smriti project report
TRANSCRIPT
RATIO ANALYSIS
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INTRODUCTION
TO
VARDHMAN
GROUP
RATIO ANALYSIS
ESTABLISHMENT OF VARDHMAN
The industrial city of Ludhiana, located in the fertile Malwa region of Central Punjab is otherwise known as the “MANCHESTER OF INDIA”.
Within the precincts of this city is located the Corporate Headquarters of the Vardhman Group, a
household name in Northern India has carved out a niche for itself in textile industry. The Vardhman
Group, born in 1965, under the entrepreneurship of Late Lala Rattan Chand Oswal has today
blossomed into one of the largest Textile Bussiness houses in India. Father of present chairman cum
managing director, SH. S.P.OSWAL.
BRIEF HISTORY
At its inception, Vardhman had an installed capacity of 14,000 spindles, today; its capacity has
increased manifold to over 5.5 lacs spindles. Perhaps the largest conglomerate in India. Since then
Vardhman Group has not looked back and it is scaling ever-new heights. The Group has 19 operational
plants with installed spinning capacity of about 5,00,000 spindles, 216 shuttle less looms and about 45
tons per day dyeing capacity, capable of processing variety of raw materials available world wide.In
1973, the company acquired Oswal Steels (now known as Vardhman Special Steels) at Faridabad. It
manufactured alloy steel and had a capacity of 50,000 metric TPA. Another steel unit was added to the
bandwagon in 1986 and today the group vaunts of a combined steel melting capacity of 1,25,000 tpa
and rolling mills capacity of 65,000 tpa.
In 1986, itself the Group witnessed forward integration as it acquired sewing thread brand in the
country. Today with 10 Mt. Per day processing capacity, Vardhman threads at Hoshiarpur, is the second
largest selling brand in the country. In 1992, it undertook yet another forward leap into the weaving
business. The Grey fabric weaving division at Baddi (Himachal Pradesh), commissioned in 1996 with a
capacity of 20,000 metres per day, has already made its mark as a quality markets. Presently, Vardhman
is exporting about 90% of its production.
The Group has recently added another feather to its cap with the setting up of Vardhman Acrylic Ltd.,
Bharuch (Gujarat), keeping in line with its expansion spree. The company also has strong presence in
various countries like Japan, Hong-Kong, Korea, and U.K in addition to the domestic market.
Vardhman is earning laurels by exporting Yarn and Fabric of International Quality to several countries
in the West, Africa and Far East earning valuable foreign currency for the country. Vardhman is the first
company among the Textile industry to receive the ISO 9002 / ISO 14002 quality awards in India.
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RATIO ANALYSIS
The uniqueness of the Vardhman Group lies in the fact that not only has it excelled in all it’s
endeavors but has also established a firm footing through its deep rooted culture that imparts the
group an unassailable strength and confidence to face the future.
HIGHLIGHTS OF THE GROUP
Largest Spinning capacity in India.
First Indian Textile Company to get ISO-9002 & ISO 14002 certification in 1992-93.
Largest manufacturing exporter of cotton yarn in the country.
Exports to high quality conscious countries like Japan, Hong-Kong, Korea, Italy, Germany,
U.K and Switzerland.
Winner of ‘OUTSTANDING EXPORT ACHIEVEMENT AWARD ‘ of the year 1996-97.
Recipient of ‘TRADING HOUSE STATUS’ IN 1994.
Recipient of ‘STATE EXPORT AWARD’ for five successive years.
Largest producer of hosiery yarns.
Largest producer and exporter of cotton yarn.
Largest producer of dyed yarns.
Largest producer of hand knitted yarns.
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RATIO ANALYSIS
MISSION STATEMENT
Vardhman aims to be the world class Textile organization producing diverse range of products for the
global Textile market. Vardhman seeks to achieve customer delight through excellence in
manufacturing and customer service based on creative combination of state of the art technology and
human resources. Vardhman is committed to be a responsible corporate citizen.
The mission of the Vardhman Group can be summed up in a single line i.e.
“BEING WORLD CLASS SPINNERS BY PROVIDING HIGHEST
QUALITY PRODUCTS WITHIN MINIMUM COST”.
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RATIO ANALYSIS
LOGO OF VARDHMAN
The “FLAME” signifies growth i.e. Growth the company along with the
growth of each and every individual associated with it whether he/she is a\
worker, an employee, employer, shareholders and customers.
The “STICK” symbolizes cotton that is the basic raw material of the core
product of Vardhman.
The “V” stands for the Vardhman Group
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RATIO ANALYSIS
CULTURE AND ITS ASPECTS
Professionalism
System Approach
Commitment To Quality
Excellence With Economy
Cost Consciousness
Human Resource Regarded As Valuable Asset
Emphasis On Teaching and Development
Preference To Human Value
Management By Participation
Open Door Policy In Sharing Ideas And Suggestions
Group Synergy
Emphasis on effective communication and coordination
Managerial strength and acceptance to change
Cordial Environment
Customer Focus
Honor And Reward
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RATIO ANALYSIS
GROUP PHILOSOPHY
The Vardhman Group has always emphasized on total customer focus in all operational areas. It
has continuously monitored and nurtured relationships with all the customers and business
associates.
VARDHMAN BELIEVES IN:
The fact that ‘change ‘ is a way of life.
Absolute market orientation for a quick and positive response to the customer’s needs.
An uncompromising commitment to a flexible, professional and personalized service from
within a stimulating result oriented environment.
Delivery to a constant standard and on time.
Response approach to the benefits of R&D and the modern technology.
Having faith in individual potential and respect for human values.
Being a responsible corporate citizen with due respect to the laws of the land and its
environment.
Product to be the best available quality for premium market segment.
These underline the corporate philosophy which has shaped VARDHMAN OF YESTER
YEARS into VARDHMAN OF TODAY.
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RATIO ANALYSIS
HUMAN RESOURCE PHILOSOPHY
Across the boundaries of time and space, the best transmission and perseverance of culture, values and
philosophy is only through the hearts of people. With manpower strength of 3,100 offices and staff and
about 15,000 workers, the Vardhman Group is well aware of the importance of human assets and this is
evident in its human resource philosophy which is
Woven around the following principles:
Employees in Vardhman are its most valuable resource and development of business and of
employees must go hand in hand.
Every employee is special and unique in his own field and has infinite potential to make
contribution to the organization.
Merit is the most important criteria for recruitment and reward.
Creativity and innovation in technology and management through our people is our
competitive edge.
HR processes facilitate consistent improvement in performance, productivity and effectiveness
through mutually agreed stretched targets.
Continuously strive to improve quality of work-life for total job satisfaction and social
harmony for the employees.
HR prepares people to accept and adapt to change and learning as a way of life.
HR promotes high standards of discipline at the workplace and compliance with the law of
land.
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RATIO ANALYSIS
LOCATION OF VARDHMAN
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TRAINING AND DEVELOPMENT
To face the challenge of New World order, Vardhman attaches great importance to the development of
its main resource- People. At its core lies the recognition and respect for individual dignity and human
values. It is the caliber and professionalism of its people that has helped Vardhman maintain in
leadership in competitive environment.
At Vardhman people understand the market expectations and competitive challenges. The emphasis is
on fostering innovation and creativity at work so that the employees can translate uncertainties into
opportunities and opportunities into accomplishments.
With a view to enhance their skills, Vardhman continuously train its people across all functions, levels
and disciplines of the organization. It has designed elaborate training and development programmes that
encompass the technical, managerial, behavioral and spiritual growth of its employees. A full fledged
training center- Vardhman Training and Development Center (VTDC)- at Ludhiana has been set up
for this purpose. Apart from this, managers participate in training programmes at some of the best
institutes like HARWARD BUSINESS SCHOOL, IMD SWITERLAND AND IIMS IN INDIA.
Vardhman sincerely believes that when technology converges, people, make all the difference.
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RATIO ANALYSIS
GROUP QUALITY POLICY
The quality shall be built into the company’s product to not only meet the customer’s requirements
continuously but also exceed them. The company shall achieve through an interface with the market
place access to state of art technology, research and development and addition of innovating
manufacturing and market strategies.
