

requirements of various users of the financial analysis, Ratio may classify into following

categories:

1 Profitability ratios.2 Turnover (activity) ratios.3 Financial ratios.For better understanding purpose I have taken the above three types in different parts

with accounting data of TELCON Co. This also includes the theoretical aspects of the

different ratios.

PROFITABILITY RATIOS INVOLVE:

1 Gross Profit Ratio2 Net Profit Ratio3 Operating Expenses Ratio4 Operating Profit Ratio5 Return On Investment / Overall Profitability Ratio

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6 Return On Equity7 Return On Total Assets8 EPS9 DPS10 Retained Earning Ratio

TURNOVER RATIOS INVOLVES:

1 Inventory stock turnover Ratio2 Debtors (Accounts Receivable) Turnover Ratios.3 Creditors (Account Payable) Turnover Ratios4 Fixed Assets turnover Ratio5 Current Assets turnover Ratio6 Working capital turnover Ratio7 Total Assets turnover Ratio8 Net Assets turnover Ratio

FINANCIAL RATIOS INVOLVES:

1 Financial Ratio: Current Ratio Quick / Acid test / Liquid Ratio. Absolute liquid / Cash Ratio

2 Leverage Ratio : Debt ratio

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Debt equity Ratio Proprietary Ratio Interest coverage

ADVANTAGES AND DISADVANTAGES OF RATIO ANALYSIS:

ADVANTAGES:

Simplifies Financial Statements: Ratio Analysis simplifies thecomprehension of financial statements. Ratios tell the story of changes in

financial condition of the business.

Facilitates Inter firm Comparison: Ratio analysis provides data for intercompany comparison. Ratio highlights the association with successful and

unsuccessful firms. They also reveal strong and weak companies, overvalued

and undervalued companies.

Makes Intra Firm Comparison Possible: Ratio analysis also makes possiblecomparison of the performance of different division of the company. The ratio

helpful in deciding about their efficiency.

Helps In Planning: Ratio Analysis helps in planning and forecasting overperiod of time a company develops certain norms that may indicates future

success/ failure. If relationship changes in firms data over different time

periods. The ratio may provide clues on trends and future problems.

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Liquidity Position: With the help of ratio analysis conclusions can be drawnregarding liquidity position of the company. The liquidity position of a

company could be satisfactory if it is able to meet its current obligations when

they become due.

Long Term Solvency: Ratio analysis equally useful for assessing the long-term financial viability of a firm. The long-term solvency is measured by the

leverage / capital structure and profitability ratios, which focus on earning power

and operating efficiency.

DISADVANTAGES:

If companies ignore the impact of inflation or price level changes in the financial

statements or if financial statements are based on historical costs. Then it becomes

limitation of ratio analysis. Another problem is it depends on quality of financial

statements. For example: if there is no transparency / disclosure of real things in

the statements it becomes problem to analyst. But now days it doesnt hold well.

Because, every company has to disclose its information according to accounting

standards, in the annual reports.

CONCLUSION:

The ratio is an aid to management in making decisions. The ratio if discriminately

and wisely interpreted be useful tool of financial analysis.

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CONTENTS

- Organization Profile

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ORGANISATON PROFILE

Telcon has been at the forefront of providing Constructive Solutions to the Indian

Construction, Earthmoving and Mining Industry. Started in 1961 as a division of Telco

(now Tata Motors), Telcon is an independent subsidiary of Tata Motors and a Joint

Venture between Tata Motors & Hitachi Construction Machinery Co. Ltd. of Japan -

world leaders in Hydraulic Excavator Technology, With holding 20% equity stake.

Telcon has the widest range of construction equipment catering to the needs of various

end use sectors and holds a dominating presence in the construction equipment market in

India.

The portfolio of our equipment range includes Hydraulic Excavators, Mining Shovels,

Backhoe Loaders, Wheel Loaders, Vibratory Compactors, Motor Graders, Crawler

Cranes, Asphalt Plants, etc. Apart from manufacturing world class machines with cutting

edge technology at our works in Jamshedpur & Dharwad, Telcon has a well designed

back up system to cater to the Support Needs of the customers. With a wide network of

over 50 front offices in the form of Dealer and Telcon offices, the resultant reach ensures

prompt service to customers both on account of Spare Parts & Breakdown Repairs.

In addition, we offer various value added services like On Site Maintenance Contracts,

Unit Exchange Programs, and Aggregate Repairs at Telcon's own workshops and

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Comprehensive Refurbishing of machines. It is Telcon's endeavor and objective to

provide pro-active & constructive solutions with a view to continuously improve

competitiveness & profitability of its valued customers. This spirit, hence, forms the core

of the Telcon Brand--Constructive Solutions.

LOCATION OF THE COMPANY:

TELCON is situated at Belur Industrial Estate, Dharwad

TELCON has 680 acres, out of which 118 Acres is for TELCON for the purpose of

production. The production started in Feb., 2001 in the own premises of TELCON.

Earlier the production was done in TELCO.

REGISTERED OFFICE AND HEAD OFFICE OF THE COMPANY:

The registered office and Head office of the company is in Bangalore.

BUSINESS OF THE COMPANY:

TELCONs principal business is the Manufacture and sale of Construction Material

handling and Earthmoving equipments.

CUSTOMERS:

Constructors Land Scarpers Builders and Contractors.

