study of inventory control system and trend analysis in mangalam cement, mangalam cement ltd

7/29/2019 Study of Inventory Control System and Trend Analysis in Mangalam Cement, Mangalam Cement Ltd

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A

Project report on

Study of Inventory Control System and Trend Analysis

in Mangalam Cement

Conducted At

(A unit of B.K. Birla group of companies)

Submitted in partial fulfillment for the degree of

Master Of Business Administration(2004-2006)

Guided by: Submitted by:Mr.Sumit Sharma Shabbar Hussain

(Dy. Manager) (M.B.A Part-II)

Submitted To

VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE(Affiliated to Pune University, Approved by AICTE)


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TABLE OF CONTENT

S.NO PERTICULARS

1. Introduction to cement industry

2. Introduction to Mangalam Cement ltd

a. Company Profile

b. Objective and Quality Policy

c. Corporate philosophy

d. TPM Policy

3. Introduction to finance department

a. Structure of finance department

4. Research Methodology

5. Project Work

6. Evaluating financial position by using ratio analysis

a. Ratio analysis a tool kit

b.Type of ratios

c. Application of ratio analysis technique

7. Conclusion

8. Suggestion

9. Bibliography


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PREFERACE

Summer training has been accepted as a integral part of the Master Of Business

Administration (M.B.A) as its objective is to let the students themselves familiar with the

working environment in an organization, deal with at least some of the problem or aspects

practically and tackle them or at least understand and analyze them. This of course paves a

road for the where they have to lead later.

Summer training also enables the student to train themselves in applied knowledgeover the theoretical learning. I feel privileged for having undergone my summer training at

MANGALAM CEMENTLTD. The training in this particular organization has enriched

my knowledge regarding cement industry.

The project assigned to me was Inventory Planning and Control and

Trend Analysis.


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ACKNOWLEDGEMENT

It is a great pleasure and privilege for me to present this report of summer training at

Mangalam Cement Ltd, in partial fulfillment for the award of MBA, degree by PUNE

UNIVERSITY,

I would like to express my gratitude to Mr. Sumit Sharma (Dy. Manager) and Mr.

N.K. Maheshwari (Personnel head), Mangalam Cement Ltd. For their valuable guidance

and encouragement given me to undertake this project.

I am also committed to thanks to staff members of Mangalam Cement ltd. whose

valuable and appropriate direction, in all respect was very helpful in preparing the report.

I specially thank Mr.S.K Vaze, Professor VIM Pune for his valuable and

appropriate guidance and direction

(SHABBAR HUSSAIN)


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Introduction to Cement Industry

Cement industry is not of recent origin. It is one of the major and oldest

manufacturing industries in the Indian economy. Cement industry showed its presence from

early 1900s Jam agar Gujarat) got the credit for setting up first cement plant in 1914. It is

an indigenous industry, with the country well endowed with the raw material, manpower,

machinery, equipment and technology.

It is a vital Industry assumes crucial role in economic growth and development of the

country. It is a basic as well as consumer industry. It is an infrastructure development of a

country.

Cement is a product of mass consumption. It can define as a substance which canjoin or unite two pieces two together to from a unit mass. India stood cement producing

country in the world. The installed capacity is 104 million tones and production is nearly 79

million tones. This is the significant achievement as in 1980 it was just 26 million tones.

More ever the pr capital consumption in 1997 was 85 kg. As compared to that of 80 kg. In

1990. It is expected that in the first decade of 21 st century, the should 140 million tones.

Of cement per annum, with per capital consumption to the tones of 120 kgs. To satisfy

the requirement of cement, we are having adequate coal lime reserve. Apart from the lime

reserve, we are also having world class managerial experts and technical staff for efficient

and economical operation of cement factory and offices. We are now in a position to play a

dominant role in global production. We had already registered our presence in world maker

by occupying the 4th position. We are just behind China, Japan and USA in terms of

production.

The table will show the production and market share of few countries

S no Country Cement Production % share

1 CHINA 389.2 28.00

2 JAPAN 94.4 7.00

3 USA 69.5 4.60

4 INDIA 33.2 3.50

5 RUSSIA 48.5 3.50

6 ITALY 21.2 2.40

7 OTHER 686.5 49.50

It was after independence that the need for self reliance is felt. At that time, cement was in ashort supply. The government was forced to import huge quantity of cement to satisfy the


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domestic demand. Realizing the fact that import is against the national interest, Govt took

steps to decontrol the production. The first initiative in this direction was taken in 1982 and

it was shown the good growth rate when the industry was deli censed with effect from 1991.

Presently cement industry was facing hard time of following reasons.

a.Supply in excess of demand

b. Presence of large number of competitors

c.Competition result in price war between companies

However the company is expecting a boom time in future. Reason behind such an

expectation.

a.It is hoped that the per capital, consumption, which is 85 kg. As compared to outside

work of 200 kg, will increase.

b. The economy of the country is growing steadily. To support the economic growth,

infrastructure development is needed .besides; population increase will put

enormous strain on the rail and road network, power sectors housing constructions.

Post facilities and other areas. These factors will increases demand for cement. With

the GDP growth rates of 7% in the country during the ninth plan. Cement industry is

likely to grow at above 9 % to 10% annually.

COMPANY PROFILE


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Mangalam cement was promoted in the year 1978 by famed house of shri B.K. Birla the

most eminent and illustrious industrialist of the country. It is a professionally managed

and well established cement manufacturing company enjoying the confidence of the

consumer because of its superior product and excellent customer service.

Mangalam cement plant was situated in Morak 65km from Kota. Its commercial

production was started in 1982, with total capacity of 1200 MT/day.

The company has commissioned in 1924 its state art new cement plant with German

technology for producing 7 lacks tones per annum at its exiting site at Morak, dist. Kota

in Rajasthan under the name of Neer Shree Cement.

Rupp Polysins, Germany and their counterpart Krupp industries India ltd. Have joined

hands with Mangalam Cement Ltd. To produce BIRLA UTTAM Premium 43 and 53

grade Portland cement and PPC using ultra modern technology.

Its Unique Feature Are As Follows:-

Vibrating screen:


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Commencing with a 500 TPH crusher with latest vibrated screen to ensure that only very

clean limestone goes in the process of manufacturing cement.

Stacker reclaimer:-

To perfectly homogenize the main raw materials i.e. Limestone

X-Ray Analyzer:

For quick and accurate analysis of all the raw material, clincker and cement

Computerized Central: for stable and efficient operation.

Roller Mills: Latest roller mills for coal/ Raw material grinding and roller press for clincker

grinds to ensure uniform particle size of cement for greater strength.

Electronic Packaging: for consistent result and prompt delivery. The company is obtaining

the from its own mines located near the plant. The mine field is spread over 10 sq km. A

part from this, it is also obtaining the high quality limestone, from Chittorgarh, Nagpur etc.

Brief Information about Mangalam

Location : Morak, Disst. Kota


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Register Office : Aditya Nagar, Morak-326517

Disst. Kota (Raj)

Head Office : 9/1 R.N Mukherjee Road,

Kolcutta- 700 001

Year of incorporation : Mangalam 1978

Near Shree 1992

Commercial production : Mangalam 1978

Near Shree 1994

Totalproject cost : Rs.500 Cr.

Total Capacity : Mangalam 1lac MT/year

Manpower : Directly employed:

300 Staff, 700 Workers

Brand name : Birla Uttam

Product manufactured : OPC 43 grade. OPC 53 grade

PPC MPA 53

OBJECTIVES OF MANGALAM CEMENT LTD


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To make continues effort to sustain and improve the quality and productivity levels

and attain consistent result.

To promote the culture for acquiring knowledge and skill to adapt to the new

technology development. To encourage team work for finding solution to be problem of quality and

productivity. and there implementation leading to enhanced commitment.

