A REPORT

ON

“FINANCIAL ANALYSIS OF KAJARIA CERAMICS LTD”

A Project report submitted in the partial fulfillment of the requirement for the degree

Of

Master of Business Administration (MBA)

KAJARIA CERAMICS LTD.

Submitted To: Submitted By:

Mr. AMRENDRA TIWAREE SYED MOHD. ZIYA
Lecturer- MBA 3rd semester (Finance)
D.A.M.S. College Roll No. 0904870089

DAYANAND ACADEMY OF MANAGEMENT STUDIES

GOVIND NAGAR, KANPUR
(AFFILIATED TO G.B.T.U. LUCKNOW, U.P.)
0
 CERTIFICATE

This is certify that Mr. Syed Mohd Ziya worked during the period w.e.f.

15.07.2010 to 14.08.2010 on the development of the project “Financial analysis of

Kajaria Ceramics Limited”, in the partial fulfillment of the requirement for the

degree of MBA (Master of Business Administration) under my guidance &

supervision. To the best of my knowledge, the matter represented in this project is

a bonafide & genuine piece of work.

During her association with the project I found him to be sincere &

motivated individual. He has shown keen interest in this project & him conduct

was excellent.

I wish him all success in his career.

Place: Rajesh Sharma

ASST. GEN. MANAGER

Date: 25-8-2010 (P & A)
Kajaria Ceramics Ltd. Sikandrabad

1
 Guided by:

Mr. Rajesh Sharma

ASST. GEN. MANAGER

(P & A)

Kajaria Ceramics Ltd. Sikandrabad

DECLARATION
I, SYED MOHD ZIYA, S/O Mr. SYED SHAKEEL AHAMED is a bonafied

student of M.B.A. at DAYANAND ACADEMY OF MANAGEMENT STUDIES.

My enrollment number is 0904870089. I hereby declare that present summer

internship report titled Account of assets is my original work. I conducted this

study at KAJARIA CERAMICS LTD. SIKANDRABAD during 15july, 2010 to

14 Aug, 2010. This report has not been submitted earlier either with DAYANAND

ACADEMY OF MANAGEMENT STUDIES and any other educational

organization as an essential requirement for the award of any Diploma/ Degree.

Date- 17/Aug/2010 Signature: -

(SYED MOHD ZIYA)

2
 PREFACE

Someone has rightly said that practical knowledge is far better than

classroom teaching. During this project I fully realized this and I came to

know about how a retailer chooses among a varied range of products

available to him.

The subject of my study is Financial Analysis of Kajaria Ceramics

Ltd., which has slowly but steadily evolved from a beginner to a

corporate giant earning laurels and kudos throughout.

The report contains first of all brief introduction about the

company. Finally there comes data presentation and analysis in the end

of my project report. I also put forward some of my suggestion hoping

that they will help Kajaria Ceramics Ltd. Move a step forward to being

the very best.

3
 ACKNOWLEDGEMENT

I acknowledge my deep sense of gratitude for giving me this opportunity to

undergo my project with Kajaria Ceramics Ltd. At this moment of successful

completion of the project, I would like to express my sincere thankfulness and

indebtedness to all those who extended their kind help by spending their precious

time in explaining the various intricacies of the subject and suggesting the correct

approach to me.

To start with I would like to thank not once but twice Mr.Ashok Kajaria

(Chairman) and Mr. Rishi kajaria (M.D.) whose contribution to the project is

beyond my capacity of expression.

I would like to thank Mr. ARUN LATH (GM), Mr. ANIL PRABHAKAR

(AGM A/C), & Mr. Deepak Gupta (Dpt. MGR), who had been my project guide

for their understanding, gracious and constructive advice which played a major in

completion of this project.

At last but not least I would also like to thanks

Mr. AMRENDRA TIWAREE (Lecturer) Guide for providing insights about

performing our work. This Project has been a great learning outcome for me and

without his help it would not have possible for me to this project.

4
 CONTENTS
INTRODUCTION OF K.C.L

1. KCL - AN OVERVIEW

Company profile
Marketing pattern
Company‟s business mission & objectives
Board of directors
KCL contribution in India
Bankers
Major competitors
Technician collaborations
Internal control system

2. AWARDS WON

3. SWOT ANALYSIS OF KCL

4. POLICIES ADOPTED

Quality policy (ISO 9001:2000)

Environmental policy (ISO 14001)
Health & safety policy (OHSAS) ISO 18001
Social accountability policy

5. PRODUCT PROFILE OF KCL

6. MANUFACTURING PROCESS

7. RESEARCH & DEVELOPMENT

Methodology
Utility of the research
Extensive literature survey
Collection of data & analysis of data

8. PERFORMANCE OF THE COMPANY

9. FINANCE OVER VIEW

Organization Chart of Finance Department

5
10. KCL FINANCIAL REPORT

Balance Sheet
Profit & Loss

11. FINANCIAL ANALYSIS

Introduction
Objective of Study
Types of Financial Analysis
Utility of Financial Analysis
Financial Ratios & Utility

12. INTRODUCTION OF RATIO ANALYSIS

Introduction
Nature
Uses of Financial Statements of Different Parties
Advantages of Ratios
Role of Financial Ratios
Objective of the Study

13. CLASSIFICATION OF RATIOS

Traditional Classification
Functional Classification
Classification According To Nature
Classification According To Importance

14. CONCLUSTION

15. RECOMMENDATIONS

LIST OF CHARTS

Chart.1 Turnover (Sales)

Chart.2 Net Profit
Chart.3 Capacity
Chart.4 Production

6
 EXECUTIVE SUMMARY

Kajaria Ceramics Limited, FMCG with a turnover of Rs.766.75 crore

manufacturing and selling ceramic Floor & Wall Tiles under the brand name

"Kajaria". It is the first tile company in India accredited with ISO 9002

Certification and recipient of one of the Global Growth company award from the

"World Economics Forum". The company has its corporate office at New Delhi

and Regional offices at Ahmedabad, Bangalore, Calcutta, Mumbai and Chennai.

Today kajaria is a well established name in the corporate world. From a modest

beginning of 3,000 sq.mts per day, the company today produces over 33,000

sq.mts of tiles every day, clearly demonstrating Kajaria‟s growing strength over the

years and also indicating rising customer preference for the brand. Manufacturing,

standards, technology user trends, competitiveness, customer preference all have

played a vital role in shaping Kajaria success story. Besides this, the company

enjoys a reputation of rendering products that's at par with international standards.

Within 11 years of operation, Kajaria has moved very close to its vision of

becoming a leader worldwide. Kajaria Ceramics has grown at a breathtaking pace

during the last decade in turnover, profits and foreign earnings. With the new plant

at Bhiwadi, Rajasthan becoming fully operational, it has almost doubled its

capacity from 80,000 TPA 1, 50,000 TPA. The first plant in Sikandrabad U.P.

already has the distinction of always producing over 100% of its capacity.
7
 The company's dedicated Research and Development efforts have also

proved to be catalytic in its leadership position.