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VISION:

Maximize value creation for all its stakeholders by offering world class

CONSTRUCTIVE SOLUTIONS in harmony with the environment

MISSION:

Telco construction Equipment Company Ltd. is committed to maximizingcustomers satisfaction and loyalty through the design, development manufacture

sale and services of a wide range of reliable, cost effective and quality

construction equipments manufactured to international standards.

The TELCON would like to develop a One-Stop-Shop for its customers,providing solutions rather than merely selling products.

The involvement of its Employees and Business Partners in the effectivefunctioning of the company and its growth is very important and it would work

towards achieving this goal.

The TELCON would like to be an Environment- Friendly company sensitive tothe need to conserve resources and protect the environment in every way possible.

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The TATA Group:

Founded in 1887 by Mr. Jamsetji Tata Turnover at 11.21 bn USD for the year ending 31st March 03. Highly diversified group with over 80 group companies present in several sectors

of economic importance

Leading business group in the private sector. (Sales 11.21 bn USD) Total Group Revenues equivalent to 2.4% of Indias GDP Indias largest Foreign Exchange earner in private sector, accounts for 5.1% of

Indias export. (Export 2.7 bn USD)

Indias largest private sector employer (240,000 employees) Strong support of over 2 million share holders. Serving the nation for last 125 years. The world's largest integrated tea operation Asias largest software exporter The world's sixth largest brand of watches Indias largest private sector steel producer Largest 5-star chain of luxury hotels in India Indias largest private sector power utility

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NEW PRODUCTS

MODEL : EH 600 Dumper

Maximum Payload

: 35.9 Ton

Maximum GMW : 56,911 kg

Engine Model : NTA-14 C (400 hp)

ConfigurationBody Capacity (struck)

Body Capacity (Heap 2:1 SAE

MODEL : ZR 503 G

Maximum Capacity : 4040 kg at 2.85 m

Boom Length : 3.47m - 8.31 m

Boom Extension Speed : 4.84 m/ 18 secs

ConfigurationElevation Range

Swing SpeedHydraulic System

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This and many more models of Tadano Truck Loader Cranes avaliable to you

from Telcon.

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HYDRAULIC EXCAVATOR

MODEL

ENGINE

HORSEPOWER

SWING SPEED

Confi OPERATI

BUCKET

ARM DIG

Fortify your businessideal for trenching job

obs with ease.

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MODEL : EX

ENGINE : Tat

HORSEPOWER : 58

SWING SPEED : 14

ConfigurationOPERATING WEIGHTBUCKET CAPACITY

ARM DIGGING FORCES

The 'Mighty Mini' - The population of thisIndia. It is small, fast and therefore very

MODEL

ENGINE

HORSEPOWER

SWING SPEED


ARM DIGGING FORCES

The shovel execution is called themaking tunnels at the time of the

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MODEL : EX110

ENGINE : TATA 697 NA

HORSEPOWER : 80 PS @ 2300 rpm

SWING SPEED : 11.8 rpm


ARM DIGGING FORCE

MODEL

ENGINE

HORSEPOWER

SWING SPEED

Configur OPERATING

BUCKET CA ARM DIGGIN

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MODEL : EX210 LCH - V

ENGINE : Isuzu A - 6 BG1T

HORSEPOWER : 135 PS @ 1950 rpm

SWING SPEED : 13.9 rpm


ARM DIGGING FORCE

MODEL

ENGINE

HORSEPOWER

SWING SPEED

Configura OPERATING

BUCKET CAP ARM DIGGIN

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MODEL : EX

ENGINE : Isu

HORSEPOWER : 23

SWING SPEED : 11.


ARM DIGGING FORCE

MODEL

ENGINE

HORSEPOWER

SWING SPEED

Configuration

OPERATING WEIGHTBUCKET CAPACITY

ARM DIGGING FORCE

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SOCIAL RESPONSIBILITIES OF TELCON:

The role of a responsible citizen does not go unheeded in Telcon, in the true spirit of the Tata

group. Telcon works in close collaboration with a number of NGOs to channelize its work.

Telcon's thrust remains educations, environment and health.

Environment:In an environment protection drive several multiple thousands of tree samplings were

planted in Dharwad and Jamshedpur inside the factory premises and in the Telcon

townships. This remains an ongoing annual activity, never to give up.

Educational assistance to the physically disabled:Assistance is extended to schools imparting special education such as the Spastic

Society of Southern India School and Karnataka School for the Deaf. Sponsorship of

education for children of Leprosy patients residing in self-settled colonies, in

collaboration with Nav Jagran Manav Samaj.

Social development:Awareness programmes for women in villages in areas of hygiene, education and all-

round development. Industrial training to worthy school children.

Infrastructure support to local educational institutions:Construction of boundary wall and toilets and supply of furniture to village schools in

Belur. Assistance to schools in Jamshedpur to set up computer laboratories and sports

facilities.

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Public Health and Family Welfare :Telcon sponsors immunization programmes in collaboration with Parivar Kalyan

Sansthan that extends medical help to thousands of children who have no access to basic

health programmes. The year is dotted with blood donation and medical camps. Family

planning counseling and programmes are held in collaboration with Parivar Kalyan

Sansthan whereby people are imparted lectures and operations are performed.

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CONTENTS:

Analysis and Interpretation Findings Suggestions Conclusion Bibliography

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ANALYSIS OF

PROFITABILITY RATIOS

OF THE

COMPANY

PROFITABILITY RATIO:

INTRODUCTION:

A company should earn profit to survive and grow over a long period of time. Profit is

the ultimate output of company and company will have no future if it fails to make

sufficient profits. Therefore company should continuously evaluate the efficiency of the

company in terms of profits.

