FINANCIAL STATEMENT ANALYSIS With reference to TANCEM A PROJECT REPORT Submitted to the SCHOOL OF MANAGEMENT In partial fulfillment of the requirements For the award of the degree Of MASTER OF BUSINESS ADMINSTRATION N. R. REVATHl(35080489) Under the guidance of Mr. S. ARUN KUMAR (ASSISTANT PROFESSOR) SRM SCHOOL OF MANAGEMENT SRM UNIVERSITY KATTANKULATHUR 603 203 MAY, 2010 ACKNOWLEDGEMENT Perseverance, inspiration and motivation have always played a key role in the success of any venture. So hereby, it’s my pleasure to record thanks & gratitude to the persons involved. First, I thank Mr. K.
MEYYANATHAN, finance manager, TAMILNADU CEMENTS CORPORATION LTD, for his continuous support, stimulating suggestions and helping me all the time during my project. I am also greatly indebted to my guide Mr. S. ARUN KUMAR he was there to listen me & help me out if I ever had any problem. He has been so lenient also. At last, thanks to my family members for being so supportive. DECLARATION l, N. R. REVATHI student of second year M. B. A in SRM Institute of Science and Technology, SRM Nagar, Kattankulathur – 603203 would like to declare that the summer project work entitled, “FINANCIAL STATEMENT ANALYSIS WITH
REFERENCE TO TANCEM” a ongtnal project done by me. PLACE: CHENNAI DATE: (N. R. REVATHI) ABSTRACT The title of the project is “Financial Statement AnalysisWith Reference To Tamil Nadu Cements” The study is to analyze and understand the past five years audited annual report. It involves balance sheet and profit and loss account. These study is mainly involves finding out the profitability and solvency position of the company and calculating the future sales, working capital, profit etc. For calculating this, various financial tools are used and they are as follows: ??? Ratio analysis ??? Commonsize statement
The results obtained through this study are included under the heading “FINDINGS”. The conclusion consists of the final results of the study. CONTENTS CHAPTER PARTICULARS PAGE NO 1 INTRODUCTION 1. 1 ABOUT THE STUDY 1 1. 1 . (A) FINANCIAL ANALYSIS 2 1. 1 . (B) RATIO ANALYSIS 4 1. 2 INDUSTRY PROFILE 11 1. 3 COMPANY PROFILE 13 1. 4 PRODUCT PROFILE 17 2 MAIN THEME OF THE PROJECT 2. 1 OBJECTIVE OF THE STUDY 18 2. 2 LIMITATION OF THE STUDY 19 2. 3 RESEARCH METHODOLOGY 20 3 DATA ANALYSIS AND INTERPRETATION 3. 1 RATIO ANALYSIS 21 3. COMMON SIZE BALANCE SHEET 61 4 FINDINGS, SUGGESTIONS AND CONCLUSION 4. FINDINGS OF THE STUDY 66 4. 2 SUGGESTION OF THE STUDY 68 4. 3 CONCLUSION OF THE STUDY 69 5 ANNEXURE 6 BIBLIOGRAPHY LISTS OF CHART CHART NO TITLE OF THE CHART PAGE NO 3. 1. 1 CURRENT RATIO 22 3. 1. 2 LIQUID RATIO 24 3. 1. 3 ABSOLUTE LIQUID RATIO 26 3. 1. 4 PROPRIETARY RATIO 28 3. 1. 5 OPERATING PROFIT RATIO 30 3. 1. 6 NET PROFIT RATIO 32 3. 1. 7 EARNINGS PER SHARE 34 3. 1. 8 INTEREST COVERAGE RATIO 36 3. 1. 9 RETURN ON ASSETS 38 3. 1. 10 RETURN ON CAPITAL EMPLOYED 40 3. 1. 11 RETURN ON SHARE HOLDER EQUITY 42 3. . 12 WORKING CAPITAL TURNOVER RATIO 44 3. 1. 14 FIXED ASSETS TURNOVER RATIO 48 3. 1. 5 ADMINISTRATION EXPENSES RATIO 50 3. 1. 16 SELLING AND DISTRIBUTION EXPENSES 52 3. 1. 17 DEBTORS TURNOVER RATIO 54 3. 1. 18 NET ASSETS TURNOVER RATIO 56 3. 1. 19 CURRENT ASSETS TURNOVER RATIO 58 3. 1. 20 AVERAGE COLLECTION PERIOD 60 CHAPTER-I INTRODUCTION 1. 1 ABOUT THE STUDY: Any management will be interested in knowing the financial strengths of the firm to make their best of the firm to take suitable corrective actions. Hence financial analysis is an essential function of a firm.
