final report 12

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INTRODUCTIONINTRODUCTION

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INTRODUCTION TO PROJECTINTRODUCTION TO PROJECT

Finance may be defined as the art & science of managing money.

Finance is the life-blood of business, like human body. As without blood thereis no meaning of human body, similarly without finance there is no meaning of

business.

The main and basic objective of business organization is to earn profit, and forachieving this objective funds are required. After raising the funds, investing

them in the right place is important in order to incur more benefit but manytimes management fails to do so of because incorrect decision-making; whichmeans investments is to be done where return on investment is more. Before

proceeding to examine the allocation and raising funds, the finance manageruses certain tools of Analysis, planning and control. Financial ratio indicatesabout the financial position of the company. A company is deemed to befinancially sound if it is in position to carry on its business smoothly and meetits obligations, both short-term as well as long term. Requirement of funds forshort term should be met out from short-term funds and long-term requirementshould be met out from long-term funds.

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PURPOSE OF STUDYPURPOSE OF STUDY

Trading and Profit & Loss Account, Balance Sheet and various schedulesprepared at the end of the year do not always convey to the reader the realsignificance of operating results and financial health of the business. Suchfinancial statements, at the most present various facts, whether these factsindicate a good, bad or indifferent managerial performance or whether they

point to a probability o future success or failure is for the reader to conclude.And rarely can satisfactory diagnosis be reached on the basis of suchinformation alone. In order to make such statement more meaningful, the userresorts to the technique of making calculations in the form of comparative

balance sheet and income statements, common size percentage, trend ratios,ratio expressing the relationship of items selected from the statements. Theseanalysis help in achieving the ultimate aim of interpreting the financialstatements. In order to adopt any or all the above techniques of analysis it isnecessary to calculate ratios.

[In this project, attempt is made to focus on analyzing and interpreting the ratiosto study the financial performance of the Crompton Greaves Ltd for the period2005-2006 to 2007-2008.]

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COMPANY PROFILECOMPANY PROFILE

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COMPANY PROFILECOMPANY PROFILE

IntroductionCrompton Greaves (CG) is part of the US$ 3 bn Avantha Group, aconglomerate with an impressive global footprint.

Since its inception, CG has been synonymous with electricity. In 1875, aCrompton 'dynamo' powered the world's very first electricity-lit house inColchester, Essex, U.K. CG's India operations were established in 1937, andsince then the company has retained its leadership position in the managementand application of electrical energy.

Today, Crompton Greaves is India's largest private sector enterprise. It

has diversified extensively and is engaged in designing, manufacturing andmarketing technologically advanced electrical products and services related to

power generation, transmission and distribution, besides executing turnkeyprojects. The company is customer-centric in its focus and is the single largestsource for a wide variety of electrical equipments and products.

With several international acquisitions, Crompton Greaves is fastemerging as a first choice global supplier for high quality electrical equipment.

HISTORY

The history of Crompton Greaves goes back to 1878 when Col. R.E.B.Crompton founded R.E.B.Crompton & Company. The company merged withF.A Parkinson in the year 1927 to form Crompton Parkinson Ltd., (CPL).Greaves Cotton and Co (GCC) was appointed as their concessionaire in India.In 1937, CPL established, it's wholly owned Indian subsidiary viz. CromptonParkinson Works Ltd., in Bombay, along with a sales organization, GreavesCotton & Crompton Parkinson Ltd., in collaboration with GCC. In the year1947, with the dawn of Indian independence, the company was taken over byLala Karamchand Thapar, an eminent Indian industrialist. Crompton Greaves isheadquartered in a self-owned landmark building at Worli, Mumbai.

Ownership

CG is a part of the BM Thapar group incorporated in1937, CGs Head quarterin a self-owned landmark building at Worli, Mumbai.

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Products & Services Offered

The company is organized into three business groups viz. Power Systems,Industrial Systems, Consumer Products. Nearly, two-thirds of its turnover

accrues from products lines in which it enjoys a leadership position. Presently,the company is offering wide range of products such as power & industrialtransformers, HT circuit breakers, LT & HT motors, DC motors, tractionmotors, alternators/ generators, railway signaling equipments, lighting products,fans, pumps and public switching, transmission and access products. In additionto offering broad range of products, the company undertakes turnkey projectsfrom concept to commissioning. Apart from this, CG exports it's products tomore than 60 countries worldwide, which includes the emerging South-EastAsian and Latin American markets.

Thus, the company addresses all the segments of the power industry fromcomplex industrial solutions to basic household requirements. The fans andlighting businesses acquired "Super brand" status in January 2004. It is a uniquerecognition amongst the country's 134 selected brands by "Super brands", UK.

Companies Presence In Market

CG is the Indian market leader across a number of product groups in theelectrical engineering sector. It enjoys an export presence across more than 60

countries, which includes the emerging South-East Asian and Latin Americanmarkets.

Manufacturing, Marketing & Servicing Network

CG's business operations consist of 22 manufacturing divisions spread across inGujarat, Maharashtra, Goa, Madhya Pradesh and Karnataka, supported by wellknitted marketing and service network through 14 branches in various statesunder overall management of four regional sales offices located in Delhi,Kolkata, Mumbai and Chennai. The company has a large customer base, whichincludes State Electricity Boards, Government bodies and large companies in

private and public sectors.

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Plugging Joint Ventures into the Fulfillment Chain:

Joint ventures are one of the key engines, which drive transformation & growthof the company. Crompton Greaves augments its proficiency with the cutting-edge of strategic alliances. Its joint ventures and technological tie-ups empowerthe company's drive to offer broad portfolio of its value-added products &services to customers in a significant way. The details of CG's joint ventures aregiven below

Company Contact Details

CG Lucy Switchgear Ltd.The collaboration with W. Lucy &

Co. of the U.K. enables CG to offerRing Main Units for reliable andconvenient distribution of power,especially in urban areas under the

joint venture

F-10MIDC Ambad,Nasik 422010PBX Nos.: (0253) 2381603,

(0253) 2387139Fax No.: - (0253) 2381542

Brook Crompton Greaves Ltd.Involved in manufacturing of LowTension high efficiency motors forvarious industrial applications.

B108/109,MIDC Industrial Area,Ahmednagar 414111PBX No.: - (0241) 778538Fax No.: - (0241) 777162

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LANDMARKSLANDMARKS

1979: - First Ac motor rolled out on 8th December.