OBJECTIVES:

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6 RETURN ON EQUITY7 RETURN ON TOTAL ASSETS8 EPS9 DPS10 RETAINED EANING RATIO

1 GROSS PROFIT MARGIN RATIO:-Gross profit is the difference between sales and the manufacturing cost of goods sold.

And gross profit is compared with the sales. Gross profit margin ratio reflects the

efficiency with which management produces each unit of product. This ratio indicates the

average spread between the cost of goods sold and sales revenue. A high gross profit ratio

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is sign of goods management and implies that the firm is able to produce at relatively

lower cost.

A low gross profit margin reflects higher cost of goods sold due to

Reduction in selling price Inefficient utilization of plant and machinery etc.

It is calculated as follows:

Gross profit ratio= Sales-Cost of Goods Sold

____________________

Net Sales.

= Gross Profit * 100

___________

Net Sales

GROSS PROFIT RATIO

YEAR 2003-04 2004-05 2005-06

Gross Profit (Rs incrore)

185.49 202.03 285.30

Net Sales (Rs in

crore)

629.45 816.84 1144.46

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RATIO (%) 29.468 24.733 24.9287

SOURCE: ANNUAL REPORTS OF COMPANY

Interpretation: Gross margin of TELCON in 2003-04 has higher ratio of 29.468%, but

in 2004-05 as compared to 2003-04 the ratio come down to 24.733%. And increased to

24.9287% in the year 2005-06 as compared to 2004-05.

Here Gross profit ratio is higher in 2003-04, and in the year 2004-05 it is reduced but it is

good enough from the point of company. Lastly in the year 2005-06 gross \profit ratio

moderately increased. Here ratio is quite normal in 2004-05 & steady.

2 NET PROFIT MARGIN RATIO OF TELCONThis ratio is also known as net margin. This measures the relationship between net profit

and sales of a firm. Depending on the concept of net profit employed, it is calculated as

follows

= Profit (loss) after tax___________________ * 100

Net Sales

This ratio indicates companys capacity to withstand adverse economic conditions.

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A company with high net margin ratio would ensure adequate return to the owners as

well as enable a firm to withstand adverse economic condition when selling price is

declining, cost of production is rising and demand for the product is falling.

It would really be difficult for a low net margin ratio company to withstand these

advantageous.

NET PROFIT RATIO

YEAR 2003-04 2004-05 2005-06

Net Profit (Rs in

crore)

20.67 40.77 86.84

Net Sales (Rs incrore)

629.45 816.84 1144.46

Ratio (%) 3.2838 4.9911 7.587

SOURCE: ANNUAL REPORTS OF COMPANY:

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Interpretation:

The Net Profit Ratio of TELCON in 2003-04 is 3.2838% and in the year 2004-05 it is

increased to 4.9911% and again in the year 2005-06 it is increased to 7.587%, therefore

net profit ratio is satisfactory. TELCON is having an advantageous position and

economic condition is good. As net profit ratio is obtained after deducting tax and other

provisions, so net profit ratio of TELCON is fair enough from company point of view.

3 OPERATING EXPENSES OF TELCONIt explains the changes in the profit margin ratio. This ratio is computed by dividing

opening expenses Viz. cost of goods sold plus selling expenses and general and

administrative expenses (excluding Interest) by sales.

Operating Expenses Ratio = Operating Expenses

_________________ *100Net Sales

A higher operating expenses ratio is unfavorable, since it will have a small amount of

operating income to meet interest, dividends etc. and on the other hand lower operating

expenses ratio is favorable.

OPERATING EXPENSES RATIO

YEAR 2003-04 2004-05 2005-06

Operating exps. (Rs 573.4 753.07 1014.44

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.in crore)

Net Sales(Rs.in crore) 629.45 816.84 1144.46

Ratio (%) 91.095 92.193 88.639


Interpretation: The operating expenses ratio of TELCON in 2003-04 is 91.095%, It

increases to 92.193% in the year 2004-05. But in the year 2005-06 it is decreased to

88.639% TELCON Company is having a low ratio in the year 2005-06, which is

favorable. Due to lower ratio company incurred profit in 2005-06.

4 OPERATING PROFIT RATIOThis ratio is calculated as follows:

= EBIT

______ * 100

Net Sales

OPERATING PROFIT RATIO

YEAR 2003-04 2004-05 2005-06

EBIT (Rs in crore) 37.88 60.20 136.76

Net Sales(Rs in crore) 629.45 816.84 1144.46

Ratio(%) 6.0179 7.369 11.949


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Interpretation:

This ratio of Operating Profit in TELCON Company, in the year 2003-04 is 6.0179% and

it is increased in the year 2004-05 to 7.369% and further it is increased to 11.949% in the

year 2005-06. The ratio is increased due to decrease in the operating expenses.

5 RETURN ON INVESTMENT (ROI) :It is also called as overall profitability ratio or Return on capital employed (ROCE) Ratio.