Financial analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing he relation between the items of balance sheet and the profit and loss account. Ratios are useful to know the financial performance in the past and assess its present financial strengths. According to Webster a ratio is defined as “the relationship between two or more things” expressed mathematically is known as FINANCIAL RATIOS. Ratios may be expressed in any of the three forms: in times, percentage and proportion. There is a growing body of evidence that ratio can be directly helpful as a basis for making predictions.
In our present study we compare the ratios for the past few years. As an analytical ool, ratios are useful not only to management but also for the investors, creditors, and stock dealers etc, to comprehend the financial aspects of the company in different dimensions at glance. Ratio analysis helps to study and diagnose the financial problems and suggest corrective measures. There is a growing body of evidence that ratios can be directly helpful as a basis for making predictions especially ratios are useful for the predicting business transactions.
Quantitative relationships can be used to make qualitative Judgements. To evaluate the financial conditions of a firm, the financial analysts need certain yardsticks. On the basis of ratio analysis the management can assess the profit performance of the business. It helps to assess the stand of the company and suggest ways to improve it. An outsider can assess the soundness of investment in an enterprise with the help of ratio analysis. Thus it is evident that the ratio is a tool of financial management with multidimensional users. 1. 1. (A) FINANCIAL ANALYSES: CONCEPT Financial analysis is the process of determining financial strengths and weaknesses of the company in which it can be resolved to some degree by the predictive ability of financial statement analysis. Stockholders are concerned whether to hold or sell the stock of the company. Creditors are concerned whether income will be sufficient to cover interest and management is concerned about the future success of operation under their leadership. For these reasons, it is essential that one must have various potential future success.
TYPES OF FINANCIAL ANALYSIS: There are two types of analysis to interpret the position of organization. They are: A. VERTICAL ANALYSIS Analysis of relation between different components and their totals for a given period of time is known as analysis”. It examines relationship between different omponents for a given point of time and does not shed light on changing behavior of the above assets to current liabilities or comparison of debt or equity or comparison of debt to total assets for one point of time are concrete example of vertical analysts.
B. HORIZONTAL ANALYSIS Analysis of changes in different components of the financial statements over different period with the help of serious of statements is known as “horizontal analysis”. Study of trends in debt or share capital or their relation over the past ten year’s period or study of profitability trends for a period of five or ten years are examples of orizontal type of analysis. Horizontal analysis is also known as “dynamic analysis”, since it reflects changes in financial position of firm over a long period of time.
UTILITY OF FINANCIAL ANALYSIS: Financial analysis seeks to spotlight the significant facts and relationship concerning management performance, corporate efficiency, financial strengths and weakness and credit worthiness of the organization. The tools of financial analysis are used to study accounting data so as to determine the continuity of the operating policy investment value of the business, credit rating and testing the efficiency of perations.
The finance manager must equip himself with the different tools of analysis in order to reach rational decisions for the firm and to carry out effective planning and controlling functions. While preparing the financial plan for the firm, the finance manager must know the impact of financial decision he is taking on financial condition and profitability of the business enterprise. Therefore utility of financial analysis is a requirement for the organization. TOOLS OF FINANCIAL ANALYSIS: The following are the tools of the financial analysis: ??? Common size balance sheet 1. . (B) RATIO ANALYSIS: Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the indicated quotient of two mathematical expressions” and it can also be defined as “the relationship between two or more things”. Ratios help to summaries the large quantities of financial data to make qualitative Judgement about the firm’s financial performance. Ratio are significant both in vertical and horizontal analysis. In vertical analysis, ratios help analyst to make a Judgement whether the performances of the firm at a point of time is good or poor.
When financial ratios for several preceding years are computed, the analyst can etermine the composition of change and determine whether there has been an improvement or deterioration in the financial position of the company over a period 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: B] As a rate of times: C] As a percentage: 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 e the past ratio of the same firm or industrys 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 COMPARISONS 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 he 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. ] 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 analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any rom 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.
