INDEX

Sr.No. Particulars Page no.

1. Executive Summary 1

2. HOC Profile 2

3. Research Methodology 9

4. Literature Study 12

5.

Project Work

1.1 Balance sheet

1.2 Profit and loss statement

1.3 Highlights

1.4 Calculations and interpretation of ratios

VII

6. Findings & Analysis XXII

7 Conclusion XXII

8. Reference Section XXVII

1

A PROJECT REPORT

ON

“RATIO ANALYSIS

OF

HOC LTD”

2

1.0EXECUTIVE SUMMARY:

Finance, like blood in the human body, gives vitality and strength to a business

enterprise; and the Financial Management is a system, like the blood circulatory system, of the

human being, which is concerned with procurement of funds at low cost and their effective

utilization in the business. The steady and healthy circulation of finance throughout the

business is the basis of solvency. Finance is described as science of money and involves the

process of conversion of accumulated funds to productive use. The essence of the effective

Financial Management is that the finance so converted should generate an income higher than

the cost of procuring such finance by utilizing the same in the best possible way. Otherwise,

the enterprise would become sick and gradually would proceed to the close or winding up.

The finance manager, therefore, must keep in view the needs of funds both short and long

term and ensure that they do not keep too many funds blocked in inventories, book debts, cash

etc.

Ratio analysis plays vital role for taking appropriate business decisions particularly at a time

when market is highly competitive.

The major consideration in taking a Ratio Analysis decision is to evaluate its returns as

compared to its investment. Ratio Analysis helps in identifying the financial strengths

and weakness of the company, in evaluating company’s performance relating to

Financial Statement Analysis, to know the liquidity position of the company,

Project also contains overall study and analysis of company’s financial position.

3

2.0 HOC PROFILE

Hindustan Organic Chemicals Limited (HOCL) was set up by the government in

1960 with the objective of attaining self-reliance in basic organic chemical needs .In fact this

was first attempt for manufacture of basic chemicals and to reduce country’s dependence on

import of vital organic chemicals.HOC started as a small chemical unit. But today has

acquired the status of multi-unit company with two fast growing units and one subsidiary

unit.

At present more than 500 units based on HOC’s products have been set up all over the

country which have not only succeeded in meeting the goal of self sufficiency but also entered

the international markets earning precious foreign exchange by exporting chemicals, dyes, dye

intermediate and drugs.

Main manufacturing units of HOC comprises of:

The Nitro aromatic complex at Rasayani in Raigad district (Maharashtra.)

The Phenol complex at Kochi (Kerala)

Polytetraflouroethylene (PTFE) Complex (Subsidary) at Rudraram, Hyderabad

(Andhra Pradesh).

4

HOC provides the basic organic chemicals essential for vital industries.

The main products manufactured by HOC are Phenol, Acetone, Nitrobenzene,

Acetanilide, Formaldehyde, Aniline, and Nitrotoluenes. The raw materials used by HOC

are Benzene, Toluene, LPG, Methanol, Naphtha and Sulphur, majority of which come

from petroleum refineries and petrochemicals complexes.

HOC provides the basic organic chemicals essential for vital industries like

resins and laminates, dyes and dye intermediates, drugs and pharmaceutical, rubber

chemicals, paints, pesticides and others, touching virtually every facet of everyday life.

It also provides the versatile engineering plastic polytetraflouroethylene (PTFE)

through its subsidiary.

MISSION:

To be a dynamic chemical market leader committed to quality and customer

satisfaction. Our mission is also to be prime representative of India in global chemical

business.

GROWTH STRATEGY:

The fast changing working environment and the need for not only sustaining but also

accelerating the growth process, dictated the long term perspective in planning coupled with

flexibility to make strategic decisions. Organizations are expected to be resilient enough to

respond to the emerging challenges. Hence, the company concentrates on the core business of

Nitro aromatics and Phenol/ Acetone and certain Phenol based down stream products.

5

Major business and investment thrust to be in the areas of core competency.

Value addition in the area of manufacture.

Continuous restructuring and reengineering in order to achieve:

i) Reduction in cost of production

ii) Increase market share and margins

iii) Higher level of efficiencies and productivity

iv) Economy of scale

v) Rationalization of manpower

6

PRODUCTS END USE

ACETANILIDE Dyes and intermediates, perfumery

Compounds, Sulpha drugs.

ANILINE Rubber chemicals, drugs, dyes polymers,

Photographic chemicals perfumes pest

Control chemicals.

CONCENTRATED NITRIC ACID

Nitration of organic compounds, explosives.

SULPHURIC ACID/ OLEUMS Industrial detergents / sulfonation.

NITROBENZENE Drugs, dyes/intermediates, aniline,

crop protection and pest control.

FORMALDEHYDE Synthetic resin, adhesives,

Drugs ,disinfectants, pesticides

intermediates.

CAUSTIC SODA Pulp and paper industry, fibre industry, soap

detergent, etc.

7

AWARDS AND REWARDS:AWARDS AND REWARDS:

HOC has received a multitude of accolades and awards. They include

YEAR DESCRIPTION

1980-81 Export award from CHEMEXCIL for five consecutive years.

1979 First prize for HOC”S annual report (1978-79) in the 21st national award for

excellence in printing and designing by dacp ministry of information and

broadcasting government of India,

1981 Indian chemical manufacturers association award for process design and

process engineering for developing know-how and installing a detoxification

plant for solvent extraction

1982 Institute of chartered accountants shield forth best presented annual accounts

and report.

1983 National society for equal opportunity of handicapped (naseoh) award for

employing maximum number of physically handicapped

1984 Grocery markets and shops board for greater Bombay (mathadi) boards

award for being an ideal employer

1985 Indira Gandhi memorial national award for excellence in public sector

enterprises.

1986 First prize for HOC annual report 1986-87 from association of business

communicators of India

1987 Second prize in suggestion scheme by the Indian national suggestion schemes

association.

1988 Certificate of commendation for HOC annual report 1987-88 from the

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association of business communicators of India

1989 Productivity award from Kerala productivity council

1990 Industrial safety award Kerala chapters (1998-1991) and consequently

thereafter from the year 1993 till 1998

1991 First prize in the chemical sector for energy conservation for the year 1991-

92 by government of India, ministry of energy, department of power

1992 Dyestuff manufacturers industries association –industrial pollution control

award –1995

1993 Certificate of merit by the Kerala state pollution control board for Kochi unit.

Second prize for safety from the Kerala chapter of the national safety council

1994 Wisitex foundation international award life 2000 91994) for national

excellence in industrial pollution abatement

1995 The dyestuff manufacturers association of India’s award (dmai) for

successful development of indigenous technology for product by a large scale

unit for the year 1995-96

1996 First prize award Indira Gandhi official language puraskar for the year 1997-

98 for best implementation of rajbhasha Hindi

1997 Kerala state productivity councils productivity award among large industries

in kerala-1998

1998 ICICI technology award by national chemical laboratory research foundation

jointly with the process development and chemical engineering division team

member of national chemical laboratory for the mono chloro benzene

expansion project

1999 National energy conservation award, 1999 first prize in chemical sector by

government of India ministry of power, New Delhi.

9

2000 National Energy Conservation Award, 2000 – First Prize in Chemical Sector

by government of India ministry of power, New Delhi.

2001 National Energy Conservation Award, 2001 – Second Prize in chemical

sector by government of India ministry of Power, New Delhi.