The quality policy shall be implemented through a network of system and procedure understood and
followed throughout the company.
1. The quality policy shall be integrated with the company is main objective.
2. To remain market leaders in quality.
3. Increase market share with focus on niche segment.
4. Improve productivity.
5. Cost reduction.
6. Reduction in percentage of seconds.
The management shall be committed to provide capital and human resources to achieve above
objectives through training and motivation to people at all levels in the organizations.
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RATIO ANALYSIS
GROUP UNITS AND PRODUCTS
1. VARDHMAN TEXTILES LTD
UNIT LOCATION PRODUCT RANGE
MAHAVIR SPINNING MILLS LTD. (UNIT-I)
HOSHIARPUR (PB.)
SEWING THREAD AND INDUSTRIAL THREAD
ARIHANT SPINNING MILLS MALERKOTLA (PB.)
COTTON, BLENDED, MELANGE YARNS
ARISHT SPINNING MILLS BADDI (H.P.) COTTON, BLENDED YARN
ARISHT SPINNING MILLS
(100%EOU)
BADDI (H.P.) COTTON, BLENDED YARN
ANANT SPINNING MILLS MANDIDEEP (PB.) COTTON, BLENDED YARN
VARDHMAN SPECIAL
STEELS
LUDHIANA (PB.) SPECIAL STEEL, ALLOY STEEL, LOW CARBON STEEL
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UNIT LOCATION PRODUCT RANGE
VARDHMAN SPINNING AND GENEWRAL MILLS LTD. (UNITS- I, II, III)
LUDHIANA (PB.) COTTON, BLENDED, ACRYLIC, HAND KNITTING, INDUSTRIAL YARNS
AURO SPINNING MILLS BADDI (H.P.) COTTON, BLENDED, FIBRE DYED YARNS
AURO DYEING MILLS BADDI (H.P.) YARNS AND FIBER DYEING
AURO WEAVING MILLS BADDI (H.P.) GREY POPLIN, SHEETING, SHIRTING
AURO TEXTILE MILLS BADDI (H.P.) FABRIC PROCESSING
VSGM (100%EOU) BADDI (H.P.) COTTON YARN
RATIO ANALYSIS
2. VARDHMAN ACRYLIC LTD .
UNIT LOCATION PRODUCT RANGE
VARDHMAN ACRYLIC LTD. BHARUCH (GUJ.) ACRYLIC FIBRE
VARDHMAN
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RATIO ANALYSIS
GLOBAL INTERNATIONAL ALLIANCE
PRODUCT/PROCESS GLOBAL PARTNER
FABRIC DYEING AND FINISHING TAKAI, SENKO, JAPAN
FIBRE AND YARN DYEING NIHON SANMO DYEING CORPORATION LTD., JAPAN
GASSED MERCERIZED YARNS KYUNG BANG, SOUTH KOREA
SEWING THREAD AMERICAN & EFRID INC., USA
ACRYIC FIBRE MARUBENI CORPORATION & JAPAN EXLAN, JAPAN
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RATIO ANALYSIS
ACHIEVEMENTS AND AWARDS
1989-90: State award for outstanding performance in export
1990-91: Bronze trophy for third largest mill yarn exporter
1991-92:
Bronze trophy for third largest mill yarn exporter
Government of India award for outstanding export performance
1993-94:
Gold trophy for largest merchant exporter of yarn
Gold trophy for largest merchant of yarn to non-quota markets
Bronze trophy for third largest merchant of grey woven fabric
1994-95:
Gold trophy for largest merchant exporter of yarn
Bronze trophy for third largest merchant of grey woven fabrics
Government of India award for outstanding export performance
1995-96: Outstanding Export Performance Award
1996-97: Silver Trophy for Outstanding Performance in Export
1997-98: TEXCPROCIL Bronze Trophy for Third Highest Export in
100% EOU
1998-99:
TEXPROCIL Silver Trophy for Second Highest Export in
EOU
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RATIO ANALYSIS
SWOT ANALYSIS
An assessment of the long term financial health of an enterprise is an important task for its strategy and
for the investors and lenders who provide funds to the enterprise in different forms. SWOT analysis is a
qualitative tool which by identifying the strengths and the weaknesses, opportunities and threats to the
organization makes an overall assessment of the financial strengths.
STRENGTHS
Good Brand Equity
Good technological base with Foreign Collaboration
High Quality Standards
High Production Capacity
Own Research and Development department
Commitment for growth
Human Capital
Zero Defect and optimum production with zero wastage
Its culture and philosophy
WEAKNESSES
Comparatively high prices
Lesser degree of promotional activity
Long Hierarchy
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OPPORTUNITIES
As quality is good and prices are comparatively high, Vardhman can always easily liquidate
stock pressure by slight reduction in prices.
As brand image is very good and production is too wide, Vardhman can have some good
customers with whom direct business can be established. With this Vardhman will have better
Quantity and Regularity of sales.
Strict payments are strengths at times as well as weakness. If a moderate policy, as per present
conditions are adopted, the dealers and customers shall be attracted to buy more and
regularly.
Shortened hierarchy shall provide hope for better customer service.
THREATS
Smaller players in the market are using Vardhman’s process as a shield to push their product
at lower prices.
Companies from south are entering into Ludhiana market.
Capacity of Yarn Spinning is increasing rapidly in comparison to increase in market size, resulting
into the addition of new players. This would result in price cuts, liberalization of payment, terms and
conditions etc.of the various functional areas. The other facilities at the corporate office include
meeting rooms, boardrooms, and conference halls.
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RATIO ANALYSIS
VARDHAN TRXTILED LTD FORMELY KNOWN AS
VARDHMAN SPINNING AND GENERAL MILLS LTD.
COMPANY PROFILE
Registered office/ corporate office Chandigarh Road, Ludhiana (PB.)
Date of incorporation 27 December, 1962
Listings on Stock Exchange
Bombay Stock Exchange, Bombay Delhi Stock Exchange Association Ltd. New Delhi Ludhiana Stock Exchange Association Ltd. Ludhiana
VSGM LTD. INCLUDES:
VSGM UNIT I
VSGM UNIT II
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RATIO ANALYSIS
AURO SPINNING MILL
AURO WEAVING MILL
AURO DYEING, BADDI
AURO TEXTILES, BADDI
BOARD OF DIRECTORS
SHRI PAUL OSWAL
SH. BAL KRISHAN BATRA
SH. SURINDER KUMAR BANSAL
SH. SURINDER SINGH BAGII
AIR MARSHAL K.S.BHATIA (RTD.)
SH. CHAMAN LAL JAIN
SH. S.K. BIJALANI
SH. RAJENDRA
CHAIRMAN CUM MANAGING DIRECTOR
NOMINEE OF IDBI LTD.
NOMINEE OF IFCI LTD.
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RATIO ANALYSIS
SH. BAL KRISHAN CHOWDARY
SH. SUCHIT JAIN
SMT. SUCHITA JAIN
EXECUTIVE DIRECTOR
EXECUTIVE DIRECTOR
COMPANY SECRETARY
MRS. SHAKTI JINDAL
AUDITORS
M/S S.C. VASUDEVA & CO. NEW DELHI
BANKERS
ALLLAHABAD BANK STATE BANK OF INDIA BANK OF AMERICA ICICI BANK LTD. CANARA BANK STATE BANK OF PATIALA STANDARD CHARTERED BANK DEUTSCHE BANK
CORPORATE GEN. MANAGER (FINANCE, ACCOUNTS & MIS ):
MR. NEERAJ JAIN
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RATIO ANALYSIS
DIFFERENT DEPARTMENTS OF VSGM
COMMERCIAL DEPARTMENT Marketing Costing Finance Material
ADMINISTRATIVE DEPARTMENT Industrial relations Personnel department Transport Security Establishment (dispatch & issue) Electronic data process
PRODUCTION DEPARTMENT Spinning I Spinning II Post Spinning I Post Spinning Worsted I, II Hand Knitting section Research & Development Dye house – unit- II
ENGINEERING DEPARTMENT Electronic department Civil department Mechanical department
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RATIO ANALYSIS
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INTRODUCTION T0
VARDHMAN
SPECIAL
STEELS
RATIO ANALYSIS
Vardhman Special Steel A Unit of Vardhman Textiles Ltd was established in the year of 1972 to
manufacture Special and Alloy Steel. The true impetus came with the upgrading of the plant located in
Ludhiana (north India) to an ultra modern plant. Today it has an installed capacity of 1, 00,000 MT per
annum.