These include development of special effects floor tiles and development of

FLOOR BORDERS matching PEI_V Tiles having high abrasive resistance. In

house R & D has also enable Kajaria to imbibe innovations and technical methods

of production based on Monoporosa Technology.

Kajaria has always been alert to changing market trends and preferences, by

producing tiles in myriad designs and colours‟. Infect Malaria is the only tile

company in the country to have an impressive range of over 400 designs with a

many as 50 different variation in Group 5 category, demonstrating out commitment

towards customer satisfaction. Kajaria also continued to improve its

communication process with architects, Builders, masons and interior decorators

and designers in order to update their products information and provide them

convenient access to its diverse brands, designs, and colours. Using the effective

technique of sampling with frequent and regular communication through

pamphlets, products folders and catalogues helped to keep the Kajaria brand on the

top_of_mind scale among the priority target customers. In additional, the company

emphasis on participating in national and local exhibitions also enabled it to

enhance its visibility and reach on a continuous basis, throughout the year. This

also helped to inspire and influence product usage at a more rapid pace.
8
 Kajaria's dominating presence in the country has been further consolidated

by a uniquely engineered network of dealers. These highly visible retail outlets

have sprung up not only in all major cities and towns but even in the most strategic

market locations.

A huge force of sub dealers cover and breadth of the country. The

tremendous advantage from this marketing strength has been the easy access to and

availability of Kajaria's entire of the customers. In addition, the vast range and

choice enables customers to select their own designs and create their own

individual combinations in exclusive preferences and tastes.

With the tremendous spurt taking place in the realm of information

technology, Kajaria is reaping the benefits from the new medium, by hosting its

own website on the internet. The Kajaria website provides wealth of information

on its entire range of wall and floor tiles, borders including detailed information on

the various specifications. Exquisitily designed, the website contains the full range

of visually appealing graphics on designs, colours and size. With access to this

facility, customers can avail the tremendous benefits of e-commerce of Kajaria

tiles, and even place their orders for quick delivery.

9
10
 COMPANY PROFILE & OVERVIEW

The company was incorporated in December, 1985 with an object of setting

up Ceramic Tile Plant with an initial capacity of 12,000 MT at Sikandrabad (U P)

in technical collaboration with Todagres SA, Spain. The company had started the

commercial production on 12th August, 1988. Since then, the company has

expanded its capacity at its existing location for floor tiles twice during 1990-91

and 91-92 by 14,000 MT each taking its floor tile capacity 40,000 TPA. In 1993-

94, the company added Wall Tile capacity of 20,000 TPA with Monoporosa

technology which was expanded to 40,000 TPA in 1995-96. The company set up a

green field Plant at Village Gailpur (Rajasthan) of 70,000 MT capacity for the

manufacture of Monocuttra Wall tiles in March, 1998. The company carried out

the modernization of its existing Plant at Sikandrabad in January, 99, which has

resulted increase in capacity from 80,000 MT to 90,000 MT and enhancing the life

of the Plant. The total present capacity of the company is 170,000 MT.

Both the Plants have adopted single firing technology (Monoporosa

technology), which is the most latest, cost efficient and more productive

technology. The company is marketing its products since inception under the

brand name of „Kajaria‟ which is a well-known brand within the industry in India

and abroad. The company has also been selected as one of the top performing

Global Growth Company from India by World Economic Forum in 1997. Kajaria
11
 is the first ceramic tile company in India and may be 5th in the world accredited

with ISO 9002 certification for its quality system. During the year the company

has also been accredited with the “ISO 14001” certification for the Environmental

Management System for manufacturing Ceramic Tiles. The company is the No. 1

preferred company for ceramic tiles in India. The company has also been given

OHSAS 18001 certificate by M/s. TUV Suddeutschland, Germany. The Certificate

has been given for the commitment of the company for fulfilling international

standards in Occupational Health and Safety Management System - Specification.

Kajaria Ceramics is the first ceramic tile company in the world to get this

certification.

Kajaria has an all India network of 600 dealers. Kajaria is selling 80% of its

products to the retail consumer and 20% to the projects. Since last year company

has franchised exclusive tile Shoppe & tile galleria on all India bases. It displays the

mock bathroom & kitchen with various combinations of tiles. It helps in selection of

the product/ design for the floor & walls. These also have customer support staff,

which advises on sizes, combinations & laying techniques.

The company has opened 11 retail European styled showrooms located in

various parts of the country. Kajaria Ceramics has also opened a showroom in

Melbourne, Australia.

The company is the largest exporter of ceramic tiles from India and accounts
for 40% of total exports of ceramic tiles from India. The Company‟s exports are
mainly to Australia, Sri Lanka, Bahrain, UAE, Saudi Arabia and Oman. The
12
company has won 7 exports award including the National Export award given in
May 2000.

The company has closed the Financial Year 2009-10 with a turnover of Rs

7667.54 million as against the turnover of Rs 6911.99 million in the corresponding

financial year. The turnover is high mainly because of increase in demand in

domestic market, effective cost control measures, better cash management and

reduction in the interest rate. The company has closed the turnover of the 1st

quarter of 2009-10 is 1598.8 million which ends on 30th of June.

13
 MARKETING PATTERN

We have a manufacturing unit at Sikandrabad, Distt. Bulandshahar [U.P.]

and the other at Village- Gailput, Distt. Alwar (Raj.). We are manufacturing Floor

Tiles at Sikandrabad Plant & Wall Tiles at Gailpur Plant. We sell our goods

through dealers and also directly to Builders, Contractors and others. The prices

are charged as per price lists applicable for the particular area. On all the

clearances the Excise Duty is being paid under Section 4A on M.R.P. less

abatement. The goods are delivering at the Factory gate to the Buyer/ on behalf of

the Buyer to the transporter. The freight at actual is paid by the Dealer/Buyer

directly to the transporter at destination. In few cases, the freight at actual is paid

by us which is show separately in the Invoice and realized from the buyer/dealer.

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 COMPANY‟S BUSINESS MISSION & OBJECTIVES

BUSINESS MISSION
***********************

To maintain a leading position as suppliers of Ceramic Wall & Floor Tiles

the company utilizes its capabilities and resources to expand the business into

allied areas and other priority sectors of the economy like housing projects etc…

BUSINESS OBJECTIVES
*****************************

GROWTH

Expectations to ensure a steady growth by enhancing the competitive edge

of Kajaria Ceramics Ltd.

PROFITABILITY

To provide a reasonable and adequate return on capital employed, primarily

through improvements in operational efficiency, capacity utilization, productivity

and generate adequate internal resources to finance the company‟s growth.

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 CUSTOMER FOCUS

To build a high degree of customer confidence by providing increased value

for his money through international standards of product quality, performance and

superior services through dealer network.

PEOPLE – ORIENTATION

To enable each employee to achieve his potential, improve his capabilities,

perceive his role and responsibilities and participate and contribute positively to

the growth and success of the company. To invest in human resources continuously

and be alive to their needs.

TECHNOLOGY

Achieve technological excellence in operations by development of

indigenous technologies and efficient absorption and adaptations of imported

technologies to suit business need and priorities and provide the competitive

advantage to the company.