Excellence in all spheres of management through census, consultation, system

perfection, delegation, decentralization and human resource development for

knowledge integration and skill development.

QUALITY POLICY

We pledge to produce and deliver

Quality clinker and cement

To the satisfaction of our customers

By following a quality management system

FINANCE DEPARTMENT

Finance department of Mangalam cement is well organized with all the staff well qualified

and experienced to handle day-to day affairs. It is concerned with the preparation of

financial statements. The books of accounts are properly maintained and updated. Enabling


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the timely preparation of financial statement. There is the proper coordination between the

staff.

Financial statement:

Financial statement is generally prepared and presented annually. They are of use to

prospective investors, creditors and even management. Ratio analysis is a powerful tool of

financial analysis to measure accurately the financial health and stability of organization to

make the profits. Financial statement includes profit and loss and balance sheet.

Taxes

In Mangalam Cement there are two type of taxes.

1. Direct taxes

2. Indirect taxes

Direct taxes

Direct tax is beard by Mangalam, which pay direct tax by corporate tax section at its head

office. Direct tax includes-

1. Income tax 2. Corporate tax

Indirect tax:

There are three type of indirect tax:

Royalty-anything below the surface of the earth belong to government and

that is why Mangalam has to pay a tax of royalty o govt. For the mining of

Lime Stone

Sales tax: Sales tax is the last tax charge on the product

Excise duty. It is the charge of manufactured product i.e. cement

Structure Of Finance Department


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INTRODUCTION

Joint President finance(Mr.R.C.Gupta)

Deputy Manager, finance(V.G. Haircut)

Assistant Officer Finance(Mr. Joshi)

Steno Grapher

Senior Assistant(Mr. Suresh Gupta)

Junior Officer Finance(Mr.R.C. Purohit)


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What is cement ?

Cement is a mixture of limestone. Clay, silica and gypsum. It is a fine powder which when

mixed with water sets to a hard mass as result of the hydration of the constituent

compounds. It is a most commonly used construction material.

Different Type Of Cement:

There are different varieties of cement based on different composition according to the

specific end uses namely ordinary Portland cement. Portland Pozolona Cement, Portland

Blast Furnaces Slag cement. White cement and specialized cement. The basic difference lies

in the percentage of clinker produces.

Ordinary Portland Cement (OPC)

OPC, popularly known as grey cement. Has 95% of clinker and 5% of gypsum and other

material. It accounts for 70% of the total consumption. White cement is a variation of OPC

and its used for decorative purpose like rendering of walls, flooring etc

Portland Pozolona Cement (PPC)

PPC has 80% clinker. 15% pozolona and 5% gypsum and accounts for 18% of total

consumption. Pozolona has siliceous and aluminous that do not posses cementing properties

but develop these properties in the presence of water. It is cheaply manufacture because it

uses fly ash/ burnt clay coal waste as the main ingredient. It has a lower heat of hydration

which helps in preventing cracks where large volumes are being cast.

Portland blast furnace slag cement (PBFSC)

PBFSC consist of 45% of Clinker. 50% blast Furnace slag and 5% of gypsum and account

for 10% of total cement consumed. It has a heat of hydration even lower than PPC and is

generally used in the construction of dams and similar massive construction.

White Cement

Basically it is OPC: clinker using fuel oil (instead of coal) and with iron oxide content

below0.4% to ensure witness. Special cooling techniques are used. It is used to enhance


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aesthetic value, in tiles and for flooring. White cement is much more expensive than grey

cement.

Specialized cement :Oil Well Cement: Is made from clinker with special additives to prevent any porosity.

Rapid Hardening Portland cement: It is similar to OPC, except that it is ground much

finer, so that casting. The compressible strength increases rapidly.

Major Cement Industries in Rajasthan

1. ACC Limited Lakheri, Bundi (1924)


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2. Ambuja Cement Limited , Beawar

3. Aditya Cement works , Chittorgarh

4. Birla Cement Works, Chittorgarh

5. Binani Cement Limited , Sirohi

6. J.K. Cement , Nimbahera

7. J.K. Udyog Limited , Udaipur

8. J.K. Corp. Limited, Sirohi (Laxmi Cement)

9. Mangalam Cement (Neershree), Morak-Kota

10. Shree Cement , Beawar

11. Shri Ram Cement, Kota.

Our Corporate Vision

The 21st

Century AtlasAtlas, the Titan Collective strength of the group:


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These symbols as a whole represent the collective strength of thegroup. The astute and dynamic management that binds the grouptogether and gives it leadership and direction is personified in the

figure of Atlas. A pillar of strength, Atlas also stands for steadfastness,consistency and reliability.

The sun Enlightenment and growth:

The head of the Atlas also represents the Sun. in this context the sunrepresents for a luminous and powerful presence that a group shouldhas over the industrial arena on one hand and resourcefulness in term

of finance, technology skill and intellectual leadership on the other.

Earth Segment - Diversified Activities:

Each latitude around the Titan represents the different industries oractivities that constitute the group. They individually draw and give

the strength to the central figure of Atlas.

The Globe- Global Vision:

The groups global vision and harmonious blend of all the elements,sum up as well conceptualized conglomerate

Strong Foundation Sustained growth Proven

Leadership

SWOT ANALYSIS

STRENGHTS:

It is best quality of cement manufacturer.

Latest technology adopted

Neeer Shree latest technology has given the best output.

It is attributed by healthy work environment and management system

Goodwill of B.K. Birla group is also strength of Mangalam Cement limited


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Good and healthy work environment is also maintained

Superior strength of its products

Optimum setting time of the cement

Good reputation among dealers/ Retailers & end users.

Transportation cost is very less

Electronic packaging system for prompt delivery

It is self for raw material

Sales depots and offices for prompt delivery and immediate attention for customer

grievances

It has its own mines for raw material near the plant

Weakness:-

Worsening power situation facing companies to invest huge amounts in captive power

plants

Inadequacy of finance for the modernization.

Increasing freight prices

Infrastructure bottlenecks like transportation for the raw material. fuel supply and

cement

Continues losses may effects its goodwill and market value of its shares

Not have good marketing network in Rajasthan except Kota division.

Awareness of customer `is not good about Birla Uttam.

Opportunities:-

Its superior qualities attract brand loyal and quality conscious customers.

Expected infrastructure growth will add to the current demand.

Cost can reduce by establishing own power plant.

Company can reduce cost. If they have own transportation.

By increasing investments in promotional activities.

If company may increase its distribution/network of the area it may grow fast.


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Threats:-

Large companies are coming up. This may put pressure on realization in central and

north area.

Cement industry is facing price price war. It may compel Mangalam cement limit to

reduce its cement price.

The low growth rate of cement market may affect the company sales.

High cost of transportation may affect the sales.

Excessive losses incurred by company can have bad impression in the mind of

customer.

VISION

We the member of Mangalam Cement Pariwar with persistent pledge to produce excellent

quality cement as per the needs of our customers and to achieve optimum utilization of our

resources by.

Striving for zero accidents. Zero quality complaints and zero down time.

Enhancing individual competencies through continuous human resources

development aids and over all excellence through people


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Total motivated involvement through participated management activities with high

degree of professionalism.

Creating clean, conductive, green, healthy and safe environment.

Continues effort for total quality management and quality way of life

Endless effort of total productivity and maintenance by creating the highly

performing work culture and inculcating the feeling that. this is my machine, I

maintain it

Fulfillment of the social responsibility of the organization by continues effort for

rural development and upliftment of the surrounding areas

QUALITY POLICY

We pledge to produce and deliver quality Clinker and Cement to the satisfaction of our

customer by a quality management system.

TOTAL PRODUCTIVE MAINTENANCE


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Total productive maintenance or TPM of each and everything and every activity in the

industry, with special care on the profitability with the involvement of all the employees.