The state-of –the-art steel mill has one UHP 30MT electric arc furnace, ladle furnace, vacuum
degassing station, 9/16 meters bloom caster and a bar mill to roll a large range of shapes and sizes. The
contemporary technologies like electro magnetic stirrers, auto mould level control and auto controlled
cooling etc. in the bloom caster have been deployed to produce high & consistent quality special &
alloy steels. These quality products find application in automotive components, forging, ball bearing,
engineering application, railway, defense etc.
Continuous research and development efforts, focused on customer satisfaction, have enabled
Vardhman Special Steels to meet the stringent quality requirement of producers of all types of
commercial vehicles, tractor, car, two wheelers, defense application, railway components, bearing,
capital good and other engineering products. The company has received approval for its products from
leading OEMs like Telco, Ashok Leyland, Maruti, Hindustan Motors, Yamaha, LML, Kinetic,
Mahindra & Mahindra, Punjab Tractors and Escorts among others.
Vardhman Special Steel focuses entirely on the requirement of its customers. This is one of the main
strengths of VSS becoming a preferred OE supplier to large corporates.
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RATIO ANALYSIS
VARDHMAN SPECIAL STEELS, LUDHIANA
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RATIO ANALYSIS
MANUFACTURING PROCESS OF STEELS
The liquid steel will be made by melting dry and scrap in the proportion in an electric arc furnace. The
Arc Furnace will be used mainly as a fast melting unit. After melting, the carbon and phosphorus in the
metallic charge will be brought down to the desired level and the bath temperature suitably raised. The
semi finished liquid steel will then be tapped slag- free as far as practicable in to a pre- heated ladle,
depending on the steel grade aimed, the liquid steel will then be subjected to suitable secondary refining
and finishing treatment. The finished liquid steel will then be continuously cast in to Billets.
The number & capacity of electric arc furnace are usually determined on the basis of production
programmed and the average Tap-To-Tap Time.
The Tap-To-Tap Time will depend on several factors, such as the type of charge materials, level of
power input, grades of steel and their quality requirements and provision for secondary refining facility
etc. The tap-to-tap time is the sum total of the time consumed for various operations such as feting, tap
holes maintenance, electrode adjustment, scrap charging and melting, DRI feeding, refining & tapping.
As the furnace charge consists of about 30% of DRI and small amount of cast iron scrap, both having
higher contents of phosphorus input in to the furnace will be high necessitating slightly longer refining
in the EAF itself under an oxidizing slag. All other refining and finishing activities can be transferred to
the ladle furnace unit. During this period of dephosphorization, bath carbon will also come down to the
desired level.
Based on the average tap-to-tap time for the EAF its production capability will be 10-12 heats per day.
This will be feasible with good quality raw materials, efficient operating practice and experienced
operating and maintenance personnel, considering utilization factor as 90%, expected average
production will be 12 heats per day.
The product mix includes carbon steels, alloy steels and spring steels. The secondary refining unit
consists of ladle refining furnace & vacuum degassing plant. The billets produced from the concast
machine are preheated after cutting in to the desired length for the purpose of rolling in the round shape.
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RATIO ANALYSIS
The rolled product is cut into desired length and laid on cooling bed in order to ensure that it can be
handled both manually & mechanically for further inspection, end cutting, pressing and storing in the
store yard. Some lots of rolled bars peeled/machined into smaller diameter to have zero surface defects
and centreless grinding of some lots done to have very close dimensional control after peeling.
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RATIO ANALYSIS
VARDHMAN SPECIAL STEELS
PRODUCTS Plain Carbon SteelCase Hardening SteelThrough Hardening SteelFree/Semi Free Cutting SteelSpring SteelBall Bearing SteelRound Corner SquaresRound Bars
PRODUCT-MIX
CATEGORY OF STEELS BLOOMSIZES
* LOW ALLOY AND CARBON 220 X 220 MM
* FREE AND SEMI FREE CUTTING 200 X 200 MM
* BEARING, BORON & MICRO-ALLOYED 160 X 160 MM
ROLLED PRODUCTS SUPPLYCONDITIONS
* ROUNDS: 25– 90 mm dia. HOTROLLED
*SQUARES: 45-110mm rcs. HOTROLLED AND
ANNEALED.
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RATIO ANALYSIS
VARDHMAN SPECIAL STEELS
MANUFACTURING FACILITIES
LOCATION OPERATIONS CAPACITY
LUDHIANA STEEL MAKING 1, 00, 000 Mt / pa
ROLLING 50,000 Mt / pa
FARIDABAD ROLLING 25,000 Mt / pa
CAPACITY
Unit Installed Capacity As at 31.03.03 As at 31.03.02
1. Steel Ingots/Billets MT 100,000 100,000
2. Rolled Products MT 40,000 40,000
3. Oxygen Gas Cu.M 2,450,000 2,450,000
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RATIO ANALYSIS
VARDHMAN SPECIAL STEELMAJOR CUSTOMERS &
OEM’S APPROVALS
MAJOR OEM’S APPROVALS MAJOR CUSTOMERS
TELCO GNA GROUP
ASHOK LEYLANDS HAPPY FORGINGS
MAHINDRA & MAHINDRA HIM- TECHNO FORCE
ESCORTS SANDHU FORGINGS
BAJAJ TEMPO UMASHANKAR KHANDELWAL& CO
EICHER AMFORGE INDUSTRIES
PUNJAB TRACTORS VELTECH FORGINGS
HMT AHMEDNAGAR FORGINGS
RAILWAYS (RDSO) BRAKES INDIA LTD.
LML UNITY FORGE LTD.
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RATIO ANALYSIS
RESEARCH
DESIGN
AND
METHODOLOGY
RESEARCH METHODOLOGY
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RATIO ANALYSIS
RESEARCH
Research in common parlance refers to a search for knowledge. One can also define research as a
scientific and systematic search for pertinent information on a specific topic.
Research is an academic activity as such the term should be used in a technical sense. Research refers
to:
Defining and redefining problem
Formulating hypothesis or suggested solutions
Collecting, organizing and evaluating data
Making deductions and reaching conclusions
At last carefully testing the conclusions to determine whether they fit the formulating
hypothesis.
RESEARCH PROCESS
Research process consists of series of action or steps necessary to effectively carry out research. These
steps are to be followed in the same sequence. These steps are as follows:
Specifying research objective
Preparing a list of needed information
Designing the data collection project
Select a sample size
Organizing and carrying data and reporting the findings.
OBJECTIVES
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RATIO ANALYSIS
One must obtain the answer of these questions, “what is the purpose of this study” and “What are the
objectives of the research”. If these questions are not properly answered, the study is likely to be
misleading and the result will not be valid.
This research project has been undertaken to fulfill the following objectives:
To study the financial position of the company
To study the profitability position of the company.
To study the liquidity position of the company , that is whether company is able to generate
enough cash to settle its liability
To study the efficiency ratios which give information about management ability to control
expenses and earn a return on the resources committed to the business
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RATIO ANALYSIS
SOURCES OF DATA
The sources of data means from where we have to get data . There are mainly two sources of data.
These are:
PRIMARY DATA: The Primary data are those which are collected a fresh and for the first time and
thus happens to be original in character. We collect primary data by observation method, interview
method through questionnaires & through schedules.
SECONDARY DATA: The secondary data are those data which have already been collected by
someone else and which have already been passed through statistics process. We get published data as
maintained by various departments like Personnel department, EDP department etc. of a concern or
other publications like Annual report, Magazines etc.