IMAGE

To fulfill and the comply the relevant legislation regulations and the

expectations which employees, customers and the country at large have from

Kajaria Ceramics Ltd.

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 BOARD OF DIRECTOR

(As on 15.07.2010)

Mr. A. K. Kajaria : Chairman & Managing Director

Mr. D. D. Rishi : Jt. Managing Director

Mr. R. P. Goyal

Mr. D. P. Bagchi

Mr. R. K. Bhargava

Mr. R. R. Bagri

Mr. Chetan Kajaria

Mr. Rishi Kajaria

Mr. R. C. Rawat : V.P. (F&A) & Company Secretary

Is the Compliance Officer of the

Company.

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 Committees of the Board

Audit Committee

Mr. R. P. Goyal : Chairman

Mr. R.K. Bhargava

Mr. R.R. Bagri

Share transfer and Investors

Grievance Committee

Mr. R.R. Bagri : Chairman

Mr. A. K. Kajaria

Mr. D. D. Rishi

Remuneration Committee

Mr. A. K. Kajaria : Chairman

Mr. D.P. Bagchi

Mr. R. K. Bhargava

Mr. R. R. Bagri

Project Management Committee

Mr. A.K. Kajaria : Chairman

Mr. D.D. rishi

Mr. Chetan Kajaria

Mr. Rishi Kajaria

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 KCL CONTRIBUTION IN INDIA

CORPORATION OFFICE

J-1/B-1 (Extn.), Mohan Co-operative Industrial Estate,

(Opp. Badarpur Thermal Power Station), Mathura Road,

New Delhi – 110 044, India.

Phone: 26946409, Fax: 91-11-26946407, 26949544

Email: newdelhi@kajariaceramics.com

Website: http://www.kajariaceramics.com

REGIONAL OFFICE

MUMBAI : No.201-208, Bonanza, 2nd Floor, Shri Mathura das Vasanji

Road, (Andheri Kurla Road), J.B. Nagar, Andheri (East), Mumbai-400 059

Phone: 28203506, 28203507, Fax: 28203509,

Email: mum@kajariaceramics.com

KOLKATA: Central Plaza, 2/6, Sarat Bose Road, Flat No.807,

Kolkata – 700 020

Phone: 24754820, 24762647, and 24763179 Fax: 24748012

Email: kol@kajariaceramics.com

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AHMEDABAD:

202, Anand Mangal-II, behind Femina Town, C.G.Road, Navrangpura,

Ahmedabad.

Phone: 26465515, 26465516 Fax: 26566669

Email: ahm@kajariaceramics.com

CHENNAI:

28, North Usman Road, T.Nagar, Chennai-600 017

Phone: 28144323, 28144324 Fax: 28144323

Email: chn@kajariaceramics.com

COCHIN:

No.52, 2nd Floor, North Square, Paramara Temple road, Ernakulum, Kerala.

Phone: 2396433, 2393364 Fax: 2396433

Email: coc@kajariaceramics.com

REGISTERED OFFICE

A-27 & 28, Industrial Area, Sikandrabad, (Distt) Bulandshahr [UP]

Phone: (05735) 222819,222393, 223353 Fax: (05735) 222140

Email: skdgmw@kajariaceramics.com, skdaccts@kajariaceramics.com

skd@kajariaceramics.com

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 MANUFACTURING UNITS

KAJARIA CERAMICS LTD.SIKANDRABAD

A-27/28/29, Industrial Area, Sikandrabad, [Distt.] Bulandshahr {UP}

Tel; (05735-222393 / 222819 Fax ;( 05735)-222140

KAJARIA CERAMICS LTD.GAILPUR

19 KM Stone, Bhiwadi – Alwar Road, Village – Gailpur, Bhiwadi [Raj]

Tel.; [01493] - 243142, 243143, 243507/8/9 Fax: [01493] -243510

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 BANKERS & SOLICITORS

BANKERS: -

State Bank of India

Canara Bank

State Bank of Mysore

HDFC Bank Ltd.

State Bank of Indore

Oriental Bank of Commerce

SOLICITORS:-

Khaitan & Khaitan

New Delhi

22
 MAJOR COMPETITORS OF KCL

Name of organization State

NITCO MAHARASHTRA

H & R JOHNSON MAHARASHTRA MP, KA

SOMANY PILKINGTONS HR, GJ

SPARTEK CERAMICS ANDHRA PRADESH

BELL CERAMICS GJ, KA

REGENCY CERAMICS ANDHRA PRADESH

REGMA CERAMICS TAMIL NADU

SAINTINY CERAMICS ANDHRA PRADESH

SUNEARTH CERAMICS MAHARASHTRA

ORIENT CERAMICS UTTER PRADESH

ANANTRAJ INDUSTRIES HARYANA

SAVANA TILES GUJARAT

MURUDESHWER CERAMICS KARNATAKA

EURO CERAMICS GUJARAT

GOLD COIN CERAMICS GUJARAT

23
 TECHNICAL COLLABORATIONS

PRODUCT COLLABORATIONS

CERAMIC GLAZED

WALL & FLOOR TODAGRES, SPAIN TILES

24
 INTERNAL CONTROL SYSTEM

The Company has well defined its internal controls in all areas of its

operations. The Company has an independent internal audit activity, which

measures the efficiency, adequacy and effectiveness of other controls in the

organization. A summary of audit observations are placed before the Audit

Committee of the Board of Directors. The Audit Committee‟s recommendations

and directions are noted and action taken accordingly. The Company has well

defined the procedures to execute financial transactions.

25
 AWARDS WON

Kajaria Ceramics Limited has been awarded the "Super

Brand" Title. Kajaria is the only ceramics tile company who has

won the status of consumers "Super Brand”.

Mr. Ashok Kajaria (Chairman & Managing Director) receiving the

award presented by Honorable Minster for Civil Aviation, Mr.

Praful Patel

The company has had a unique distinction of having

received the President's Award for achieving the highest

exports in the industry.

Kajaria Ceramics is the largest exporter of ceramic tiles in

India and consistently winning the Export Awards.

Mr. Chetan Kajaria with the National Export Award Presented by

The Prime Minister of India.

26
 SWOT ANALYSIS OF KCL

STRENGTHS

Low cost Producer of quality tiles. Flexible manufacturing set-up for longer

uniformity of product and comprising to international standards fully adaptation,

absorption of technology.

WEAKNESSES & RISKS

The ceramic tiles industry is dependent on the growth in the construction

and housing sector. In the Budget 02-03, tiles have been delisted from the SSI

category and accordingly all manufacturers of tiles come in the excise net. To

some extent they have arrived at the competitive level to the organized sector. But

due to their negligible overheads, tax evasion and copies of designs of organized

sector that retains the potential to under cut the organized sector. There is a stiff

competition within the organized sector which is putting pressure on the price also.

27
OPPORTUNITIES

Strong distribution network across the country and overseas market. With focus on

retail marketing to build and establish exclusive showrooms across the country and

overseas markets.

Using innovative display and communicating to customers through

exhibitions and trade shows for consistent brand building efforts.

Nurturing and cultivating highly skilled human work force by motivating

and rewarding them.