1980: - Ac motors commercial production started in160-180 frame shifted fromWorli.

1981: - Frame 200-315 shifted from LMD and added to product Range.

1991: - ISO 9001 approval received First in electrical industry.

1994: - BASSEFA approval for FLP motors for export market First in Indianindustry.

1996: - Alternator production started after absorbing technology fromEUROGEN, Italy.

1997: - DC Motors manufacturing started under license from SIEMENSGermany. Relocation of Worli operations to Goa and Ahmednagar

2001: - Expansion of alternator range upto 625kva.

2002: - Addition of Nema range motors and CSA certification for USA andCanada market. Addition of Gas Group IIC FLP motors in the range first inIndian Industry.

2003: - IECEX approval for increased safety motors for exports-first in IndianIndustry.

2005: - Acquisition of the Pauwels Group in May 05,

2006: - Acquisition Hungarian based Ganz (GTV), on 17th October 2006

2007: - Acquisition of Microsol Holdings Limited (MHL) and its associatecompanies in May 2007 as a Global T&D Solutions Provider. MHL, based inIreland

2008: - Crompton Greaves concluded an arrangement for the acquisition ofSociete Nouvelle de Maintenance de Transformateurs (Sonomatra) of France inJune 2008.

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The Manufacturing GridThe Manufacturing Grid

Crompton Greaves' strength emanates from its business operationsconsisting of 21 divisions spread across in Gujarat, Maharashtra,Goa, Madhya Pradesh and Karnataka supported by well knittedmarketing and service network through 14 branches in statecapitals under overall management of four regional sales offices

located in Delhi, Kolkata, Mumbai and Chennai-Corporate Office, Mumbai

Telecommunications Plant, Jigani Bangalore

Light Sources Manufacturing Plant, Baroda.

Alternators & DC Machines Plant,Ahmednagar

Switchgear Plant, Nashik

LT Motors Plant, Ahmednagar. Transformers Plant, Kanjurmarg - Mumbai

Transformer Plant, Mandideep Ceiling Fans Plant, Goa

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LT Motors Division, AhmednagarLT Motors Division, Ahmednagar

The LT Motors Division of Crompton Greaves is the largest manufacturer ofLow Tension Motors in India offering a range of AC and DC motors rangingfrom 0.05kw to 10,000 kw in various standard and customized configurations,which meet the exacting demands of the industry.

The Division had manufacturing plants in Ahmednagar, Goa and Mumbai.These modern plants are maintained in world-class condition with regularinfusions of the latest technology so as to ensure the highest quality ofthroughput. A team of dedicated professionals ensures that customers get the

benefit of a range of trouble free products and services based on superiormechanical and product design. The manufacturing facilities are ISO 9001certified by the BVQI. The standard motors offered by the Division are incompliance with efficiency level 2 of the proposed revision tp ISI2615 in India

as well as CEMEP standards

Prevalent in Europe for energy efficient motors. To ensure the highest levels ofcustomer satisfaction, the latest designs have been incorporated for the range ofLT Motors, ensuring better electrical performance as well as versatility inmechanical features. The Divisions products are exported to over 30 countriesincluding the quality conscious markets of USA and Europe.

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RESEARCH METHODOLOGYRESEARCH METHODOLOGY

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Research MethodologyResearch Methodology

Area of the ResearchFinance

Topic Of Research Ratio Analysis is a tool for finding the financialperformance of the company

Period of the Research- /08/2008 to /09/2008

Objective of the Research

The principal objective is to analyze the financial statement of Crompton

Greaves Ltd., using Ratio Analysis. To compare the performance of the company for the 3 years.

Type of Data

Primary Data: Primary data is collected from the staff members of the Financedepartment.Secondary Data: Secondary data is collected from the Financial statements andwebsite of the company

Research DesignIt includes following steps

Calculations of Ratios

Analyzing &Interpreting the ratios

Research Findings

Suggestions

Limitation of the study

Data was collected mostly from secondary data.

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INTRODUCTIONINTRODUCTION

TOTO

TOPICTOPIC

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Introduction to TopicIntroduction to Topic

RATIO ANALYSISRATIO ANALYSIS

RATIO: -The term ratio refers to the numerical or quantative relationshipbetween 2 items or variables.

EXPRESSION OF RATIOS

1. Pure : -Expressed as quotientE.g.: - Current Ratio = Current Assets/ Current Liabilities

= Rs. 2,00,000/ Rs. 1,00,000= 2:1

2. Percentage: -Expressed in percentageE.g.: - Gross Profit Ratio = Gross Profit/Net Sales X 100

= 25%

3. Time : -Expressed in number a particular figure is compared to anotherfigure

E.g.: - Stock turnover ratio which studies relationship between cost ofgoods sold. And average stock is (say) 4 times

4. Fraction : -Expressed as fractionE.g.: - Ratio of fixed assets to share Capital is (say) (0.75)

5. Expressed in number of days

E.g.: - The average collection period is 73 daysThese alternatives methods of expressing items, which are related to eachother, are for purposes of financial analysis, referred to as ratio analysis. Itshould be noted that ratio des not have inherent value. What the ratio does isthat they reveal the relationship in a more meaningful way so as to enableequity investors; management and lenders make better investment and creditdecisions. The rationale of ratio analysis lies in the fact that it makes relatedinformation comparable. A single figure by itself has no meaning but whenexpressed in terms of a related figure, it yields significant inferences

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ANALYSIS: - The term analysis refers to the separation of a whole into partforstudy or interpretation

RATIO ANALYSISRATIO ANALYSIS

Ratio analysis is a widely used tool of financial analysis. It is defined as thesystematic use of ratio to interpret the financial statements so that the strengthsand weakness of a firm, as well as its historical performance and currentfinancial condition can be determined.In ratio analysis, various ratios are computed, depending upon the objective ofthe user and analyzing the financial statements. Short-term creditors are

primarily concerned with a companys ability to meet short-term debt fromcurrent assets, so they concentrate on the Liquidity Ratios emphasizing cash

flow. Long-term creditors want to be paid back in the long-term, so they look tosolvency ratios such as Total Debt to Total Stockholders equity. Potentialinvestors are interested in dividends and appreciation in market price of stock,so they focus on profitability ratios (e.g., profit margin) and market measures(e.g., price-earnings ratio). Auditors zero in on the going concern of the client

by determining its ability to meet debt (e.g., interest coverage ratio).

