financial analysis of rico auto

8/3/2019 Financial Analysis of RICO AUTO

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A

SUMMER TRAINING REPORT

ON

Financial Analysis of Rico Auto LTD

SUBMITTED IN THE PARTIAL FULFILMENT OF THE REQUIREMENT FOR

THE AWARD OF DEGREE OF

MASTER OF BUSINESS ADMINISTRATION (MBA)

From

Amity University Haryana

Manesar

Submitted by:

Ashish Negi

Roll No:-12

MBA 3 rd Sem.

AMITY BUSINESS SCHOOL

(2010 2012)


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DECLARATION

I, Ashish Negi , Roll No. 12 M.B.A. (3 rd Semester) of Amity University Haryana, Manesar,

Gurgaon hereby declare that the Project Report entitled, Financial Analysis Of Rico Auto

LTD is an original work and the same has not been submitted to any other institute for theaward of any other degree. The interim report was presented to the supervisor and the pre-

submission presentation was made on _______. The feasible suggestions have been duly

incorporated in consultation with supervisor .

Signature of the Supervisor Signature of Candidate

Countersigned

Director of the Institute


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ACKNOWLEDGEMENT

It is my privilege to acknowledge the contribution of all helping hands for their cooperation

and guidance that enabled me to dedicate time and effort in framing my analysis in

conceivable system.

I would like to thank Dr.Padmakali Banerji , Pro Vice Chancller, Amity University

Haryana for extending full help in my project . Her consistent support and cooperation

showed the way towards the successful completion of the project.

The success of this project has largely been due to the invaluable guidance of MR. P.K

Sharma, Faculty, Amity Business School, Manesar, my project guide . I am very thankful

to him, for his helpful suggestion and motivation throughout my work. I really appreciate the

patience with which he resolved my doubts amidst his busy schedule. I feel it is privilege to

have the opportunity to work under his prestigious supervision.

I am very grateful to my project guide Mr. Anand Gupat (Finance Manager, Rico Auto Ltd

,Gurgaon) for providing me constant support and inspiration during the summer training.

My overriding debts continue to be to the management and all employees of Rico Auto Ltd

for their co-operation and guidance, which made my summer training project possible.

Finally I would like to give special thanks to my family and my friends who make it all

happen and make it worthwhile.

Ashish Negi


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PREFACE

Practical training provides a golden opportunity to implement studied rules and regulation. In

the absence of Practical knowledge, theoretical knowledge is incomplete. This indented for

the experience gained by trainee during Summer Training in RICO AUTO Ltd .

While making this project report, trainee became Familiar with the Accounting terms (Cost

Related) that are usually used in a company and the different functions that a Finance

Manager has to perform. Trainee has learnt how to do a financial analysis through various

tools and techniques like making Profit & Loss A/C and hence how to calculate these costs

form judgment about the operating performance and of a business.

It is very challenging thats why I have undertaken this project. It is significant not only for

the calculation perspective but also helpful in the practical real life.


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TABLE OF CONTENTS

Declaration

Acknowledgement

Preface

Chapter 1

Introduction I Significance of the Study II Objectives of the Study III Research Methodology VI

Chapter 2

Industry Profileo Growth driverso Policy Initiativeso Road Aheado Competitors analysis

Company Profileo Management

o Profileo History & Milestoneso Products

Chapter 3 Literature Review

Chapter 4

Analysis & Interpretation

Chapter 5

Findings & Suggestion

Conclusion Bibliography


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Chapter - 1


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AN

INTRODUCTION


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Financial analysis is an important part of the process of developing a business plan, and then

for monitoring the success of that plan.

Typical elements of financial analysis include:

1. Budgeting - creating a budget setting out planned cash flows in and out of the business.

By monitoring a cash flow budget it is possible to identify any potential crisis points where

liquidity will be poor. Budgets can also be set out for income and expenditure by the business,

as well as a capital budget showing major capital spending e.g. on premises, equipment etc.

2. Profit and loss analysis - this involves the creation of a profit and loss budget setting out

expected future profits/losses for the business. This is important in assessing the return on the

business. Useful parts of profitability analysis are:

Gross profit margins - the gross profit of the business as a percentage of sales. Operating profit margins - operating profit as a percentage of sales.

3. Solvency analysis - involves calculating the net current assets of a business as shown in

the balance sheet (i.e. current assets - current liabilities).

4. Return on capital employed (ROCE) - this is a measure of the return made on all of the

capital employed in the business in a given period of time.

5. Where a business has shareholders it is useful to analyze returns to these shareholders in

terms of returns for each Rupee invested in share capital.

Financial analysis is very important in planning because ultimately business success is

measured in terms of money. Investors in a business need to feel that:

Their money is secure That their returns are comparable to what they can earn elsewhere That planner gets a good sense of the financial implications of their actions.


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SIGNIFICANCE OF THE STUDY

This study of financial analysis will show what importance a financial analysis holds

for the company and its investors, supp liers, buyers, as well as other subsidiary.

This study has helped in getting knowledge of Comparison of growth of the company

in last five years from FY07 to FY11.

It has given me the insight on how to do a financial analysis. It will help other researchers to do a study.


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Objective of the Study

Owners and managers require financial statements to make important business

decisions that affect its continued operations.

Employees also need these reports in making collective bargaining agreements(CBA) with the management.

Prospective investors make use of financial statements to assess the viability of

investing in a business.

Financial institutions (banks and other lending companies) use them to decide

whether to grant a company with fresh working capital or extend debt securities (such

as a long-term bank loan or debentures) to finance expansion and other significant

expenditures.

Government entities (tax authorities) need financial statements to ascertain the

propriety and accuracy of taxes and other duties declared and paid by a company.

Vendors who extend credit to a business require financial statements to assess the

creditworthiness of the business.


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Research Methodology

The system of collecting data for research projects is known as research methodology . The

data may be collected for either theoretical or practical research for example management

research may be strategically conceptualized along with operational planning methods and

change management.