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RATIO ANALYSIS
Meaning of Ratio
The ratio analysis is one of the most power full tools of financial analysis. a ratio is a simple
arithmetical expression of the relation ship of one number to another . It may be define as the indicated
of two mathematical expression. In simple language ratio is one no. expressed in term of another and
can be worked out by dividing one no. into another.
Ratio analysis is a technique of analysis and interpretation of financial statements. it is
the process of establishing and interpreting various ratio for helping in making certain decisions.
However, ratio analysis is not an end in itself. It is only a means of better understanding of financial
strengths & weaknesses of a firm.The following are the four steps involved in the ratio analysis
i) Selection of relevant data from the financial statements depending upon the objective of the
analysis.
ii) Calculation of appropriate ratio from the above data.
iii) Comparison of the calculated ratios with the ratios of the same firm in the past or the ratio
developed from projected financial statements or the ratio of some other firms or the
comparison with ratio of the industry to which the firm belongs.
iv) Interpretation of the ratios
I. Purposes and Considerations of Ratios and Ratio Analysis
Ratios are highly important profit tools in financial analysis that help financial analysts implement plans
that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage.
Although ratios report mostly on past performances, they can be predictive too, and provide lead
indications of potential problem areas. Ratio analysis is primarily used to compare a company's
financial figures over a period of time, a method sometimes called trend analysis. Through trend
analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can
also see how your ratios stack up against other businesses, both in and out of your industryThere are
several considerations you must be aware of when comparing ratios from one financial period to
another or when comparing the financial ratios of two or more companies
If you are making a comparative analysis of a company's financial statements over a certain
period of time, make an appropriate allowance for any changes in accounting policies that
occurred during the same time span.
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RATIO ANALYSIS
When comparing your business with others in your industry, allow for any material differences
in accounting policies between your company and industry norms.
When comparing ratios from various fiscal periods or companies, inquire about the types of
accounting policies used. Different accounting methods can result in a wide variety of reported
figures.
Determine whether ratios were calculated before or after adjustments were made to the balance
sheet or income statement, such as non-recurring items and inventory or pro forma adjustments.
In many cases, these adjustments can significantly affect the ratios.
Carefully examine any departures from industry norms.
RESEARCH DESIGN AND METHODOLOGY
Chapter Overview:
This chapter includes the research design description and the
Various assumptions and limitations related with the study.
Restatement of problem and hypothesis:
The problem and hypothesis are clearly defined in the first chapter so there is no need for
restatement of the same.
Description of research design:
Research design is the plan; structure and the strategy of the investigative process which
sets out to obtain answers to research questions.Diffrent types of research designs are
possible depending on the nature of subject, availability of time, money and circumstances.
Generally research is considered under four heads:
(i) The sample Design: It deals with the method of selecting a sample to be
surveyed or observed.
(ii) The statistical Design: This decides sizes of samples to
Surveyed and tools to be used for analysis.
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RATIO ANALYSIS
(ii) The Observation Design: This relates to the conditions under which the
observation is conducted.
(iii) The Operational Design: This describes the techniques by which the above
designs are to be administered.
The statistical design is done here and the tool used is Ratio analysis.
Methodological Assumptions and limitations.
The research is based on following assumptions;
(I) In activity ratio the numbers of working days taken are 360 days.
(ii) In Inventory-Turnover Ratio the closing stock of inventory
taken because closing stock is given more importance.
(iii) For Working Capital turn over Ratio net working capital figure is used.
(iv) For Solvency Ratio the total assets including fixed assets after depreciation are
taken.
(v)In capital turnover ratio gross capital employed is taken
(vi) In fixed assets turn over ratio fixed assets after depreciation are taken.
The research suffers from the following limitations: a) Lack of time was the main limitation.
b) As the study is carried out in a unit (of Vardhman Textiles Ltd) and not the
company itself the following ratios can not be calculated because the shares are
issued by the Head Office.
c) Debt-Equity Ratio.
d) Funded Debts to total Capitalization Ratio.
e) Equity Ratio
f) Fixed Assets to Net Worth Ratio
g) Dividend Coverage Ratio
h) Return on Equity Capital.
i) Return on Share Holder Investments.
j) Earning Per Share.
k) Dividend per Share.
l) Total Assets to long term funds ratio.
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RATIO ANALYSIS
CLASSIFICATION OF VARIOUS RATIOS ACCORING TO TESTS
Liquidity Ratio Long-term Activity Profitability
Solvency & Ratio Ratio
Leverage Ratio
A)
1. Current Ratio Financial 1.Inventry turnover A) in
2. Liquidity Ratio Operating ratio relation
(Acid) Composite 2.debtor turnover to sales
Test or quick 1.Debt equity 3.Fixed assets 1.Gross Profit
(Ratio) ratio turnover ratio Ratio
3. Absolute 2. Debt to total 4.Total assets 2.Operating
Liquid ratio capital ratio turnover ratio Ratio
3. Interest Coverage 5.Woring capital 3.Operating
4. Cash turnover ratio profit raito
Flow/debt 6.Payables 4.Net profit
5. Capital gearing turnover ratio ratio
7. Capital employed 5.Expense
Turnover ratio Ratio
B)
Page 38 of 79
RATIO ANALYSIS
In Relation to Investment
1. Debtors Turnover ratio 1.Retrun on investment
2. Creditors Turnover ratio 2.Return on capital
3. Inventory Turnover ratio 3.Return on Equity Capital
4. Return on total resources
5. Earning Per Share
6. Price-Earning Rate
CURRENT RATIO
Page 39 of 79
RATIO ANALYSIS
Current ratio is also termed as’ working capital ratio’. It may be defined as
The relationship between current assets and current liabilities. it is a measure of
general liquidity and is most widely used to make the analysis of short term
Financial position of a firm .it is calculated as:
Current ratio= Current assets
Current liabilities
Or Current assets: Current liabilities
The two basic components of this ratio are: current assets and current
Liabilities. Current assets include cash and those assets which can be easily
Converted into cash within a short period of time generally, one year, current
Liabilities are those obligations which are payable within a short period of
generally one year.
INTERPRETATION OF CURRENT RATIO IN GENERAL
The current ratio of a firm measures its short-term solvency. The higher the current ratio, the larger the
amount of rupees available per rupee of current liability, the more the firm’s ability to meet current
obligation and greater the safety of funds of creditors.
As a convention of minimum of `two is to one ratio’ (2:1) is referred to as a banker’s rule of thumb. The
idea of having doubled the current assets as compared to current liabilities is to provide for delays and
losses in realization of current assets. The rule of thumb cannot, however, be applied mechanically.
CURRENT RATIOS OF VSS
Page 40 of 79
RATIO ANALYSIS
YEAR 2005 2006 2007 2008
CURRENT ASSETS 91914.22 131222.36 147591.8 269756.4
CURRENT LIABILITIES 22483.08 19940.4 27965.95 45768.92
CURRENT RATIO 4.09 6.58 5.28 5.89
INTERPETATION OF VSS
Page 41 of 79
RATIO ANALYSIS
The Current ratio for VSS is showing erratic trend. It is not consistent. The ratio was 4.09:1 in the year
2005. It increased marginally to 6.58:1 in 2006. In 2007 the ratio goes down to 5.28:1 and in 2008 it is
5.89:1. The “Rule of Thumb” for this ratio 2:1.
So the ratio for the year 2005, 2006 and 2007,2008 is still higher than the norms. The ratio decreased in
2007and 2008 is due to increase in current liabilities. The higher ratio indicates that the unit’s liquidity
position is good and it has the ability to pay its current obligation in time and as when they become due.
QUICK OR ACID TEST OR LIQUID RATIO
Page 42 of 79
RATIO ANALYSIS
Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid
liabilities. Cash in hand and cash at bank are the most liquid assets. Inventories cannot be termed as
liquid assets because they cannot be converted into cash immediately without a sufficient loss of value.