BASIS OF COMPARISIONBASIS OF COMPARISION

Ratio, are relative figure reflecting the relationship between variables. Theyenable analysts to draw conclusion regarding financial operations. The use ofratios, as a tool of financial analysis, involves their comparison, for a singleratio, like absolute figure, fails to reveal the true position i.e., is it favourable orunfavourable. Four types of comparisons are involved: -

1) Trend ratios2) Interfirm comparison3) Comparison of items with a single years financial statement of a firm4) Comparison with standards or plan

Trend ratios: -Trend ratios involve a comparison of the ratios of a firm over

time, that is, present ratios are compared with past ratios for the same firm. Thecomparison of the profitability of a firm, say, year 1 through 5 is an illustrationof a trend ratio. Trend ratios indicate the direction of change in the

performance-improvement, deterioration or constancy-over the years.

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Interfirm comparison: - The interfirm comparison involves comparison ofratios of a firm with those of others in the same line of business or the industryas a whole its performance in relation to its competitors

Other types of comparison: - Other types of comparison may relate tocomparison of items within a single years financial statement of a firm andcomparison with the standards or plans.

OBJECTIVE OF RATIO ANALYSISOBJECTIVE OF RATIO ANALYSIS

1) The main objective of ratio analysis is to Test and Make QualitativeJudgment about the Firms Profitability, Financial Position (Liquidity &Solvency), and Operating Efficiency.

E.g.: - Current Ratio is calculated by dividing current assets by currentliabilities; the ratio indicates a relationship-a qualified relationship betweencurrent assets and current liabilities.2) It measures the Firms Liquidity: The greater the ratio, the greater the

firms liquidity and vice-versa.3) In Financial Analysis, a ratio is used as a benchmark for evaluating the

financial position and performance of a firm.4) An Accounting figure conveys meaning when it is related to some other

relevant information.E.g. Rs.5 Crore Net Profit may look impressive, but the firms performance

can be said to be good or bad only when the net profit is related to the firmsinvestment.

TYPES OF RATIOSTYPES OF RATIOS

1) Liquidity Ratios: - They measure the firms ability to meet currentobligations.

2) Solvency Ratios: - They show the proportions of debt & equity infinancing the firms assets.

3) Activity Ratios: - They reflect the firms efficiency of utilizing assets.4) Profitability Ratios: - They measure overall performance and

effectiveness of the Firm.5) Coverage Ratios: - They measure the profit to measure the interest

charges.

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IMPORTANCE OF RATIO ANALYSISIMPORTANCE OF RATIO ANALYSIS

As a tool of financial management, ratios are of crucial significance. Theimportance of ratio analysis lies in the fact that it presents facts on acomparative basis and enables the drawing of inferences regarding the

performance of a firm. Ratio analysis is relevant in assessing performance of afirm in respect of the following aspects: -

Liquidity positionWith the help of the ratio analysis conclusions can be drawn regarding theliquidity position of a firm. The liquidity position of a firm would besatisfactory if it is able to meet its current obligations when they become due. Afirm can be said to have the ability to meet its short-term liabilities if it hassufficient liquid funds to pay the interest on its short-maturing debt usuallywithin a year as well as to repay the principal. This ability is reflected in theliquidity ratios of a firm. The liquidity ratios are particularly useful in creditanalysis by banks and other suppliers of short-term loans.

Long-term Solvency

Ratio analysis is equally useful for assessing the long-term financial liability ofa firm. This aspect of the financial position of a borrower is of concern to thelong-term creditors, security analysts and the present and potential owners of a

business. The long-term solvency is measured by the leverage/capital structureand profitability ratios, which focus on earning power and operating efficiency.Ratio analysis reveals the strength and weaknesses of a firm in this respect. Theleverage ratios, for instance, will indicate whether a firm has reasonable

proportion of various sources of finance or if it is heavily loaded with debt in

which case its solvency is exposed to serious strain. Similarly, the variousprofitability ratios would reveal whether or not the firm is able to offer adequatereturn to its owners consistent with the risk involved.

Operating Efficiency

Yet another dimension of the usefulness of the ratio analysis, relevant from theviewpoint of management, is that it throws light on the degree of efficiency inthe management and utilisation of its assets. The various activity ratios measure

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this kind of operational efficiency. In fact, the solvency of a firm is, in theultimate analysis, dependent upon the sales revenues generated by the use of itsassets-total as well as its components.

Overall Profitability

Unlike the outside parties which are interested in one aspect of financialposition of a firm, the management is constantly concerned about the overallprofitability of theEnterprise. That is, they are concerned about the ability of the firm to meet itsshort-term as well as long-term obligations to its creditors, to ensure areasonable return to its owners and secure optimum utilisation of the assets ofthe firm. This is possible if an integrated view is taken and all the ratios areconsidered together.

Inter-firm Comparison

Ratio analysis not only throws light on the financial position of a firm but alsoserves as a stepping-stone to remedial measures. This is made possible due tointer-firm comparison and comparison with industry averages. A single figureof a particular ratio is meaningless unless it is related to some standard or norm.One of the popular techniques is to compare the ratios of a firm with theindustry average. It should be reasonably expected that the performance of a

firm should be in broad conformity with that of the industry to which it belongs.An inter-firm comparison would demonstrate the firms position vis--vis itscompetitors. If the results are at variance either with the industry average orwith those of the competitors, the firm can seek to identify the reasons and, inthat light, take remedial measures.

Trend Analysis

Ratio analysis enables a firm to take the time dimension into account. In otherwords, whether the financial position of a firm is improving or deterioratingover the years. This is made possible by the use of trend analysis. Thesignificance of a trend analysis of ratios lies in the fact that the analysts canknow the direction of movement, that is, whether the movement is favourableor unfavorable.