MANGALAM TPM POLICY

We at Mangalam Cement ltd. Aims for zero failure , zero defect zero accident and creating

pollution free environment through introduction of TPM with participation of personal at all

level in the unit. This will contribute to the improvement of overall equipment efficiency

and awareness of all workmen and deduction in the cost.

FIVE MAIN BASIC CONCEPT OF TPM

1. Building up a profitable business.

2. Culture preventive policy

3. all workers participation

4. Genba Genbustsu (actual scene, actual thing and reality)

5. Automation and unmanned plant operation

MANGALAM COMITTMENT TO TPM

To double our productivity.

To reduce the cost of production by 30%

To reduce the cost of complaint by 75%

To reduce inventory by 50%


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To involve employees by applying their suggestion and increase in their

morale that is one suggestion per employee per year to be implemented.

ACHIVEMENTS 190214 MT tons cement in Delhi in 1990-91 the

Won prestigious company of the year award for cement industry high-

test among all manufacturer during the year 1988-1989

DSJ corporate excellence award in year 1991-1992

ISO9002 certificate from BIS.

Research Methodology

Management Information system:-


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A management information system is a continuing and interacting structure of

people, equipment and procedure to gather, sort, analyze, evaluate, and distribute pertinent

timely and accurate information for use by management decision makers. To improve their

planning execution and control.

The four subsystem of the companys management information system are:-

1. Internal Report System

2. Intelligence System

3. Research System

4. Analysis

Through research an executive can get a synopsis of the current scenario which improves

his information base for making sound decision affecting future operations of the enterprise.

Research has its helpful hand in the area offinancial planning and control.

Financial research involves the process of systematic collection, compilation, analyses and

interpretation of relevant data for financial planning and control. Research tools are applied

effectively for studies involving financial position of the enterprise and for studying the

Investment planning and the techniques used for the controlling the activities and major

function of the company.

Research system:-

For undertaking my project, titled, Study of Inventory ControlSystem and Trend Analysis

in Mangalam Cement research has been conducted in four stages.


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Stage I:-Defining the Problem and Research Objective

a. What is the Process of inventory planning and control to classify the different type

of inventory to determine the type and degree of control required for each.

b. Trend analysis which involves the comparisons of the Ratios of the firm over the

period of time which indicate the direction of change in the performance,-

improvement, deteriorations and consistency

Research Objective:-

Material control refers to the managerial functions which are directed to ensure that the

required quality and quantity of material is required at proper time with the minimum

amount of capital.

Inventory control is not the wider term than material control. It seems to be a part of

material control.

The first step in inventory planning/control process is the classification of different type of

inventory to determine the type and degree of control required for each. The ABC system is

a widely used classification technique for the purpose. On the basis of the cost involved, the

various items are classified into three categories.

1. A consisting of items with the largest investment

Defining the

problem and

research objective

Developing and

collecting the

information

Analyzing the

information

Presenting the

findings


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2. C with relatively low investment, but fairly large number of items

3. B witch stands mid-way between category A and C

Category A requires more rigorous control, C requires minimum attention, and B deserves

less attention than A. but more than C.

Order quantity problem:-

Economic order quantity(EOQ)is the second key inventory problem relates to determination

of the size/quantity of the inventory which would be acquired that would minimize the total

cost associated with inventory management.EOQ refers to the level of inventory at which

the total cost of inventory comprising

1. Order/ setup cost.

2. Carrying cost is the minimum.

Since data related to the Order/ setup cost and Carrying cost is confidential with the

Mangalam for that we have not calculated the EOQ.

Order point problem:-

Yet another problem relating to the inventory planning and control is: when should

the order to procure to inventory to be placed? It is that inventory level which is equal to the

consumption during the lead time/procurement time.

Reorder Level = Safety stock + (daily usages * lead time)

Safety stock:

Safety stocks are the minimum additional inventory which serves as a safety margin

to meet an unanticipated increase in usages. This increase may be due to an unusually high

demand or because of uncontrollable late receipt of incoming inventory.

RATIO ANALYSIS

Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use

of ratio to interpret the financial statement so that the strength and weakness of the firm, as

well as his historical performance and current financial position can be determined.

Three types of comparisons are involved in the ratio analysis which reflects the relationship

between the related variables:-

1. Trend analysis.

2. inter-firm comparison

3. Comparison with standards/industry averages.


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In this project work the Trend Analysis of the of the Ratios of the financial result of last

year with the Ratios of the same previous year is calculated.

This analysis will figure out the performance of the Mangalam Cement in this year

in comparison with the last year.

Ratios are broadly classified into four groups

1. liquidity Ratios

2. Capital Structure or Leverage Ratios

3. Profitability Ratios

4. Activity/Turnover/Efficiency Ratios

Stage II: - Developing and Collecting the Information:-

In these stage efforts was directed towards developing and collecting the data. This stage

calls for determining the type of information needed and the most efficient way to gather

the information. A researcher can get the secondary data or primary or both.

This project work strongly depends on the collection of the secondary information or data.

The data is being collected by visiting the different departments of the Mangalam on the

basis of the questionnaire prepared and also the data relating to the ratios are being taken

from the financial results published in news paper or on website of Mangalam Cement Ltd.

www.manglamcement.com

Questionnaire:-

Ques1 What are the raw material used in the production of the cement and segregate it into

the direct or indirect material?

Ques2 What techniques are used for inventory planning and control

ABC analysis

Economic Order Quantity (EOQ)

Perpetual inventory system

Setting of Various Level.

Ques3 What is the production of cement and Clinker in past three months from April to

June?
http://www.manglamcement.com/http://www.manglamcement.com/


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Ques4 What are the dispatches of cement in the past three months?

Ques5 What is the consumption of raw material for cement production in three months?

According to this questionnaire the effort has been made for collecting the information from

the various department of Mangalam Cement ltd.

Like inventory control techniques from stores department and consumption from the

production department and all other information from the sales, accounts and finance

departments. These all information collected is secondary and used for analytical purpose

The data related to the valuation of inventory is confidential with Mangalam Cement for

that the analysis of the valuation technique cannot be done in this project.

Stage III:-Analyzing the Information:-

The next step in the research process is to extract pertinent information and findings from

data. We have attempted to apply some of the advance statistical techniques and decision

models in the analytical research system in the hope of discovering additional information.

For analysis purpose we have compare the techniques used by Mangalam in inventory

planning with other techniques and have advised the more suitable technique which can also

be implemented.

Stage IV: - Presenting the findings:-

The next step in this process is to find out the useful and fruitful information from the data

or the analytical work done. The researcher should present major findings that are relevant

to the major financial decision facing management. The study is useful when it reduces the

amount of uncertainty facing the financial executive.


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Study of Inventory Control System and Trend

Analysis in Mangalam Cement

Synopsis:-1. Technique used for inventory planning and control

2. What is the stock of raw material they maintain during the production?

3. Trend analysis of the financial position of the firm in comparison with the last year

position.

PROJECT WORK

QUES1:-What is the Process of inventory planning and control to classify the different typeof inventory to determine the type and degree of control required for each?

The inventory can be referred as the sum total of the value of the raw material, fuels and

lubricant, spare parts maintenance consumable. Semi-processed material and finished goods

stock at any given point of time. The average business has about 30% of its working capital

tied up in inventories.

The technique used by Mangalam Cement with regards to the process of inventory planning

and control to classify different type of inventory is ABC analysis.

The concept of ABC analysis we have discussed in Research methodology.

Below given table summarizes how Mangalam Cement treats the various category item

according to there consumption value.