CLASSIFICATION OF RATIO BASED ON FINANCIAL BASED ON FUNCTION BASED ON USER STATEMENT RATIO 2] LEVERAGE RATIO SHORT TERM 2] REVENUE 3] ACTIVITY RATIO CREDITORS STATEMENT 4] PROFITABILITY 2] RATIO FOR RATIO 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 fgures taken from financial statements. Figures may be taken from Balance Sheet , P & L 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 fgures 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 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 fgures from the revenue statement is called revenue statement ratios. These ratios 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 ratiosa) Some composite ratios study the relationship between the profits & the investments f the concern.
E. g. return on capital employed, return on proprietors fund, return on equity capital etc. b) 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:
It shows the relationship between proprietors funds & debts used in financing the assets of the concern e. g. capital gearing ratios, debt equity ratios, & Proprietary 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: a) It shows the relationship between profits & sales e. g. operating ratios, gross profit ratios, operating net profit ratios, expenses ratios b) It shows the relationship between profit & investment e. g. return on investment, return on equity capital. 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 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.
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, 2] Long-term solvency, 3] Operating efficiency, 4] Overall profitability, 5] Inter firm comparison 6] Trend analysis.
ADVANTAGES OF RATIO ANALYSIS Financial ratios are essentially concerned with the identification of significant ccounting 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 anagement analyze the financial performance of the firm. LIMITATIONS OF RATIO ANALYSIS Ratio analysis has its limitations. These limitations are described below: Ratios output. The fgures 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. When comparing performance over time, there is need to consider the changes in echnology. 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. Ratios provide only quantitative information, not qualitative information. Ratios are calculated on the basis of past financial statements. They do not indicate future trends and they do not consider economic conditions. 1. INDUSTRY PROFILE Plants – Cement Plants Alangulam Cement Works Located at Alangulam in Virudhunagar District, Commercial production was commenced in 1970-71 with a capital outlay of Rs. 6. 6 crores. With the rated capacity of 4 lakh tones per annum, this unit provides direct employment to 787 people and indirect employment to 2000 people. The Unit manufactures and markets ARASU brand 43 Grade OPC/PPC Cements in Tamilnadu and Kerala. Major consumption is by Government Departments for their construction activities such as Bridges, Dams, and High raised Multistorey Buildings etc.
It has a wide network of stockiest both in Tamilnadu and Kerala. Modernization of plant is on. Portland Pozzalana Cement (PPC), Ordinary Portland Cement (OPC) [43 Grade] are manufactured at this unit. Ariyalur Cement Works Commercial production in this unit was commenced during October 1979. Set up with a capital outlay of Rs. 29 crores and a rated capacity of 5 lakhs tones per annum of cement, this unit provides direct employment 734 people and indirect employment to 1500 people.
With the best limestone deposit available it is able to produce the high quality cement of various grades and supplies to Government Departments and Public. Wide appreciations have been received from various quarters for its ARASU brand cement being marketed in Tamilnadu and Kerala. Tamilnadu Asbestos Sheet Plant Set up with a capital outlay of Rs. 2. 0 crores, this unit located at Alangulam, Virudhunagar District commenced its commercial production in October 1981. Capacity of the plant is 36,000 tons of Asbestos sheets per annum.
It produces corrugated, semi – corrugated and plain sheets of 1 meter to 3 meters length with a standard width of 1. 05 meters and thickness of 6 mm. The range includes plain sheets and accessories. This unit gives a direct employment to 255 people and indirect employment to 700 people. Tamilnadu, Kerala, Pondicherry and part of Karnataka. Stoneware Pipes Plant This plant established at Virudhachalam, Cuddalore District during 1962 at a capital ost of Rs. 12. 90 lakhs was taken over by TANCEM from TACEL during 1989.