10

3.0 RESEARCH METHODOLOGY

3.1 Scope of the Study

This research is done on financial position of the company which is based on financial

statement.

This study is very helpful to find out the performance of the company which is helpful

to take decisions in future and improve the company performance.

This study report helps in the assessment of the liquidity, operating efficiency,

profitability and solvency of a firm.

The study is also beneficial to employees and offers motivation by showing how

actively they are contributing for company’s growth.

This study is helpful to shareholders, creditors, lenders, government to know the

company financial position.

3.2 Objective of study

To identify the financial strengths and weakness of the company.

Through the net profit ratio and other profitability ratio, understand the Profitability

position of the company.

Evaluating company’s performance relating to Financial Statement Analysis.

To know the liquidity position of the company, with the help of Current Ratio.

11

To find out the utility of financial ratio in credit analysis and determining the financial

capability of the firm.

3.3 Limitation of the Study

The Balance sheet and Profit and loss statement of the year 2010-2011 is not easily

available.

Because the limitations of the company some information can not use for study.

Time duration is also one of the constraints for the study.

3.4 Sources of Data

The focus of this chapter is on the methodology used for the collection of data for research.

Data constitutes the subject matter of the analyst. The primary sources of the collection of data

are observations, interviews and the questionnaire technique. The secondary sources are

collections of data are from the printed and annually published material.

Primary data:-

Data that is collected for the specific purpose at hand is called as primary data. Information

relating to the project was collected during formal and informal discussions with the Chief

Finance Manager and Staff of finance department.

Secondary Data:

Secondary data highlights the contextual familiarities for primary data collection. It provides

rich insights into the research process.

Secondary data is collected through following sources:

Published Sources:

Annual report of HOC Ltd from the year from 2008-09 to 2010-11

a. Profit and loss accounts statements.

b. Balance sheet (assets and liabilities)

12

3.5 Sampling procedure

Samples are not use in the project report because there is no need of samples for the ratio

analysis.

3.6 Methods & Instruments of Data gathering

Most of the data is gathered from internet and books. No questionnaire method is used for

ratio analysis.

3.7 Statistical Treatment

Ratio Analysis is used for Statistical treatment.

13

4.0 LITERATURE STUDY

4.1 Introduction of Ratio

MEANING OF RATIO:

A ratio is one figure express in terms of another figure. It is a mathematical yardstick

that measures the relationship of two figures, which are related to each other and mutually

interdependent. Ratio is express by dividing one figure by the other related figure. Thus a ratio

is an expression relating one number to another. It is simply the quotient of two numbers. It

can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “so

many times”. As accounting ratio is an expression relating two figures or accounts or two sets

of account heads or group contain in the financial statements.

MEANING OF RATIO ANALYSIS:

Ratio analysis is a widely-used tool of financial analysis. It can be used to compare the risk

and return relationship of firms of different sizes. It is defined as the systematic use ratio to

interpret the financial statement so that the strengths and weaknesses of a firm as well as

historical performance and current financial condition can be determined. The term ratio

refers to the numerical or quantitative relationship between two items/variable. This

relationship can be expressed as (i) percentages, say, net profits are 25percent of sales

(assuming net profits of Rs 25,000 and sales of Rs. 1, 00,000) , (ii) fraction (net profit is one –

fourth of sales ) and (iii) proportion of numbers (the relationship between net profits and sales

is 1:4).these alternative methods of expressing items which are related to each other are, for

purposes of financial analysis, referred to as ratio analysis. It should be noted that computing

the ratios does not add any information not already inherent in the above figures of profit and

sales. What the ratio does is that they reveal the relationship in a more meaningful way so as

to enable equity investors; management and lenders make better investment and credit

decisions.

The rationale of ratio analysis lies in the fact that it makes related information comparable. A

single figure by itself has no meaning but when expressed in terms of a related figure, it yields

significant inferences. For instance, the figure of net profits of a firm amount to, say,

Rs10lakhs throws no light on its adequacy or otherwise. The figure of net profits has to be

considered in relation to other variables. How does it stand in relation to sales? What does it

14

represent by way of return on total assets used or total capital employed? If, therefore, net

profits are shown in terms of their relationship with items such as sales, assets, capital

employed, equity capital and so on, meaningful conclusions can be drawn regarding their

adequacy. To carry the above example further assuming the capital employed to be Rs 50lakh

and Rs 100lakh, the net profits are 20 percent and 10 percent respectively. Ratio analysis,

thus, as a quantitative tool, enables analysts to draw quantitative answers to questions such as:

are the net profits adequate? Are the assets being used efficiently? Is the firm solvent? Can the

firm meet its current obligations and so on?

FORMS OF RATIO:

Since a ratio is a mathematical relationship between two or more variables /

accounting figures, such relationship can be expressed in different ways as follows –

A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the preference share

capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is

20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:

In the above case the equity share capital may also be described as 4 times that of

preference share capital. Similarly, the cash sales of a firm are

Rs. 12, 00,000 & credit sales are Rs. 30, 00,000. So the ratio of credit sales to cash sales can

be described as 2.5 [30, 00,000/12, 00,000] or simply by saying that the credit sales are 2.5

times that of cash sales.

C] As a percentage:

In such a case, one item may be expressed as a percentage of some other item. For

example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs.

10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]

15

Steps in Ratio Analysis

The ratio analysis requires two steps as follows:

1] Calculation of ratio

2] Comparing the ratio with some predetermined standards. The standard ratio may be the past

ratio of the same firm or industry’s average ratio or a projected ratio or the ratio of the most

successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot

reach any fruitful conclusion unless the calculated ratio is compared with some predetermined

standard. The importance of a correct standard is oblivious as the conclusion is going to be

based on the standard itself.

Types of Comparison

The ratio can be compared in three different ways –

1] Cross section analysis:

One of the way of comparing the ratio or ratios of the firm is to compare them with the

ratio or ratios of some other selected firm in the same industry at the same point of time. So it

involves the comparison of two or more firm’s financial ratio at the same point of time. The

cross section analysis helps the analyst to find out as to how a particular firm has performed in

relation to its competitors. The firms performance may be compared with the performance of

the leader in the industry in order to uncover the major operational inefficiencies. The cross

section analysis is easy to be undertaken as most of the data required for this may be available

in financial statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the performance of a firm is evaluated

over a period of time. By comparing the present performance of a firm with the performance

of the same firm over the last few years, an assessment can be made about the trend in

progress of the firm, about the direction of progress of the firm. Time series analysis helps to

the firm to assess whether the firm is approaching the long-term goals or not. The Time series

16

analysis looks for (1) important trends in financial performance (2) shift in trend over the

years (3) significant deviation if any from the other set of data\

3] Combined analysis:

If the cross section & time analysis, both are combined together to study the behavior

& pattern of ratio, then meaningful & comprehensive evaluation of the performance of the

firm can definitely be made. A trend of ratio of a firm compared with the trend of the ratio of

the standard firm can give good results. For example, the ratio of operating expenses to net

sales for firm may be higher than the industry average however, over the years it has been

declining for the firm, whereas the industry average has not shown any significant changes.

Pre-requisites to Ratio Analysis

In order to use the ratio analysis as device to make purposeful conclusions, there are

certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are

not conditions for calculations for meaningful conclusions. The accounting figures are

inactive in them & can be used for any ratio but meaningful & correct interpretation &

conclusion can be arrived at only if the following points are well considered.