1. Every category has fast and slow moving items.

a. Fast moving inventory is one which is used three or more times in a year

b. Slow moving inventory is one which is used less than 3 times a year

2. Category of inventory according to its valuation.

a. A consist of category where the valuation of inventory is 20000 and above

b. B consists of inventory where the valuation of inventory is between 19999

and 10000.

c. C consists of inventory where the valuation of inventory is less than 10000.

Here is the data of the ABC analysis of the Mangalam Cement for the month of April and

May.


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31 May 2005

Rs.in lacks

31 April 2005

Rs.in lacks

A B

C

Fast Slow Fast Slow Fast Slow

units Rs. units Rs. units Rs. units Rs. units Rs. units Rs.

534 318.17 361 241.86 212 11.95 203 30.34 1168 15.44 5374 380.02

We can see the above data that the company has engaged Rs 968.78lacks in the month of

May and Rs 997.78lacks in the month of April. So almost 10 crore Rs. has been blocked in

from the companies working capital and from that the amount on slow moving items, whichis used less than three times in a year, is 647.69lacks in May and Rs 652.22lacks in the

month of April so almost 7 crore of Rs has been blocked around slow moving items.

Limitation of ABC analysis:-

1. ABC analysis, in order to be fully effective, should be carried out with

standardization and codification.

A BC

Fast Slow Fast Slow Fast Slow

units Rs. units Rs. units Rs. units Rs. units Rs. units Rs.

528 293.43 376 234 225 11.76 229 30.56 1198 15.9 5458 383.13


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2. ABC analysis is based on gradation of different items, this gradation may include a

lot of subjective elements.

3. The result of ABC analysis should be reviewed periodically and updated.

COMPARISON WITH ANATHER TECHNIQUES

Economic Order Quantity (EOQ):-

The correct quantity to buy is the quantity at which the cost of acquisition equals the

cost of possession. This is technically known as the economic order quantity or the

reorder quantity.EOQ helps to achieve the lowest unit cost.

The concept of economic order quantity is primarily based on the consideration of the

acquisition cost and possession cost, which has been discus below.

Acquisition Cost:-

In order of determining the EOQ the cost of acquiring the inventory should

be known like cost of placing the order, cost of stocking material and the quantity

discounts available. For the item being purchased.

By knowing these we can find out the extra cost of servicing an order. It is the

incremental cost rather than the average cost per order that is important here, because,

within limits the fixed cost of these departments continues regardless of the number of

order placed

Possession cost :-

The cost is also referred as the inventory carrying cost. This cost is mostly

represented by the items like the rent of storage, cost of insurance, opportunity cost of

tying up with large working capital with inventory.

Limitation of EOQ

1. The calculation of EOQ is based on the accuracy of the information of the ordering

cost and the carrying cost on which they are based.

2. The concept is based on the assumption that the usage of material is both predictable

and evenly distributed.

3. Acquisition cost and the carrying cost is not easy to be calculated.

The data related with the acquisition cost and the possession cost is not available with the

company. So it should not be feasible for the company to calculate the acquisition cost and

the possession cost as a result it is difficult to calculate the EOQ.

Setting up of various levels


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Another important technique of inventory planning and control is the setting the various

levels for the inventory control. Various levels should kept in mined.

Maximum stock level: - Maximum stock level represents the upper limit beyond which thequantity of any item is not normally allowed to rise. The main object of establishing this

limit is to ensure that unnecessary working capital is not blocked in the stores.

Maximum Level = Reordering Level + Reordering - Minimum

Quantity Consumption

Mangalam should also maintain the maximum stock level so that its working capital is not

engaged in for the slow moving items. Investment for the slow moving items is around 7

crore which is a big amount to invest.

Minimum stock level: - This is the lower limit below which the stock of any item shouldnot allow to fall. This is also known as safety or buffer stock. The main object behind this

limit is to protect against the stock out of a particular item.

Minimum stock level = Reorder Level (Normal Usages * Average

Per period Delivery time)

Reorder level: - reorder level is fixed between the minimum and maximum stock level.

When the purchase of the material reaches at its point the company should initiate for the

purchase of the material. The reorder level is slightly more than the minimum stock level to

guard against Normal Usages and Abnormal delay in supply.

Reorder-level=Maximum Consumption * Maximum period required

During the period for delivery

Danger level: - this is generally fixed below the minimum stock level. Normal stock should

not be below the minimum level. If it reaches the danger level at any point of time, urgent

action for replenishment of stock must be taken to prevent the stock out.

Note: - Due to the lack of data available with the company we cannot able to calculate these

levels because the data with the company are confidential.

Evaluating Financial Position


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By

Using Ratio Analysis

Introduction:-

1.1 Importance of financial statement analysis in an organization.

In our money oriented economy, Finance may be defined as provision of money at the time

it is needed. To every one responsible for provision of funds, it is problem of securing

importance to so adjust his resources as to provide for a regular outflow of expenditure in

face of an irregular inflow of income.

1. The profit and loss account (Income Statement).

2. The balance sheet

In companies, these are the two statements that have been prescribed and there contents

have been also been laid down by law in most countries including India.

There has been increasing emphasis on

(a) Giving information to the shareholder in such a manner as to enable them to

grasp it easily.

(b) Giving much more information e.g. funds flow statement, again with a view to

facilitating easy understanding and to place a year results in perspective through

comparison with post year results.

(c) The directors report being quite comprehensive to cover the factors that have been

operating and are likely to operate in the near future as regards to the various

functions of production, marketing, finance, labour, government policies,

environment in general.

Financial statements are being made increasingly used by parties like Bank, Governments,

Institutions, and Financial Analysis etc.


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The statement should be sufficiently informative so as to serve as wide an curia as possible.

The financial statement is prepared by accountants based on the activities that take place in

production and non-production wings in a factory. The accounts convert activities in

monetary terms to help to know the position and performance of the enterprise..

1.2 Uses of Financial Statement Analysis.

The main uses of accounting statements for; -

Executives:- To formulate policies.

Bankers:- To establish basis for Granting Loans.

Institutions \ Auditors:- To extend Credit facility to business.

Investors :- To assess the prospects of the business and to know

whether they can get a good return on their

investments

Accountants:- To study the statement for comparative purposes.

Financial Ration Analysis The Tool Kit

3.1 Ration Analysis :-


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Ratio Analysis is the process of determining and interpreting numerical relationship

based on financial statement. It is defined as the systematic use of ratio to interpret the

financial statement so that the strength and weakness of a firm as well as its historical

performance and current financial conditions can be determined.

A ratio is a statically yard stick that provides a measure of the relationship between

variables and figures.

The relationship between variables or figures can be expressed in fractions.

For Ex. Quotient of current assets by current Liabilities.

Percentages;-

For Rs. Cost of goods sold as percentage of sales.

Proportion of numbers:-

For Ex. Double the Turnover in last one year.

These alternative methods establish a relationship among variables for the purposes of

financial analysis referred to as Ration Analysis.

Ration are simple to calculate and easy to understand, Financial analysis employee these

fools to explain financial statements and performance of a company.

3.2 Objectives of Ratio Analysis:-

The main objective of Ration Analysis technique is to reveal the relationship in more

meaningful way so as to enable us to draw conclusion from them. The ration analysis thus

as a quantitative tool helps the Analyst to draw answers to questions such as

Are the Net Profits Adequate

Are the assets being use efficiently is the firm solvent

Can the firm meet its current obligation and so on

Thus the Ratio Analysis help the


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Owner or Investors: For estimating earning capacity.

Creditors: Concerned primarily with liquidity and ability to pay interest and

redeem loan within specified period.

Financial Executive: - Interested in evaluating analytical tool that will measurecosts efficiency, liquidity and profitability, with a view to making intelligent

decisions.

Basis of comparison;-

Ratios are relative figures reflecting the relationship between variables. This enables the

analysis to draw conclusion regarding financial operations

The use of ratio as a tool of financial analysis involves their comparison, for a single ratio,

like absolute figures, fails to reveal the true position. For ex, P /E ratio (price /earning ratio

for particular scrip) should be compared over a period of time to get a true picture of

company performance.