THREATS

The Company is continuously on the path to over come any threats arising

from imports / competition amongst the tile manufacturers by making the product

more competitive in terms of price and quality, which has been possible by

reducing the input costs and providing more value added items with dynamic range

of designs and colours.

28
 QUALITY POLICY
(ISO 9001:2000)

We are committed to excel in all areas of Management to be a leader in the

manufacture of Ceramic Glazed Floor and Wall Tiles by complying with the

requirements of our customers, National and International Standards.

We shall achieve this through continual improvement in our Quality

Management System by increasing the productivity, reducing the costs, updating

and up-gradation of technology, optimum utilization of resources and active

involvement of all employees.

29
 ENVIROMENTAL POLICY (EMS)

(ISO 14001)

KAJARIA CERAMICS LIMITED, Sikandrabad, Distt. Bulandshahr (UP)

an ISO9001:2000 Company manufacturing Ceramic Glazed Floor & Wall Tiles,

resolve to achieve excellence and leadership in protection the environment.

We are committed to:

Continual reduction in pollution, consumption of energy, raw material and

conservation of other natural resources.

Prevent Air, Land, Water, Noise pollution and Solid waste

Comply relevant environmental legislation regulations and organizations

environmental standards.

Provide awareness and training to all our employees on relevant

Environmental Management issues. Its continual improvement and periodical

review of the same.

30
 HEALTH & SAFETY POLICY (OHSAS)

(ISO 18001)

We believe that safe working methods lead to better business performance,

motivated work force and higher productivity.

We shall create a safety culture in organization by:

Continual improvement in Health and Safety Performance

Complying with all current applicable OH & S legislation and organizational

standards.

Empowering the relevant employees to ensure safety in their working area.

Promoting Safety & Health awareness among all employees, suppliers and

contractors.

Periodically reviewing the policy.

This policy shall be made available to the public.

31
 SOCIAL ACCOUNTABILITY POLICY (SA)

(SA 8000)

Committed to:

Conformance of national and international standards requirements w.r.t.

Social Responsibility and Accountability.

Improve its social performance continuously to ensure better quality of life.

32
 PRODUCT PROFILE OF KCL

PRODUCT SIZE INSTALLED CAPACITY

FLOOR TILES 300 x 300 MM 9700000 M2

(At Sikandrabad Unit) 395 x 395 MM

400 x 400 MM

WALL TILES 200 X 200 MM 8300000 M2

(At Gailpur Unit) 200 X 300 MM

250 X400 MM

33
 PRODUCT DEVELOPMENT

The Company has consistently pioneered and brought in the latest

international quality products in India. During the year the Company launched

30X40 cm and 30X45 cm in rectified wall tiles and 45X45 cm joint free floor tiles.

It opened seven Kajaria world show room in 2008-09. This has set a new trend and

has inspired interior designers/architects to recast their designs to provide a better

combination series to discerning customers. The Company has also added a series

of new products namely Oasis/Bermuda/Ranger/Smoke. Leo/Diana/Alfa/Cedar etc

which has been widely accepted by the customers in the market.

34
 MANUFACTURING PROCESS

Ceramic Floor Tile is mainly consists of two parts i.e. Body and Glaze.
Body is a mixture of triaxial body i.e. made of three different and distinguishable
Raw materials viz:

Hard materials like Quartz or Siliceous material.

Feldspar which acts as a flux on firing.

Different clays to give suitable properties required in green and fired stages.

All these materials are mixed in pre-determined quantitative proportions and

wet milled in Ball mill. The Body slip thus prepared is duly sieved and de-

magnetized and stored in under ground tanks and is converted into spray dried

granules in spray Drier.

Similarly, Glaze is prepared by mixing and wet milling of different

constituents like Frit, Feldspar powder, Quartz powder, China clay, Calcined

alumina, Zinc oxide and zirconium slicate in Ball mill depending upon the nature

of Glazes to be produced.

The spray dried granules are fed to the automatic hydraulic press to produce

tiles. These pressed tiles are bone dried in vertical drier by maintaining drier

temperature in the range 100-110 Deg.Cent. The dried tiles then sent to Glaze Line

35
through belt conveyor for Glaze application. Glazing is done in two coatings either

spraying by Disc or by campana depending upon the required surface followed by

screen printing and dry powder application as per design requirement.

The Glazed Tiles are automatically loaded in the box car and then transferred to

the track for roller hearth kiln feeding. At the kiln entry tiles are unloaded and fed

into the kiln in pre-determined firing cycle and temperature. The firing temperature

is in the range between 1130 to 1160 Deg.Cent. Depending upon the firing cycle.

At the kiln exit, the fired tiles are loaded in the box car and transferred to the

sorting section for selection. In Sorting Section, tiles are sorted as First, Second

and Utility depending upon the visible faults and packed in corrugated boxes and

sent to B.S.R. for dispatches.

Name of main Raw material:

 Clay‟s & Feldspar

 Glaze material such as Quartz, Alumina, China Clay & Ball Clay

 Frit

 Stains & Pigments

 Zirconium

36
 RESEARCH AND DEVELOPMENT (R&D)

(1) Specified Areas in which (R&D) carried out by the Company:

Development of alternative basic Raw material / Glazes and its formulation

for cost reduction with standardization of method in preparation of Body /Glaze for

longer uniformity.

Research for further indigenizing pigments/frits for achieving lower firing

cycle and better quality/consistency with increase in the production of tiles.

Installation of Surface Glaze Application Machine and upgraded B&T Storage

Handling Machines at Kiln Feeding & Exit point.

37
(2) Benefits derived as a result of the above R & D

The Company is able to reduce the cost of raw material, fuel & spare cost.

Several new orders have been received by the Company due to this R&D in

the area of special purpose of laying wall & floor tiles.

The product has become more effective and preferable to all type of

consumers due to its products availability in wide range of floor & wall tiles.

(3) Future plan of action:

The Company has always been a leader in producing special effect Wall &

Floor Tiles that shares the advantage of existing market scenario.

Introduction of special effect of Wall & Floor tiles in larger sizes and

offering new look completely different from other manufacturers.

Up-gradation and obtain the technique for producing the extra ordinary tiles

which would be staining resistance and excellent quality.

38
 To improve Company‟s infrastructures and R&D team, so that all products

go through an exhaustive Quality Control by use of cheaper and reliable inputs

both Imported and Indigenous.

(4) Company is going to have the captive power co-generation plant

based on waste heat recoveries from Kiln & Spray Driers.

39
 Expenditure on (R&D)

(Rs.in Million)

2009-2010 2008-2009

Capital -- --

Recurring 0.82 0.20

Total 0.82 0.20

Total R&D expenditure as a

Percentage Of total turnover. (%) 0.011 0.003

40
 PERFORMANCE OF THE COMPANY

During the year, the company has registered a turnover of Rs.7667.54

Million as compared to Rs.6911.99 million in the previous year, showing a growth

of more than 11%. Despite cut in Natural Gas supply at Sikandrabad Plant and

substantial increase in fuel prices, the profit before interest, dep & tax has

increased from Rs.127.5 million to Rs.514.4 million showing an increase of 304%,

The profit for the year has been higher mainly on account of increased demand in

domestic market, effective cost control measures, better cash management and

reduction in the interest cost.