This ratio is the broadest measure of the overall performance of business firm. It indicates

the percentage of return on the total capital employed in the business. The higher ratio,

the more efficient use of the capital employed. It is calculated on the bases of the

following:

ROI = Operating Profit OR PBIT

_______________ * 100 ________________ * 100Capital employed Capital employed

RETURN ON INVESTMENT

YEAR 2003-04 2004-05 2005-06

EBIT (Rs in crore) 37.88 60.20 136.76

Capital employed (Rsin crore)

339.81 319.68 347.78

Ratio (%) 11.15 18.83 39.32


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Interpretation:

In 2003-04 the ROI was 11.15 %, in the year 2004-05 it increases to 18.83 %, and in the

year 2005-06 it moves to 39.32 %, Because of decrease in operating expenses. The return

on investment ratio is increased in all the 3 years. It means here the company had use the

capital employed efficiently.

6 RETURN ON EQUITY (ROE) / NET WORTHReturn on Equity is calculated to see the profitability of owners investment.

Return on Equity = PAT

____________________________ * 100Shareholders Equity or Net worth

Return on Equity indicates how well the firm has used the resources of owners. This ratio

reflects the extent to which this objective has been accomplished. This ratio is of great

interest to the present as well as the prospective shareholders and also of great concern to

management, which has the responsibility of maximizing the owners welfare.

RETURN ON EQUITY

YEAR 2003-04 2004-05 2005-06

PAT (Rs in crore) 20.67 40.77 86.48

Net Worth (Rs in

crore)

205.31 228.97 274.16

Ratio (%) 10.067 17.805 31.543


Interpretation:

In 2003-04 the return on investment was 10.067%. It increases to 17.805 in the year

2004-05. And it further increases to 31.543%. It indicates that management has used the

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resources of owners very effectively. Therefore in the year 2005-06 company incurred

profit. The ratio is high. In addition, there is substantial increase in all the 3 years.

7 RETURN ON TOTAL ASSETS (ROTA)This ratio is compared to know the Productivity of the total assets. There are two

methods of computing Return on Total Assets

1. ROTA= PAT

___________ * 100Total Assets

2. ROTA= PAT + Interest

_______________ * 100Total Assets

RETURN ON TOTAL ASSETS:

YEAR 2003-04 2004-05 2005-06

PAT + Interest (Rs in

crore)

37.95 49.79 94.01

Total Assets (Rs in

crore)

339.81 319.68 347.78

Ratio (%) 11.168 15.574 27.0314


Interpretation:

In 2003-04 the return on assets was 11.168 %. It increases to 15.574 % in the year 2004-

05. And it further increases to 27.0314 %. It indicates that management has used assets

very effectively. Therefore in the year 2005-06 company incurred profit. The ratio is

high. In addition, there is substantial increase in all the 3 years.

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8 EARNING PER SHARE (EPS):It measures the profit available to the equity shareholders on a per share basis, that is

amount that they can get on every share held. It is calculated by dividing the profits

available to the shareholders by the number of the outstanding shares. The profits

available to the ordinary shareholders are represented by net profit after taxes and

preference dividend. The overall profitability can also be judged by calculating EPS.

EPS is calculated by following formula:

EPS = PAT

___________________Number of Equity Shares

EARNING PER SHARE

YEAR 2003-04 2004-05 2005-06

PAT (Rs in crore ) 20.67 40.77 86.48

No. of Equity Shares 100,000,000 100,000,000 100,000,000

Ratio 2.067 4.08 8.68SOURCE: ANNUAL REPORTS OF COMPANY:

Interpretation: EPS of Company in 2003-04 is Rs. 2.067, which increases to Rs. 4.08 in

the year 2004-05. And further it increases to Rs. 8.68 in the year 2005-06 due to increase

in profit, EPS is increased.

9 DIVIDEND PER SHARE (DPS)It is the dividend paid to the ordinary shareholders on a per share basis. In other words,

DPS is the net distributed profit belonging to the shareholders divided by the number of

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ordinary shares outstanding. This ratio is particularly useful for those investors who are

interested only in dividend income. Dividend per share is calculated by following

formula:

DPS= Dividend Paid

_______________Number of Shares

TELCON CO, not paid dividend during the period 2003-04, 2004-05, 2005-06. Hence

there is no chance to calculate the DPS.

10.RETAINED EARNING RATIO


Retained Earning Ratio = Retained Earning * 100

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Total Earning

The Telcon Company has not declared any divided during the period 2005-06 and

retained earnings ratio is 100%.

The retained earning ratio is indicators of the amount of earning that have been ploughed

back in the business. The lower the retained earnings ratio the lower will be amount of

earnings ploughed back into business and vice-versa.

A Higher retained earning ratio means and stronger financial position of the company

RETAINED EARNINGS RATIO:

YEAR 2003-04 2004-05 2005-06

Retained Earnings(Rs in crore)

20.67 40.77 86.48

Total Earnings (Rs in

crore)

20.67 40.77 86.48

Ratio 100% 100% 100%


Interpretation:

In the year 2003-04, 2004-05, and 2005-06 TELCON Company retained 100% earnings

as retained earning, Due to non declaration of Dividend.

NOTES:

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Net sales= Gross SalesExcise COGS= (Op. stock +Purchases of products +Consumption of Raw

materials & components + consumption of stores spares, tools + freight,

transportation, port charges + Power and fuel. )Closing Stock.

Operating Expenses = COGS + Payments to and provision for employees+ rent + Rates and taxes + Insurance + publicity and selling expenses work

operating expenses + Repairs to building + Repairs to plant and machinery

+ other expenses + Depreciation.