Quantitative Research

In the social sciences, quantitative research refers to the systematic empirical investigation of

social phenomena via statistical, mathematical or computational techniques. The objective of

quantitative research is to develop and employ mathematical models, theories and/or

hypotheses pertaining to phenomena. The process of measurement is central to quantitative

research because it provides the fundamental connection between empirical observation and

mathematical expression of quantitative relationships.

Secondary Research

Secondary research occurs when a project requires a summary or collection of existing data.

As opposed to data collected directly from respondents or "research subjects" for the express

purposes of a project, (often called "empirical" or "primary research"), secondary sources

already exist.

These secondary sources could include previous research reports, newspaper, magazine and

journal content, and government statistics. Sometimes secondary research is required in the

preliminary stages of research to determine what is known already and what new data is

required, or to inform research design. At other times, it may make be the only research

technique used.

A key performance area in secondary research is the full citation of original sources, usually

in the form of a complete listing or annotated listing.


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Chapter 2


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Industry Analysis

India has the most competitive auto parts manufacturing industry in the world, with Indian

automotive components being widely preferred by major automobile manufacturing

companies. The auto component companies in India are contributing to the growth of this

sector by providing genuine, cheap and reasonably priced automotive parts.

The Indian automotive components industry has actively and quickly transformed from a

domestic market supplier, to one of the essential auto parts supplier in the world.

The Indian auto component sector has been growing at 20 per cent a year since 2000 and is

projected to maintain the high-growth phase of 15-20 per cent till 2015.

Growth Drivers

Rising demand for vehicles - Vehicle production grew to around 17.9 million in

2010-11 - Global Original Equipment Manufacturers (OEMs) are entering India to

establish their manufacturing base

Low-cost and high quality standards Low labour costs in India have resulted in a

significant cost reduction, with international quality standards being duly maintained.An average cost reduction of nearly 25-30 per cent has attracted several global

automobile manufacturers to set base since 1991

Availability of low cost skilled manpower India produces close to 0.4 million

engineering graduates every year, and the cost of entry-level engineers is as low as

US$ 8,000 a yea r.The country accounts for 26 per cent of the worlds Engineering

Service Outsourcing (ESO)

Policy initiatives - De-regulation and policy initiatives such as lower excise duties,

realisation of value added tax (VAT), etc., have been implemented. Foreign direct

investment (FDI) up to 100 per cent is permitted through the automatic route for

manufacturers of automobiles and components.


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Policy Initiatives

The Ministry of Heavy Industries and Public Enterprises has envisaged the Automotive

Mission Plan (AMP) 2006-2016 to promote growth in the sector. The plan targets to:

Increase turnover to US$ 122 billion US$ 159 billion by 2016 from US$ 34 billion in

2006

Increase export revenue to US$ 35 billion by 2016

Provide employment to additional 25 million people by 2016

Road Ahead

Going forward, the automotive component industry in India displays strong potential in

generating employment and promoting entrepreneurship in the country. The series of new

investment plans announced by global and domestic automobile manufacturers re instates the

emergence of India as a global hub for auto components.

The boost in demand, with the growth of the automobile industry, will see the emergence of

several new players in the industry. The huge market for auto components, and the diverse

products and technology involved ensures a place and role for many. Among the smallerplayers in the unorganised segment, the industry could witness a shift from being standalone

companies, to entering into either contract manufacturing or being ancillary units. The newly

defined rules of specialisation, development and delivery, hold the key to success in the auto

component industry.


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Competition analysis

TOP 3 Companies

BOSCH - Bosch innovations have shaped cars from the start and will keep doing so infuture. As the worlds biggest independent automotive supplier, Bosch focuses on

innovations to make driving safer, cleaner and economical. Automotive Technology is thelargest business segment of Bosch in India, supplying to the local automotive industry, andexporting components overseas.

Name Last Price Market Cap. SalesTurnover

Net Profit Total Assets

(Rs. cr.)Bosch 7,074.00 22,211.58 6,899.40 858.9 4,374.44

Motherson Sumi Systems Limited (MSSL) Is the flagship company of the Samvardhana

Motherson Group and was established in 1986. It is a joint venture between Samvardhana

Motherson Group and Sumitomo Wiring Systems (Japan). MSSL is a focused, dynamic and

progressive company providing customers with innovative and value-added products.

The company is one of the leading manufacturers of automotive wiring harnesses and mirrors

for passenger cars in India. It is also a leading supplier of plastic components and modules to

the automotive industry.

Name Last Price Market Cap. SalesTurnover Net Profit TotalAssets(Rs. cr.)

MothersonSumi

177.85 6,892.47 2,855.08 287.49 1,802.84

Amtek Auto is a diversified automotive component supplier in the global auto component

manufacturing and supply chain. Observing a powerful entrepreneurial culture, the forward

looking company manufactures automotive systems, assemblies, modules and components.

Tapping into its proven capabilities, over the past 25 years, Amtek has lived upto its

commitment to fulfill the rising indigenous demand and compete in the global forum. And

thus, today has a significant presence.

Name Last Price Market Cap. SalesTurnover

Net Profit Total Assets

(Rs. cr.)

Amtek Auto 141.3 3,294.75 1,792.64 85.3 6,576.10


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Company

Profile


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Management - Rico Auto

Name Designation

Chandra Mohan Chairman / Chair Person

Arvind Kapur VC & Mng.Director & CEO

Arun Kapur Joint Managing Director

Amarjit Chopra Director

Satish Sekhri Director

Vinod Kumar Bhalla Director

Kanwal Monga Director

Ashok Seth Director

Rakesh Kapur Director

Anup Singh Director


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PROFILE

Rico Auto Industries Limited (RICO) is a supplier of high precision aluminum and ferrous

components and assemblies to almost all major original equipment manufacturers (OEMs) in

India, including Hero moto corp, Maruti Udyog, Honda Siel Cars, Honda Motor Cycle and

Scooter, Tata Cummins and Delphi. The company is also a Tier-one supplier to auto OEMsin the International market. Its global customers include Ford, Land Rover, Jaguar, Cummins

Engine Company, and Matsusaka Engineering Company. The company incorporated in 1986

is promoted by Mr. Arvind Kapur and Mr. Arun Kapur. The company is a single source

supplier for Matsusaka Engg. Co. Limited, Japan for water pump kits and Eaton Limited, UK

for vehicle transmission components. The company has entered into a 50:50 JV with FCC,

Japan (largest manufacturer of clutches in that country). The company has also entered into a

JV with Daewoo Precision Industries Limited (DPI), Korea. The JV company will not onlybe the single source OE supplier for Daewoo operations in India, but will also progressively

emerge as the OE supplier to Daewoo in international markets. The JV is expected to

improve capacity utilization of Rico`s facilities and help in updating its technology to world

class standards. The trial production in the JV commenced from June 1997.