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LimitationsLimitations

Ratio analysis is a widely used tool of financial analysis. Yet, it suffers fromvarious limitations. The operational implication of this is that while using theratios, the conclusions should not be taken on the face value. Some of thelimitations, which characterize ratio analysis, are: -

1. Difficulty in comparison

2. Impact of inflation3. Conceptual diversity

4. Ignores qualitative factors

Difficulty in Comparison

One serious limitation of ratio analysis arises out of the difficulty associatedwith their comparability. One technique that is employed is inter-firmcomparison. But such comparisons are vitiated by different procedures adopted

by various firms. The differences may relate to: -1. Differences in the basis of inventory valuation (e.g. last in the first out,

first in first out, average cost and cost)2. Different depreciation methods (i.e. straight method vs written down

basis)3. Estimated working life of assets, particularly of plant and equipment.4. Amortisation of intangible assets like goodwill patents and so on.5. Amortisation of deferred revenue expenditure such as preliminary

expenditure and discount on issue of shares.6. Capitalisation of lease.7. Treatment of extraordinary items of income and expenditure and so on.

Secondly, apart from different accounting procedures, companies may havedifferent accounting periods, implying differences in the composition of theassets, particularly current assets. For these reasons, the ratios of two firms maynot be strictly comparable. Another basis of comparison is the industry average.This presupposes the availability, on a comprehensive scale, of various ratiosfor each industry group over a period of time. If, however, as is likely, such

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information is not completed is not compiled and available, the utility of ratioanalysis would be limited.

Impact of Inflation

The second major limitation of the ratio analysis as a tool of financial analysisis associated with price level changes. This, in fact, is a weakness of thetraditional financial statements, which are based on historical costs. Animplication of this feature of the financial statements as regards ratio analysis isthat assets acquired at different periods are, in effect, shown at different pricesin the balance sheet, as they are not adjusted for changes in the price level. As aresult, ratio analysis will not yield strictly comparable and, therefore,dependable results.

Conceptual Diversity

Yet another factor which influences the usefulness of ratios is that there isdifference of opinion regarding the various concepts used to compute the ratios.There is always room for diversity of opinion as to what constitutesshareholders equity, debt, assets, profit and so on. Different firms may use

these terms in different senses or the same firm may use them to mean differentthings at different times.Also, ratios are only a post-mortem analysis of what has happened between two

balance sheet dates. For one thing, the position in the interim period is notrevealed by ratio analysis. Moreover they give no clue about the future.In brief, ratio analysis suffers from serious limitations. The analyst should notcarry away by its oversimplified nature, easy computation with high degree of

precision. The reliability and significance attached to ratios will largely dependupon the quality of data on which they are based. They are as good as the dataitself. Nevertheless, they are an important tool of financial analysis.

Ignores Qualitative Factor

Accounting ratios are tools of quantitative analysis only. But sometimesqualitative factors may surmount the quantitative aspects. The calculationsderived from the ratio analysis under such circumstances may get distorted.E.g.: -Though credit may be granted to a customer on the basis of informationregarding his financial position, yet the grant of credit ultimately depends ondebtors character, honesty, past records and his managerial ability.

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Financial RatiosFinancial Ratios

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Classification of RatiosClassification of Ratios

LIQUIDITY RATIO

1. Current Ratio2. Acid Test Ratio

TURNOVER RATIO

1. Inventory Turnover Ratio2. Debtors Turnover Ratio3. Fixed Asset Turnover Ratio4. Current Asset turnover Ratio5. Working Capital Turnover Ratio

PROFITABILITY RATIO

6. Net Profit Ratio7. Operating Profit Ratio8. Operating Expenses Ratio9. Return on Gross Capital Employed10 Return on Net Capital Employed

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PROFIT&LOSS A/C,PROFIT&LOSS A/C,

BALANCE SHEETBALANCE SHEET

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Crompton Greaves Pvt Ltd.

Balance Sheet as at 31st March, 2008

Figures in Lakh (R

ParticularsCurrent year Previous Year

F.Y. 2007-08 F.Y. 2006-07 F.Y. 2005-06

SOURCES OF FUNDS

Shareholders Funds

Capital

Reserves and Surplus

Loan Funds

Secured Loans (679) (712) (857)

Unsecured Loans (81)

Deferred Tax Asset

Current Account 36,812 19,154 18,889

36,133 18,442 17,950

APPLICATION OF FUNDS

Fixed Assets 12,069 12,729 10,385

Investments

Current Assets, Loans &Advances

Inventories 17,022 13,637 9,123

Sundry Debtors 51,819 45,213 43,147

Cash & Bank Balances 4 8 6

Loans & Advances 1,990 3,130 3,791

70,834 61,988 56,067

Less; Current Liabilities & Provisions

Liabilities 57,759 45,463 38,467

Provisions

57,759 45,463 38,467

NET CURRENT ASSET 13,075 16,525 17,600

Profit & loss Account (61,277) (47,695) (45,936)

Capital Employed (36,133) (18,442) (17,950)

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Schedules for Working of Ratios Components

Average Inventory : Current year Previous Year

F.Y. 2007-08 F.Y. 2006-07 F.Y. 2005-06

Opening Inventory 13,637.10 9,122.69

Closing Inventory 17,021.71 13,637.10

TOTAL 30,658.81 22,759.79

Avrage Inventory 15,329.40 11,379.89

Current year Previous Year

Average Trade Debtors :F.Y. 2007-08 F.Y. 2006-07 F.Y. 2005-06

Opening Trade Debtors 45,212.60 43,146.93

Closing Trade Debtors 51,818.57 45,212.60

TOTAL 97,031.16 88,359.53

Avrage Trade Debtors 48,515.58 44,179.76

Working Capital : Current year Previous Year

Current Assets: F.Y. 2007-08 F.Y. 2006-07 F.Y. 2005-06

Inventories 17,021.71 13,637.10 9,122.69

Sundry Debtors 51,818.57 45,212.60 43,146.93

Cash & Bank Balances 3.53 7.92 6.48

Loans & Advances 1,990.00 3,130.11 3,790.89

TOTAL 70,833.81 61,987.73 56,066.99

Less: Current Liabilities

Liabilities 57,758.68 45,463.03 38,466.62

Provisions

TOTAL 57,758.68 45,463.03 38,466.62

Working Capital 13,075.13 16,524.70 17,600.37


Operating Profit: F.Y. 2007-08 F.Y. 2006-07 F.Y. 2005-06

Net Income 279,516.90 220,982.17 175,178.04

Less: Operating Expenses

Staff & Welfare 7,496.45 6,239.83 6,348.17Manufacturing ,Selling & Administration 18,560.59 14,596.34 11,389.94

Diff of Excise. Duty Paid & Recovered

Interest & Commitment Charges 916.22 580.62 442.77

Depreciation 1,946.30 1,992.47 2,078.57

28,919.57 23,409.25 20,259.45

Operating Profit 250,597.33 197,572.92 154,918.60


Gross Capital Employed: F.Y. 2007-08 F.Y. 2006-07 F.Y. 2005-06

Fixed Assets 12,069.36 12,728.51 10,385.25

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Crompton Greaves Pvt Ltd.