The dates of different financial statements from where data is taken must be same.

If possible, only audited financial statements should be considered, otherwise there

must be sufficient evidence that the data is correct.

Accounting policies followed by different firms must be same in case of cross section

analysis otherwise the results of the ratio analysis would be distorted.

One ratio may not throw light on any performance of the firm. Therefore, a group of

ratios must be preferred. This will be conductive to counter checks.

Last but not least, the analyst must find out that the two figures being used to calculate

a ratio must be related to each other, otherwise there is no purpose of calculating a

ratios.

17

4.2 Classification of ratio:-

Figure 4.2.1 CLASSIFICATION OF RATIO

BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER

STATEMENT

1] BALANCE SHEET 1] LIQUIDITY RATIO 1] RATIOS FOR

RATIO 2] LEVERAGE RATIO SHORT TERM

2] REVENUE 3] TURNOVER RATIO CREDITORS

STATEMENT 4] PROFITABILITY 2] RATIO FOR

RATIO SHAREHOLDER

3] COMPOSITE 5] COVERAGE 3] RATIOS FOR

RATIO RATIO MANAGEMENT

4] RATIO FOR

LONG TERM

CREDITORS

BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from financial

statements. Figures may be taken from Balance Sheet , P& P A/C, or both. One-way of

classification of ratios is based upon the sources from which are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called Balance Sheet

Ratios. E.g. ratio of current assets to current liabilities or ratio of debt to equity. While

calculating these ratios, there is no need to refer to the Revenue statement. These ratios study

18

the relationship between the assets & the liabilities, of the concern. These ratio help to judge

the liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current

ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity ratio, and Stock

working capital ratio.

2] Revenue ratio:

Ratio based on the figures from the revenue statement is called revenue statement

ratios. These ratio study the relationship between the profitability & the sales of the concern.

Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net

operating profit ratio, Stock turnover ratio.

3] Composite ratio:

These ratios indicate the relationship between two items, of which one is found in the

balance sheet & other in revenue statement.

There are two types of composite ratios-

Some composite ratios study the relationship between the profits & the investments of

the concern. E.g. return on capital employed, return on proprietors fund, return on

equity capital etc.

Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend

payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to liquidity

ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios:

It shows the relationship between the current assets & current liabilities of the concern

e.g. liquid ratios & current ratios.

2] Leverage ratios:

19

It shows the relationship between proprietors funds & debts used in financing the

assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietory ratios.

3] Activity ratios:

It shows relationship between the sales & the assets. It is also known as Turnover

ratios & productivity ratios e.g. stock turnover ratios, debtors turnover ratios.

4] Profitability ratios:

It shows the relationship between profits & sales e.g. operating ratios, gross profit

ratios, operating net profit ratios, expenses ratios

It shows the relationship between profit & investment e.g. return on investment, return

on equity capital.

5] Coverage ratios:

It shows the relationship between the profit on the one hand & the claims of the

outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios.

BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.

Figure: 4.2.2

20

LIQUIDITY RATIO: -

Liquidity refers to the ability of a firm to meet its short-term (usually up to 1 year)

obligations. The ratios, which indicate the liquidity of a company, are Current ratio,

Quick/Acid-Test ratio, and Cash ratio. These ratios are discussed below

Figure: 4.2.3

CURRENT RATIO:

Meaning:

This ratio compares the current assests with the current liabilities. It is also known as

‘working capital ratio’ or ‘solvency ratio’. It is expressed in the form of pure ratio.

E.g. 2:1

Formula: Current Assets

Current Ratio =

Current Liabilities

21

The current assets of a firm represents those assets which can be, in the ordinary course of

business, converted into cash within a short period time, normally not exceeding one year.

The current liabilities defined as liabilities which are short term maturing obligations to be

met, as originally contemplated, with in a year.

Current ratio (CR) is the ratio of total current assets (CA) to total current liabilities (CL).

Current assets include cash and bank balances; inventory of raw materials, semi-finished and

finished goods; marketable securities; debtors (net of provision for bad and doubtful debts);

bills receivable; and prepaid expenses. Current liabilities consist of trade creditors, bills

payable, bank credit, and provision for taxation, dividends payable and outstanding expenses.

This ratio measures the liquidity of the current assets and the ability of a company to meet its

short-term debt obligation.

CR measures the ability of the company to meet its CL, i.e., CA gets converted into cash in

the operating cycle of the firm and provides the funds needed to pay for CL. Higher the

current ratio, greater the short-term solvency. This compares assets, which will become liquid

within approximately twelve months with liabilities, which will be due for payment in the

same period and is intended to indicate whether there are sufficient short-term assets to meet

the short- term liabilities. Recommended current ratio is 2: 1. Any ratio below indicates that

the entity may face liquidity problem but also Ratio over 2: 1 as above indicates over trading,

that is the entity is under utilizing its current assets.

QUICK RATIO:

Meaning:

Quick ratio is also known as acid test ratio or liquid ratio. Quick ratio compares the quick

assets with the quick liabilities. It is expressed in the form of pure ratio. E.g. 1:1.

The term quick assets refer to current assets, which can be converted into, cash immediately

or at a short notice without diminution of value.

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Formula:

Current Assets – Inventory

Quick Ratio =

Current Liabilities

Quick Ratio (QR) is the ratio between quick current assets (QA) and CL. QA refers to those

current assets that can be converted into cash immediately without any value strength. QA

includes cash and bank balances, short-term marketable securities, and sundry debtors.

Inventory and prepaid expenses are excluded since these cannot be turned into cash as and

when required.

QR indicates the extent to which a company can pay its current liabilities without relying on

the sale of inventory. This is a fairly stringent measure of liquidity because it is based on those

current assets, which are highly liquid. Inventories are excluded from the numerator of this

ratio because they are deemed the least liquid component of current assets. Generally, a quick

ratio of 1:1 is considered good. One drawback of the quick ratio is that it ignores the timing of

receipts and payments.

INVESTMENT / SHAREHOLDERS:-

Figure: 4.2.4

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EARNING PER SHARE:-

Meaning:

Earnings per Share are calculated to find out overall profitability of the organization. Earnings

per Share represent earning of the company whether or not dividends are declared. If there is

only one class of shares, the earning per share are determined by dividing net profit by the

number of equity shares. EPS measures the profits available to the equity shareholders on

each share held.

Formula:-

NPAT

Earnings per share =

Number of equity share

The higher EPS will attract more investors to acquire shares in the company as it indicates

that the business is more profitable enough to pay the dividends in time. But remember not all

profit earned is going to be distributed as dividends the company also retains some profits for

the business

DIVIDEND PER SHARE:-

Meaning:

DPS shows how much is paid as dividend to the shareholders on each share held.

Formula:

Dividend Paid to Ordinary Shareholders

Dividend per Share =

Number of Ordinary Shares

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DIVIDEND PAYOUT RATIO:-

Meaning:

Dividend Pay-out Ratio shows the relationship between the dividend paid to equity

shareholders out of the profit available to the equity shareholders.

Formula: Dividend per share

Dividend payout ratio = X 100

Earning per share

D/P ratio shows the percentage share of net profits after taxes and after preference dividend

has been paid to the preference equity holders.