In the same manner, prepared expenses are also excluded from the list of quick assets. The term quick
assets refers to current assets which can be converted into cash immediately or at a short notice without
diminutions of value. The quick ratio can be calculated by dividing the total of the quick assets by the
total current liabilities.
Quick Ratio = Quick or liquid assets
Current Liabilities
INTERPRETATION OF QUICK RATIO IN GENERAL
It is a rigorous measure of a firm’s ability to service short term liabilities and is the best available test of
liquidity position usually quick ratio is an indication that the firm is liquid and has the ability to meet its
current liabilities in time and on the other hand allow quick ratio represent that firm’s liquidity position
is not good.
As a rule of thumb quick ratio of 1:1 is considered satisfactory. If is generally thought that if quick
assets are equal to current liabilities than the concern may be able to met its current obligation. But this
ratio should be used continuously
QUICK RATIO OF VSS
Page 43 of 79
RATIO ANALYSIS
Interpretation of ratio of vss
As a “Rule of Thumb” the quick ratio of 1:1 is considered satisfactory. In case of VSS the proportion of
quick assets to current liabilities is quite satisfactory. In the year 2005 the ratio is 1.63 and 2006 the
ratio is 3.58 and 2007 the ratio is 2.67 and in 2008 is 2.77. The decrease in ratio in 2007 is because of
Quick Assets and increase in current liabilities as compared to last year. The ratio in total period to
study is above the norm and the 2007-08 ratio shows that the immediate liquid position of concern is
good.
Page 44 of 79
YEAR 2005 2006 2007 2008
QUICK / LIQUID ASSETS 36661.02 71345.19 74557.48 126578.6
CURRENT LIABILITIES 22483.08 19940.4 27965.95 45768.92
QUICK / LIQUID RATIO 1.63 3.58 2.67 2.77
RATIO ANALYSIS
ABSOLUTE LIQUID RATIOS
This ratio relates super quick assets to the total current liabilities. This is the variation of acid-test ratio
and is also called as super quick ratio. Although receivables, debtors and bills receivable are more liquid
than inventories, yet, there may be doubts regarding their realization into cash immediately. To find
absolute liquid assets even receivable are excluded from the current assets. It is calculated as:
Absolute Liquid Ratio = Absolute Liquid Assets
Current liabilities
INTERPRETATION OF ABSOLUTE LIQUID RATIO IN GENERAL
Absolute liquid assets include cash in hand and cash at bank and marketable securities or temporary
investments. The rule of thumb for this ratio is 50% or 0:5:1 or 1:2 that is Rs.1 worth liquid assets are
considered adequate to pay Rs, 2 worth current liabilities in time as all the creditors are not accepted to
demand cash at the same time and then cash may be realized from debtors and inventories.
YEAR 2005 2006 2007 2008
Page 45 of 79
RATIO ANALYSIS
ABSOLUTE
LIQUID ASSETS
2722.81 27400.77 22284.32 33457.22
CURRENT
LIABILITIES
22483.08 19940.4 27965.95 45768.92
ABSOLUTE
LIQUID RATIO
0.12 1.37 0.79 0.73
Interpretation of Ratio:
The ratio is ranging between 0.12 to 1.37. It was maximum in the year 2006.But it decreased to 0.79
in 2007 and then again decreased in 2008 to 0.73.The norm for this ratio is 0.5:1. According to the
concern, this ratio is sufficient because they can not keep much of the cash idle.
CURRENT ASSETS MOVEMENT OR EFFICIENCY/ACTIVITY RATIOS
Page 46 of 79
RATIO ANALYSIS
Funds are invested assets in business to make sales and earn profits. The efficiency with which assets
are managed directly affects the volume of sales. The better the management of assets, the larger is the
amount of sales and profits. Activity ratio measures the efficiency or effectiveness with which the firm
manages its resources or assets. These are also called turnover ratio because they indicate the speed with
which assets are converted or turned over into sales. The current ratio and assets-test ratio give
misleading results if current assets include high amount of debtors or slow moving inventories.
So its important to calculate the following turnover or efficiency ratio:
1) Inventory turnover ratio
2) Debtors turnover ratio
3) Working capital turnover ratio
INVENTORY TURNOVER RATIO
Every firm has to maintain a certain level of inventory to finished good so as to be able to meet the
requirement of the business. But the level of inventory should neither be too high not too low-
Inventory turnover ratio also known as a stock velocity is normally calculated as sales/average
inventory or cost of goods sold/average inventory it would indicate whether inventory has been
efficiently used or not. Inventory turnover ratio (I.T.R) indicates the number of times the stock has
been turned over during the period and evaluates the efficiency with which a firm is able to manage its
inventory.
The ratio is calculated by dividing cost of goods sold by the amount of average inventory at cost:
Inventory turnover ratio = Cost of goods sold /Net sales
Average inventory at cost/Inventory at the end
INTERPRETATION OF INVENTORY TURNOVER RATIO IN GENERAL
Page 47 of 79
RATIO ANALYSIS
Inventory turn over ratio measures the velocity of conversion of stock into sales. Usually, a high
turnover/stock velocity indicates efficient management of inventory. Because more frequently the
stocks are sold, the lesser amount of money is required to Finance the inventory. A low inventory
turnover ratio indicates inefficient management of inventory. A low inventory turnover implies over-
investments in inventories, dull business, Poor quality of goods, etc. a too high turnover of inventory
may not necessarily always imply a favorable situation. A high inventory turnover may be the result of a
very low level of inventory which results in shortage of goods in relation to demand.
The ratio may be high due to a conservative method of valuing the inventories at lower values or the
policy of the firm being to buy frequently in small lots. Hence, in cases of too high or too low inventory
turnover further Investigation should be made before interpreting the final result. There is not rule of
thumb or standard inventory turnover ratio for interpreting the inventory turnover ratio. However, a
study of comparative or trend analysis inventory over is useful for financial analysis.
YEAPPPPR 2005 2006 2007 2008
COST OF
GOODS SOLD
129395.75 128562.59 137744.69 266934.56
AVERAGE
STOCK
55253.2 57565.19 66455.745 124567.07
INVENTORY
TURNOVER
RATIO
2.34 2.23 2.07 2.14
Page 48 of 79
RATIO ANALYSIS
Interpretation of Ratio Of VSS
Inventory turnover ratio measure the velocity of conversion of stock into sales. The ratio of VSS is
showing improving trend over the years. The ratio in the year 2005 is 2.34, in 2006 is 2.23, in 2007 is
2.07,and in 2008 it is 2.14. In the year 2007-08 ratio shows that concern turnover its inventory nearly
three times which is an indication of efficient management of stock and more frequent sales
Page 49 of 79
RATIO ANALYSIS
DEBTOR TURNOVER RATIO
A concern may sell goods on cash as well as credit. Selling of goods on credit may result in tying up
substantial funds of a firm in the form of trade debtors. Two kinds of ratio can be computed to evaluate
the quality of debtors.
Debtor’s turnover ratio indicates the velocity of debt collection of a firm. In Simple words, it indicates
the number of times receivables are turned over during a year, thus:
Debtors Turnover ratio= Net credit annual sales
Average trade debtors
= No. of Time
INTERPRETATION OF DEBTORS TURNOVER RATIO/VELOCITY
Debtor velocity indicates the number of times the debtors are turned over during a year. Generally,
higher the value of debtor’s turnover the more efficient is the management of debtors/sales or more
liquid are the debtors. Similarly low debtor’s turnover implies inefficient management of debtors/sales
or less liquid debtors. But, a precaution is needed while interpreting a very high debtors turnover ratio
because a very high ratio may imply a firm’s ability due to lack of resource of sell on credit thereby
loosing sales and profit. There is no rule of thumb which may be used as a norm to interpret the ratio.
This ratio should be compared with ratio of other firms doing similar business.