Profit & Loss Account for the Year Ended 31st March, 2008

Figures in Lakh (Rs

ParticularsCurrent year Previous Year

F.Y. 2007-08 F.Y. 2006-07 F.Y. 2005-06

INCOME

Gross Sales 325,803.57 259,050.78 204,379.89

Less: Excise Duty 45,998.53 37,610.00 28,941.31

Net Sales 279,805.04 221,440.79

Other Income 288.13 458.61 260.53

Net Income 279,516.90 220,982.17 175,178.04

Expenditure

Materials 189,319.97 149,877.99 108,982.83

Staff & Welfare 7,496.45 6,239.83 6,348.17

Manufacturing, Selling & Administration 18,560.59 14,596.34 11,389.94

Diff of Excise. Duty Paid & Recovered

Interest & Commitment Charges 916.22 580.62 442.77

Depreciation 1,946.30 1,992.47 2,078.57

Impairment of Assets

218,239.54 173,287.24 129,242.27

Profit Before Exceptional Items 61,277.36 47,694.93 45,935.77

Exceptional Items (Net)

Profit Before Taxes 61,277.36 47,694.93 45,935.77

Provision for Taxation

Current Tax

Deferred Tax

Fringe Benefit Tax

Trf to Doubtful Debts Reserve

Profit After Tax 61,277.36 47,694.93 45,935.77

PROFIT/ LOSS CARRIED TO BALANCE SHEET 61,277.36 47,694.93 45,935.77


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Current Assets, Loans &Advances

Inventories 17,021.71 13,637.10 9,122.69

Sundry Debtors 51,818.57 45,212.60 43,146.93


Loans & Advances 1,990.00 3,130.11 3,790.89

Gross Capital Employed 82,903.17 74,716.24 66,452.25Current Assets:

Inventories 17,021.71 13,637.10 9,122.69

Sundry Debtors 51,818.57 45,212.60 43,146.93


Loans & Advances 1,990.00 3,130.11 3,790.89

TOTAL 70,833.81 61,987.73 56,066.99

Liquid Current Assets:

Sundry Debtors 51,818.57 45,212.60 43,146.93


Loans & Advances 1,990.00 3,130.11 3,790.89

TOTAL 53,812.10 48,350.63 46,944.30

Absolute Liquid Assets:


Marketable Securities - - -

TOTAL 3.53 7.92 6.48

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DATA ANALYSISDATA ANALYSIS

INTERPRETATIONINTERPRETATION

&&

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GRAPHICALGRAPHICAL

PRESENTATIONPRESENTATION

LIQUIDITY RATIOSLIQUIDITY RATIOS

Liquidity ratios measure the ability of the firm to meet its short-term obligationsthat is capacity of the firm to pay its current liabilities as and when they falldue. Thus these ratios reflect the short-term financial solvency of a firm. A firmshould ensure that it does not suffer from lack of liquidity. The failure to meetobligations on due time may result in bad credit image, loss of creditorsconfidence, and even in legal proceedings against the firm on the other hand

very high degree of liquidity is also not desirable since it would imply thatfunds are idle and earn nothing. So therefore it is necessary to strike a proper

balance between liquidity and lack of liquidity.

The various ratios that explain about the liquidity of the firm are: -1. Current Ratio2. Acid Test Ratio / quick ratio3. Absolute liquid ration / cash ratio

CURRENT RATIO

The current ratio measures the short-term solvency of the firm. It establishes therelationship between current assets and current liabilities. It is calculated bydividing current assets by current liabilities.

Current Ratio = Current Asset

Current Liabilities

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Current assets include cash and bank balances, marketable securities, inventory,and debtors, excluding provisions for bad debts and doubtful debtors, billsreceivables and prepaid expenses. Current liabilities includes sundry creditors,

bills payable, short- term loans, income-tax liability, accrued expenses anddividends payable.

Table No 1

Particulars 2005-06 2006-07 2007-08

Current Asset 56,066.99 61,987.73 78,833.81

Current Liabilities 38,467.00 45,463.00 57,759.00Ratio 1.46 1.36 1.23

Graph No.1

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1.46

1.36

1.23

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

1.5

2005-06 2006-07 2007-08

Ratios

Current Ratio

Times

Year


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INTERPRETATION

A higher current ratio has better liquidity. A standard norm of current ratio is2:1. Since last 3 years although the current ratio has been decreased butcompanys current assets are more than its current liabilities so the company isassuring to pay its maturing debt as and when it becomes due. Ratio issatisfactory to the company according to its characteristics. It is good sign thatcompany is keeping sufficient margin of safety.

2. ACID TEST RATIO / QUICK RATIO/ LIQUID RATIO

It has been an important indicator of the firms liquidity position and is used asa complementary ratio to the current ratio. It establishes the relationship

between quick assets and current liabilities. It is calculated by dividing quickassets by the current liabilities.

Acid Test Ratio = Liquid Assets

Current liabilities

Quick assets are those current assets, which can be converted into cashimmediately or within reasonable short time without a loss of value. These

include cash and bank balances, sundry debtors, bills receivables and short-term marketable securities.

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Table No.2Particulars 2005-06 2006-07 2007-08

Liquid Assets 46,944.30 48,350.63 53,812.10

Current Liabilities 38,467.00 45,463.00 57,759.00Ratio 1.22 1.06 0.93

Graph No.2

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1.22

1.06

0.93

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2005-06 2006-07 2007-08

Ratio

Acid Test Ratio

Times

Year


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INTERPRETATION

Liquid ratio is widely accepted as the best available test of the liquidity position

of the firm. Generally, a liquid ratio 1:1 is considered satisfactory as a firm caneasily meets all current claims. In case of Crompton Greaves, the liquid ratiowas 1.22 in year 2005-06 & it decreased by 0.16 in 2006-07 year i.e., it reachedto 1.06, which is more than the standard norms. But in 2007-08 year the liquidratio was less than the standard norm as it reached to 0.93. Such fluctuationstakes place due gap between collection period & payment period. Liquidity

position of the firm is almost satisfactory.