GEARING:-

Figure: 4.2.5

CAPITAL GEARING RATIO:-

Meaning:

Gearing means the process of increasing the equity shareholders return through the use of

debt. Equity shareholders earn more when the rate of the return on total capital is more than

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the rate of interest on debts. This is also known as leverage or trading on equity. The Capital-

gearing ratio shows the relationship between two types of capital viz: - equity capital &

preference capital & long term borrowings. It is expressed as a pure ratio.

Formula:

Preference capital+ secured loan

Capital gearing ratio =

Equity capital & reserve & surplus

Capital gearing ratio indicates the proportion of debt & equity in the financing of assets of a

concern.

PROFITABILITY

These ratios help measure the profitability of a firm. A firm, which generates a substantial

amount of profits per rupee of sales, can comfortably meet its operating expenses and provide

more returns to its shareholders. The relationship between profit and sales is measured by

profitability ratios. There are two types of profitability ratios: Gross Profit Margin and Net

Profit Margin

Figure: 4.2.6

FF

.

26

GROSS PROFIT RATIO:-

Meaning:

This ratio measures the relationship between gross profit and sales. It is defined as the excess

of the net sales over cost of goods sold or excess of revenue over cost. This ratio shows the

profit that remains after the manufacturing costs have been met. It measures the efficiency of

production as well as pricing. This ratio helps to judge how efficient the concern is I

managing its production, purchase, selling & inventory, how good its control is over the direct

cost, how productive the concern , how much amount is left to meet other expenses & earn net

profit.

Formula:

Gross profit

Gross profit ratio = x 100

Net sales

NET PROFIT RATIO:-

Meaning:

Net Profit ratio indicates the relationship between the net profit & the sales it is usually

expressed in the form of a percentage.

Formula:

NPAT

Net profit ratio = x 100

Net sales

This ratio shows the net earnings (to be distributed to both equity and preference

shareholders) as a percentage of net sales. It measures the overall efficiency of production,

27

administration, selling, financing, pricing and tax management. Jointly considered, the gross

and net profit margin ratios provide an understanding of the cost and profit structure of a firm.

RETURN ON CAPITAL EMPLOYED:-

Meaning:

The profitability of the firm can also be analyzed from the point of view of the total funds

employed in the firm. The term fund employed or the capital employed refers to the total

long-term source of funds. It means that the capital employed comprises of shareholder funds

plus long-term debts. Alternatively it can also be defined as fixed assets plus net working

capital.

Capital employed refers to the long-term funds invested by the creditors and the owners of a

firm. It is the sum of long-term liabilities and owner's equity. ROCE indicates the efficiency

with which the long-term funds of a firm are utilized.

Formula:

NPAT

Return on capital employed = x100

Capital employed

FINANCIAL

These ratios determine how quickly certain current assets can be converted into cash. They are

also called efficiency ratios or asset utilization ratios as they measure the efficiency of a firm

in managing assets. These ratios are based on the relationship between the level of activity

represented by sales or cost of goods sold and levels of investment in various assets. The

important turnover ratios are debtors turnover ratio, average collection period, inventory/stock

turnover ratio, fixed assets turnover ratio, and total assets turnover ratio. These are described

below:

28

Figure: 4.2.7

DEBTORS TURNOVER RATIO (DTO)

Meaning:

DTO is calculated by dividing the net credit sales by average debtors outstanding during the

year. It measures the liquidity of a firm's debts. Net credit sales are the gross credit sales

minus returns, if any, from customers. Average debtors are the average of debtors at the

beginning and at the end of the year. This ratio shows how rapidly debts are collected. The

higher the DTO, the better it is for the organization.

Formula:

Credit Sales

Debtors Turnover Ratio =

Average Debtors

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INVENTORY OR STOCK TURNOVER RATIO (ITR)

Meaning:

ITR refers to the number of times the inventory is sold and replaced during the accounting

period.

Formula:

COGS

Stock Turnover Ratio =

Average Stock

ITR reflects the efficiency of inventory management. The higher the ratio, the more

efficient is the management of inventories, and vice versa. However, a high inventory

turnover may also result from a low level of inventory, which may lead to frequent stock outs

and loss of sales and customer goodwill. For calculating ITR, the average of inventories at the

beginning and the end of the year is taken. In general, averages may be used when a flow

figure (in this case, cost of goods sold) is related to a stock figure (inventories).

FIXED ASSETS TURNOVER (FAT)

The FAT ratio measures the net sales per rupee of investment in fixed assets.

Formula:

Net Sales

Fixed Assets Turnover =

Net Fixed Assets

30

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

indicates a high degree of efficiency in asset utilization while a low ratio reflects an inefficient

use of assets. However, this ratio should be used with caution because when the fixed assets

of a firm are old and substantially depreciated, the fixed assets turnover ratio tends to be high

(because the denominator of the ratio is very low).

STOCK WORKING CAPITAL RATIO:

Meaning:

This ratio shows the relationship between the closing stock & the working capital. It helps to

judge the quantum of inventories in relation to the working capital of the business. The

purpose of this ratio is to show the extent to which working capital is blocked in inventories.

The ratio highlights the predominance of stocks in the current financial position of the

company. It is expressed as a percentage.

Formula:

Closing Stock

Stock Working Capital Ratio =

Working Capital

Stock working capital ratio is a liquidity ratio. It indicates the composition & quality of the

working capital. This ratio also helps to study the solvency of a concern. It is a qualitative test

of solvency. It shows the extent of funds blocked in stock. If investment in stock is higher it

means that the amount of liquid assets is lower.

31

DEBT EQUITY RATIO:

MEANING:

This ratio compares the long-term debts with shareholders fund. The relationship between

borrowed funds & owners capital is a popular measure of the long term financial solvency of

a firm. This relationship is shown by debt equity ratio. Alternatively, this ratio indicates the

relative proportion of debt & equity in financing the assets of the firm. It is usually expressed

as a pure ratio. E.g. 2:1

Formula:

Total Long-term Debt

Debt-Equity Ratio =

Total Shareholders Fund

Debt equity ratio is also called as leverage ratio. Leverage means the process of the increasing

the equity shareholders return through the use of debt. Leverage is also known as ‘gearing’ or

‘trading on equity’. Debt equity ratio shows the margin of safety for long-term creditors & the

balance between debt & equity.

CREDITORS TURNOVER RATIO:

It is same as debtor’s turnover ratio. It shows the speed at which payments are made to the

supplier for purchase made from them. It is a relation between net credit purchase and average

creditors

32

Net credit purchase

Credit turnover ratio =

Average creditors

365 days

Average age of accounts payable =

Credit turnover ratio

Both the ratios indicate promptness in payment of creditor purchases. Higher creditors

turnover ratio or a lower credit period enjoyed signifies that the creditors are being paid

promptly. It enhances credit worthiness of the company. A very low ratio indicates that the

company is not taking full benefit of the credit period allowed by the creditors.

4.3 Importance of ratio analysis

As a tool of financial management, ratios are of crucial significance. The importance

of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the

drawing of interference regarding the performance of a firm. Ratio analysis is relevant in

assessing the performance of a firm in respect of the following aspects:

1] LIQUIDITY POSITION: -

With the help of Ratio analysis conclusion can be drawn regarding the liquidity

position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its

current obligation when they become due. A firm can be said to have the ability to meet its

short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing

debt usually within a year as well as to repay the principal. This ability is reflected in the

liquidity ratio of a firm. The liquidity ratios are particularly useful in credit analysis by bank

& other suppliers of short term loans.