The performance of the Company for the past years (since beginning) has

been shown graphically.

41
 TURNOVER CHART

(Rs. In Million)

'09-10 7667.54

'08-09 6911.99

'07-08 5289.07

'06-07 4368.03

'05-06 3517.92

'04-05 3003.96

'03-04 2491.8

'02-03 2102.4

'01-02 2278.4

00-01 2359.3

99-00 2450.8
YEAR

98-99 1939.4

97-98 1362.2

96-97 1302.1

95-96 1184.8

94-95 730.9

93-94 487.3

92-93 457

91-92 358.6

90-91 251.6

89-90 152.1

88-89 68.3

0 1000 2000 3000 4000 5000 6000 7000 8000 9000

88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- '01- '02- '03- '04- '05- '06- '07- '08- '09-
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
(Rs. In Million) 68.3 152 252 359 457 487 731 1185 1302 13621939 2451 23592278 2102 24923004 3518 43685289 6912 7668
TURNOVER Rs. IN Million

42
 NET PROFIT

(Rs. In Million)

'09-10 358.52

'08-09 89.01

'07-08 150.23

'06-07 76.73

'05-06 281.71

'04-05 254.88

'03-04 135.4

'02-03 99.3

'01-02 26.3

00-01 68.3

99-00 110.6
YEAR

98-99 67.5

97-98 148.3

96-97 201.9

95-96 210.2

94-95 129.5

93-94 86

92-93 53

91-92 40.4

90-91 25.6

89-90 7.4

88-89 0.1

0 50 100 150 200 250 300 350 400

88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 '01-02 '02-03 '03-04 '04-05 '05-06 '06-07 '07-08 '08-09 '0 9-10

(Rs. In M illion) 0. 1 7.4 25. 6 40.4 53 86 129. 5 210.2 201. 9 148.3 67.5 110.6 68.3 26. 3 99. 3 135. 4 254. 88 281.71 76.73 150.23 89. 01 358. 52

NET PROFIT Rs. IN LAC

43
 CAPACITY CHART

2010 238000

2009 170000

2008

2007

2006

2005

2004 150000

2003

2002

2001

2000

1999
YEAR

1998

1997 90000

1996

1995 80000

1994 60000

1993

1992 40000

1991

1990 26000

1989

1988 12000.000

0 50000 100000 150000 200000 250000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

M Tonne 1200 2600 4000 6000 8000 9000 2E+0 2E+0 2E+0
MT UPTO 1988 SQ,MTR FROM 2010

44
 PRODUCTION CHART

GLPR
SKBD

2003 63208
54642

2002 76198
97910

2001 76417
90682

2000 74599
92817

1999 72409
81696

1998 2063
YEAR

91028

1997 84793

1996 80713

1995 56667

1994 40675

1993 40038

1992 32420

1991 25167

1990 15156

1989 8809

0 20000 40000 60000 80000 100000 120000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

GLPR 2063 72409 74599 76417 76198 63208

SKBD 8809 15156 25167 32420 40038 40675 56667 80713 84793 91028 81696 92817 90682 97910 54642

MT UPTO 2002 & SQ.MTR FROM 2003

45
 ORGANISATION CHART OF FINANCE DEPARTMENT

CHAIRMAN & MANAGING DIRECTOR

Mr. Ashok Kajaria

JT. MANAGING DIRECTOR

Mr. D.D.Rishi

V. P. (FIN. & A/C) & CO.SECY

Mr. R.C.Rawat

AGM (A/C)

MR. ANIL PARABHAKAR

SR. MGR. (A/Cs)

MR. ARUN LATH

Dpt. Manager (A/Cs)

MR. DEEPAK GUPTA

46
 KAJARIA CERAMICS LTD

****** ANNUAL REPORT 2009-2010*****

47
 BALANCE SHEET

BALANCE SHEET
AS ON 31 MARCH 2010
(Rs in Millions)
PARTICULARS SCHEDULES 2009-10 2008-09

SOURCES OF FUNDS :
Shareholder Funds:
Share Capital 1 147.17 147.17
Reserves & Surplus 2 1746.23 1473.51
1893.40 1620.68
Loan Funds
Secured Loans 3 2588.28 2926.67
Unsecured Loans 4 40.00 325.00
2628.28 3251.67
Differed Tax Liabilities 5 548.52 534.55
Total………………………………………………………………… 5070.20 5406.90

Application of Funds
Fixed Assets:
Gross Block 6 5435.46 5014.92
Less : Accumulated Depreciation 1987.57 1738.39
Net Block 3447.89 3276.53
Capital Work-in-progress 25.43 ---------
3473.32 3276.53

Investments 7 33.94 33.94

Current Assets, Loans & Advances
Inventory 8 1402.55 1384.57
Sundry Debtors 9 773.21 678.04
Cash and Bank Balance 10 44.91 78.87
Loans & Advances 11 755.76 826.82
(A) 2976.43 2968.30
Less : Current Liabilities & Provisions
Current Liabilities 12 1197.69 829.85
Provisions 13 215.80 42.02
(B) 1413.49 871.87
Net Current Assets (A-B) 1562.94 2096.43
Total Assets………………………………….. 5070.20 5406.90

48
 PROFIT AND LOSS (Rupees in Crores)

PROFIT AND LOSS ACCOUNT

AS ON 31 MARCH 2010
(Rs in Millions)
PARTICULARS SCHEDULES 2009-10 2008-09
INCOME :
Sales (Gross) 7667.54 6911.99
Less: Excise Duty On sales 312.18 263.16
7355.36 6648.83
Other Income 14 8.24 9.96
Increase / decrease in stocks 15 2.75 -109.47
7366.35 6549.32

EXPENDITURE :

Material Manufacturing & Other Expenses 16 4811.17 4,485.61

Salaries, Wages and Amenities 17 612.84 504.87
Repairs and Maintenance 18 51.63 46.67
Administrative & Other Expenses 19 298.78 240.94
Selling & Distribution Expenses 20 435.21 311.97
Financial Charges 21 375.24 582.42
Depreciation 267.06 249.37
6851.93 6421.85

Profit Before Tax 514.42 127.47

Provisions for:
Income Tax 130.00 16.80
Fringe Benefit Tax --- 8.00
Deferred Tax 13.97 12.55
Income Tax/Wealth Tax Adjustment 11.93 1.13

Profit After Tax 358.52 88.99

Balance as per last year 819.03 728.51
Profit Available for Appropriation 1,177.55 817.50

Appropriation
Proposed Dividend on Equity Shares 73.58 14.72
Corporate Dividend Tax 12.22 2.50
Transfer to General Reserve 100.00 ----
Transfer from Debenture Redemption Reserve -2.40 -18.75

Surplus carried Over 994.15 819.52

1,177.55 817.50
Basic/Diluted Earnings per share (Rs.) 4.87 1.21

49
Significant Accounting Policies and Notes on Accounts 22

50
 Introduction

Financial Analysis is the process of determining the operating & financial

characteristics of a firm from accounting data & financial statement. The goal of

such analysis is to determine efficiency & performance of the firm management, as

reflected in the financial records and reports. Its main aim is to measure the firm‟s

liquidity, profitability and other indications that business is conducted in a rational

and orderly way.