YEAR 2005 2006 2007 2008
Page 50 of 79
RATIO ANALYSIS
CREDIT SALE 190211.62 194810.75 215228.83 387603.28
AVERAGE
DEBTORS
21706.2 22344.46 24585.06 44757.88
DEBTORS
TURNOVER
RATIO
8.76 8.72 8.75 8.66
Interpretation of Ratio Of VSS
Debtor’s turnover or velocity indicates the no. of times the debtors are turned over during a year. The
ratio in 2005 is 8.76; in 2006 it is 8.72, in 2007 it is 8.75 and in 2008 it is 8.66. The debtors turnover
ratio is almost constant and high in case of VSS which represents, management is efficient to manage
debtors.
Page 51 of 79
RATIO ANALYSIS
Average Collection Period Ratio
The average collection period represents the average number of days for which a firm has to wait
before its receivables are converted into cash.
A.C.P= No. of working days
Debtor’s turnover ratio
= No. of day’s
Further to find out sale per day the sale figure should be divided by the no. of working days given in a
year, the no. of working days may be assumed to be 360 or 365 days in a year
.
YEAR 2005 2006 2007 2008
NO. OF WORKING DAY'S 365 365 365 366
DEBTORS TURNOVER
RATIO
8.76 8.72 8.75 8.66
DEBTORS COLLECTION
PERIOD (DAY’S)
42 42 42 42
INTERPETATION OF RATIO
There is no standard or rule of thumb which may be used as norm while interpreting this ratio as ratio may be different from firm to firm depending upon its credit policy , nature of the business , business conditions . In VSS collection period is almost same in all the financial years from 2005 to 2008 that is 42, which shows that VSS has been able to maintain its credit policy inspite of the fact that customers always demand for extended credit period.
Page 52 of 79
RATIO ANALYSIS
CREDITORS/PAYABLES TURNOVER RATIO
In creditor’s turnover ratio is naturally interested in finding out how much time the firm is likely to take
in repaying its trade creditors. The analysis for creditor’s turnover is basically the same of
debtor’s turnover ratio except in place of trade debtors, the trade creditors are taken as one of the
component of the ratio.
Creditors Turnover Ratio = Net Credit annual purchase
Average trade Creditor’s
= No. of times
YEAR 2005 2006 2007 2008
CREDIT ANNUAL PURCHASE
89538.67 82127.96 98314.22 156945.35
AVERAGE TRADE CREDITORS
4179.59 4586.36 8100.46 12674.75
CREDITORS TURNOVER RATIO
21.42 17.91 12.14 12.38
Page 53 of 79
RATIO ANALYSIS
INTERPETATION OF CREDITOR’S RATIO
In VSS Creditor turnover ratio is very fluctuating , it is following decreasing trend , in 2005 it was 21.42 and decreased to 17.19 in 2006 ,then further decrease in 2007 and 2008 , in 2007 it was 12.41 and in 2008 it was 12.38 . Generally higher the creditor velocity better it is . but here the condition is reverse and creditor ratio is decreasing in VSS the ratio is not favourable.VSS should try to increase the credit terms with suppliers.
CREDITORS TURNOVER VELOCITY
There is no ‘rule of thumb’ or ‘standard ‘. This ratio indicates the velocity with which the creditors are
turned over in relation to purchase. Generally, higher the creditor’s velocities better it is or otherwise
lower the creditor’s velocity, less favorable are the results.
Average payment period= No. of working day
Creditor’s turnover ratio
= No. of day’s
YEAR 2005 2006 2007 2008
Page 54 of 79
RATIO ANALYSIS
NO.OF WORKING DAY'S 365 365 365 366
CREDITORS TURNOVER RATIO 21.42 17.91 12.14 12.38
CREDITORS TURNOVER
RATIO(DAY'S)
17 20 30 30
INTERPETATION OF RATIO
In VSS the trend of ratio is increasing . In year 2005 it was 17days then it was increased to 20 in 2006 and 30 in 2007 and remained same in 2008 .This shows that VSS has been able to improve upon credit terms with their suppliers. However the same can be improved further.
WORKING CAPITAL TURNOVER RATIO
Working capital of a concern is directly related to sales. The working capital is taken as:
Page 55 of 79
RATIO ANALYSIS
Working capital is= Current assets – Current liabilities
Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio
indicates the number of times the working capital is turned over in the course of a year. This ratio can
be calculated as:
Working capital turnover ratio= Cost of sales
Average working capital
= No. of times
INTERPRETATION OF WORKING CAPITAL TURNOVER RATIO
This ratio indicates the number of time the working capital is turned over in the course of a year this
ratio measures the efficiency with high the working capital is being used by the firm. A higher ratio
indicates efficient utilization of working capital .
But a very high working turn over ratio is not a good situation for any firm and hence care must be
taken while interpreting the ratio can at best be used by making of comparative and trend analysis for
different firms in the same industry and for various periods.
= No. of times
WORKING CAPITAL TURNOVER RATIO
YEAR 2005 2006 2007 2008
COST OF SALE 129395.8 128562.6 137744.7 266934.56
AVERAGE WORKING 69431.14 90356.55 115453.9 223987.48
Page 56 of 79
RATIO ANALYSIS
CAPITAL
WORKING CAPITAL TURNOVER RATIO
1.86 1.42 1.19 1.19
Interpretation of Ratio
Working capital turnover ratio indicates the velocity of utilization of working capital. The ratio for VSS
has decreased from the 2005 to 2008.In 2005 it was 1.86 , in 2006 it was decreased to 1.42 ,in 2007 it
was further decreased to 1.19 and remain same in 2008 it was 1.19.This indicates that the working
capital is turned over less number of times as compared to previous years. This shows inefficient
utilization of working capital in VSS.
ANALYASIS OF LONG-TERM FINANCIAL POSITION ORTESTS OF
SOLVENCY
Page 57 of 79
RATIO ANALYSIS
The term solvency refers to the ability of a concern to meet its long term obligation the long-term
indebtedness of a firm includes debenture holders, Financial institutions providing medium and long-
term loans and other creditors selling goods on installment basis. The long- term creditor of a firm are
primarily interested in knowing the firm’s ability pay regulatory interest on long term borrowing,
repayment of the principal amount at the maturity and the security of their loans.
The Following ratio serves the purpose of determining the solvency of the concern:
1) Debt equity ratio
2) Solvency ratio or ratio of total liabilities to total assets.
3) Debt service ratio or Interest coverage ratio
DEBT EQUITY RATIO (LONG-TERM DEBT TO SHAREHOLDER FUNDS RATIO
Debt-equity ratio also known as External – Internal equity ratio is calculated to measure the relative
claims of outsider and the owner against the firm assets. The outsider funds include all debts/liabilities
to outsider. The shareholder funds consist of equity share capital, preference share capital, capital
reserve, revenue reserve etc. The accumulated losses and deferred expenses if any should be deducted
from the total to find out shareholders fund.
Long term debt to shareholder funds (Debt-Equity Ratio) = Long term debt
Share Holder’s Fund
INTERPRETATION OF DEBT EQUITY RATIO
The ratio indicates the proportionate claims of owners and the outsiders against the firm assets. The
purpose is to get an idea of the available to outsiders on the liquidation of the firm. As the general rule,
Page 58 of 79
RATIO ANALYSIS
there should be an approxipriate mix of owners fund and outsiders fund in financing the firms assets.
Therefore, interpretation of this ratio depends primarily upon the financial policy of the firm and upon
the firm’s nature of business. A ratio of 1:1 may be usually considered to be a satisfactory ratio.
Although, there cannot be any ‘rule of thumb’ or standard for all type of business. In some business a
high ratio 2:1 or even more may be considered satisfactory.
YEAR 2005 2006 2007 2008
LONG TERM DEBT 68561.12 85441.33 151091.63 194865.57
SHARE HOLDER'S FUND 82990.98 100647.59 115044.31 140856.22
DEBT/EQUITY RATIO 0.83 0.85 1.31 1.38
Page 59 of 79
RATIO ANALYSIS
INTERPETATION OF VSS
In 2005 debt equity ratio was 0.83 and increased slightly in 2006 that is 0.85 and in 2007 there is
increase in ratio to 1.31 and finally in 2008 it was 1.38.
In VSS debt equity ratio has been improving since 2005 and has been better than 1:1 since 2007 which
is considered to be a healthy sign for an organization .