With additional investment the total capital cost comes to Rs. 124. 60 lakhs. Continuous Chamber Kiln was put up during 1994 with a view to expand its Capacity to 600 MTS per month and reduce the cost of production. This unit provides direct employment to 72 people and indirect employment to 100 people. This product is manufactured and marketed both to Government Sector and Public. This is used mainly for Drainage purpose. Chennai Metropolitan Water supply and Severage Board is the major consumer. 1. 3 COMPANY PROFILE
Tamilnadu Cements Corporation Ltd. , (TANCEM), a wholly owned Government of Tamilnadu undertaking, started business from 1st April 1976 with an authorized share capital of Rs. 18 crores taking over cement plant at Alangulam and setting up another plant at Ariyalur in the year 1979. TANCEM, as its expansion and conversion activities, set up Asbestos Sheet unit at Alangulam during 1981. TANCEM also took over during 1989, a Stoneware pipe plant from TACEL with a view to provide employment to the retrenched employees.
TANCEM has, thus become a multi plants, multi locations and multi products ompany with an annual turnover of around Rs. 250 crores and the authorized capital as of now is Rs. 37. 43 Crores. The company has its main objective in production of cement and cement based products and primarily cater to the needs of Government departments. Limestone being the main raw material, the company acquired and reserved enough limestone bearing lands in and around Alangulam and Ariyalur which are sufficient to run the cement plants for decades to come.
Hence, the role of TANCEM in the development of state is immense. Our Company: Tamilnadu Cements Corporation Limited (TANCEM) was formed during February, 976 as a public limited company under the provisions of the Companies Act, 1956, its Registered / Corporate Office is situated at 735, Anna Salai, LLA Building, 2 nd Floor, Chennai 600 002. Our Business: The Company is engaged in the manufacture and selling of Cement, Asbestos Cement Sheets and Stoneware Pipes. The factories are situated in various districts of Tamilnadu as under: 1 . Alangulam Cement Works, Alangulam, Virudhunagar district, 2.
Ariyalur Cement Works, Ariyalur, Ariyalur district, 3. Tamilnadu Asbestos (Sheet) Unit, Alangulam, Virudhunagar district, 4. Stoneware Pipe Factory, Virudhachalam, Cuddalore district. Our Mission: To produce and sell cement / allied products in the Public Sector so as to have a moderating influence on the market for making available cement / allied products. Our Vision: ??? To encourage the use of environment and friendly practices in production and ??? To make available cement and other products at affordable prices to the common consumers and Govt. departments.
Our Commitments: (A) On achieving excellence in production 1 . We are committed to maintain the highest quality standards by ensuring compliance with all laid down specifications. . We shall achieve the highest capacity utilization of plant and machinery thus ensuring maximum operational efficiency. 3. We shall involve and motivate all our employees in the process of production thus ensuring the highest productivity. 4. We shall adopt the latest technologies by modernizing the plants and plant practices besides bringing about continuous process improvements. B) On achieving excellence in supply & distribution: 1 . We shall make available cement and other products to the common consumers at affordable prices by only providing for a reasonable margin of profit. 2. We shall nsure supply to all Government Departments / Agencies engaged in public works activities at price cheaper than those in the market. 3. We shall develop an effective market net work of stockiest and dealers thus making cement and other products available all over Tamil Nadu and in neighboring States. 4.
We shall adopt a transparent and healthy approach to market cement and other products thereby setting an example in the industry. (C) On Environment: 1 . Produce eco-friendly quality cement, Asbestos Cement sheets and stoneware pipes by adopting innovative technologies. 2. Comply with all relevant environmental legislations and regulations. . Conserve and optimize the usage of resources namely Power, Coal, other raw materials like Limestone, and other permissible additives, Fly Ash etc. within the limits as fixed by Bureau of Indian Standards (BIS). D) Human Resources Development: 1 . We shall periodically impart training to our employees so as to inculcate in them a sense of national priority, industrial excellence and consumer friendliness. 2. We shall maintain harmonious Industrial Relations and enhance the quality of life of our employees. 3. We shall improve the conditions of the people living in the neighborhood of our actories by participating in community development projects in these areas as corporate social responsibility. 4.
We shall imbibe the latest development in cement technology in the world through purposeful interaction with the cement industry in India and abroad. 5. We shall continue to encourage our Scientists and Engineers engaged in research and development efforts to produce cement and cement products adopting ecofriendly technology resulting at least social and economic costs. 6. We shall continuously improve the Quality Management System by implementing ‘SO-9001-2000 and through formation of Quality Circles among the shop floor