33

2] LONG TERM SOLVENCY: -

Ratio analysis is equally useful for assessing the long-term financial viability of a

firm. This respect of the financial position of a borrower is of concern to the long-term

creditors, security analyst & the present & potential owners of a business. The long-term

solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s

that focus on earning power & operating efficiency.

Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage

ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources

of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious

strain. Similarly the various profitability ratios would reveal whether or not the firm is able to

offer adequate return to its owners consistent with the risk involved.

3] OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint

of management, is that it throws light on the degree of efficiency in management & utilization

of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the

solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by

the use of its assets- total as well as its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial position

of a firm, the management is constantly concerned about overall profitability of the enterprise.

That is, they are concerned about the ability of the firm to meets its short term as well as long

term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum

utilization of the assets of the firm. This is possible if an integrated view is taken & all the

ratios are considered together.

5] INTER – FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also serves as

a stepping-stone to remedial measures. This is made possible due to inter firm comparison &

comparison with the industry averages. A single figure of a particular ratio is meaningless

unless it is related to some standard or norm. One of the popular techniques is to compare the

34

ratios of a firm with the industry average. It should be reasonably expected that the

performance of a firm should be in broad conformity with that of the industry to which it

belongs. An inter firm comparison would demonstrate the firms position vice-versa its

competitors. If the results are at variance either with the industry average or with those of the

competitors, the firm can seek to identify the probable reasons & in light, take remedial

measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account. In other

words, whether the financial position of a firm is improving or deteriorating over the years.

This is made possible by the use of trend analysis. The significance of the trend analysis of

ratio lies in the fact that the analysts can know the direction of movement, that is, whether the

movement is favorable or unfavorable. For example, the ratio may be low as compared to the

norm but the trend may be upward. On the other hand, though the present level may be

satisfactory but the trend may be a declining one.

ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of significant

accounting data relationships, which give the decision-maker insights into the financial

performance of a company. The advantages of ratio analysis can be summarized as follows:

Ratios facilitate conducting trend analysis, which is important for decision making and

forecasting.

Ratio analysis helps in the assessment of the liquidity, operating efficiency,

profitability and solvency of a firm.

Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons.

The comparison of actual ratios with base year ratios or standard ratios helps the

management analyze the financial performance of the firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below:

35

1] Information problems

Ratios require quantitative information for analysis but it is not decisive about

analytical output.

The figures in a set of accounts are likely to be at least several months out of date, and

so might not give a proper indication of the company’s current financial position.

Where historical cost convention is used, asset valuations in the balance sheet could be

misleading. Ratios based on this information will not be very useful for decision-

making.

2] Comparison of performance over time

When comparing performance over time, there is need to consider the changes in

price. The movement in performance should be in line with the changes in price.

When comparing performance over time, there is need to consider the changes in

technology. The movement in performance should be in line with the changes in

technology.

Changes in accounting policy may affect the comparison of results between different

accounting years as misleading.

3] Inter-firm comparison

Companies may have different capital structures and to make comparison of

performance when one is all equity financed and another is a geared company it may

not be a good analysis.

Selective application of government incentives to various companies may also distort

intercompany comparison. comparing the performance of two enterprises may be

misleading.

Inter-firm comparison may not be useful unless the firms compared are of the same

size and age, and employ similar production methods and accounting practices.

Even within a company, comparisons can be distorted by changes in the price level.

Ratios provide only quantitative information, not qualitative information.

36

Ratios are calculated on the basis of past financial statements. They do not indicate

future trends and they do not consider economic conditions.

ROLE OF RATIO ANALYSIS:

It is true that the technique of ratio analysis is not a creative technique in the sense that

it uses the same figure & information, which is already appearing in the financial statement.

At the same time, it is true that what can be achieved by the technique of ratio analysis cannot

be achieved by the mere preparation of financial statement.

Ratio analysis helps to appraise the firm in terms of their profitability & efficiency of

performance, either individually or in relation to those of other firms in the same industry. The

process of this appraisal is not complete until the ratio so computed can be compared with

something, as the ratio all by them do not mean anything. This comparison may be in the form

of intra firm comparison, inter firm comparison or comparison with standard ratios. Thus

proper comparison of ratios may reveal where a firm is placed as compared with earlier period

or in comparison with the other firms in the same industry.

Ratio analysis is one of the best possible techniques available to the management to

impart the basic functions like planning & control. As the future is closely related to the

immediate past, ratio calculated on the basis of historical financial statements may be of good

assistance to predict the future. Ratio analysis also helps to locate & point out the various

areas, which need the management attention in order to improve the situation.

As the ratio analysis is concerned with all the aspect of a firms financial analysis i.e.

liquidity, solvency, activity, profitability & overall performance, it enables the interested

persons to know the financial & operational characteristics of an organisation & take the

suitable decision.

USERS OF RATIO ANALYSIS

Financial statements are used and analyzed by a different group of parties, these groups

consists of people both inside and outside a business. Generally, these users are:

37

A. Internal Users: are owners, managers, employees and other parties who are directly

connected with a company:

1. Owners and managers require financial statements to make important business decisions

that affect its continued operations. Financial analysis is then performed on these statements

to provide management with more detailed information. These statements are also used as part

of management's report to its stockholders, and it form part of the Annual Report of the

company.

2. Employees also need these reports in making collective bargaining agreements with the

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

promotion and rankings.

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

are outside the business but need financial information about the business for numbers of

reasons.

1. Prospective investors make use of financial statements to assess the viability of investing

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

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

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

give a company with fresh loans or extend debt securities (such as a long-term bank loan ).

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

and accuracy of taxes and duties paid by a company.

4. Media and the general public are also interested in financial statements of some companies

for a variety of reasons.

Which Ratio for whom:

As before mentioned there are varieties of people interested to know and read these

information and analyses, however different people for different needs. And it is because each

of these groups has different type of questions that could be answered by a specific number

38

and ratio. Therefore we can say there are different ratios for different groups, these groups

with the ratio that suits them is listed below :

1. Investors: These are people who already have shares in the business or they are willing to

be part of it. So they need to determine whether they should buy shares in the business, hold

on to the shares they already have or sell the shares they already own. They also want to

assess the ability of the business to pay dividends. As a result the Return on Capital

Employed Ratio is the one for this group.

2. Lenders: This group consists of people who have given loans to the company so they want

to be sure that their loans and also the interests will be paid and on the due time. Gearing

Ratios will suit this group.

3. Managers: Managers might need segmental and total information to see how they fit into

the overall picture of the company which they are ruling. And Profitability Ratios can show

them what they need to know.

4. Employees: The employees are always concerned about the ability of the business to

provide remuneration, retirement benefits and employment opportunities for them, therefore

these information must be find out from the stability and profitability of their employers who

are responsible to provide the employees their need. Return on Capital Employed Ratio is

the measurement that can help them.

5. Suppliers and other trade creditors: Businesses supplying goods and materials to other

businesses will definitely read their accounts to see that they don't have problems, after all,

any supplier wants to know if his customers are going to pay them back and they will study

the Liquidity Ratio of the companies.

6. Customers: Customers are interested to know the Profitability Ratio of the business with

which they are going to have a long term involvement and are dependent on the continuance

of presence of that.