TURNOVER RATIOTURNOVER RATIO

Turnover ratios are also known as activity ratios or efficiency ratios with whicha firm manages its current assets. The following turnover ratios can becalculated to judge the effectiveness of asset use.

1. Inventory Turnover Ratio

2. Debtor Turnover Ratio3. Creditor Turnover Ratio4. Assets Turnover Ratio

1. INVENTORY TURNOVER RATIO

This ratio indicates the number of times the inventory has been converted intosales during the period. Thus it evaluates the efficiency of the firm in managingits inventory. It is calculated by dividing the cost of goods sold by averageinventory.

Inventory Turnover Ratio = Cost of goods soldAverage Inventory

The average inventory is simple average of the opening and closing balances ofinventory. (Opening + Closing balances / 2). In certain circumstances opening

balance of the inventory may not be known then closing balance of inventorymay be considered as average inventory

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Cost of goods sold 108,982.83 149,877.99 189,319.97

Average Inventory 11,379.89 15,329.40Ratio - 13.17 12.35

Graph No.3

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13.17

12.35

11.8

12

12.2

12.4

12.6

12.8

13

13.2

2006-07 2007-08

Ratio

Inventory Turnover Ratio

Times

Year


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INTERPRETATIONInventory Turnover Ratio measures how quickly inventory is sold. A highinventory turnover ratio is better than a low ratio. A high ratio implies good

inventory management. Yet, a very high ratio calls for a careful analysis & onthe other hand a very low level of inventory has serious implications; it willadversely affects the ability to meet customers demand as it may not cope upwith its requirement. Hence, a firm should have neither too high nor too lowinventory turnover. In case of Crompton Greaves, ratio has decreased from13.75 to 12.35 i.e., by 1.4 times. So it is an alert signal for the companyconsidering that the company should meet the supply of its products accordingto its market demand. Company is almostly managing its investments ininventory efficiently.

2. DEBTOR TURNOVER RATIO

This indicates the number of times average debtors have been converted intocash during a year. It is determined by dividing the net credit sales by averagedebtors.

Debtor Turnover Ratio = Net Credit SalesAverage Trade Debtors

Net credit sales consist of gross credit sales minus sales return. Trade debtorincludes sundry debtors and bills receivables. Average trade debtors (Opening+ Closing balances / 2)

When the information about credit sales, opening and closing balances of tradedebtors is not available then the ratio can be calculated by dividing total sales

by closing balances of trade debtor

Debtor Turnover Ratio = Total Sales

Trade Debtors

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Total Sales 175,438.58 221,440.79 279,805.04

Average Trade Debtors 44,179.76 48,515.58Ratio - 5.01 5.77

Graph No.4

INTERPRETATION

- 35 -

5.01

5.77

4.6

4.8

5

5.2

5.4

5.6

5.8

2006-07 2007-08

Ratio

Debtors Turnover Ratio

Times


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INTERPRETATION

A higher debtors turnover ratio and shorter collection period, a better is thetrade credit management and better is the liquidity of debtors, as shortcollection period and high turnover ratio imply prompt payment on the part ofdebtors. In short high turnover is preferable. In case of Crompton Greaves ratiois increasing. It has increased from 5.01 to 5.77 i.e., by 0.76 times. It meanstime lag between credit sales & cash collection is reducing which is good signalfor the future of the company.

3. ASSETS TURNOVER RATIO

The relationship between assets and sales is known as assets turnover ratio.Several assets turnover ratios can be calculated depending upon the groups ofassets, which are related to sales.

1. Fixed asset turnover2. Current asset turnover

3. Net working capital turnover ratio4. Total asset turnover5. Net asset turnover

1. FIXED ASSET TURNOVER

This ratio is calculated by dividing sales by net fixed assets.

Fixed asset turnover = Total Sales

Fixed Assets

Net fixed assets represent the cost of fixed assets minus depreciation.

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Year


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Total Sales 175,438.58 221,440.79 279,805.04

Fixed Assets 10,358.00 12,729.00 12,069.00Ratio 16.89 17.40 23.18

Graph No.5

INTERPRETATION

- 37 -

16.89 17.4

23.18

0

5

10

15

20

25

2005-06 2006-07 2007-08

Ratio

Time

s

Year

Fixed Asset Turnover Ratio


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INTERPRETATION

A high ratio indicates efficient utilization of fixed assets in generating sales.Companies whose plant & machinery are old show a higher fix asset turnoverratio than the company, which is newly established. In case of CromptonGreaves since 3 years i.e., from 2005-06 to 2007-08 the ratio has increasedfrom 16.89 to 23.18. It means it has increased 6.29 times because of increase inthe sales & depreciation of assets to till date. One of the reasons is that thecompany is not newly established.

2. CURRENT ASSET TURNOVERIt is divided by calculating sales by current assets

Current asset turnover = Total Sales

Current Assets


Total Sales 175,438.58 221,440.79 279,805.04

Current Assets 56,066.99 61,987.73 70,833.81

Ratio 3.13 3.57 3.95

Graph No.6

- 38 -

3.13

3.57

3.95

0

0.5

1

1.5

2

2.5

3

3.5

4

2005-06 2006-07 2007-08

Ratio

Current Asset Turnover Ratio

Times


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INTERPRETATIONCurrent asset turnover ratio enables to measure of efficiency or activity. Morethe ratio better is the efficiency. Incase of Crompton Greaves, since 3 years thecurrent asset turnover ratio is constantly increasing. During the year 2005-06 itwas 3.13 & it increased to 3.57 in year 2006-07 & had reached to 3.95 in theyear 2007-08 which means over a period of 3 years it has increased by 0.82times which indicates that the assets of the company are efficiently utilized bythe management.

4. NET WORKING CAPITAL TURNOVER RATIO

A higher ratio is an indicator of better utilization of current assets and workingcapital and vice-versa (a lower ratio is an indicator of poor utilization of current

assets and working capital). It is calculated by dividing sales by workingcapital.