The basic financial statement

Of the various reports that the companies issue to their shareholder, the

annual report is by far the most important. Two types of information are given in

this report, first there is a text that describes the firms operating results during the

past year and discusses new development that will affect future operations. Second

there are few basic financial statements –the income statement, the balance sheet,

the statement of retained earnings and the sources and uses of funds statements.

The financial statement taken together give an accounting picture of the

firm‟s operation and financial positions.

51
 “Financial statement analysis is largely a study of relationship among the

various financial factors in a business as disclosed by a single set of statements,

and a study of trends of these factors as shown in a series of statements”

--- John N. Myer

“The analysis and interpretation of financial statement are an attempt to

determine the significance and meaning of the financial statement data so that the

forecast may be made of the prospects for future earnings, ability to pay interest

and debt maturities (both current & long term) and profitability of a sound

dividend policy”

--- R.D. and S. % Mc Muller

Thus, analysis of financial statement means such a treatment of the

information contained in the financial statement as to afford a full diagnosis of the

profitability and financial position of the firm concerned.

52
Nature of financial statement

According to the American institute of certified public accountants

“……………… financial statement reflected a combination of recorded

facts, accounting conventions and personal judgments.

Objective of financial analysis

The number and types of people interested in financial statements have

changed radically over a period of time. They need varied information and

fortunately such information may be classified as relating to profitability, liquidity

and solvency.

The Project “ANALYSIS AND INTERPRETATION OF FINANCIAL

STATEMENTS” is undertaken to fulfill the following objectives.

To estimate the earning capacity

To gouge the financial position and financial performance of the firm

To determine the long terms liquidity of the funds as well as solvency

To determine the debt capacity of the firm

To decide about the future prospective of the firm

53
 Types of Financial Analysis

Financial analysis may be classified into different categories dependency upon

 The material used

 The method of operation followed in the analysis

Graphical representation 

Financial Analysis

The material used the method of operation followed in the Analysis

Internal External Horizontal Vertical

Analysis Analysis Analysis Analysis

54
(a) According to material used

Internal analysis – this is performed by the corporate finance and

accounting

Department and is more detailed than external analysis. These departments

have available more details and current information that is available to outsiders.

They are able to prepare perform or future statements and are able to produce a

more accurate and analysis of the firm‟s strength and weakness.

External analysis – outsiders to the firm such as creditors, stock-holders or

investment analysis perform this. It makes use of existing financial statement and

involves a limited access to confidential information on a firm.

(b) According to modus operation of analysis

Horizontal analysis – this method of classified is based on the modus

operandi of analysis. Horizontal analysis refers to the comparison of the trend of

each item in the financial statement over a number of years or companies. The

figures of this type of analysis are presented horizontally over a number of

columns. Such a column represents a year of a company. This type of analysis is

also called „dynamic analysis‟ as it is based on data from year to year, rather than

on data of any one year

55
 Vertical analysis – it is frequently used for referring to ratios developed for

one data or one accounting period. Vertical analysis is also called static analysis.

This is not very conductive to a proper analysis of the firm‟s financial position and

its interpretation as it does not enable to study data in respective. This can only be

provided by a study conducted over a number of years so that comparison can be

affected. Therefore, vertical analysis is not very useful.

56
 Financial Ratio & Utility

A ratio may be defined as a fixed relationship in degree or number between

two numbers. In finance, ratios are used to point out relationship that is not

obvious from the row data. Some uses financial ratios are following 

(1) To Compare Different Companies in Some Industry: ratio can high

light the factors association with successful and unsuccessful firms. They can

reveal strong firms and weak firms, overvalued undervalued firms.

(2) To Compare Different Industries: Every industry has its own unique

set of operating and financial characteristics. These can be identified with the help

of ratios.

(3) To Compare Performance In The Different Time Periods: Over a

period of years, a firm or a industry develop certain forms that may indicate future

success or failure. If relationship changes in firms data over different time periods,

the ratio may provide clues and trends of future problems.

57
 Utility of Financial Analysis

Following are the advantages of Financial Analysis

With the help of ratios we can determine the ability of the firms to meet its

current-obligation.

 Overall operating efficiency and performance of the firm.

 Efficiency with which firms is utilizing its various assets in generating

sales Revenue.

 Ratios help in inter-firm and intra-firm comparison.

 They help in determining the financial strength by highlighting the

liquidity.

 They are useful in comparison of performance.

 They are also useful in forecasting purpose.

58
59
 INTRODUCTION

The ever changing, external & internal environment in which the organization

operates to achieve its goal has often leaded to change in the financial structure of

the firm. This change may be in the assets structure, capital structure or any other

such type of the change have often been found out of bring changes in the liquidity

position, level of activity & profitability of organization.

To be aware of various positions parties concerned with the organization often

go for the various type of analysis one of them being financial analysis, that is

done to know about the present performance of the firm in which they are either

going to invest or do business, with. The responsibility of management to look

after the effective & efficient utilization of resources of the overall sound financial

situation of the organization, increase their requirement to have a detailed report on

probably each & every aspect of financial position which may be liquidity,

activity, profitability.

The presentation of an elaborate system of ratio analysis was made in 1909 by

Alexander wall, who criticized the bankers for its lopsided development owing to

their decisions regarding the grant of credit on current ratios alone.

60
 Wall, one of the foremost proponents of ratio analysis, pointed out that, in

order to get a complete picture, it is necessary to consider relationship in financial

statement other than that of current assets to current liabilities – relationship that

might be measured quantitatively and used as checks on current ratio. Since then,

comprehensive analysis by means of calculation of a series rapidly became „all the

range‟.

Based upon their wide range of requirement the general trend is of going for

the financial ratio analysis, which is also considered to be the most effective one

capable of giving detailed & accurate information, more detailed & accurate than

any other type of financial analysis.

Financial ratio analysis is an arithmetic relationship between two figures.

Financial ratio analysis is a study of ratio between various items of groups of

items in financial statement. It also based upon various financial ratios, which are

calculated from the data provided in company‟s balance sheet & profit and loss

account.

As per I.M. Pandey “Financial ratio in the relationship between two

accounting figures, expressed mathematically “.

In addition to the analysis based on current year financial ratio comparison

with previous year help us in establishing various methods. Which are further

helpful in predicting the future of the concern as well as present financial situation?

61
 This report is submitted as a part of brief study of financial condition of

“KCL”. This report has been prepared for the management purpose to make them

aware of the unit in the various fields of finance.

Detailed analysis is also a part of this report, which is based upon various

ratios calculated & various trends seen. Each & every ratio has been analyzed

briefly & adequately followed by various inferences & suffusions based on this

analysis, which is beneficial for the Top-level Management in the better financial

control & planning for future.

This report is just a part of feedback to the Top-level Management for the

various plans they made regarding allocation of financial resources etc, which were

implemented, in the current financial year.

This report can give a deep insight into various matters if any implementation

of the plans for achieving the objective of the firms.