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HISTORY & MILESTONES

1984-86

Rico Auto Incorporated (1984-85) and Commercial Production Started (1986)

Aluminum HPDC Plant set up in Dharuhera (40 Kms from Delhi, India)

TC with FCC Japan for manufacturing of Clutch Assembly

1990-92

Ferrous Casting & Machining Plant set up in Gurgaon (20 Kms from Delhi, India)

Entered International Market as OEM Supplier to MEC Japan.

1994-96

FCC RICO (50:50) JV formed

Started supplying globally to USA & UK (Eaton, Cummins, GM etc.)

1998-00

Second Aluminum HPDC & Machining Plant set up in Gurgaon

2000-02

Set up full service Engineering, Design & Development function. Added Customers: Ford, Jaguar, Land Rover

Certified TS 16949, ISO 140001, OHSAS 18001

2002-04

Enhanced Ferrous & Aluminum Capacity

Added Customers: Caterpillar, Honeywell, Detroit Diesel, Volvo


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2004-06

R&D Center started

Added Customers: Nissan, Tata, Perkins

2007

JV with CONTINENTAL Automotive Systems (Hydraulic Brakes)

JV with JINFEI CHINA (Aluminum Alloy Wheels - 2 Wheelers)

Acquired 25 acres land in Chennai.


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CURRENT GLOBAL CUSTOMER BASE

Two Wheelers

Passenger Cars

Commercial Vehicles

System Suppliers


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PRODUCTS

Oil Pump Assembly

Annual Volumes - 500,000

Fuel System Parts

Annual Volumes - Annual Volumes - 400,000

Lube Oil Filters Heads


Exhaust Manifolds


Turbine Housings

Center Housings

Back Plates

Crank Cases & Covers

Annual Volumes - 1 Million

Cylinder Head Covers


Oil Pan


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Intake Manifold Covers


Front Cover

Valve Cover


Side Cover


Balance Shafts Assembly


Gear Housing

Annual Volumes - 1,20,000

Main Bearing Caps


Water, Air Connections and Pressure Plates

Flywheels


Timing Cases


Oil Filter Adaptor



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Engine Brackets

Annual Volumes - 4.2 Million

Cylinder Block (Ferrous)

Cylinder Head (Aluminum)

Clutch Assembly


Automatic Transmission Bracket Assembly


Differential Case Housings


Gear Shifts Forks

Wheel Hubs Assembly

Annual Volumes - 7 Million Sets

Brake Panel Assembly

Annual Volumes - 7 Million Sets

Brake Discs


Drums



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Steering Knuckles



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Chapter - 3


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Conceptualization

Financial Statement

Financial statements (or financial reports) are formal records of a business' financialactivities.

Financial statements provide an overview of a business' financial condition in both short and

long term. There are four basic financial statements:

Balance sheet : also referred to as statement of financial position or condition, reports on a

company's assets, liabilities and net equity as of a given point in time.

Income statement : also referred to as Profit and Loss statement (or a "P&L"), reports on a

company's results of operations over a period of time.

Statement of retained earnings: explains the changes in a company's retained earnings over

the reporting period.

Statement of cash flows : reports on a company's cash flow activities, particularly its

operating, investing and financing activities.

Ratio Analysis: Ratio analysis enables the analyst to compare items on a single financial

statement or to examine the relationships between items on two financial statements.

Purpose of financial statements

The objective of financial statements is to provide information about the financial strength,

performance and changes in financial position of an enterprise that is useful to a wide rangeof users in making economic decisions. Financial statements should be understandable,

relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to

an organization's financial position. Reported income and expenses are directly related to an

organization's financial performance.

Financial statements are intended to be understandable by readers who have "a reasonable

knowledge of business and economic activities and accounting and who are willing to study

the information diligently."


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Owners and managers require financial statements to make important business decisions that

affect its continued operations. Financial analyses are then performed on these statements to

provide management with a more detailed understanding of the figures. These statements are

also used as part of management's report to its stockholders, as it form part of its Annual

Report.

Employees also need these reports in making collective bargaining agreements (CBA) with

the management, in the case of labor unions or for individuals in discussing their

compensation, promotion and rankings.

External Users : are potential investors, banks, government agencies and other parties who

are outside the business but need financial information about the business for a diversenumber of reasons.

Prospective investors make use of financial statements to assess the viability of investing in a

business. Financial analyses are often used by investors and is prepared by professionals

(financial analysts), thus providing them with the basis in making investment decisions.

Financial institutions (banks and other lending companies) use them to decide whether to

grant a company with fresh working capital or extend debt securities (such as a long-term

bank loan or debentures) to finance expansion and other significant expenditures.

Government entities (tax authorities) need financial statements to ascertain the propriety and

accuracy of taxes and other duties declared and paid by a company.

Media and the general public are also interested in financial statements for a variety of

reasons.

Income Statement

An Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement

for companies that indicates how Revenue (money received from the sale of products and

services before expenses are taken out, also known as the "top line") is transformed into net

income (the result after all revenues and expenses have been accounted for, also known as the

"bottom line"). The purpose of the income statement is to show managers and investors

whether the company made or lost money during the period being reported.