Net working capital turnover ratio = Total Sales

Net Working Capital

Working capital is represented by the difference between current assets andcurrent liabilities.

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Year


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Table No.7

Particulars 2005-06 2006-07 2007-08

Total Sales 175,438.58 221,440.79 279,805.04Net Working Capital 17,600.37 16,524.70 13,075.13

Ratio 9.97 13.40 21.40

Graph No.7

- 40 -

9.97

13.4

21.4

0

5

10

15

20

25

2005-06 2006-07 2007-08

Ratio

Net Working Capital Ratio

Tim

es

Year


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INTERPRETATION

This ratio indicates whether the working capital has been efficiently utilized ornot in making sales. In this graph since 3 years i.e., from 2005-06 to 2007-08the ratio has increased from 9.97 to 21.4 i.e. by 11.43 times which indicates thatthe company is maintaining balance between risk and profitability& there isefficient management of working capital in the company.

PROFITABILITY RATIOSPROFITABILITY RATIOS

The profitability ratio of the firm can be measured by calculating variousprofitability ratios. General two groups of profitability ratios are calculated.

a. Profitability in relation to sales.b. Profitability in relation to investments.

Profitability in relation to sales

1. Gross profit margin or ratio2. Net profit margin or ratio3. Operating profit margin or ratio4. Operating Ratio5. Expenses Ratio

1. NET PROFIT MARGIN OR RATIO

It measures the relationship between net profit and sales of a firm. It indicatesmanagements efficiency in manufacturing, administrating, and selling the

products. It is calculated by dividing net profit after tax by sales.

Net profit margin or ratio = Net Profit

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Net Sales

Table No.8

Particulars 2005-06 2006-07 2007-08

Net Profit 45,935.77 47,694.93 61,277.36

Net Sales 175,438.58 221,440.79 279,805.04Ratio 26.18 21.54 21.90

Graph No.8

- 42 -

26.18

21.54 21.9

0

5

10

15

20

25

30

2005-06 2006-07 2007-08

Ratio

Net Profit Ratio

Pe

rcentage

Year


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INTERPRETATION

Net profit ratio reveals overall efficiency of business, Higher the ratio. the

better it is. In case of Crompton Greaves, net profit ratio in the year2005-06 was26.18% & in 2007-08-it was21.9%, it means companys profitability has beendecreased as compared to previous year. One of the reason for decrease in net

profitability ratio is increase in administrative &selling expenses.

2. OPERATING PROFIT MARGIN OR RATIO

It establishes the relationship between total operating expenses and net sales. Itis calculated by dividing operating expenses by the net sales.

Operating profit margin or ratio = Operating Profit

Net sales

Operating expenses includes cost of goods produced/sold, general andadministrative expenses, selling and distributive expenses.

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Table No.9

Particulars 2005-06 2006-07 2007-08

Operating Profit 154,918.60 197,572.92 250,597.33

Net Sales 175,438.58 221,440.79 279,805.04

Ratio 11.57 10.59 10.35

Graph No.9

- 44 -

11.57

10.59

10.35

9.5

10

10.5

11

11.5

12

2005-06 2006-07 2007-08

Ratio

Operating Profit Ratio

Percentage

Year


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INTERPRETATIONOperating profit ratio measures a companys operating efficiency and pricingefficiency with its successful cost controlling. The higher the ratio, the better acompany is. A higher operating profit margin means that a company has lower

fixed cost and a better gross margin or increasing sales faster than costs, whichgives management more flexibility in determining prices. It also provides usefulinformation for investors to determine the quality of a company when lookingat the trend in operating margin over time and to compare with industry peers.This graph shows that ratio has decreased. In the year 2005-06 it was 11.57%

& in comes down to 10.59% in year 2006-07 again it falls to 10.35% in year2007-08. Hence during these 3 years it had been decreased by 1.22%. Hence,the company needs to be more alert while fixing the cost.

4. OPERATING EXPENSE RATIO

The operating expense ratio also known as the OER is the ratio between thetotal operating expenses and the effective gross income for an income

producing property. Operating expenses are costs associated with the operationand maintenance of income producing properties. They include such items as

property taxes, property management fees, insurance, wages, utilities, repairs

and maintenance, supplies, advertising, attorney fees, accounting fees, trashremoval, pest control, etc. The following are not operating expenses; loan

payments, personal property and capital improvements.

The effective gross income for a property is the actual yearly income from allsources. It is equal to the yearly gross rents possible plus other income such aslaundry receipts, vending machines, parking fees, etc. less the yearly vacancyamount.

Operating Expense Ratio= Operating Expense

Net Sales

The operating expense ratio shows the percentage of a property's income that isbeing used to pay maintenance and operational expenses.

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Table No.10

Particulars 2005-06 2006-07 2007-08

Operating Expense 20,259.45 23,409.25 28,919.57

Net Sales 175,438.58 221,440.79 279,805.04Ratio 88.43 89.41 89.65

Graph No.10

- 46 -

88.43

89.41

89.65

87.8

88

88.2

88.4

88.6

88.8

89

89.2

89.4

89.6

89.8

2005-06 2006-07 2007-08

2005-06

2006-07

2007-08

Operating Expense Ratio

Percentage

Year


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INTERPRETATION

The operating expense ratio is an indicator of how efficiently a property is

being managed. The lower the operating expense ratio, the greater the profit forthe investor or investors. But in case of Crompton Greaves the ratio has beenconstantly increasing. Hence, the company should take necessary steps toreduce vacancies, reduce operating expense items and increase income.

PROFITABILITY IN RELATION TOPROFITABILITY IN RELATION TO

INVESTMENTSINVESTMENTS

1. Return on gross investment or gross capital employed2. Return on net investment or net capital employed3. Return on shareholders investment or shareholders capital employed.4. Return on equity shareholder investment or equity shareholder capital

employed.

1. RETURN ON GROSS CAPITAL EMPLOYED

This ratio establishes the relationship between net profit and the gross capitalemployed. This is a financial measure that quantifies how well a companygenerates cash flow relative to the capital it has invested in its business. It is

defined asNet operating profit less adjusted taxes divided by Invested Capitaland is usually expressed as a percentage. In this calculation, capital investedincludes all monetary capital invested: long-term debt, common and preferredshares.The term gross capital employed refers to the total investment made in

business. The conventional approach is to divide Earnings after Tax (EAT) bygross capital employed.