Thus comparisons with related facts is the basis of ratio analysiss

In ratio analysis, four types of comparisons are involved.

1 Trend Ratio

2 Inter firm comparisons

3 Comparisons of items within a single years financial statement of a firm.

4 Comparisons with standard or plans

Trend ratios:-

Comparison of firm over time i.e. present ratios are compared with past ratios.Trend ratios indicate the direction of change in performance improvement deterioration or

consistency over the years.

Inter firm comparisons:-

Comparisons of the ratios of a firm with those of other in the same line of business or with

the industry reflect its performances in relations to its competitor. The other type of

comparisons may relate to comparisons of items with in a single year financial statement of

a firm and comparisons with standard or plans.

Types of Ratio

Types of Ratios: -


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1. Liquidity ratios

2. Leverage Ratios

3. Turnover Ratios

4. Profitability Ratios

5 Valuation Ratios.

4.1 Liquidity Ratio: -

Liquidity refers of the ability of a firm to meet its obligation in the short run, usually one

year or when the become duration for payment.

A proper balance between liquidly and profitability is required for efficient Financial

Management.

Liquidity ratios are based on the relationship between current assets the sources for meeting

short-term obligation and current liabilities.

The ratios, which indicate the liquidity of a firm, are: -

1. Current Ratio.

2. Acid test Ratio.

3. Fund-Flow Ratio.

4. Net working capital.

4.1.1 Current Ratio

The current Ratio is the ratio of current liabilities it is calculated as: -

Current assets

Current ratio = ________________

Current Liabilities

The current assets include cash and Bank Balance, Marketable securities, Bills, Receivable,

Inventories, Loan sand advances, Advances Payment and prepaid expenses.

The current liabilities include creditors, bills payable bank overdraft short-term loans,

outstanding expense & income tax payable, unclaimed divided and proposed dividend.

Te current ratio measures the ability of the firm to meet its current liabilities. The current

assets get converted into cash into the operational cycle of the firm and provide the fund

needed to pay current liabilities. The higher the ratio, to ward off.


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4.1.2 Acid Test Ratio: -

The acid test ratio is the ratio between quick current assets and current liabilities.

It is calculated as

Quick assets

Acid Test Ratio =

Current liabilities

The term quick asset refers to current assets that can be converted into cash immediately.

Quick assets current assets (inventories + prepaid expenses)

It is based on current asset, which are highly liquid. This also called quick ratio. Generally,

an acid test ration of 1:1 considered satisfactory as a firm can easily meet all current claims

4.1.3 Bank to working capital Gap Ratio: -

This ratio establishes a relationship between short-term bank borrowing and working capital

gap

It is calculated as

Short term bank Borrowing

Bank Finance to working Gap Ratio =

Working capital gap

Working capital equal to current assets less current liabilities other than bank borrowing.

The tondon committee reports suggest this ratio should not exceed 0.75 even under most

liberal scheme of financing.

4.1.4 Fund flow ratio: -

A dynamic analysis of liquidity call for examination of cash inflow and cash outflow in

addition to the size of the liquid asset balances at a given point of time.

The current ratio and acid test ratio are static in nature.

Quick assets

Internal measure =


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Average daily flow of operational cash

expenditure

4.2 leverage or capital structure ratios: -

These ratios refer to the use of debt finance long term solvency of the firm can be examined

by using leverage or capital ratios.

The leverage ratio or capital structure ratio can be defined as the financial ratios which

throw light on the long term solvency of a firm reflected in its ability to assure the long term

creditors with regards to.

1. Periodic payment of interest during the period of loan.

2. Repayment of Principe on maturity or in predetermined installments at due dates.

Leverage ratio help in assessing the risk arising from the use debt capital. Two type of

ration that is commonly used to analyze financial ration are.

1. Structural ratios.

2. Coverage ratios

4.2.1 Structural ratios: -

Structural ratios are based on the proportion of debt and equality in the financial structure of

the firm, two important coverage ratios are interest converge ratios and fixed charge

coverage ratio 5:3:1 Structural ratios

Debt equity ratio

This ratio reflects the relative claims of creditors and share holders against the assets of the

firm, debt equity ratios establishment relation ship between borrowed funds and ownercapital to measure the long term financial solvency of the firm. The ratio indicates the

relative proportions of debt and equity in financing the assets of the firm.

It is calculated as follows

Debt

Debt equity ratio =

Equity


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The debts side consist of all liabilities (that include short term and long term liabilities) of

the firm. The equity side consists of new worth (plus) preference capital.

The lower the debt equity ratio the higher in the degree of protection enjoyed by the

creditors.

The debt equity ratio defined by the controller of capital issue, debt is defined as long term

debt plus preference capital which is redeemable before 12 years and equity is defined as

paid up equity capital plus preference capital which is redeemable after 12 years.

The general norm for this ratio is 2:1. on case of capital intensive industries as norms of 4:1

is used for fertilizer and cement industry and a norms of 6:1 is used for shipping units.

Debt asset ratio:-

The debit asset ratio establishes a relationship between borrowed funds and the assets of

firm.

It is calculated as:

Debt

Debt Asset Ratio = -------------------------------

Asset

Debt includes all liabilities. Short term as well as long term and the assets include the total

of all the assets (the balance sheet total)

This ratio is related to the debt equity as follow.

Debt

-----------------------

Equity

Debt asset ratio = -- ------------------------------------------

1+ Debt----------

Equity

4.2.2 Coverage Ratios.


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These ratios are computed from the information available in the profit and loss account. The

coverage ratios measure the relation ship between what is normally available from

operations of the firm and the claims of the outsider.

The various coverage ratios are

1. Interest coverage ratio

2. Fixed charges average ratio

3. Dividend coverage ratio

Interest coverage Ratio

This ratio is also know as Time interested Earned ratio This ratio measures the debt

servicing of capacity of a firm in so far as fixed interest on long term loan is concerned.

Interest coverage ratio determined by dividing the operating profits or earning beforeinterest and taxes by fixed interest charges on loans

It is calculated as

Earning Before Interest &Taxes

(EBIT)

Interest coverage Ratio = --------------------------------------------

Debt Interest

The EBIT is used in the numerator of this ratio because the ability of a firm to pay interest

is not affected by tax payment as interest on debt fund in a tax deductible expenses.

The ratio apparently measure the margin of safety the firm enjoys with the respect to its

interest burden.

A high interest coverage ratio implies that the firm can easily meet its interest burden even

if EBIT decline.

A low interest coverage ratio results in financial embarrassment when EBIT declines. This

ratio is not appropriate measures of interest coverage because the source of interest payment

is cash flow before interest and taxes.

In this view, we may use the modified interest coverage ratio.

EBIT +depreciation

Coverage ratio Modified Interest Coverage Ratio = -----------------------------

Debt Interest


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Fixed charges coverage Ratio:

This ratio helps in measuring the debt servicing ability adequately because it considers both

interest and the principal repayment obligations.

It is calculated as:

EBIT +depreciation

Fixed charges coverage Ratio: - ---------------------------------------

Repayment of Loan

If the denominator of this ratio only the repayment of loan is adjusted upwards for the tax

factor because the loan repayment amount un like interest, is not tax deductible.

This ratio may be amplified to include other fixed charges like lease payment and

preference dividend.

Thus,

Earning After Tax (EST)

Dividend Coverage Ratio = -------------------------------------------------

Preference Dividend

This ratio like the interest coverage ratio reveals the safety margin available to the

preference share holder. The higher the coverage the better it is from their point of view.

4.3 Turnover Ratio

Turnover Ratios are also referred to as Activity ratio or Assets. Management ratios. This

ratio establishes relationship between the level of activity represented by sales or cost of

good sold and levels of various assets.