7. Governments and their agencies: They are concerned with the allocation of resources

and, the activities of businesses. To regulate the activities of them, determine taxation policies

and as the basis for national income and similar statistics, they calculate the Profitability

Ratio of businesses.

39

8. Local community: Financial statements may assist the public by providing information

about the trends and recent developments in the prosperity of the business and the range of its

activities as they affect their area so they are interested in lots of ratios.

9. Financial analysts: They need to know various matters, for example, the accounting

concepts employed for inventories, depreciation, bad debts and so on .therefore they are

interested in possibly all the ratios.

10. Researchers: Researchers' demands cover a very wide range of lines of enquiry ranging

from detailed statistical analysis of the income statement and balance sheet data extending

over many years to the qualitative analysis of the wording of the statements depending on

their nature of research.

40

5.0 DATA ANALYSIS

5.1 BALANCE SHEET AS AT 31 ST MARCH, 2011

(Rs. In lacs)

PARTICULARS Year ended

March 2011

Year ended

March 2010

I.SOURCES OF FUNDS

1. SHAREHOLDERS’ FUNDS :

a) Share Capital

b) Reserves and Surplus

2. LOAN FUNDS :

a) Secured Loans

b) Unsecured Loans

TOTAL

II. APPLICATION OF FUNDS

1. FIXED ASSETS :

a) Gross Block

b) Less : Depreciation / Amortisation

c) Net Block

d) Capital work-in-progress (CWIP)

33726.96

6577.50

40304.46

3095.05

19020.37

22079.42

62383.88

71501.38

53830.64

17670.74

3298.88

20969.62

33727.36

6478.23

40205.59

7028.15

18333.84

25361.99

65567.58

70579.12

51378.48

19200.64

3068.97

22269.61

41

2. INVESTMENTS

3. CURRENT ASSETS, LOANS AND

ADVANCES :

a) Inventories

b) Sundry Debtors

c) Cash and Bank Balances

d)Other current assets

e) Loans and Advances

4. CURRENT LIABILITIES AND

PROVISIONS :

a) Current Liabilities

b) Provisions

Net Current Assets

5.MISSCLANEOUS EXPENDITURE

Profit and Loss Account

1106.00

11031.75

5141.03

3105.99

548.35

7440.46

27252.58

11438.59

6783.35

18221.94

9030.64

-

31277.62

62383.88

1106.00

7626.19

4723.71

2894.84

622.42

7279.93

23147.09

9653.45

5150.88

14804.33

8342.76

-

33849.21

65567.58

42

5.2 PROFIT AND LOSS A/C FOR YEAR ENDED 31 ST MARCH

2010-2011

(Rs. In lacs)

Particulars Year ended

March 2011

Year ended

March 2010

INCOME:

Sales(gross)

Less. Excise on sales

Net sales

Other income

Profit on sale of asset

Increase/(decrease)in stock-in-trade

TOTAL

EXPENDITURE:

Materials consumed

Excise duty

Employees Remuneration and Benefits

Manufacturing, Administrative and

Selling Expenses

Interest

Depreciation

Provisions

Loss on sale/disposal of Asset

Profit/(Loss)for the year before Tax

73803.91

7067.88

66736.03

1006.79

3.45

3041.77

70788.04

39213.21

167.97

12002.85

11856.12

2088.35

2517.74

2411.46

68.03

68158.73

52071.24

4207.83

47863.41

1745.59

0.98

(212.72)

49397.26

31489.89

165.13

9037.86

12020.43

2323.10

2652.28

139.89

0.63

57829.21

43

Less: Provision for taxation

Less: Provision for Fringe Benefit Tax

Less: Fringe Benefit Tax-previous

year

Profit /(loss) after Tax

Less: Reserve/provision no longer

required,Prior period & extra ordinary

items

Profit /(loss) after Tax & Adjustment

Add: Opening balance of profit and

loss account

Add: Transferred from General

Reserve

Add: Transferred from Bond

Redemption reserve no longer

required

Balance carried to Balance Sheet

Earnings per share

2629.31

-

-

-

2629.31

57.72

2571.59

(33849.2)

-

-

(31277.62)

3.83

(8431.95)

-

-

-

(8431.95)

(124.16)

(8307.79)

(26591.42)

-

1050.00

(33849.21)

(12.35)

44

5.3 Highlights for the year 2010-2011

PRODUCTION

During the year under review the company was able to generate the Net profit of Rs. 25.72 crores during the year, while the net loss during the previous year was Rs 83.08 crores.As regards the unit wise performance, the net profit of Kochi unit was Rs.130.08 crores which was much higher as compared to the previous year’s profit of Rs.14.74 crores. The Rasayani unit recorded a net loss of Rs. 104.37 crores as compared with the previous year’s loss of Rs. 97.82 crores.

OPERATIONS :

During the year under report, company’s Kochi unit, achieved a sales turnover of 84082 MTs valuing Rs.58120.81 lacs as against 72172 MTs valuing Rs. 38032.63 lacs of the previous year. With the production of 234684 MTs (main products) during the year 2010-11 as against the production of 221249 MTs (main products) in 2009-10, company could achieve an overall capacity utilization of 58% during the year company has recorded the sale of 129021.09 MTs during the year (last year 125512.48 MTs) valuing Rs.64142.59 lacs (last year Rs.45940.24 lacs).

The high labour cost and high incidence of cost on closed plants at Rasayani unit are the major concerns. Company has continued its cost cutting measures to counter these problems and in order to be competitive and improve performance and profitability. During the year, Rasayani unit could achieve only 67798 MTs (main products) of production as against 83520 MTs production (main products) of the previous year. The capacity utilization for the year 2010-11 was 27%.

HOC continued to enjoy support from all its valuable customers during the year 2010-11 due to excellent quality of its products manufactured at Kochi and Rasayani. It has achieved sales turnover of Rs.667.36 Crores (net of excise duty) as against Rs. 478.63 crores (net of excise duty) of the previous year. The sales volume during year 2010-11 was 1,45,173.65 MTs against 1,43,747.48 MTs for the year 2009-10, registering an increase in sales realization for the year amounting to Rs. 188.73 crores as compared to previous year’s sales of Rs. 478.63 crores

45

5.4 Calculation and Interpretation of Ratios

PROFITABILITY RATIOS:-

5.4.1 RETURN ON CAPITAL EMPLOYED:-

NPBT

Return on Investment: - X 100

Capital Employed

Year 2010-11 2009-10 2008-09 2007-08NPBT 2,629.31 -8,431.51 -2,573.51 1,566.93Capital

Employed48,222.20 30,612.37 36,714.73 35,385.68

Return on Investment

5.45% -27.54% -7.01% 4.43%

It indicates that company used its assets economically and made aprofit for the financial year

2010-11 over the previous year’s loss.It also indicate that management has utilised its

resources in proper manner. The return on capital employed of 5.45% indicates that net return

of Rs.5.45 is earned on a capital employed of Rs. 100.