Various other factors are there which limit the accuracy & correctness of the

report. Even then a great effort has been kind of analysis & interpretation on

personal level.

62
 NATURE

Ratio analysis is a powerful tools a financial analysis. In financial analysis, a ratio

is used as a benchmark.

For evaluating the financial position & performance of the firm. The relationship

between two accounting figures, expressed mathematically, is known as a financial

ratio. Ratio helps to summarized large quantity of financial data & to make

qualitative judgment about the firm‟s financial performance.

This relationship is an index or yardstick, which permits qualitative judgments to

be, formed about the firm‟s ability to, meets its current obligations.

It measured the firm‟s liquidity. The greater the ratio, the greater the firm‟s

liquidity & vice-versa. The point to be note is that a ratio reflecting a quantitative

relationship helps to form qualitative judgments. Such is the nature of all financial

ratios.

63
 USES OF FINANCIAL ANALYSIS FOR DIFFERENT PARTIES

The analysis and interpretation of financial is an important accounting

activity. The end users of business statement are interested in these statements

primarily as an aid to determine the financial position and the results of the

operations. There are different parties interested in the financial analysis of their

statement and their aims and to different parties:

To the financial executives : The first party interested in the financial statements

analysis is the finance department of the business concern itself to the financial

managers such analysis provides a deep insight into the financial condition of the

enterprises and the view of the past performance which helps in future decision

making. The financial statements give vital information concerning the position of

the enterprise as well the result of the operations.

To the top management: The top management of the concern is also increase in

the analysis of these statements because it helps them reaching conclusions

regarding:

Performance appraisal of overall business activities.

Enquire about current financial position and long-term strategic planning.

Queries concerning the relationship of earning to trends in sales etc.

Queries concerning the relationship of earning to investment.

64
To the creditors: The analysis of these statements is very essential to the

creditors. Also some aspect of enterprises operations are of interested to creditors

in regard to liquidity of funds, soundness of financial structure, profitability of the

operations, effectiveness of working capital management etc.

To the investors and others: Investors presents as well as prospects are also

interested in the measurement of earning capacity of the securities. Investors have

been increasingly concerned with the cash generation capability of an enterprise,

primarily in term of the flexibility available to such enterprise to acquire other

business and new assets on an advantage basis for Thai purpose.

65
 ADVANTAGES OF RATIOS

The ratio analysis is one of the most powerful tools of financial analysis. It is use

as a device to analysis and interprets the financial health of enterprise. Just like a

doctor examines his conclusion regarding the illness and before giving his

treatment, a financial analyst analyses the financial statement with various tools of

analysis before commenting upon the financial bearlth or weakness of an

enterprise. „A ratio is known as a symptom like blood pressure, the pulse rate or

the temperature of the individual‟. It is with help of ratios that the financial

statements can be analyzed and decision made from such analysis.

HELPS IN DIVISION MAKING: Financial statements are prepared primarily

for decision making, but the information provided in financial statements is not an

end in itself and no meaningful conclusions can be drawn from these statements

alone. Ratio analysis helps in making decisions from the information provided in

these financial statements.

HELPS IN FINANCIAL FORCASTING AND PLANNING: Ratios analysis is

of much help in financial forecasting and planning. Planning is looking ahead and

the ratios calculated for a number of year‟s work as a guide for the future.

Meaningful conclusions can be drawn for future from these ratios. Thus, ratio

analysis helps in forecasting and planning.

66
HELPS IN COMMUNICATING: The financial strength and weakness of a firm

are communicated in a more easy and understandable manner by the use of ratios

the information contained in a financial statements conveyed in a meaningful

manner to the one for the whom it is meant. Thus, ratios help in communicating

and enhance the value of financial statements.

HELPS IN COORDINATION: Ratios even helps in coordinating, which is

utmost important in effective business management. Better communication of

efficiency and weakness of an enterprise results in better coordination in the

enterprise.

HELPS IN CONTROL: Ratio analysis even helps in making effective control of

the business. Standard ratios can be based upon Performa Financial Statements

and variance or deviations, if any, can be founded by comparing the actual with the

standards so as to take corrective action at the right time. The weakness or

otherwise, if any, come to the knowledge of the management which helps in

effective control of the business.

67
 ROLE OF FINANCIAL RATIO

Aid in financial forecasting: Ratio analysis is very helpful in financial

forecasting. Ratio relating to the past sales, profits & financial position from the

basis for setting future trends.

Aid in comparison: With the help of ratio analysis ideal ratio can be composed &

they can be used for comparing a firm progress & performance. Inter firm

comparison with the industry averages is made possible by ratio analysis.

Financial solvency of the firm: Ratio analysis indicates the trend in financial

solvency of the firm. Solvency has to dimensions:

Long-term Solvency

Short-term Solvency

Long term solvency refers to the financial viability of the firm while Short-term

solvency is the liquidity position of the firm.

Communication values: Different financial ratios communicate the strength &

financial standing of the firm to the internal & the external parties. They indicate

overall profitability of the firm

Other uses: Financial ratios are very helpful in the diagnosis & financial health of

a firm. They highlight the liquidity, solvency, profitability & capital gearing etc.

of the firm. They are useful tools of analysis of financial performances.

68
 OBJECTIVE OF THE STUDY

An analysis of financial statements with the help of „ratio‟ may be termed as

“Ratio Analysis”. It implies the process of computing determining & presenting

the relationship of the terms or group of items of the financial statements. It also

involves the comparison & interpretation of these ratios & use of them for future

projections.

And the fund flow arises when the net effect of the transaction is to increase or

decrease the amount of working capital. Normally, a firm will have some

transactions that will change net working capital & some that will cause no change

in net working capital include most of items of profit & loss account and those

business events, which simultaneously effect both current & non-current balance

sheet items.

CLASSIFICATION OF RATIOS

Ratio may be classified in a number of ways to suit any particular purpose.

Different kinds of ratio statement are selected for different types of situations.

Mostly, the purpose for which the ratios are used and the kind of the data available

determine the nature of analysis. In general, the following basis of classification is

in vogue.
69
(a) Traditional classification or classification according to the statements

from which ratios are derived:

A basis of classification of ratios which readily suggests itself is according to the

statement to which the determinants of a ratio belong. From this angle, ratios are

classified as thus:

(1) Balance Sheet Ratios: these ratios are also called financial ratios. They

deal with the relationship between two items, or group of item, which are

together in the balance sheet, example current ratio, liquid ratio, proprietary

ratio, fixed assets ratio, capital gearing ratio, and debt equity ratio.

(2) Profit & Loss Account Ratios: these ratios are also called operating ratios.

The items used for the calculation of these ratios are usually taken out from the

profit and loss statement. Example operating ratio, expensive ratio, net profit

ratio, gross profit ratio, stock turnover ratio.

(3) Inter-statement ratios or combined ratios: the information required for

the compilation of these ratios is normally drawn from both the balance sheet, and

profit & loss account. Example Return on capital employed, return on

proprietors‟ funds or share holders‟ investment, and return on total investment,

debtors Turnover ratio, creditor‟s turnover ratio, fixed assets turnover ratio,

working capital turnover ratio.