Gross Profit= Net SalesCOGS Total Assets= Fixed Assets + Current Assets. Net Worth= Capital + Reserves and surplus. COGS= Cost Of Goods Sold

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ANALYSIS OF

TURNOVER RATIOS

OF THE

COMPANY

TURNOVER / ACTIVITY RATIOS OF THE COMPANY

Introduction:

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Activity ratios are employed to evaluate the efficiently with which the firm manages and

utilizes its assets. These ratios are also called as turnover ratio. Therefore they indicate

the speed with which assets are being converted / turned over in to sales.

Thus an activity ratio involves relationship between sales and assets. A proper balance

between sales and assets generally reflects that assets are managed well.

In other words, turnover ratio indicates the efficiency with which the capital employed is

rotated in the business.

Higher the ratio of rotation, the greater will be the profitability

DIFFERENT TURNOVER RATIOS:

1 Inventory stock turnover Ratio2 Debtors (Accounts Receivable) Turnover Ratios.3 Creditors (Account Payable) Turnover Ratios4 Fixed Assets turnover Ratio5 Current Assets turnover Ratio6 Working capital turnover Ratio7 Total Assets turnover Ratio8 Net Assets turnover Ratio

1 INVENTORY / STOCK TURNOVER RATIO (ITR/STR).

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It indicates the efficiency of firm in producing and selling its products. High Ratio is

good from the view point of liquidity and vice versa.

A low ratio would signify that inventory does not sell fast and stably in the warehouse for

a longtime.


Cost of Goods Sold OR Sales (If there is no opening stock)

________________ __________Avg. Inventory Closing Stock

Hence Avg. Inventory = Opening Stock + Closing Stock

____________________________2

Avg. Inventory is calculated by taking stock levels of raw materials, working process and

finished goods at the beginning of year & at the end of the year & that is divided by two

INVENTORY TURNOVERY RATIO

YEAR 2003-04 2004-05 2005-06

COGS (Rs in crore) 443.96 614.81 859.16

Avg. Inventory (Rs in

crore)

76.17 87.97 101.275

Ratio 5.828 6.988 8.4834


INVENTORY CONVERSION RATIO

YEAR 2003-04 2004-05 2005-06

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No. of days in a year 365 365 365

ITR 5.828 6.988 8.4834

DAYS 62.628 52.232 43.025


Interpretation:

The STR/ ITR are high in all three years. And Stock conversion is very fast because

company takes 63 days in 2003-04. It decreases in 2004-05 to 52 days. And in 2005-06 it

is 43 days. It indicates that conversion ratio is very fast.

2 DEBTORS TURNOVER RATIO:

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Debtors constitute an important constituent of current assets and therefore the quality of

debtors to great extent determines that firms liquidity. There are two ratios. They are:

1 Debtors turnover Ratio2 Debtors collection period Ratio

Debtors turnover can be calculated by dividing total sales by balance of debtors.

Debtors turnover = Sales

______Debtors

Higher the ratio is better, since it indicate that debts are being collected more promptly

DEBTORS TURNOVER RATIO

YEAR 2003-04 2004-05 2005-06

Net Sales (Rs in

crore)

629.45 816.84 1144.46

Debtors (Rs in crore) 95.24 99.68 142.51

Ratio 6.60 8.194 8.03073


Interpretation:

The ratio in the year 2003-04 is at 6.60, which increases to 8.194 in the year 2004-05. But

in the year 2005-06 it decreases to 8.0307. The Slight decrease in 2005-06 is negligible. It

indicate that debts are being collected more promptly

DEBTORS COLLECTION PERIOD:

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

average debt collection period. The higher is the turnover ratio and shorter is the average

collection period the better is the trade credit management and the better is the liquidity

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of debtors, as short collection period and high turnover ratio imply prompt payment on

the part of debtors. On the other hand, low turnover ratio and long collection period

reflects that payments by debtors are delayed.

Debtors Collection Period = No. of days

__________DTR

It is helpful to

The creditors and lenders of the firm to know the firms collecting within areasonable time.

DEBTORS COLLECTION PERIOD:

YEAR 2003-04 2004-05 2005-06

No. of days in a

year(Rs in crore)

365 365 365

DTR 6.60 8.194 8.03

DAYS 55 44 45


Interpretation:

Credit allowed is a bit on the higher side in 2003-04. Compare to 2003-04, in the year

2004-05 and 2005-06 there is a reduction in credit allowed i.e. on an average 45 days,

This is quite normal. The slight increase in 2005-06 is negligible.

3) CREDITORS TURNOVER RATIO:

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CTR 1.305 1.1138 1.42504

DAYS 280 328 256


A Higher creditors turnover ratio or Lower credit period enjoyed ratio. Signifies that

the creditors are being paid promptly thus enhancing the credit worthiness of the

company.

Interpretation:

Creditors paid after 280 days in the year 2003-04. But in the year 2004-05 creditors are

paid after 328 days it is not good from the companys point of view. Further it decreases

to 256 days i.e. creditors are paid after 256 days compare to year 2004-05 it is good from

the companys point of view. It means creditors are being paid promptly.

4) FIXED ASSETS TURNOVER RATIO

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This ratio indicates the extent to which the investments in fixed assets contributed

towards sales. If compared with a previous period, it indicates whether the investment in

fixed assets has been judicious / not.