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Charitable organizations that are required to publish financial statements do not produce an

income statement. Instead, they produce a similar statement that reflects the fact that the

charity is not operating to make a profit.

Items on income statement

Operating section

Revenue - Cash inflows or other enhancements of assets of an entity during a period from

delivering or producing goods, rendering services, or other activities that constitute the

entity's ongoing major operations. Usually presented as sales minus sales discounts, returns,

and allowances.

Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a

period from delivering or producing goods, rendering services, or carrying out other activities

that constitute the entity's ongoing major operations.

General and administrative expenses (G & A) - represent expenses to manage the business

(officer salaries, legal and professional fees, utilities, insurance, depreciation of office

building and equipment, stationery, supplies)

Selling expenses - represent expenses needed to sell products (e.g., sales salaries and

commissions, advertising, freight, shipping, depreciation of sales equipment)

R & D expenses - represent expenses included in research and development

Depreciation - is the charge for a specific period (i.e. year, accounting period) with respect

to fixed assets that have been capitalised on the balance sheet.

Non-operating section

Other revenues or gains - revenues and gains from other than primary business activities

(e.g. rent, patents). It also includes unusual gains and losses that are either unusual or

infrequent, but not both (e.g. sale of securities or fixed assets).

Other expenses or losses - expenses or losses not related to primary business operations.

Irregular items


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They are reported separately because this way users can better predict future cash flows -

irregular items most likely won't happen next year. These are reported net of taxes.

Discontinued operations are the most common type of irregular items. Shifting business

location, stopping production temporarily, or changes due to technological improvement do

not qualify as discontinued operations.

Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected

nature disaster, expropriation, prohibitions under new regulations. Note: natural disaster

might not qualify depending on location (e.g. frost damage would not qualify in Canada but

would in the tropics).

Changes in accounting principle are, for example, deciding to depreciate an investment

property that has previously not been depreciated. However, changes in estimates (e.g.estimated useful life of a fixed asset) do not qualify.

Cash Flow

Cash flow is a term that refers to the amount of cash being received and spent by a business

during a defined period of time, sometimes tied to a specific project. Measurement of cash

flow can be used to evaluate the state or performance of a business or project.

To determine problems with liquidity. Being profitable does not necessarily mean beingliquid. A company can fail because of a shortage of cash, even while profitable.

To generate project rate of returns. The time of cash flows into and out of projects are used as

inputs to financial models such as internal rate of return, and net present value.

To examine income or growth of a business when it is believed that accrual accounting

concepts do not represent economic realities. Alternately, cash flow can be used to 'validate'

the net income generated by accrual accounting.

Cash flow as a generic term may be used differently depending on context, and certain cash

flow definitions may be adapted by analysts and users for their own uses. Common terms

(with relatively standardized definitions) include operating cash flow and free cash flow.

Classification

Cash flows can be classified into:


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1. Operational cash flows: Cash received or expended as a result of the company's core

business activities.

2. Investment cash flows: Cash received or expended through capital expenditure,

investments or acquisitions.

3. Financing cash flows: Cash received or expended as a result of financial activities,

such as receiving or paying loans, issuing or repurchasing stock, and paying

dividends.

All three together are necessary to reconcile the beginning cash balance to the ending cash

balance.

Benefits from using Cash flow

The cash flow statement is one of the four main financial statements of a company. The cashflow statement can be examined to determine the short-term sustainability of a company. If

cash is increasing (and operational cash flow is positive), then a company will often be

deemed to be healthy in the short-term. Increasing or stable cash balances suggest that a

company is able to meet its cash needs, and remain solvent. This information cannot always

be seen in the income statement or the balance sheet of a company. For instance, a company

may be generating profit, but still have difficulty in remaining solvent.

The cash flow statement breaks the sources of cash generation into three sections:

operational cash flows, investing, and financing . This breakdown allows the user of

financial statements to determine where the company is deriving its cash for operations. For

example, a company may be notionally profitable but generating little operational cash (as

may be the case for a company that barters its products rather than selling for cash). In such a

case, the company may be deriving additional operating cash by issuing shares, or raising

additional debt finance.

Companies that have announced significant write downs of assets, particularly goodwill, may

have substantially higher cash flows than the announced earnings would indicate. For

example, telecoms firms that paid substantial sums for 3G licenses or for acquisitions have

subsequently had to write-off goodwill, that is, indicate that these investments were now

worth much less. These write-downs have frequently resulted in large announced annual

losses, such as Vodafone's announcement in May 2006 that it had lost 21.9 billion due to a

writedown of its German acquisition, Mannesmann, one of the largest annual losses in

European history. Despite this large "loss", which represented a sunk cost, Vodafone's


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operating cash flows was solid: "Strong cash flow is one of the most attractive aspects of the

cell phone business, allowing operators like Vodafone to return money to shareholders even

as they rack up huge paper losses."

In certain cases, cash flow statements may allow careful analysts to detect problems that

would not be evident from the other financial statements alone. For example, WorldComcommitted an accounting fraud that was discovered in 2002; the fraud consisted primarily of

treating ongoing expenses as capital investments, thereby fraudulently boosting net income.

Use of one measure of cash flow (free cash flow) would potentially have detected that there

was no change in overall cash flow (including capital investments).

Balance Sheet

In financial accounting, a balance sheet or statement of financial position is a summary of thevalue of all assets, liabilities and Ownership equity for an organization or individual on a

specific date, such as the end of its financial year. A balance sheet is often described as a

"snapshot" of a company's financial condition on a given date. Of the four basic financial

statements, the balance sheet is the only statement which applies to a single point in time,

instead of a period of time.

A company balance sheet has three parts: assets, liabilities and shareholders' equity. The

main categories of assets are usually listed first and are followed by the liabilities. The

difference between the assets and the liabilities is known as the net assets or the net worth of

the company. According to the accounting equation, net worth must equal assets minus

liabilities.

Records of the values of each account or line in the balance sheet are usually maintained

using a system of accounting known as the double-entry bookkeeping system.