- 47 -
http://en.wikipedia.org/wiki/NOPLAThttp://en.wikipedia.org/wiki/Invested_Capitalhttp://en.wikipedia.org/wiki/Percentagehttp://en.wikipedia.org/wiki/Invested_Capitalhttp://en.wikipedia.org/wiki/Percentagehttp://en.wikipedia.org/wiki/NOPLAT


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Return on gross capital employed = Net Profit after Tax

Gross capital employed

Table No.11

Particulars 2005-06 2006-07 2007-08

Net Profit After Tax 45,935.77 47,694.93 61,277.36

Gross Capital Employed 66,425.25 74,716.24 82903.17Ratio 69.13 63.83 73.91

Graph No.11

- 48 -

69.13

63.83

73.91

58

60

62

64

66

68

70

72

74

2005-06 2006-07 2007-08

Ratio

Return on Gross Capital Employed Ratio

Percentages


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INTERPRETATIONReturn on gross capital employed measures the gross profit, which a firm earnson investing a unit of capital. Hence, a return on capital employed ratio (ROCE)should be as high as possible. A negative ROCE would mean that the firm hadmade a loss. In this graph the gross capital employed ratio in the year2005-06 is69.13% but it has decreased to 63.83% in the year 2006-07 but again it hasincreased to 73.91% hence it is a good signal for the company.

2. RETURN ON NET CAPITAL EMPLOYED

It is calculated by dividing Earnings before Interest & Tax (EBIT) by the netcapital employed. The term net capital employed in the gross capital in the

business minus current liabilities. Thus it represents the long-term fundssupplied by creditors and owners of the firm.

Return on net capital employed = Net Profit After Tax

Net capital employed

Table No.12

Particulars 2005-06 2006-07 2007-08

Net Profit After Tax 45,935.77 47,694.93 61,277.36

Net Capital Employed 27,985.62 29,253.21 25,144.00Ratio 164.14 163.04 243.70

Graph No.12

- 49 -

Year

164.14 163.04

243.7

0

50

100

150

200

250

2005-06 2006-07 2007-08

Ratio

Return on Net Capital Employed Ratio

Pe

rcentages


50/57

INTERPRETATION

Return on net capital employed measures the net profit, which a firm earns oninvesting a unit of capital. Hence, a return on capital employed ratio (ROCE)should be as high as possible. A negative ROCE would mean that the firm hadmade a loss. In this graph the gross capital employed ratio in the year2005-06 is164.14% % but it has decreased to 163.04% in the year 2006-07 but again it hasincreased to 243.7%. Hence it is a good signal for the company

RATIOSRATIOS

Particulars 2007-08 2007-06 2005-06LIQUIDITY RATIOCurrent Ratio 1.23 1.36 1.46Acid Test Ratio 0.93 1.06 1.22TURNOVER RATIOInventory Turnover Ratio 12.35 13.17Debtors Turnover Ratio 5.77 5.01Fixed Asset Turnover Ratio 23.18 17.40 16.89Current Asset Turnover Ratio 3.95 3.57 3.13

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Year


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Working Capital Turnover Ratio 21.40 13.40 9.97

PROFITABILITY RATIONet Profit Ratio 21.90 21.54 26.18

Operating Profit Ratio 10.35 10.59 11.57Operating Expense Ratio 89.65 89.41 88.43Return on Gross Capital Employed 73.91 63.83 69.13Return on Net Capital Employed 243.70 163.04 164.14

FINDINGSFINDINGS

LIQUIDITY RATIOS

Companys current assets are more than its current liabilities. Companyis keeping sufficient margin of safety.

Acid ratio is initially more than standard norm 1:1 but is decreasing & isless than standard norm in the year 2007-08 with 0.93 ratio

TURNOVER RATIOS

Inventory turnover ratio has been decreased which is an alert signal forthe company

Debtors turnover ratio has increased which indicates time lag between

credit sales & cash collection is reducing which is good signal for thefuture of the company.

Fixed Asset Turnover Ratio has increased because of increase in the sales& depreciation of assets to till date.

Current asset turnover ratio has increased constantly

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Working capital turnover ratio has also been constantly increasing whichindicates that the company is maintaining balance between risk and

profitability. There is efficient management of working capital in the

company.

PROFITABILITY RATIO

Net profit ratio has been fluctuating. One of the reasons for decrease innet profitability ratio is increase in administrative &selling expenses.

Operating profit ratio has been decreasing constantly since 2005-06 to2007-08 by 1.22%. Hence, the company needs to be more alert whilefixing the cost.

The operating expense ratio has been constantly increasing Hence, thecompany should take necessary steps to reduce vacancies, reduceoperating expense items and increase income.

Return on gross capital employed ratio has been fluctuating. In the year2005-06 it was 69.13% but it has decreased to 63.83% in the year 2006-07 but again it has increased to 73.91%. Hence it is a good signal for thecompany.

Return on net capital employed has been fluctuating. In the year 2005-06it was 164.14% & it has decreased to 163.04% in the year 2006-07 i.e. by1.1% but it has again increased to 243.7% i.e., by 80.66%. Hence it is agood signal for the company.

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CONCLUSIONCONCLUSION

In this project financial statement of last 3 years has been compared & throughratio analysis technique it is concluded that the company is satisfactorilycarrying on its workings. The study is restricted to only financial statements.The company has recorded significant increase in working capital turnoverratio. Overall it has managed to expand favorably at a every ratio improvingsteadily.

Hence it can be said that the company is constantly putting efforts forreaching the path of excellence

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SUGGESSTIONSSUGGESSTIONS

In future company can increase its liquid assets because liquid ratio is0.93& the standard is 1.

Net profit of the company is low because of increase inmanufacturing, selling & administrative expenses.

Company should make contract with vendors for a long period atfixed prices.

Company should assess what steps it can take to reduce vacancies,reduce operating expense items and increase income

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BIBLIOGRAPHYBIBLIOGRAPHY

Referred Books

Financial Management(Khan & Jain)

Websites

Cgonline.com

Google.comClipart.com

Annual Reports of Crompton Greaves Ltd.(Year 2005-06 to 2007-08)

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final report 12

Documents