The important turnover ratios are: -

Inventory Turnover ratio


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Average collection period ratio

Receivable Turnover ratios

Fixed Asset Turnover ratios

Debtors Turnover ratios

Creditors Turnover ratios

Inventory Turnover ratio: -

This Ratio is computed by dividing net sales by inventory

Thus,

Net sales

Inventory Turnover ratio = ----------------

Inventory

The numerator of this ratio is the net sales for the year and the denominator is the Inventory

balance at the end of the year.

This ratio is deemed to reflect the efficient the management of inventories and vice versa.

This statement need not be always true. A low level of inventory may cause a higher

inventory turnover ratio.

It might be argued that the inventory turnover ratio may be

Cost of goods sold

Inventory Turnover ratio = _________________________

Avg. inventory

Cost of Goods Sold = Sales -Gross Profit

Average Inventory = Average of (Opening +Closing Stock)

This ratio also indicates how fast inventory is sold

A high ratio is good from the viewpoint of liquidity and vice versa. Average collection

period.

Receivable

Average collection period. = ------------------------------

Average sales per day

The receivable figure of the ratio generally represents the receivables balance at the end of

the year. When sales the highly seasonal, the average of receivable figure at the and of


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each month or each season can be used and when sales growth is high the average of the

beginning and ending receivables balances are to be used. An average sale per day in the

denominator is simply the sales of the year divided by 365.

The average collection period should be compared with firm credit terms to judge the

efficiency of receivables management.

As a rule of thumb, the average collection period should be not exceeding 1 times the

credit period.

Receivable Turnover ratios

The Receivable Turnover ratio measures the relationship between credit sales during

a particular accounting period and the average receivables (sundry debtors) outstanding

during the period.

It is expressed in two forms

Net Sale

Receivable Turnover ratios = -----------------

Receivables

Average collection period after calculating daily sales (sales day) and dividing accounts

receivable by sales per day.

The receivables figures used is the receivables figures at the end of the period

.

The receivables turnover ratio and the average collection period are a follows.

360

Average Collection Period = ------------------------------

Receivables turnover Ratio

The shorter the average collection period the higher the receivables turnover ratio.

Net SalesFixed Assets Turnover Ratio = ----------------------

Fixed Assets

The net sales indicate the net sales for the period and fixed assets are the balance in the net

fixed assets account at the end of the year.

This ratio measures the efficiency with which fixed assets are employed. If the fixed assets

turnover ratio is high it indicates the there is a high degree of efficiency in assets utilization.

Similarly if the ratio is low if reflects in efficient use of assets.


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It is important to note that when the fixed assets of the firm are old and substantially

depreciated, the fixed turnover ratio tens to be high because the denominator ratio is very

low.

Total assets turnover ratio:-

The main objectives of the total assets turnover ratio are to measure how efficiency assets

are employed. It is a kind to the out capital ratio in economic analysis.

Net Sales

Fixed Assets Turnover Ratio = ----------------------

Fixed Assets

Total assets simply the balance sheet total at the end of year.

If the total assets turnover ratio is high it implies that there is high degree of efficiency in

assets utilization and vice-versa.

Debtors turnover ratio: -

The debtors turnover ratio is determined by dividing the net credit sales by average debtorsoutstanding during the year.

Therefore

Debtors turnover ratio = Net credit sales

Average debtors

Here net sales consist of gross credit less returns. Average debtors are simply average of

debtors at the beginning and at end of the year.

The main function of this ratio is to measure how rapidly debts are collected.

A high ratio is indicative of shorter time lag between credit sales and cash collection/

A low ratio indicates that debts are not being collected rapidly.

Creditor turnover ratio:-


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Creditor turnover ratio is a rate between net purchase and average amount of creditor out

standing during the year.

Creditors turnover ratio = net credit purchases

Average of creditors

Net credit purchase = gross credit

Purchase less returns to supplier

Average creditors = Average of creditors outstanding at theBeginning and at the end of the year.

A low turnover ratio reflects liberal terms granted by suppliers, while a high turnover ratio

shown that accounts are settled rapidly.

The creditors turnover ratio is an important tool as a firm can reduce its requirement of

current assets by relying on suppliers creditors.

The intent to which trade creditors are willing to wait for payment can be approximated bythe creditors turnover ratio.

4.4 Profitability Ratios:-

Profitability is measured of efficiency and the search for its provides an incentive to achieve

efficiency.

Profitability the final results of business operations mainly the owners and management are

in the financial soundness of the firm.

The management of the firm is eager to measure its acting efficient. Similarly the owners

invest their funds with the expectation of reasonable return. Thus it all depends on the profit

for the ensure operating efficiency to the management and ensure reasonable return to the

owners.

1. Profit margin ratio (gross and net)

2. Expenses ration or operating ratio profitability ratios in relation to investment are.


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3. Return on investment

4. Return on assets

5. Return on equity

6. Return on capital employed.

7. Net income to total assets ratio.

4.4.1 Profit margin ratio:-

Profit margin ratio measures the relationship between profit and sales; there are two profit

margin ratios

Gross margin ratio

Net margin ratio

Gross profit margin ratio: -

Gross profit can be defined as the difference between net sales and cost of goods

sold.Gross margin profit ratio is also known as gross margin gross profit margin ratio is

calculated by dividing gross profit by sales.

Gross profit margin ratio = gross profit

Net sales

Net sales-cost of goods sold.

The gross profit margin ration shows the margin left after meeting manufacturing cost. Theratio also measures.

The efficiency of production as well as pricing. The Gross profit to sales is a sign of good

managements as it implies that the cost of production of the firm is relatively low. A high

ratio may also imply of a higher sales rise without a corresponding increase in the cost of

goods sold.

Whereas a low gross profit margin in a danger signals, warranting a careful and detailed

analysis of the factors responsible for the same.


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The main contributing factors responsible for low ratio maybe high cost of production as

will as inefficient utilization of fixed as well as current assets a low selling price resulting

from severe competition, inferior quality. Lock of demand etc.

Net Profit Margin Ratio:

The Net Profit Margin Ration determines the between Net profit and sales of business firm.

This relationship is also known as net margin. This ratio shows the earning left for

shareholder (both equity and preference) as percentage of Net sales.

Net Margin Ratio measures the over all efficiency of production, Administration selling,

Financing and pricing.

Thus,

Net Profit

Net profit Margin Ratio: - -------------------

Net Sales

A high Net profit Margin indicates adequate return to the owners as will as enable a firm to

withstand adverse economic conditions when selling price is decanting, cost of production

is rising and demand for product is falling.

A low Net Profit Margin has opposite implications. A firm with low net profit margin can

earn a high rate of return on investment it has a higher inventory turnover.

Jointly considering gross and net profit margin provides a valuable understanding of the

cost and profit structure of the firm and enables the analyst to identity the source of business

efficiency of inefficiency.

4.4.2 Profitable Ratios in regard to Investment

The profitable ratios can also be computed by relating the profits of a firm to its

investments. These ratios are popularly termed return on investment (ROI).

There are three different concept of investment in vogue assets. Capital employed andShareholders Equity.


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Based on each of the above there are three board categories of ROIs

They are

Return on Assets

Return on Capital Employed

Return on Shareholders Equity.

Return on Assets: -

Return on Assets ration measure the profitability ratio in terms of relationship between Net

Profit and Assets. There are various approaches possible to define net profit and Assets.

The concept of Net profit may be

Net Profit after Taxes.

Net Profit after Taxes plus Interest

Net Profit after Taxes plus Interest minus Tax Saving.

Assets may be variants of return on assets are

Net Profit after Taxes

Return on Assets = ---------------------------------Average Total Assets

The Return on Assets based ration would be an under estimate as the interest paid to the

creditor is excluded from the Net Profit.