A simple business operating entirely in cash could measure its profits by simply withdrawingthe entire bank balance at the end of the period, plus any cash in hand. However, real

businesses are not paid immediately; they build up inventories of goods to sell and they

acquire buildings and equipment. In other words: businesses have assets and so they could

not, even if they wanted to, immediately turn these into cash at the end of each period. Real

businesses also owe money to suppliers and to tax authorities, and the proprietors do not

withdraw all their original capital and profits at the end of each period. In other words

businesses also have liabilities.


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Types of balance sheets

A balance sheet summarizes an organization or individual's asset, equity and liabilities at aspecific point in time. Individuals and small businesses tend to have simple balance sheets.

Larger businesses tend to have more complex balance sheets, and these are presented in the

organization's annual report. Large businesses also may prepare balance sheets for segments

of their businesses. A balance sheet is often presented alongside one for a different point in

time (typically the previous year) for comparison.

Personal balance sheet

A personal balance sheet lists current assets such as cash in checking accounts and savings

accounts, long-term assets such as common stock and real estate, current liabilities such as

loan debt and mortgage debt due or overdue, and long-term liabilities such as mortgage and

other loan debt. Securities and real estate values are listed at market value rather than at

historical cost or cost basis. Personal net worth is the difference between an individual's total

assets and total liabilities.

Small business balance sheet

A small business balance sheet lists current assets such as cash, accounts receivable, and

inventory, fixed assets such as land, buildings, and equipment, intangible assets such as

patents, and liabilities such as accounts payable, accrued expenses, and long-term debt.

Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The

small business's equity is the difference between total assets and total liabilities.

Corporate balance sheet structure

Guidelines for corporate balance sheets are given by the International Accounting Standards

Committee and numerous country-specific organizations.

Balance sheet account names and usage depend on the organization's country and the type of

organization. Government organizations do not generally follow standards established for

individuals or businesses.


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If applicable to the business, summary values for the following items should be included on

the balance sheet:

1. Assets

2. Current assets

3. Inventories4. Accounts receivable

5. Cash and cash equivalents

6. Long-term assets

7. Property, plant and equipment

8. Investment property, such as real estate held for investment purposes

9. Intangible assets

10. Financial assets (excluding investments accounted for using the equity method,accounts receivables, and cash and cash equivalents)

11. Investments accounted for using the equity method.

12. Biological assets, which are living plants or animals. Bearer biological assets are

plants or animals which bear agricultural produce for harvest, such as apple trees

grown to produce apples and sheep raised to produce wool.

Liabilities

1. Accounts payable

2. Provisions for warranties or court decisions

3. Financial liabilities (excluding provisions and accounts payable), such as promissory

notes and corporate bonds

4. Liabilities and assets for current tax5. Deferred tax liabilities and deferred tax assets

6. Minority interest in equity

7. Issued capital and reserves attributable to equity holders of the parent company

Equity

The net assets shown by the balance sheet equals the third part of the balance sheet, which is

known as the shareholders' equity. Formally, shareholders' equity is part of the company'sliabilities: they are funds "owing" to shareholders (after payment of all other liabilities);


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usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding

shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is

not a coincidence. Records of the values of each account in the balance sheet are maintained

using a system of accounting known as double-entry bookkeeping. In this sense,

shareholders' equity by construction must equal assets minus liabilities, and are a residual.

Numbers of shares authorized, issued and fully paid, and issued but not fully paid, par value

of shares, reconciliation of shares, outstanding at the beginning and the end of the period.

Description of rights, preferences, and restrictions of shares Treasury shares, including shares

held by subsidiaries and associates. Shares reserved for issuance under options and contracts.

A description of the nature and purpose of each reserve within owners' equity.

Financial Statement Analysis

Financial statement analysis is the process of examining relationships among financial

statement elements and making comparisons with relevant information. It is a valuable tool

used by investors and creditors, financial analysts, and others in their decision-making

processes related to stocks, bonds, and other financial instruments. The goal in analyzing

financial statements is to assess past performance and current financial position and to make

predictions about the future performance of a company. Investors who buy stock are

primarily interested in a company's profitability and their prospects for earning a return on

their investment by receiving dividends and/or increasing the market value of their stock

holdings. Creditors and investors who buy debt securities, such as bonds, are more interested

in liquidity and solvency: the company's short-and long-run ability to pay its debts. Financial

analysts, who frequently specialize in following certain industries, routinely assess the

profitability, liquidity, and solvency of companies in order to make recommendations about

the purchase or sale of securities, such as stocks and bonds.

Analysts can obtain useful information by comparing a company's most recent financial

statements with its results in previous years and with the results of other companies in the

same industry. Three primary types of financial statement analysis are commonly known as

horizontal analysis, vertical analysis, and ratio analysis.

Horizontal Analysis

When an analyst compares financial information for two or more years for a single company,

the process is referred to as horizontal analysis , since the analyst is reading across the page to

compare any single line item, such as sales revenues. In addition to comparing dollar


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amounts, the analyst computes percentage changes from year to year for all financial

statement balances, such as cash and inventory. Alternatively, in comparing financial

statements for a number of years, the analyst may prefer to use a variation of horizontal

analysis called trend analysis . Trend analysis involves calculating each year's financial

statement balances as percentages of the first year, also known as the base year. When

expressed as percentages, the base year figures are always 100 percent, and percentage

changes from the base year can be determined.

Vertical Analysis

When using vertical analysis, the analyst calculates each item on a single financial statement

as a percentage of a total. The term vertical analysis applies because each year's figures are

listed vertically on a financial statement. The total used by the analyst on the income

statement is net sales revenue, while on the balance sheet it is total assets. This approach to

financial statement analysis, also known as component percentages , produces common-size

financial statements . Common-size balance sheets and income statements can be more easily

compared, whether across the years for a single company or across different companies.