The ratio is calculated as follows:

= Cost of Goods Sold

_________________

Net Fixed Assets

FIXED ASSETS TURN OVER RATIO:

YEAR 2003-04 2004-05 2005-06

COGS (Rs in crore) 443.96 614.81 859.16

Net Fixed Assets(Rs

in crore)

217.80 203.42 180.29

Ratio 2.038 times 3.022 times 4.7654 times


Interpretation:

The fixed assets turnover is 2.038 times in the year 2003-04, in the year 2004-05 the

fixed assets turnover is 3.022 times. But in the year 2005-06 it is increased to 4.7654

times. It means in the year 2005-06 fixed assets are properly utilized i.e. there is a better

efficiency in utilization of fixed assets.

5) CURRENT ASSETS TURNOVER RATIO:

This ratio indicates the extent to which the investment in current assets contributed

towards sales. If the ratio is compared with a previous period, it indicates whether the

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OR

= Net Sales

_______________

Net Current Assets

WORKING CAPITAL TURNOVER RATIO:

YEAR 2003-04 2004-05 2005-06

COGS (Rs in crore) 443.96 614.81 859.16

Net Working Capital

(Rs in crore)

113.62 111.08 163.86



Interpretation:

The ratio is increased in 1st

two years i.e. in the year 2003-04 is at 3.9074, and in the year

2004-05 is at 5.534. But in the year 2005-06 it decreases to 5.243. But it is quit normal

compare to year 2003-04, and it is negligible. This ratio indicates that working capital has

been effectively utilized in making sales.

7) TOTAL ASSETS TURNOVER RATIO

This ratio is computed by dividing the cost of goods sold the average total assets.

Total assets include fixed assets, current assets and miscellaneous expenditure. Average

total assets are simple average of the opening and the closing balance of the total assets.

Total assets turnover ratio=Cost of Goods Sold

Total Assets

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This ratio measures the efficiency of a company in managing and utilizing its

assets. The higher the turnover ratio, the more efficient is the management and utilization

of available assets. While low turnover ratio is indicative of under utilization of available

resources and presence of idle capacity. In operational terms the company can expand its

activity level (in terms of production and sales) should be borne in mind that this ratio

might be on a higher side due to the fact that the value of the assets is very less after the

depreciation. Keeping this in mind, a cautious use of this ratio is desirable.

TOTAL ASSETS TURNOVER RATIO:

YEAR 2003-04 2004-05 2005-06

COGS (Rs in crore) 443.96 614.81 859.16

Total Assets (Rs in

crore)

339.81 319.68 347.78


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Interpretation:

The ratio in all the 3 years it is increased. In the year 2003-04 is at 1.3064, and in the year

2004-05 it is increased to1.9232. But in the year it is still increased to 2.4704. Higher the

turnover ratio, the more efficient is the management and utilization of available assets.

8) NET ASSETS TURNOVER RATIO

Net assets include net fixed assets and net current assets

A firms ability to produce large volumes of sales for a given amount of net assets is the

most important aspects of its operating performance.

Underutilized assets increases the firms need for costly financing as well as expenses for

maintains and up keep.


= Net Sales

_________

Net Assets

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NET ASSETS TURNOVER RATIO

YEAR 2003-04 2004-05 2005-06

Net sales(Rs in crore) 629.45 816.84 1144.46

Net Assets (Rs in

crore)

339.81 319.68 347.78



Interpretation:

The ratio is increased year by year. The ratio is 1.852 @ in the year 2003-04 which

increases to 2.55 times in the year 2004-05 and it increases to 3.29 times in the year

2005-06. so it indicates that the ratio bit higher side. It also indicates that there has been

increased in utilization of resources year by year.

ANALYSIS OF

FINANCIAL RATIOS

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OF THE

COMPANY

FINANCIAL RATIOS OF THE COMPANY

Introduction:

Financial ratios indicate about the financial position of the company. A company is

deemed to be financially sound, if it is in position to carry on its business smoothly and

meet all its obligations both long- term as well as short- term without strain. Thus,

company financial position has to be judged from two angles long- term as well as short-

term.

3 Financial Ratio: Current Ratio Quick / Acid test / Liquid Ratio. Absolute liquid / Cash Ratio

4 Leverage Ratio : Debt ratio

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Debt equity Ratio Proprietary Ratio Capital employed to net worth ratio Interest coverage

LIQUIDITY RATIO

Liquidity ratios may be defined as financial ratio, which thorough tight on short term

slovenly of firm.

Liquidity Ratio measures the ability of the firm to meet its current obligations. Liquidity

ratio needs establishing a relationship between cash and other current assets to current

obligations to provide quick measures of liquidity. A firm should ensure that it doesnt

suffer from lack of liquidity and also that it does not have excess liquidity. Failure of a

company to meet its obligations due to lack of sufficient liquidity, will result in a poor

creditworthiness, loss of creditors confidence.

Liquidity is perquisite for the survival of firm. The short-term creditors of firm are

interested in short-term solvency / liquidity of firm. But liquidity implies from the

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

So liquidity ratio measure ability of a firm to meet its short- term obligations and reflect

short- term financial strength / solvency of firm.

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1) CURRENT RATIO:

This ratio is an indicator of firms commitment to meet its short- term liabilities. Higher

ratio, better the coverage, 2:1 ratio is treat as standard ratio. This ratio is also called as

solvency / working capital ratio.

The current ratio is the ratio of the current assets and current liabilities. It is calculated by

dividing current assets by current liabilities.