5.4.2 GROSS PROFIT MARGIN RATIO:-

Gross Profit Margin Ratio= Gross Profit Margin X 100

Net Sales

Year 2010-11 2009-10 2008-09 2007-2008Sales 66,736.03 47,864.41 54,653.7 57,142.84Cost of Goods Sold 42,254.98 31,702.61 37,683.5 40,626.2Gross Grofit Margin 24,481.05 16,161.8 16,970.2 16,516.64

Gross profit margin=sales - cost of goods sold

46

Year 2010-11 2009-10 2008-09 2007-08Gross Profit Margin Ratio 24,481.05 16,161.8 16,970.2 16,516.64

Net Sales 66,736.03 47,864.41 54,653.7 57,142.84Gross Profit Margin Ratio

36.68% 33.77% 31.05% 28.90%

The gross profit ratio in 2010-11 is 36.68% which was 33.77% in 2009-10. In 2010-11 Gross

profit ratio has increased by 8.62% than its previous year its because of cost of sales is less in

this year. This indicates that the company’s profitability position is good.

5.4.3 NET PROFIT RATIO:-

Net Profit Ratio: - Net Profit X 100

Net Sales

Year 2010-11 2009-10 2008-09 2007-08Net Profit 2,629.31 -8,431.95 -2,613 1,529Net Sales 66,736.03 47,864.41 54,653.7 57,142.84

Net Profit Ratio 3.939865767 -17.61632495 -4.781012082 2.675750803

Net profit ratio for the year 2010-11 is +3.93% which is more than net profit ratio of 2009-10

which was -17.61%. Net profit ratio increased in 2010-11 by 122% as compared to previous

year because of reduction in cost of production and increase in sales.

LIQUIDITY RATIO:-

5.4.4 CURRENT RATIO:-

Current Ratio:- Current Assets

Current Liabilities

47

Year 2011-10 2009-10 2008-09 2007-08Current Assets

27252.58 23147.09 23947.53 23100.31

Current Liabilities

18221.94 14804.33 11909.71 13847.47

Current Ratio 1.495591578 1.563535128 2.010756769 1.668197151

The standard current ratio is 2:1. The short term position of company is not satisfactory and it

indicates good short term financial condition is required. Current ratio of company for 2010-

11 is 1.49% and it was 1.56% in 2009-10 that indicate a company has a low percentage of its

current assets in the form of working capital, cash that would be more liquid in the sense of

being able to meet obligations as & when they become due. It is seen from year 2008-09

company’s current ratio is declining which is not a good sign for company. The current ratio

throws light on the company’s ability to pay it’s current liabilities out of it’s current assets.

5.4.5 QUICK RATIO:-

Quick Ratio: - Quick Assets

Quick Liabilities

Year 2010-11 2009-10 2008-09 2007-08Quick Assets 16235.83 15520.9 17252.18 17226.47Quick Liabilities

18221.94 14804.33 11909.71 13878.47

Quick Ratio 0.89100447 1.048402731 1.448581032 1.241236966

The quick ratio indicates the liquid financial position of an enterprise. Standard quick ratio is

1:1. Company’s quick ratio is lessfor the year 2010-11 that is 0.89:1 which indicate that

company liquidity position is not so good, so company can not easily meet it’s short term

liabilities. Quick assets are less because there is lots of inventory is blocked in the form of

current asset which is not good for company .

48

INVESMENT RATIOS:-(In a view of accumulated losses ,company has not declared

any dividend on equity shares; therefore calculation of following ratios does not mean

anything with respected to project; hence not calculated.)

5.4.6 EARNING PER SHARE:-

Earning per share: - Net profit available to equity shareholders

Number of equity shares

5.4.7 DIVIDEND PER SHARE RATIO:-

Dividend Paid to Ordinary Shareholders

Dividend per Share =

Number of Ordinary Shares

5.4.8 DIVIDEND PAYOUT RATIO:-

Dividend per share

Dividend Payout ratio = x100

Earning per share

.

49

GEARING RATIO:-

5.4.9 CAPITAL GEARING RATIO:-

Capital Gearing Ratio:- Preference Capital+ Secured Loan

Equity Fund

Year 2010-11 2009-10 2008-09 2007-08Preference Capital 27000 27000 27000 27000Secured Loan 3059.05 7028.15 6064.79 11848.13Equity Fund 10000 10000 10000 10000Capital Gearing Ratio

3.005905 3.402815 3.306479 3.884813

Gearing means the process of increasing the equity shareholders return through the use of

debt. Capital gearing ratio is a leverage ratio, which indicates the proportion of debt and

equity in the financing of assets of a company. Capital gearing ratio is decreased in the

year2010-11 by 11.76% which shows that company has reduced its external loans. It

indicates company’s external funds are less so company can rely more on external funds.

FINANCIAL RATIO:-

5.4.10 STOCK TURNOVER RATIO:-

Stock Turnover Ratio:- Cost of Goods Sold

Average Inventory

Average Inventory:- Opening Stock + Closing Stock

2

50

Year 2010-11 2009-10 2008-09 2007-08Cost of Goods Sold

66736.03 47864.41 54653.7 57142.84

Average Stock

3354.48 3871.28 6695.35 5873.84

Stock Turnover Ratio(times)

19.89459767 12.36397522 8.162933977 9.728361685

Stock turnover ratio shows the relationship between the sales and stock it means how stock is

being turn over into sales. Stock turnover ratio is more in 2010-11 as compared to previous

years because there is increase in cost of goods sold and decrease in average stock.

5.4.11 FIXED ASSETS TURNOVER RATIO:-

Fixed Assets Turnover Ratio: - Net Sales

Total Fixed Assets

Year 2010-11 2009-10 2008-09 2007-08Net Sales 66736.03 47863.41 54653.7 57142.84Total Fixed Assets

17670.74 19200.64 24676.91 21394.84

Fixed Assets Turnover Ratio(times)

3.776640367 2.492802844 2.214770812 2.670870172

Fixed assets turnover ratio is more in 2010-11 as compared to previous years there is

decrease in fixed assets but net sales of the company is increased in this year but instead of

this it shows a good condition of sales against total assets. There is increase in total asset

because of new projects undertaken by company.

51

5.4.12 DEBT EQUITY RATIO:-

Debt Equity Ratio: - Long-term Debt

Equity

Year 2010-11 2009-10 2008-09 2007-08Long-term Debt

22079.42 25361.99 23143.48 18210.03

Equity 40205.59 40205.59 41451.74 41700.63  0.54916294 0.630807557 0.558323487 0.43668477Debt Equity Ratio

The debt equity ratio for the year 2010-11 is 0.55 which is less as compared to debt equity

ratio of previous two years.It’s due to decrease in long term debt and also company’s reserves

in this year is also decreased. Standard debt equity ratio is 2:1 so company can raise its

external borrowings.

5.4.13 DEBTORS TURNOVER RATIO:-

Net Sales

Debtor Turnover Ratio: -

Debtors

Year 2010-11 2009-10 2008-09 2007-08Net sales 66736.03 47863.41 54653 57142.84Debtors 5141.03 4723.71 3886.46 6590.5Debtor turnover ratio(times)

12.98106216 10.13258858 14.06241155 8.670486306

5.4.15 Collection Period: - No. of days in a year

Debtor’s Turnover

52

Year 2010-11 2009-10 2008-09 2007-08No. of days 365 365 365 365Debtors Turnover

12.98106216 10.13258858 14.06241155 8.670486306

Debtor Collection Ratio(days)

28.117884 36.02238432 25.95571881 42.09683138

Debtor’s turnover ratio is alternative known as “Accounts Receivable Turnover Ratio”. This

ratio measures the collectibility of debtors and other Accounts receivable it means the rate at

which the trade debts are being collected. Debtor turn over ratio in year 2010-11 is 28 times

which less as compared to previous year. Therefore company’ efficiency of collecting debt

has been increased compared to earlier year.