Ratio Analysis

Ratio analysis enables the analyst to compare items on a single financial statement or to

examine the relationships between items on two financial statements. After calculating ratios

for each year's financial data, the analyst can then examine trends for the company across

years. Since ratios adjust for size, using this analytical tool facilitates intercompany as well as

intracompany comparisons. Ratios are often classified using the following terms: profitability

ratios (also known as operating ratios), liquidity ratios , and solvency ratios . Profitability

ratios are gauges of the company's operating success for a given period of time. Liquidity

ratios are measures of the short-term ability of the company to pay its debts when they come

due and to meet unexpected needs for cash. Solvency ratios indicate the ability of thecompany to meet its long-term obligations on a continuing basis and thus to survive over a

long period of time. In judging how well on a company is doing, analysts typically compare a

company's ratios to industry statistics as well as to its own past performance.

Classification of ratios

1) Liquidity ratios

2)

Solvency ratios3) Activity or turnover ratios


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4) Profitability or turnover ratios

1) Liquidity ratios it is the ability of the firm to meet its current liabilities. They are

therefore called short term solvency ratios. Liquidity ratios include

a) Current ratios or working capital ratio this ratio is used to assess the firms ability to

meet its short term liabilities on time. According to accounting principles, a current

ratio of 2 : 1 is supposed to be an ideal ratio.

b) Quick ratio or acid test ratio an ideal quick ratio is 1 : 1. If it is more, it is

considered to be better. The idea is that for every rupee of current liabilities, there

should at least be one rupee of liquid assets.

2) Solvency ratios these ratios are calculated to assess the ability of the firm to meet its

long term liability as and when they become due.

a) Debt equity ratio this ratio expresses the relationship between long-term debts &

shareholders funds. This ratio is calculated to ascertain the soundness of long term

financial policies of the firm. Debt equity of 2 : 1 is considered safe.

b) Total asset to debt ratio this ratio is usually expressed as a pure ratio i.e. 1 : 1 or 2 :

1. This ratio expresses the relationship between total assets and long term loans are

covered by assets which indicates the margin of safety available to providers of long

term loans

c) Proprietary ratio this ratio indicate the proportion of total assets funded by owners

or shareholders. A higher proprietary ratio is generally indicated as an indicator of

sound financial position from long term point of view, because it means that a large

proportion of total assets is provided by equity and hence the firm is less dependent

on external source of finance.

3) Activity ratios these ratios are calculated on the basis of cost of sales therefore these

ratios are called turnover ratios. Higher turnover ratios indicate the better use of capital or

resource & in turn lead to higher profitability.

a) Inventory turnover ratio or stock turnover ratio this ratio indicates the relationship

between the cost of goods sold during the year & average stock kept during that year.A low stock turnover ratio indicates that stock does not sell quickly and remains lying


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in the godown for quite a long time. This results in increased storage cost, blocking of

funds and losses on account of goods becoming obsolete or unsalable.

b) Debtors turnover ratio this ratio is the relationship between credit sales and average

debtors during the year. This ratio indicates the speed at which money is collected

from debtors. The higher the ratio, the better it is, since it indicates that amount from

debtors is collected more quickly.

c) Creditors turnover ratio or payables turnover ratio this ratio indicates the

relationship between credit purchase & average creditors plus average bills payable.

This ratio indicates the speed at which the amount of creditors is being paid by the

company.

d) Working capital turnover this ratio is the relationship between the net sales &

working capital (current assets current liability). This ratio is particular important in

non manufacturing concerns where current assets play a major role in generating

sales.

e) Fixed assets turnover ratio this ratio is of particular importance in manufacturing

concerns where the investment in fixed assets is quite high. The ratio reveals how

efficiently the fixed assets are being utilized. If there is an increase in the ratio it

means that the fixed assets are being utilized efficiently.

4) Profitability ratios or income ratios the efficiency & the success of the business can

be measured with the help of profitability ratios.

a) Gross profit ratio the ratio shows the relationship between gross profit and sales.

The higher the gross profit ratio the better it is. No ideal standard is fixed for this

ratio, but the gross profit should be adequate enough not only to cover the operating

expenses but also to provide for depreciation, interest on loans, dividends & creation

of reserves.

b) Operating ratio this ratio measures the proportion of enterprises cost of sales &operating expenses in comparison to its sales

c) Net profit ratio this ratio tells the relationship between the net profit & sales.

d) Return on investment or rate of return this ratio shows the overall profitability of the

business. It is calculated by comparing the profit earned before interest tax &

dividends and the capital employed to earn it.

e) Earnings per share (E.P.S) this ratio is helpful in determining of market price of the

equity share of the company. This ratio is also helpful in the determination of themarket price of the equity share of the company.


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f) Dividend per share profits remaining after payment of tax & preference dividend are

available to equity shareholders. D.P.S is the dividend distributed to equity

shareholders divided by the number of equity shares.


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Chapter - 4


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Analysis & Interpretation

Profit & loss A/CProfit & Loss - Rico AutoIndustries Ltd.

Mar'11 Mar'10 Mar'09 Mar'08 Mar'0712 Months 12 Months 12 Months 12 Months 12 Months

INCOME:Sales Turnover 1,055.95 812.27 806.65 800.57 876.18

Excise Duty 79.21 52.21 78.74 91.86 105.78NET SALES 976.74 760.06 727.91 708.71 770.4Other Income 0 0 0 0 0

TOTAL INCOME 1,016.98 784.2 755.25 735.28 781.92

EXPENDITURE:Manufacturing Expenses 79.62 69.22 66.73 59.88 54.98Material Consumed 635.59 492.66 481.17 453.04 521.34Personal Expenses 129.71 94.53 83.95 78.34 67.96

Selling Expenses 0 0.46 0.36 0.86 4.9Administrative Expenses 45.41 39.59 33.65 41.38 37.69

Expenses Capitalized 0 0 0 0 0

Provisions Made 0 0 0 0 0TOTAL EXPENDITURE 890.33 696.46 665.86 633.5 686.87Financial Charges 43.65 41 45.47 25.89 15.16

Gross Profit 83 83.74 53.92 75.89 79.89

Operating Profit 86.41 63.6 62.05 75.21 83.53EBITDA 126.65 87.74 89.39 101.78 95.05