Net Profit after Taxes +Interest

Return on Assets = ---------------------------------

Average Fixed Assets


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Net Profit after Taxes +Interest

Return on Assets = ---------------------------------

Average Tangible Assets

The above may not provide correct results for inter firm comparison. As a measure of

operating performance, the above equations should be substituted by the following: -

Net Profit after Taxes +Interest Tax Advantage on Interest

Return on Assets = --------------------------------------------------------------------

Average Total \ Fixed Tangible Assets

This equation correctly reports about the operating efficiency of firms if they all are equity

financed. The main purpose of return on assets is to measure the profitability of the total

funds Investment of a firm.

Return on Capital Employed (ROCE):-

Return on capital employed is same as return on assets except for the difference that the

profits are related to the capital employed. In this ratio the term capital employed refers to

the long term funds supplied by the creditors and owners of the firms.

The return on capital employed can be computed \calculated in two ways firstly it is equal

to non-current liabilities (Long Term Liabilities) plus owners equity. Secondly it is

equivalent to net working capital plus fixed assets.

Net profit After Taxes +Interest

ROCE = -----------------------------------------------------

Average Total Capital Employed

Net profit After Taxes +Interest Tax Advantage on Interest

ROCE = -----------------------------------------------------

Average Total Capital Employed

Net profit After Taxes +Interest

ROCE = -----------------------------------------------------

Average Total Capital Employed-Average Intangible Assets

In the ratio is compared with similar firms, with industry average and over time would

provide sufficient insight into how efficiently the long term funds of owners and creditors

are being used.

The higher the ratio, the more efficient in used of the capital employed.


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Return on Equity:-

The return on equity the profitability of equity funds invested in the firm. Return on equity

is regarded as very important measures because it reflects the productivity of the ownership(or risk capital employed in the firm)

Thus

Equity Earning

Return on Equity = -------------------

Net Worth

Equity earning of this ratio is equal to profit after tax less preference divided

Net worth includes all contribution made by equity shareholder (paid up capital + reserve &

surplus)

This ratio is called as return on net worth.

This ratio is influenced by several factors return on investment, debt equity ratio average

cost of Debt. Funds and tax rate.

Return on investment:-

The return on investment is a measure of business performance, which is not affected by

interest charges and tax payments.

Thus

Return on investment = EBIT

Total assets

Numerator represent pre-earning belonging to all sources of finance, total assets represent

total financing.

This ratio focuses on operation performance and obstructs away the effect of financial

structure and tax rate. It is eminently suited for inter firm comparisons. This ratio is

internally consistent.

Net income to total assets ratio: -


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The main purpose of net income to total assets ratio is measure how efficiency the capital is

employed.

Net income of total assets ratio = Net income / Earning PerProfit Share

The market price per share may be the price prevailing on a certain day or preferably the

average price over a period of time.

The earning per share (EPS) is simply profit after tax divided by number of outstanding

equity shares. The PE ratio is a summary measures & which primarily reflects the following

factors growth, prospects, risk characteristics, share holders, orientation, corporate image

and degree of liquidity.

Yield: -

Yield: - Divided + price change

Initial price

This may be split into two parts

Divided Price change

+

Initial yield divided yield Initial price capital gain/loss yield

Generally companies with low growth prospects after a high divided yield and low capital

gains yield, companies with superior growth prospects after a low divided yield and high

capital gains yield.

Market value to book value ratio: -

Market value per share

Market value to book value ratio =

Book value per share

This ratio reflects the contribution of a firm to the net wealth of the society. If the market

value to book value ratio is equal to 1. All the three ratios return on equity, earnings per

share (which is inverse to PE ratio) and total yield are equal

If the ratio is say 2 the firm has created a net wealth of one rupee for every rupees invested

in it. If the ratio is equal to 1 it implies that the firm has neither contribution nor detracted

from the net wealth of the society.


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Application of Ratio

Analysis Techniques

Application Of Ratio Analysis Technique


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6.1 Liquidity ratio

1. Current ratio = Current assetsCurrent liabilities

2. Acid test ratio = Quick assets

Current liabilities

Financial year Current ratio Acid test ratio

1994-95 1.68 1.11

1995-96 1.57 1.32

1997-98 1.45 1.22

1998-99 1.13 1.08

1999-00 1.17 1.06

2000-01 1.09 1.03

2001-02 1.22 1.18

2002-03 3.21 2.19

2003-04 4.69 2.39

2004-05 5.12 2.77

Current ratio

1.68 1.57 1.451.13 1.17 1.09 1.22

3.21

4.695.12

0

1

2

3

4

5

6

19

94-

95

19

95-

96

19

97-

98

19

98-

99

19

99-

00

20

00-

01

20

01-

02

20

02-

03

20

03-

04

20

04-

05

Financial Year

Acidtest ratio

1.111.32 1.22

1.08 1.06 1.031.18

2.192.39

2.77

0

0.5

1

1.5

2

2.5

3

199

199

199

1998

1999

2000

2001

2002

2003

200

Financial Year

6.2 Leverage ratio


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1. Debt Equity Ratio = Debt/Equity

2. Debt Asset Ratio = Debt/Assets

3. Total debt to total capital employed = Total Debt/ TotalCapitalEmployeed

4. Interest coverage ratio = EBIT + Dep/Debt

Interest

Debt Assets Ratio

0.41 0.43 0.43 0.42 0.430.47 0.49

0.41

0.52

0.62

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1995

-96

1996

.97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

Debt Equity Ratio

1.211.161.171.151.151.171.251.271.38

2.12

0

0.5

1

1.5

2

2.5

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

Total Debt to total capital employed

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1995-96

1996.97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

6.3 Turnover Ratio

Financial year Debt Equity Ratio Debt Assets Ratio Total Debt to total

capital employed

1995-96 1.21 0.41 0.63

1996.97 1.16 0.43 0.60

1997-98 1.17 0.43 0.60

1998-99 1.15 0.42 0.61

1999-00 1.15 0.43 0.56

2000-01 1.17 0.47 0.61

2001-02 1.25 0.49 0.65

2002-03 1.27 0.41 0.67

2003-04 1.38 0.52 0.68

2004-05 2.12 0.62 0.77


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Net sales

1. Inventory turnover ratio =

Average Inventory

Net Sales

2. Debtors turnover ratio =

Total Debtors

Net Sales

3. Fixed assets turnover ratio =

Fixed assets

Net Sales

4 current assets turnover ratio =Current assets

Net sales

5. Net Capital employed (Avg.) =

Capital Employed

Financial

year

Inventory

turnover

ratio

Debtors

turnover

ratio

Fixed asset

turnover

ratio

Current

assets

turnover

ratio

Net capital

employed

(AVG)

1995-96 5.88 7.67 1.51 2.42 1.05

1996.97 6.55 7.07 1.57 2.97 1.06

1997-98 7.86 8.55 1.53 3.29 1.03

1998-99 7.50 8.93 1.38 2.71 0.93

1999-00 6.81 9.61 1.36 2.58 1.32

2000-01 5.85 12.06 1.28 3.51 0.97

2001-02 7.31 8.93 1.68 2.71 1.64

2002-03 5.89 11.32 2.33 2.59 1.032003-04 6.96 13.22 2.51 3.32 1.56

2004-05 5.76 11.62 1.96 2.61 1.22


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Inventory turnover rati

5.886.55

7.86 7.56.81

5.85

7.31

5.896.96

5.76

0

2

46

8

10

1995

-96

1996

.97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

Debtors turnover rati

7.677.078.558.93

9.61

12.06

8.93

11.32

13.2211.62

0

2

4

68

10

12

14

1995

-96

1996

.97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

Fixed as set turnover r

1.511.571.531.381.361.28

1.68

2.332.51

1.96

0

0.5

1

1.5

2

2.5

3

1995

-96

1996

.97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

Current assets turnover rati

2.42

2.973.29

2.712.58

3.51

2.712.59

3.32

2.61

00.5

11.5

22.5

33.5

4

1995

-96

1996

.97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

Net capital employed (AVG)