Current Ratio= Current assets

Current liabilities

The current ratio is a measure of short- term solvency of the company. It indicates the

rupee of current assets available for each rupee of current liability. The higher the current

ratio the larger the amount of rupees available per rupee of current liability and the

greater the safety of the short- term creditors. This margin of safety to the creditors is

essential due to the unevenness of the flow of funds through current assets and current

account. The current liabilities can be settled by making the payment whereas the current

assets available to liquidate them are subject to shrinkage of various reasons like

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2) QUICK / ACID TEST / LIQUID RATIO:

Liquid ratio is indication of availability of quick assets to honor its immediate claims.

Higher the ratio betters the coverage. And the standard ratio is 1:1.

An asset is liquid if is can be converted into cash immediately without loss of value.

Hence cash is most liquid assets after assets which are considered to be relatively liquid

are; Debtors balance, marketable securities etc. inventories considered to be less liquid

therefore they require some time form relishing into cash and their value also has

tendency to fluctuate.


= Quick Assets________________________

Current Liabilities

QUICK RATIO:

YEAR 2003-04 2004-05 2005-06

Quick Assets (Rs in

crore)

135.42 166.74 313.35

Current Liabilities

(Rs in crore)

167.98 246.73 375.93

Ratio 0.806 0.675 0.8335

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Interpretation:

The ratio is not good in all the three years when compared with the conventional standard

1:1. In all the three years the ratio is below the 1. But it is nearer to ratio1. So the ratio is

improved compare to last year. Here creditors are getting their payment slowly.

The ratio is decreases from 0.806 in 2003-04 to 0.675 in 2004-05 but in the year 2005-06

it increases to 0.8335. It shows that there is improvement in the ratio in 2005-06.

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3) CASH / ABSOLUTE LIQUID RATIO:

It calculated as follows:

= Cash + Bank Balance

_____________________Current Liabilities

Here, trade investment; marketable securities are equivalent of cash. And therefore they

may be included in the computation of cash ratio. The standard rate for this ratio 0.5:1.

This ratio also indicates liquidity position and company and firms commitment to meet

its short -term liabilities.

CASH RATIO:

YEAR 2003-04 2004-05 2005-06

Cash +Bank Balance(Rs in crore)

3.18 16.80 34.61

Current Liabilities

(Rs in crore)

167.98 246.73 375.93

Ratio 0.0189 0.0680 0.09206


Interpretation:

Cash ratio is much less than the conventional standard of 0.5:1 the ratio is less than 0.5 in

all the 3 years. It indicates that there is a poor liquidity position of the company and there

is poor firms commitment to meet its short-term liabilities. But the ratio is increasing

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1) DEBT RATIO:

It expresses out side liabilities i.e. both long -term and short-term in relation to total

capitalization of firm.


= Total Debt

______________Total Assets

Generally creditors will prefer low debt ratio, since lower the ratio, higher the caution

against creditors losses in the event of liquidation.

Conversely, owners may prefer high debt ratio either

To magnify earnings or Because issuing new share means giving up some degree of control

But a high debt ratio may create problem with respect to future financing since creditors

may reluctant to lend the firm more money unless equity base is increased.

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DEBT RATIO:

YEAR 2003-04 2004-05 2005-06

Total Debt (Rs in

crore)

124.85 71.65 63.02

Net Assets (Rs incrore)

339.81 319.68 347.78

Ratio 0.367 0.224 0.1812


Interpretation:

The ratio is decreasing year by year. In 2003-04 the ratio was @ 0.367 which decreased

to 0.224 in 2004-05 and it further decreased to 0.1812 in 2005-06.It indicates that the

companys reliance on debt is decreased year by year. This shows that the company has

less long term borrowings from financial institutions.

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2) DEBT-EQUITY RATIO

It measures the relation between debt and equity in the capital structure of the firm.

In other word, This ratio shows the relationship between the borrowed capital and

owners capital. This ratio shows relative claim of the creditors and shareholders against

the assets of the company.

It is expressed as:

= Long-term Debt

__________________

Shareholders Equity

Generally higher the ratio greater is the possibility of increasing the ROR to equity

& vice versa.

A high debt equity ratio may be adopted to take advantage of cheaper debt capital.

The ratio indicates the extent to which the firm depends upon out side for its

existence. The ratio provides margin of safety to the creditors. It tells owners the extent to

which they can gain benefits of maintaining control with a limit investment.

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DEBT- EQUITY RATIO

YEAR 2003-04 2004-05 2005-06

Long-term Debt (Rs

in crore)

124.85 71.65 63.02

Shareholders Equity(Rs in crore)

205.31 228.97 274.16

Ratio 0.608 0.3129 0.229


Interpretation:

The ratio is quite lower side. It is decreases from 0.608 in 2003-04 to 0.3129 in 2004-05

and it further decreases to 0.229 in 2005-06. the TELCON Company depends more on

internal sources than on external sources i.e. it indicates that company depends upon

insiders i.e. on shareholders fund & and it also indicates that company is having sound

financial position.

3) PROPRITORY RATIO:

It establishes relationship between the propitiator or shareholders funds & total tangible

assets.

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It may be expressed as:

Proprietary Ratio=Proprietors Funds

Total Assets

The ratio indicates properties stake in total assets. Higher the ratio lowers the risk and

lower the ratio higher the risk. Debt equity ratio & current ratio affects the proprietary

ratio.

PROPRITORY RATIO:

YEAR 2003-04 2004-05 2005-06

Shareholders funds(Rs in crore)

205.31 228.97 274.16

Total Assets (Rs incrore)

339.81 319.68 347.78

Ratio 0.60419 0.7162 0.7883


Interpretation:

The ratio is high in all the three years. It increases from 0.60419 in 2003-04 to 0.7162 in

2004-05. And it increases to 0.7883 in 2005-06. It indicates that there is too much

depends on inside money. It shows that the financial position of the company is strong.