Depreciation 53.94 47.62 50.02 47.32 42.54Other Write-offs 0 0 0 0.52 0.52EBIT 72.71 40.12 39.37 53.94 51.99

EBT 29.06 -0.8 -6.1 28.05 36.83

Taxes 2.55 -1.09 -1.88 5.77 11.16

Net Profit 26.51 0.21 -4.22 22.28 25.67Non Recurring Items 0 5.93 10.42 0.2 0.22

Other Non CashAdjustments

0 0 -1.45 -0.2 0

Other Adjustments 0 0 0 0.02 0REPORTED PAT 26.51 6.07 4.75 22.27 25.84

The statement of profit and loss follows a general form as seen in this example. It begins

with an entry for revenue and subtracts from revenue the costs of running the

business, including cost of goods sold, operating expenses, tax expense and interest expense.

The bottom line (literally and figuratively) is net income (profit).


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BALANCE SHEET

The balance sheet, income statement and statement of cash flows are the most important

financial statements produced by a company. While each is important in its own right, theyare meant to be analyzed together.

Balance sheet - Rico Auto Industries Ltd.

Particulars Mar'11 Mar'10 Mar'09 Mar'08 Mar'07

Liabilities 12 Months 12 Months 12 Months 12 Months 12 Months

Share Capital 13.53 15.72 12.56 12.56 12.56

Reserves & Surplus 306.12 272.15 260.13 256.85 243.4Net Worth 319.65 287.87 272.69 269.41 255.96

Secured Loans 453.53 341.16 262.24 229.61 189.42

Unsecured Loans 0 78.39 108.09 143.01 48.39

TOTAL LIABILITIES 773.18 707.42 643.02 642.03 493.77

Assets

Fixed Assets 833.37 803.74 720.59 657.37 584.45

(-) Acc. Depreciation 357.82 306.8 264.46 216.05 170.15

Net Fixed Assets 475.55 496.94 456.13 441.32 414.3Capital Work in Progress. 59.77 28.96 29.58 26.89 15.31

Investments. 98.6 63.95 26.83 20.31 4.24

Inventories 102.2 90.04 77.18 71.58 60.89

Sundry Debtors 142.32 119.72 106.17 133.21 90.61

Cash And Bank 14.03 7.08 3.11 27.59 6.39

Loans And Advances 146.52 116.45 95.85 59.98 42.01

Current Assets 405.07 333.29 282.31 292.36 199.9

Current Liabilities 262.64 213.45 146.62 131.09 141.52

Provisions 3.17 2.27 5.21 8.8 0.02Total Current Liabilities 265.81 215.72 151.83 139.89 141.54

NET CURRENT ASSETS 139.26 117.57 130.48 152.47 58.36

Misc. Expenses 0 0 0 1.04 1.56

TOTAL ASSETS 773.18 707.42 643.02 642.03 493.77


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Financial ratios

Key Financial Ratios In %

Mar'11 Mar'10 Mar'09 Mar'08 Mar'07

Liquidity Ratios

Current ratio 1.52 1.54 1.85 2.08 1.41

Liquid ratio 0.58 0.58 0.71 1.14 0.68

Solvency Ratios In %

Debt Equity ratio 1.41 1.45 1.35 1.38 0.92

Total assets to debt ratio 1.70 1.68 1.73 1.72 2.07

Proprietary ratios 2.41 2.45 2.35 2.38 1.92

Turnover Ratios In

times

Working capital turnover ratio 7 6.4 5.5 4.6 13.2

Fixed Assets Turnover Ratio 2.05 1.53 1.59 1.60 1.85

Profitability Ratios In %

Gross profit ratios 8.49 11.07 7.4 10.70 10.36

Net profit ratio 2.71 0.027 -0.57 3.14 3.33

ROI 7.45 4.34 4.59 6.58 8.08

EPS 1.96 0.47 0.38 1.77 2.06


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Interpretation

Current ratio this ratio is used to assess the firms ability to meet its short term liabilities

on time. According to accounting principles a current ratio of 2:1 is supposed to be an ideal

ratio. It means that the current assets of a business should, at least be twice of its current

liabilities. The current ratio of RICO has been dynamic it was at its ideal position in fy08 but

then the ratio has shown consistent drop. It sho ws that the companys current liabilities are

coming at equilibrium with current assets.

0

0.5

1

1.5

2

2.5


1.52 1.54

1.852.08

1.41

Current Ratio

Current Ratio


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Liquid Ratio the ideal ratio is 1:1. It shows the short term financial condition of thecompany. It has also dropped after the fyo8. It shows the inadequacy of assets which are

easily converted into cash. In march 08 the ratio was at ideal level but in march 11 it

decreased to o.58.

0

0.2

0.4

0.6

0.8

1

1.2


0.58 0.580.71

1.14

0.68

Liquid ratio

Liquid ratio


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Debt Equity Ratio the ideal ratio is 2:1. It shows the firms ability to meet its long termliabilities. As seen in the above analysis the ratio is steadily improving from fy07 to fy10 but

in fy11 the ratio slightly declined and over all the companys ability to fund its long term

liability is insufficient.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6


1.41 1.45 1.35 1.38

0.92

Debt Equity ratio

Debt Equity ratio


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Total Asset to Debt Ratio the ideal ratio 1:1 or 2:1. This ratio expresses the relationshipbetween the total assets & long term loans. In the fy07 the company had 2.07 ratio but during

the year it steadily decreased but still it has been at the ideal position of 1:1. This means that

the margin of safety for long term loan providers is at an ideal position and if the company

asks for loan from banks then seeing this ratio they will approve them.

0

0.5

1

1.5

2

2.5


1.7 1.68 1.73 1.72

2.07

Total assets to debt ratio

Total assets to debt ratio


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Proprietary ratios a higher proprietary ratio is generally treated as an indicator of soundfinancial positions from long term view point, because it means that large proportion of total

assets is provided by equity & hence the firm is less dependent upon external sources of

finance.