5.4.16 STOCK-WORKING CAPITAL RATIO:-

Closing Stock

STOCK-WORKING CAPITAL RATIO=

Working Capital

Year 2010-11 2009-10 2008-09 2007-08Closing Stock 6708.96 3764.92 3977.64 1767.1Working Capital

9030.64 8364.76 12037 9221.84

Stock-Working Capital Ratio

0.742910801 0.450093009 0.330451109 0.191621195

Stock-working capital ratio for the year 2010-11 is 0 .74 which is less as compared to

previous .This ratio shows that extend of funds blocked in stock. Closing stock is more in

2010-11 so it indicates that fund blocked in stock is more. Also there is increase in working

capital because of increase in cash.

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5.5 Graphs:

Sales turnover Chart No. 5.5.1

(sources: Profit and loss statement of HOC LTD)

Sales turnover chart shows that the company sales turnover has increased in year 2010-11.It

has achieved sales turnover of Rs.667.36 Crores as against Rs. 478.63 crores the previous

year. The sales volume during year 2010-11 was 1,45,173.65 MTs against 1,43,747.48 MTs

for the year 2009-10, registering an increase in sales realization for the year amounting to Rs.

188.73 crores as compared to previous year’s sales of Rs. 478.63 crores.

Production chart No.5.5.2

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(sources: Annual report of HOC LTD)The chart shows that the company production is more in 2010-11 as compared to previous year2009-10. Company could achieve overall capacity utilization of 58% during the year.

Financial performance chart No.5.5.3

(sources: Profit and loss statement of HOC LTD)

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Net profit after tax has increased in year 2010-11. In 2010-11 net profit is much more as

compared to previous year. It’s becauseof company’s cochi unit has permormed very well and

has brought in profit of Rs130 crores. It shows that company’s profitability position is good.

Distribution of each rupee earned chart No.5.5.4

(sources: Profit and loss statement of HOC LTD)

Company has huge investment in employees remuneration and benefits;

manufacturing,administrating and selling expenses;depriciation etc.

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6.0 FINDINGS AND CONCLUSION

6.1 Findings

Tall organization structure: The organization structure being tall and the culture

being bureaucratic, the communication has become slow. Multitired responsibility and

authority has made the decision making process slow. This has put serious limitation

on the organization response time to the changes in external environment, in particular

competition.

High cost of production: The machinery & plants of the organization are old and

requires repair and maintenance expenditure. Due to this overhead cost increases and

production cost also increases. The other companies are able to maintain their

overhead costs such as maintenance, water, fuel, electricity etc and are able to produce

at low cost. Due to high cost of production the demand of the product has declined

considerably as compared to previous years.

Old depreciated plant: Most of the plants are old and depreciated, it require high

maintenance cost. Some of the plants are idle due to various reasons. Some plants are

idle due to lack of raw materials. Company has to prepared proper budgets for heavy

investment for modernization of plants.

High manpower cost: Although companies’ manpower is skilled but they are over

employed, it results in increase in the operating cost of the company.

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External factors: External factors like government policies, fluctuation in external

environment reflects the company’s financial performance, changing demand pattern,

technologies, increasing competition due to globalization etc. affect the company’s

performance adversely. The companies’ technology is one which affects the

performance of the company drastically.

Strategic considerations like increasing company’s competitiveness, reducing

company’s dependence on external agencies etc.

Engineering and Technical viability.

Financial viability.

Seeking the support and involvement of all levels of management.

Fundamentally, the format serves as nothing more than a convenient way to record

budget figures. It does not encourage or require that the managers developing these

figures consider and analyze the various factors that are relevant to the development of

truly meaningful budget figures.

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6.2 Conclusion

In the finance department each section should have its separate latest PC’s with

laser printers, so they can complete their work faster.

New software programs like ERP, Tally, SAP, etc should be implemented which can

make finance work easier and faster.

Tall organization structure: The company should also give due consideration to

organization structure. Organization structure plays very essential role in the

communication of employees. HR manager must form proper policies for the

organization. Proper budgeting must be done in the tall organization to overcome the

future hurdles. The responsibility should be properly disseminated to person in tall

organization structure.

Reduced cost of production: Production cost must be reduced so that company can

gain due advantage. This can be done only by using proper tools, equipments and

technology required for production of products. High cost of production is mainly due

to overhead costs (power, maintenance, fuel and water) which the management must

think and plan properly to reduce the costs.

Manpower cost: HR manager must plan properly and form proper policies so that the

competent employees can be retained in the organization. The HR manager must form

personnel budget so that future cost can be estimated.

Other external and internal factors: The companies management needs to give due

consideration to external and internal factors and chalk out appropriate solution to the

problems.

There should be proper mechanism to recognize and assess the impact on financial

and operational performance of changes in the level of activity.

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Clear and Realistic goals: Budgeting is a means to achieve goals and objectives.

Budgeting will not succeed if the goals to be achieved are not clear; budget

implementation will not be systematic. The financial manager or the budget director,

therefore, must ensure that objectives and goals have been properly laid down. The

enterprise objectives and budget goals to be accomplished through budgeting should

be reasonable and realistic; they should be capable of attainment. Budgets goals

should not set at too high or low a level. Goals set at a very high level are impossible

to attain and as a result, have depressing effect on the employee’s morale. Once the

employees know that they are unrealistic and unattainable they do not put any serious

efforts to achieve them.

Creation of Responsibility centres: A small firm can be managed by an individual

or a small group of individual. But the activities of a large firm cannot be supervised

by an individual. For effective control of all activities a large firm is divided into

meaningful segments, departments or divisions. Responsibility centre is a sub unit of

an organization under the control of a manager who has the responsibility for the

activities of that responsibility centre. For planning and control purposes

responsibility centres must generally classified into cost centre, profit centre, and

investment centre.

Full Participation: Full participation of managers and their subordinates at all level

should be sought in developing the budgeting system. The participation should be

meaningful and real. If employees have effectively participated in developing the

budget goals and targets, they will make special efforts to see that the budgeting

process succeeds.

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Flexibility: The budgeting system should be flexible enough to take advantage of all

opportunities that arise from time to time. Inflexibility impairs the initiative and

freedom of managers and subordinates in making decision. HOCL must administered

flexible budgeting system due to which managers will feel free and relaxed in

implementing the budget.

Top management support: A budgeting system will be an utter failure if it is not

initiated and supported by top management. Top management must: (i) understand the

nature and characteristic of budgeting; (ii) Support the programs in its entire

ramification; (iii) Be willing to devote the effort required to make it operative. The

support of top management for the budgeting system implies that it is confident about

its capability to plan the future course of action and run the enterprise successfully.

HOCL has to do this for effective budgeting as effective budgeting results in good

management.

Reduction of Scrap: To reduce the cost HOCL must reduce the scrap. As the control

of scrap or defective work is a matter of great importance in a manufacturing

organization. That is why many manufacturing organizations have a high powered

committee that periodically makes a careful examination of the cause of each item of

scrap produced by an organization.

7.0 REFERENCE SECTION

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A] Bibliography

Annual Report 2008-2009, 2009-2010,2010-11 of HOC Ltd..

Finance Sense-Dr. Prasanna Chandra.

Websites:

www.hocl.gov.in

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