This is increasing year by year.

4) INTEREST COVERAGE RATIO:

This is a measure of the protection available to creditors for payment of interest charges

by the company. The ratio shows whether the company has sufficient income to cover its

interest requirements by a wide margin. The interest coverage ratio is computed by

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FINDINGS AND

SUGGESTIONS

FINDINGS:

PROFITABILITY RATIOS:

Gross profit of the Telcon is increased to 24.92 % in the year 2005-06 as compareto 2004-05.

Net profit of the company is increased to 7.58%in the year 2005-06 as compare to2004-05 and 2003-04.

The operating expenses of the Company is decreased to 88.63% in the year 2005-06 compared to year 2004-05 and 2003-04

Due to decrease in operating expenses, the profitability of the Company isincreased from year to year.

Due to profit , the ratios such as Return on investment is increased to 39.32% ,Return on Equity is increased to 31.543%, Return on Total Assets is increased to

27.0314% , EPS is increased to 8.68% , in the year 2005-06 as compare to 2004-

05.

DPS is nil in all the 3 years because of non-declaration of dividend.

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The retained earnings ratio in the year 2003-04, 2004-05 and in 2005-06 is 100%due to non declaration of Dividend.

TURNOVER RATIOS:

The Inventory Turnover Ratio and the inventory conversion ratio are high in allthe three years. i.e. in the year 2005-06 turnover ratio is 8.4834% , and turnover

period is 44 days. Compare to 2004-05

Debtors Turnover Ratio is higher side and debtors collection period i.e. creditallowed to debtor is quite lower side. It means debts have been collected within

the given period of time. i.e. in the year 2005-06 the debt turn over ratio is

8.030% and debt collection period is 45 days.

Creditors Turnover Ratio is moderate and the creditors payment period is alsoquite normal i.e. in the year 2005-06 creditors turnover ratio is 1.425% creditor

payment period is 256 days.

The Fixed Assets turnover ratio in the year 2005-06 is 4.7654 , Current AssetsTurnover ratio is 1.59 in the year 2005-06, Total assets turnover ratio in the year

2005-06 is 2.4704, and Net Assets Turnover ratios in the year 2005-06 is 3.290 ,

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as compare to 2004-05 and 2003-04 the ratio is increased in the year 2005-06 and

it is quite satisfactory . And it shows that the assets are properly invested towards

making sales.

FINANCIAL RATIOS:

The current ratio is below the standard ratio (i.e.2) and it is not good fromcompanys point of view. It shows that it is in not in position to meet the short

term liabilities .The ratio in the year 2005-06 is 1.4358%.

The Liquid ratio is not according to standard ratios (i.e. 1:1) and it is not goodfrom companys point of view. The ratio in the year 2005-06 is 0.8335%.

The Cash ratio is quite lower side in all the three years when compared tostandard ratio. (i.e. 0.5:1). And it shows that there is poor firms commitment to

meet its short-term liabilities. The ratio in the year 2005-06 is 0.09206

The Debt ratio and the debt equity ratio both are showing decreasing trend in allthe 3 years. It indicates that the company is depending more on internal resources.

A more internal fund means the shareholders fund; it shows that the company is

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financially strong. Debt ratio in the year 2005-06 is 0.1812. And debt equity

ratio is 0.229 in the year 2005-06.

The proprietary ratio is increasing year by year; it shows that company isfinancially strong. The ratio in the year 2005-06 is 0.7883.

SUGGESTIONS:

1 The company can think on increasing the liquidity position.2 As the inventory turn over ratio shows high inventory turnover. And hence the

Company has detailed study of the inventory position and makes the maximum

use of the inventory.

3 Company instead of depending fully on internal funds, it can also study thefeasibility of borrowing funds from external sources, so it can still expand its

production capacity considering the demand.

4 Company can see the possibility of declaring the dividend to increase the interestof the shareholders.

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5 Company since making investment in Fixed Assets can see the possibility ofGovernment concessions.

6 Company can also make investments with other Companies subject to theprovisions as per memorandum and articles.

7 Companies also see the possibility of Public Issue with high premium.

Conclusion:

RATIO ANALYSIS is defined as systematic use of ratio to interpret the financial

statements so that strength and weakness of firm as well as historical performance and

current financial condition can be determined.

The ratio is an aid to management in making decisions. The ratio if discriminately and

wisely interpreted be useful tool of financial analysis.

According to analysis of ratios of three years of TELCON, I came to know that the

company made a good effort to increase the profit. It has used the all the assets

effectively to get good returns. The ratios like return on investment, return on total assets,

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return on equity, earning per share, fixed assets turnover ratio, total assets turnover ratio,

net assets turnover ratio all are increasing year by year it shows that company is in profit

making. TELCON has good brand name and it has maintained a good relationship

between customers. And it can increase its profit still better by concentrating the above

given suggestion.

Contents:

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Bibliography

BIBLIOGRAPHY:

I.M. PandeyFinancial Management. Vikas Publishing House Pvt. Ltd. M.Y. Khan and P. K. Jain Financial Management. Tata Megraw Hill

Publishing company Ltd. New Delhi.

Khan and Jain Management and Accounting. Himalaya publishing housePvt. Ltd.

Web Site: www. telcon.co.in

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