0

0.5

1

1.5

2

2.5


2.41 2.45 2.35 2.38

1.92

Proprietary ratios

Proprietary ratios


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Working Capital Turnover Ratio - It indicates the velocity of the utilization of net workingcapital. This ratio represents the number of times the working capital is turned over in the

course of year. A high working capital turnover ratio indicates efficient use of working

capital & quick t urnover of current assets like stock & debtors. Companys turnover ratio was

at 13.2 times but fell in fy08 to 4.6, but after it has been steadily increasing to 7 times in fy07.

0

2

4

6

8

10

12

14


76.4

5.54.6

13.2

Working capital turnover ratio

Working capital turnoverratio


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Fixed Assets turnover Ratio this ratio is particularly important in manufacturing concernswhere the investment in fixed assets is quite high. This ratio indicates that how efficiently

fixed assets are being utilized. Since fy07 the ratio has been decreasing but at the stage of

fy11 the ratio jumped to 2.05 that indicate that fixed assets of the company are being utilized

to their highest as compared to previous year.

0

0.5

1

1.5

2

2.5


2.05

1.53 1.59 1.61.85

Fixed Assets Turnover Ratio

Fixed Assets TurnoverRatio


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Gross Profit Ratio the ratio measures the margin of profit available on sales. The higherthe gross profit ratio the better it is. No ideal standard is fixed for this ratio, but the gross

profit should be adequate enough to cover all the operating expenses & also to provide

depreciation, interest on loans, dividends & creation of reserve. In rico ltd the % has shown a

decline so we can assume that

1. Price of materials purchased have gone up but the selling price might not have gone

up or vice versa

2. There may be misappropriation, theft or pilfered of stocks during the year.

3. There is fall in sale of more profitable varieties of goods

4. There is fall in price of unsold goods, thereby reducing the value of closing stock.

0

2

4

6

8

10

12


8.49

11.07

7.4

10.7 10.36

Gross Profit Ratio

Gross Profit Ratio


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Net Profit ratio this ratio measures the rate of net profit earned on sales. It helps in

determining the overall efficiency of business operations. The ratio is very useful as if the net

profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its

investment.

This ratio also indicates the firm's capacity to face adverse economic conditions such as price

competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But

while interpreting the ratio it should be kept in mind that the performance of profits also be

seen in relation to investments or capital of the firm and not only in relation to sales.

As seen in the company s graph the NPR was satisfactory in 07 & 08 but went negative in 09

this shows that the company did not earned sufficient profits as well as in 10. But in fy11 it

rose to a satisfactory level of 2.71.

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5


2.71

0.027

-0.57

3.143.33

Net Profit Ratio

Net Profit Ratio


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Return on Investment this ratio reflects the overall profitability of the business. It

measures how efficiently the capital employed in the business is being used. The companys

ratio for fy07 was 8.08% but fell down at 6.58 in fy08 7 consecutively fell to 4.50 & 4.34, but

regained it in fy11 with 7.45%.it also reflects that company should make its borrowing policy

under 7.45% in future.

0

1

2

3

4

56

7

8

9


7.45

4.34 4.59

6.58

8.08

ROI

ROI


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EPS this ratio is helpful in determination of the market price of the share of the company.This ratio also shows the companys ability to declare dividends on equity shares. The

companys EPS was 2.06 per share but declined to 1.77 to 0.38 lowest in 09, b ut regained to

1.96 in fy 11.

0

0.5

1

1.5

2

2.5


1.96

0.47 0.38

1.77

2.06

EPS

EPS


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Chapter - 5


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Findings & Suggestion

Findings1. In FY 07 the companys financial position was very good as we see in analysis of

each ratio, except the Current ratio.

2. In FY 08 the company has down performed as compared to FY 07.

3. In FY 09 some of the ratios remained to the same position as in FY08, but some ratios

saw negative turn like the Net Profit Ratio.

4. In FY 10 the Solvency, Turnover & Profitability ratio rose but Liquidity ratio slided

downwards.

5. In FY 11 profitability & turnover Ratio rose to a safe level, but Liquidity & Solvency

remained same as FY10.


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Suggestion1. The company should improve its current ratio which is 1:52 as compared to ideal

ratio which is 2:1

2. The company should also improve its liquid ratio as the ideal is 1:1

3. The company should also improve working capital turnover ratio as compared to 13.2

in FY07, which is 7 in FY 11

4. The company should also improve its gross profit ratio which is 8.49% in Fy11 as

compared to 11.07 in FY10

5. My suggestion would be that the company should concentrate on quality factors

especially improving the TQM philosophy which would give them a competency

factor against all other competitors and improve the companys stature.

6. As the year 2011 introduced expansion plans like the Haridwar & Sanand in Gujrat

the company the company is giving full loyalty to its customers Hero Moto Corp &

Tata motors Ltd. This will prove to be a beneficial project for future growth.


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ConclusionAs seen through keen analysis of key ratios like Liquidity Ratio, Solvency Ratio & Activity

Ratio my conclusion of the study is that the company suffered mostly in fy08 & fy09 but

after that period the company is steadily growing at a slow rate. On could depict the reason

for this condition, it is the Financial crisis of 2008 & EU crisis which are causing slowdown

in the world economy. But still as we see the analysis the company is growing in FY11.


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Bibliography1. Pandey, I.M. 1999, Financial Management, 9 th Ed., Vikas Publishing House

2. D.K.Goel, Rajesh Goel & Shelly Goel, Aryan (2009), Analysis of financial statementPublications, Seventh edition

3. Rustagi, R.P. 1999, Financial Management: Theory, Concepts and Problems, Galgotia

Publishing Company.4. www.moneycontrol.com 5. www.economictimes.com 6. www.investopedia.com
http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.economictimes.com/http://www.economictimes.com/http://www.investopedia.com/http://www.investopedia.com/http://www.investopedia.com/http://www.economictimes.com/http://www.moneycontrol.com/


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financial analysis of rico auto

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