Page 60 of 79
RATIO ANALYSIS
SOLVENCY RATIO OR RATIO OF TOTAL LIABILITES TO TOTAL ASSETS
This is also called as the ratio if total liabilities to total assets and is a very small variant of equity ratio
and can be simply calculated as 100 – Equity ratio. The ratio indicates the relationships between the
total liabilities to outsiders to total assets of a company and can be calculated as follow
Solvency ratio = Total liabilities to outsiders
Total assets
INTERPRETATION OF SOLVENCY RATIO
Generally, lower the ratio of total liabilities to total assets, more satisfactory or stable is the long-term
solvency position of a firm
SOLVENCY RATIO
YEAR 2005 2006 2007 2008
TOTAL LIABILITIES TO OUTSIDER'S
75974.97 112220.54 177189.6 267982.37
TOTAL ASSETS 185997.5 243409.18 331490.74 331490.74
SOLVENCY RATIO 0.41 0.46 0.53 0.57
Page 61 of 79
RATIO ANALYSIS
Interpretation of Ratio
The ratio of VSS is showing increasing trend of the years. The ratio ranges between 0.41 to 0.57 in the
period of study . The ratio indicates that the total liabilities to outsiders have increased .Generally, lower
the ratio more satisfactory it is for the long –term solvency position of the concern. So the solvency
ratio of VSS is not good.
Page 62 of 79
RATIO ANALYSIS
INTEREST COVERAGE RATIO OR DEBT SERVICE RATIO
Net income to debt service ratio or simply debt service ratio used to test the debt servicing capacity of
the firm. The ratio is also known as interest coverage ratio or fixed charges coverage ratio.
Debt service ratio or interest coverage = net profit before interest and tax(EBIT)
Fixed interest charges
INTERPRETATION OF INTEREST COVERAGE RATIO
Interest coverage ratio indicates the number of times interest is covered by the profits available to pay
the interest charges. Generally higher the ratio more safe are the long-term creditors because even if
earning of the firm’s fall, the firm shall be able to meet its commitment of fixed interest charges. But a
too high interest coverage ratio may not be good for the firm because it may imply that form is not using
debt as source of a finance so as to increase the earning per share.
YEAR 2005 2006 2007 2008
EBIT 23364.88 30104.86 28433.03 38692.56
FIXED INTEREST
CHARGES
5494.84 3587.31 3460.74 4112.50
INTEREST
COVERAGE RATIO
4.25 8.39 8.21 9.41
Page 63 of 79
RATIO ANALYSIS
INTERPETATION OF RATIO OF VSS
In VSS the interest coverage ratio has increasing trend .In 2005 it was 4.25 , and in 2006 it increased to 8.39 and in 2007 it slightly decreased to 8.21 and in 2008 it again improved to 9.41. Overall there has been improvement since 2005 which will increase the confidence of creditors in VSS as VSS shall be able to meet its commitment of fixed interest charges in a better way.
Page 64 of 79
RATIO ANALYSIS
ANALYSIS OF PROFITABILITY OR PROFITABILITY RATIOS
Apart from the creditors, both short –term and long-term, also, interested in the financial soundness of
a firm are the owners and the management or the company itself. The management of a firm is naturally
eager to measure its operating efficiency. The operating efficiency of a firm and its ability to ensure
adequate return to its share holders depends ultimately on the profits earned by it. Profitability is a
measure of efficiency. Profitability also indicates public acceptance of the product and shows that the
firms can produced competitively. Moreover, profits provide the money for the repaying the debt. In the
words of Lord Keynes “Profit is the engine that drive the business enterprise” profitability of a firm can
be measure by its profitability ratio. Profitability ratio can be determined on the basis of either sales or
investments. The various profitability ratios are discussed below:
1) Gross profit ratio
2) Operating ratio
3) Administration Expenses Ratio
4) Selling and distribution expenses ratio
5) Manufacturing expenses ratio
Page 65 of 79
RATIO ANALYSIS
1) GROSS PROFIT RATIO
Gross profit ratio measure the relationship of gross profit to net sales and is usually represented as a
percentage. Thus, it is calculated by dividing the gross profit by sales:
Gross Profit Ratio = Gross Profit * 100
Net Sales
INTERPRETATION OF GROSS PROFIT RATIO
The gross profit ratio indicates the extent to which the selling prices of the goods Per unit may decline
without resulting in losses on operations of a firm. It reflects the efficiency with which a firm produces
its products. Higher the gross profit ratio (G/P ratio) better the result and is a sign of good management,
low cost of production and Higher sales price. A relatively low ratio is a danger signal. There is no
standard norm for gross profit ratio but it should be adequate to cover the operating expenses and to
provide for fixed charges. A low gross profit ratio, generally, indicates high cost of goods sold. A
Comparison of gross profit ratio over time or for different firms in the same industry is a good measure
of profitability.
YEAR 2005 2006 2007 2008
GROSS PROFIT 60815.87 66248.16 77484.14 120668.72
NET SALE 190211.62 194810.75 215228.83 387603.28
GROSS PROFIT
RATIO (%)
32 34 36 31
Page 66 of 79
RATIO ANALYSIS
INTERPETATION OF VSS
The Gross Profit Ratio indicate the extent to which selling price of goods may decline without resulting in losses on operation of a firm. It reflects the efficiency with which the firm produced its products. The ratio decreased in the year 2005 and increased in the year 2006, again increase in 2007 and slightly decrease in 2008 , mainly on account of less sale realization on account of decrease in prices during 2008 because of recessionary trend in world economy.
Page 67 of 79
RATIO ANALYSIS
2) NET PROFIT RATIO
Net profit ratio establishes a relationship between net profit (after tax) and sales and indicates the
efficiency of the management in manufacturing, selling, administration and other activities of the firm.
Net profit ratio= net profit (after tax)*100
Net sales
INTERPETATION IN GENERAL
This ratio is very useful as if the profit is not sufficient, the firm shall not be able to achieve a
satisfactory return on its investment, this ratio also indicates the firm capacity to face adverse economic
condition such as price competition, low demand, etc. Higher the ratio shows the better profitability of
the concern.
YEAR 2005 2006 2007 2008
NET PROFIT (AFTER TAX) 13444.6 20424.79 18997.3 25935.04
NET SALE 190211.62 194810.75 215228.83 387603.28
NET PROFIT RATIO (%) 7.1 10.48 8.83 6.69
Page 68 of 79
RATIO ANALYSIS
INTERPETATION OF VSS
The ratio decreased in the year 2005 and increased in the year 2006 from 7.1 to 10.48, but however again decreased in 2007 and further decreased in 2008 to 6.69, mainly on account of less sale realization on account of decrease in prices during 2008 because of recessionary trend in world economy.
Page 69 of 79
RATIO ANALYSIS
OPERATING RATIO
Operating ratio establishes the relationship between cost of goods sold and other operating expenses on
the one hand and the sales on the other .In other words, it measures the cost of operations per rupee of
sales. The ratio is calculated by dividing operating costs with net sales and it’s generally represented as
a percentage.
Operating ratio = Operating Cost *100
Net Sales
= Cost of Goods Sold + Operating Expenses *100
Net Sales
The two basic elements of this ratio are operating cost and net sales. Operating cost can be found by
adding operating expenses to the cost of goods. Operating expenses consist of administrative and office
expenses and selling and distribution expenses.
INTERPRETATION OF OPERATING RATIO
Operating ratio indicates the percentage of net sales that is consumed by operating cost. Obviously,
higher the operating ratio, the less favorable it is because, it would have small margin to cover interest,
tax dividend and reserves. There is no rule of thumb for this ratio .However,75 and 80% may be
considered to be a good ratio’s comparison of operating ratio over time or for different firms in the same
industry may give a better idea. This ratio is considered to be the yardstick of operating efficiency but it
should be used cautiously.