1.051.06 1.030.93

1.32

0.97

1.64

1.03

1.56

1.22

0

0.5

1

1.5

2

199

5-9

199

7-9

199

9-0

200

1-0

200

3-0


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6.4 Profitability Ratio:

Gross profit

1. Gross profit to sales =

Turnover-Excise

Net profit (PAT)

2. Net Profit to sales =

Net sales

Net profit

3. Net profit on Fixed Assets =

Fixed Assets

Financial year Gross profit to

sales

Net profit to sales Net profit on fixed

assets1995-96 8.18 1.39 2.19

1996.97 8.54 1.81 2.63

1997-98 11.99 4.88 7.83

1998-99 11.91 2.43 6.279

1999-00 11.63 2.86 3.36

2000-01 10.12 2.81 4.56

2001-02 7.93 1.98 3.29

2002-03 10.23 2.33 6.89

2003-04 9.66 2.74 6.90

2004-05 7.60 2.41 4.70

Gross profit to sales

8.18 8.54

11.99 11.91 11.6310.12

7.93

10.23 9.667.6

02468

101214

1995-9

1996

.9

1997

-9

1998-9

1999-0

2000-0

2001-0

2002-0

2003-0

2004-0


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Net profit onfixedassets

2.19 2.63

7.83

6.279

3.36

4.56

3.29

6.89 6.9

4.7

0

2

4

6

8

10

1995

1997

1999

2001

2003

Net profit to sales

1.39 1.81

4.88

2.432.86 2.81

1.98 2.332.74 2.41

01

23

45

6

1995-9

1996

.9

1997

-9

1998-9

1999-0

2000-0

2001-0

2002-0

2003-0

2004-0


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6.5 Return on Investments

Net profit (before tax)-Interest

1. Return on total capital employed =

Total capital employed

Net profit after tax

2. Return on net worth =

Net worth

Net Profit (after Tax)

3. Return on Assets =

Total Assets

Financial year Return on totalcapital

employed

Return on networth

Return on assets

1995-96 12.82 3.65 1.23

1996.97 16.61 5.20 1.90

1997-98 17.75 12.08 4.47

1998-99 14.23 5.68 3.56

1999-00 11.29 11.25 2.29

2000-01 9.63 7.56 3.59

2001-02 10.23 9.25 2.98

2002-03 16.29 11.51 6.892003-04 14.26 10.25 3.99

2004-05 8.89 9.37 2.69

12.82

16.6117.75

14.23

11.29

9.6310.23

16.29

14.26

8.89

0

2

4

68

10

12

14

16

18

1995-96 1997-98 1999-00 2001-02 2003-04

Return on total capital employed


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3.65

5.2

12.08

5.68

11.25

7.569.25

11.5110.25

9.37

0

2

4

6

8

10

12

14

1995-96 1997-98 1999-00 2001-02 2003-04

Financial Year

Return on net worth

1.231.9

4.473.56

2.29

3.592.98

6.89

3.99

2.69

0

1

2

3

4

5

6

7

1995-

96

1998-

99

2001-

02

2004-

05


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Conclusion


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CONCLUSION

Conclusion drawn from the study of Inventory control system in Mangalam Cement ltd.

Mangalam Cement has adopted ABC analysis for inventory planning. And from that

we come to know that that company engaged its 10 core in the inventory in stock

and from that 7 corers in slow moving items which is been used less than three time

a year. We suggest bringing that inventory to some lower amount so that its working

capital may get stronger than before.

We suggest that the company should set maximum and minimum level for its

inventory so that its investment should become less in the inventor

There is no acquisition cost and the possession cost calculated by the company for

that the calculation of economic order quantity (EOQ) is not possible. So it should

be difficult for the company to calculate the reordering level for that company has to

bear the extra cost other than fixed cost like the ordering charges, transportation

charges etc.

Zero level inventory system is also the most efficient way of maintaining the proper

inventory but Mangalam Cement cannot able adopt this because it is in the remote

area and 60 km away from kota so that it will take time to get the item from thereand some important and costly equipments are to be exported. So it is not feasible

for the company to adopt zero level inventory system.

In the end I suggest Mangalam Cement that it should set the various levels for its

inventory planning like the maximum level, minimum level and danger level. From that the

investment in the inventory is being lowered.

Now a day through the advance technology of computers and internet. The work of setting

levels for the inventory has been easier through efficient Management InformationSystem (MIS).


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The conclusion drawn from the analysis of ratio is the previous chapter is presented in the

following section

6.1 Return on Investment

Mangalam Cement ltd return on assets (ROA) return on total capital employed and return

on shareholders equity have increased considerably from 1995-96 to 2004-05. Return on

assets (ROA) return on total capital employed and return on shareholders equity how

increased by about 35% from 1995-96 to 2004-05 indicating an excellent overall

performance by the management.

This ROA is comparable to some highly profitable companies like the Colgate PalmoliveLtd. Hindustan Lever Ltd who are active in the consumer product business Rajasthan Spg.

Wvg. Mills is into highly specialized industrial products hence their achievement in return

on investment should set p example for other to follow: -

6.2 Turnover Ratios

The turnover ratios show fairly good performance by the company. The inventory turnover

ratio (approx. 4 times) indicates good inventory management. The average collection period

(varies between 50-70 days with an expectation in year 2004-05 indicate a liberal credit

contract. It does not border a cash and carry system. The fixed asset turnover ratio indicates

a low profitable deployment of fixed assets (approx. 2 times) the capital employed to

turnover ratio indicates fair utilization of capital employed.

The average collection period should to exceed1.5 times the credit period companies like

Colgate Palmolive has a average collection period of 15 days compared to this Mangalam

Cement ltd. should bring its average collection period. The company should concentrate on

profitable deployment of fixed assets.

6.3 Liquidity Ratio

The current ratio (approx. 1.5) and quick ratio (approx. 1.3) indicates an effective

liquidity management by Mangalam Cement ltd. A high current and quick ratio indicates

that the company can meet its current obligation liabilities.

The high liquidity ratios reflect a very strong short term financial structure. Mangalam

Cement ltd. should maintain current assets in the form of receivables and cash rather than ininventory so as to meet its current obligation efficiency.


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6.6 Profitability Ratio

Mangalam Cement ltd. Gross profit Margin ratio and the net profit margin ratio on an

average of is about 35% and 10% respectively. These figures and during the last three

financial years are truly remarkable. The gross profit margin ratio and the net profit margin

ratio have increased during 1995-96 to 2004-05 in spite to low profit suffered by the

company during 1995-96 which indicates that company heavy capital expenditure for

expansions of spindles and looms by the company.

It may by noted as Net profit Margin has Been around 15%in the last three financial years

reflecting a better earning for the shareholders.

6.7 Leverage Ratio

The high Debt equity, debt assets and debt to total capital ratio indicates a moderate

existence of equity and capital employed these ratio indicate that the company has a low

geared capital structure Mangalam Cement ltd. is able to maintain an average interest

coverage ratio indicating that the firm enjoys the margins of safety with the respect to this

interest burden.

The company maintains a modest interest coverage ratio so that it can easily meet its

interest burden even if EBIT suffers a decline.

Considering the above ratios for a period of time during 1995-96 and 2004-05, it is clear

that Mangalam Cement ltd. has achieved an overall efficiency in production Administration

Selling, Financing, Pricing and Tax Management.


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study of inventory control system and trend analysis in mangalam cement, mangalam cement ltd

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