Page 70 of 79
RATIO ANALYSIS
OPERATING RATIO
YEAR 2005 2006 2007 2008
OPERATING COST
158111.43 160418.69 168067.51 305872.23
NET SALE 190211.62 194810.75 215228.83 387603.28
OPERATING RATIO (%)
83.12 82.35 78.08 78.91
Interpretation of Ratio
The operating ratio indicates the percentage of sales consumed by operating cost. Obviously, higher the
ratio, the less favorable it is. The operating ratio above said concern has 83.12 increased in 2005.It
dropped to 82.35 in 2006 and again decrease in 2007 to 78.08 and in 2008 it is 78.91. This decreased
ratio is a good indication that the concern having more margin to cover interest and income tax.
Page 71 of 79
RATIO ANALYSIS
EXPENSES RATIO
Expenses ratio indicate the relationship of various expenses to net sales. The operating ratio reveals the
average total variation in the expenses. Expenses ratios are calculated by dividing each item of expenses
of groups of expenses with net sales to analysis the causes of variation of the operating ratio. The ratio
can be calculated for each individual item of expenses. There are different variants of expenses ratio.
That is
a. Cost of goods sold ratio = cost of goods sold *100
Net sales
b. Operating expense ratio = Administrative expenses +SellingExpenses
Net Sales
INTERPRETATION OF EXPENSES RATIO
The expenses ratio is, in a way, reciprocal of the profit margin, gross as well as net. For intence, if the
profit margin is deducted from 100%, the resultant is the operating ratio. Alternatively, when the
operating ratio is subtracted from 100%, we get the profit margin. The expenses ratio is very important
for analyzing the profitability of a firm. It should be compared over a period of time with the industry
average as well as firms of similar type. As a working a proposition, a low ratio is favorable while a
high one is unfavorable. The implication of a high expenses ratio is that only a relatively small
percentage share of sales is available for meeting financial liabilities like interest, tax and dividends, etc.
A low operating ratio is by the large a test of operational efficiency. In case of firms whose major
source of income and expenses are non-operating, the operating ratio, however, can not be used as yard
stick of profitability. To conclude, the profitability ratio based on sales are an important indicator of the
operational efficiency a manufacturing enterprise. However, they suffer from a serious limitation in that
they are not useful from the viewpoint of the owners of the firm.
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RATIO ANALYSIS
Expenses ratios indicate the relationship of various expenses to sales. The ratio is calculated for each
individual item of expenses.
Cost of Goods Sold to Sales Ratio = 100 – Gross Profit Ratio %
a) Interpretation of Administrative and Expenses Ratio = Particular Expenses *100
Sales
ADMINISRATION EXPENSE RATIO
YEAR 2005 2006 2007 2008
ADMINISTRATION
EXPENSES 4620.89 5166.77 5969.58 9801.27
NET SALES 190214.02 194810.75 215228.83 245364.51
ADMINISTRATION
EXPENSE RATIO 2.43 2.65 2.77 3.99
Administrative and office expenses to sales ratio for VSS was in 2005 it is 2.43 ,in 2006 it was 2.65
and it increased in 2007 to 2.77 and maximum in year 2008 i.e 399. The ratio has been continuously
increasing over the years this has been because of the increase in administrative expenses as a
proportion of sales.
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RATIO ANALYSIS
b) Selling & Distribution Exp. Ratio = Selling & Distribution Exp.*100
Sales
SELLING AND DISTRIBUTION EXPENSES RATIO
YEAR 2005 2006 2007 2008
SELLING AND
DISTRIBUTION
EXPENSES 13711.39 15208.38 11104.22 8371.14
NET SALES 190214.02 194810.75 215228.83 245364.51
SELLING AND
DISTRRIBUTION
EXPENSE RATIO 7.21 7.81 5.16 3.411
Interpretation of ratio
Selling and distribution expenses ratio for VSS increased in 2006 to 7.81% as compared to 2005 ,
2007,2008 is 7.21% ,5.16% and 3.14% respectively. The decrease in the ratio shows that less
expenses selling and distribution have been incurred to generate the sales as compared to previous
year.
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RATIO ANALYSIS
c) Manufacturing Expenses to Sales Rate
=Manufacturing Exp.*100
Sales
MANUFACTURING EXPENSES RATIO
YEAR 2005 2006 2007 2008
MANUFACTURING
EXPENSES 39857.08 46434.63 52587.62 55070.63
NET SALES 190214.02 194810.75 215228.83 245364.51
MANUFACTURING
EXPENSE RATIO 20.95 23.84 24.43 22.44
Interpretation of Ratio
Manufacturing expenses ratio for VSS increased in 2006 as compare to 2005, 2007and 2008. In year
2005 the ratio is 20.95% but in 2006 this ratio was increase to 23.84 and again decreases to 21.43%in
2007 and in 2008 it is 22.44% . The decrease in the ratio shows that less expenses manufacturing and
distribution have been incurred to generate the sales as compared to previous years.
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RATIO ANALYSIS
LIMITATIONS
1. The data collected for ratio analysis is jut for last four years. i.e. 2005-08
2. The effect of price level changes has not been reflected in the study.
3. The analysis is based on historical data.
4. As the study is carried out in a unit (of Vardhman Textiles Ltd) and not the company itself the following ratios can not be calculated because the shares are issued by the Head Office.
Debt-Equity Ratio.
Funded Debts to total Capitalization Ratio.
Equity Ratio
Fixed Assets to Net Worth Ratio
Dividend Coverage Ratio
Return on Equity Capital.
Return on Share Holder Investments.
Earning Per Share.
Dividend per Share.
Total Assets to long term funds ratio
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RATIO ANALYSIS
CONCLUSION
VSS is known as performance oriented and customer oriented concern. Quality of its products and
services to customer has made that Vardhman enjoys a dominant position in domestic market. The
financial position of the concern can be concluded as :
Company’s short-term and long-term financial position is good. Its liquidity position can be said
favorable. The liquid ratio although show decline but it is good from concern’s point of view ,The
concern would like to invest the cash in other investment opportunities and for repayment of loans
instead of keeping it idle which is not going to earn anything for the concern.
Improved W.C turnover ratio indicates that the concern is utilizing it W.C to optimum level. Assets
are also efficiently utilized to generate more sales. The long – term solvency position needs
improvement as the solvency ratio is increasing. The profitability of the concern is improving as the
gross and net profit have increased the expenses have decreased.
The return on assets and capital employed has also increased. Also the capital turnover ratio has
shown and upward movement. This means that the concern is performing better to get more returns
by efficient utilization of its resources.
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RATIO ANALYSIS
RECOMMENDATIONS
Although, overall financial position of VSS is very strong but there are some fields which require
further improvement.
In today, scenario every debtor’s wants to purchase goods on credit basis. But liberal credit policies
create a difficulty to organization. The collection of debts should be improved and the concern must
revise its credit policies.
The total liabilities of the concern are also increasing while the total assets are decreasing which is not
a good signal for long-term solvency. The increase in non operating expenses is also not a good
indication for concern profitability as less will be the expenses more will be the profits. So concern
should try to remove such expenses.
The working capital turn over ratio can be further improved by efficiency management of debt. As
large part of W.C is involved in debtors and it is affecting the financial position of the concern.
The turn over of creditors has decreased still it is very high as compared to debtors turn over. This
means concern is selling more on credit basis and availing less credit facilities for purchase. This affects
the liquidity position of the concern. If the creditor are paid less frequently these funds can be utilized in
some other investment opportunities to get more profits.
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RATIO ANALYSIS
BIBILIOGRAPHY
1) DR.O.P.Gupta, Bhawna Gupta – ‘Financial Management’-Rekha Prakashan Delhi, 1997.
2) M.Y.Khan and S.K.Jain – ‘Management Accounting’-1997.
3) Panday I.M-‘Financial Management’ N.D. - Vikas Publishing House, 1997.
4) R.K.Sharma and Shash K.Gupta ‘Management Accounting Principles and Practices’-Kalyani
Publisher, 1997.
5) S.N.Maheshwari-‘Management Accounting and Principles’.
.
6) S.P.Gupta – ‘Statistical Methods’ – Sultan chand and Sons Publishers N.D.1991.
7) Annual Reports of VSS.
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