70
(b) Classification according to tests satisfied or functional classification:-

Robert N. Anthony suggested that ratios may be grouped the basis of certain tests

which satisfy needs of the parties having financial interest inventory the business

concern. These tests are:

Test of liquidity

Test of profitability

Market tests

(c) Classification from the point of view of financial management or

classification according to nature:

This standard of classification envisages the organization of accounting ratios into

four fundamental types which are as follows;

(1) LIQUIDITY RATIOS

Liquidity refers to the ability of the firm to meet its obligations inventory the short-

run, usually one year. Liquidity ratios are generally based on the relationship

between current assets and current liabilities (the sources for meeting short-term

obligations). Example: Current ratio, Acid test ratio.

71
(2) LEVERAGE RATIOS

Capital structure ratio

Earnings ratio

Dividend ratio

Financial leverage refers to the use of debt finance. While debt capital is analysis

cheaper source of finance, it is analysis riskier source of finance. Leverage ratios

helps inventory assessing the risk arising from the use of debt capital. They are

also known as capital structure ratios. Example: Debt-to-equity ratio, fixed assets

to net work, interest coverage ratio.

(3) ACTIVITY RATIOS

They are also called turnover ratios or asset management ratios. They measures

how efficiently the assets are employed by the firm. These ratios are based on the

relationship between the level of activity and the level of various assets. Example:

Fixed assets turnover, Stock turnover, Debtors turnover, Creditors turnover, Total

assets turnover ratio.

These ratios would also indicate the profitability position of the business.

72
(4) PROFITABILITY RATIOS

Profitability reflects the final result of business operations. There are two

types of profitability ratio.

Profit margin ratios

Rate of return ratios

A profit margin ratio shows the relationships between profit and sales. Rates of

return reflect the relationship between profit and investment.

(d) Classification According To Importance:

Some ratios when related to the main objective of the business purpose of analysis

may be more important than others. This basis classification has been

recommended by the British Institute of Management for inter-firm computations

and the following types have been suggested by the institute:

(i) Primary Ratios:

The primary motive of any commercial under taking is profit and therefore,

ratios like profit-to-sales, return on capital employed may be termed as primary

ratios to such an undertaking.

73
(2) Secondary Ratios:

These ratios are mainly used to explain the primary ratios. They are also

known as subsidiary or supporting ratios. Taking the ratio of return on capital

employed as the primary ratio, the following ratios may be grouped as secondary

ratios:

(a) Profit and Earning ratios

(b) Cost or expenses ratios

(c) Turnover ratios

(d) Capital and related ratios

74
 SHORT-TERM SOLVENCY OR LIQUIDITY RATIOS

Liquidity ratios play analysis key role in the analysis of the short-term financial

position of analysis business. Commercial banks and other short-term creditors are

generally interested in such an analysis. However, managements can employ these

ratios to ascertain how efficiently they utilize the working capital in the business.

Shareholders and debenture-holder and long-term creditors can use these ratios to

assets the prospects of dividend and interest payments. This type of ratios

normally indicates the ability of the business to meet the maturing or current debts,

the efficiency of the management inventory utilizing the working capital and the

progress attained inventory the current financial position.

Description of Principal Ratios:-

1. Current Ratio

Current ratio may be defined as the ratio of current assets to current liabilities. It is

also known as working capital ratio or 2 to 1 ratio. Current ratio shows the

relationship between total current assets and total current liabilities.

75
Components

Current assets normally include cash in hand or at bank, marketable securities

other short-term high quality investment bills receivable, prepaid expenses, work-

in-progress, sundry debtors and inventories. While current liabilities are composed

of sundry creditors, bills payable, outstanding and accrued expenses, income tax

payable.

Expressed as a formula, the current ratio is as follows:

Current Assets

Current Ratio = -----------------------

Current Liabilities

2009-10

2976.43

Current Ratio = ------------ = 2.11:1

1413.49

2008-09

2968.30

Current Ratio = --------------- = 3.40:1

871.87

76
Explanation:

Coming to KCL the current ratio is 2009 has decreasing in comparison year 2008.

The ratio of 2009 shows that the assets are 2.11 times of current liabilities. Current

Assets should be one and half of current liabilities. According to KCL report is

improving. A low current ratio indicates that the enterprise is short of funds for

honoring its commitment and this was lead to insolvency. On the other hand a

very high current ratio indicates that the firm has a very large amount of current

assets Many times higher than that of current liabilities.

This is a situation of high liquidity and is indicative the existence of excessive

current assets.

2. Acid Test Ratio or Liquid Ratio

Acid test Ratio or Liquid ratio, as it is sometimes called is concerned with the

relationship between liquid assets and liquid liabilities to supplement the

information given by the current ratio. In many lines of business a concern whose

current assets consist largely of inventory can very early become technically, if not

actually; insolvent within analysis very short period of time and this is the rationale

of the term „Acid-Test Ratio‟

77
Components:

Liquid Assets = Current Assets – Inventory.

Generally, this ratio is considered to be good if it is 1:1. It shows the relationship

of quick cash-yielding assets to current liabilities.

Expressed as a formula, the liquid ratio is as follows:

Quick Assets

Liquid Ratio = -----------------------

Current Liabilities

2009-10

1573.88

Liquid Ratio = --------------- = 1.11:1

1413.49

The quick ratio is increasing over the period 2008 to 2009. With the help of quick

ratio we analysis the inventory level. The quick ratio analysis gives better picture

than the current ratio towards the payment of current liabilities. It is used to test

the short-term liquidity of the firm in its correct form and represent good position.

78
LONG-TERM SOLVENCY ANALYSIS

Bankers and other short-term creditors are most interested in the current debt-

paying ability of business, so the share holders and debenture holders are mainly

concerned with the long-term financial prospects. However, neither group may

logically ignore the financial aspects of primary interest to the other so that both

these groups concern themselves with current and prospective earnings. Some

selected solvency ratios are discussed below:

(a) Debt-Equity-Ratio

Debt-to-equity ratio relates all external liabilities to owners recorded claims. It is

also known as „External-Internal Equity Ratio‟. It is determined to measure the

firm‟s obligations to creditors in relation to the funds invested by the owners.

Components: The term external equities refers to total outside liabilities and

internal equities includes all claims of preference share holders and equity share

holders such as share capital and reserves and surplus. Outside liabilities include

all debts, whether long-term or short-term or in the form of mortgages, bills or

debentures. But when used as analysis long-term financial ratio, only term debts

like debentures etc are to be considered.

79
In generally, Debt-to-equity ratio 2:1 is acceptable.

2009-10

Debt 2628.28

Debt-Equity-Ratio = --------- = --------------- = 1.39:1

Equity 1893.40

The ratio indicates the degree of protection provided to the lenders. The lower the

ratio the higher will be the degree of protection. As a general rule, this should not

exceed 2:1. If the debt equity ratio is more than that is shows a rather risky

financial position from the long-term point of view. This ratio shows favorable

condition of KCL.

(b) Proprietary Ratio

This is a variant of the debt-equity ratio. This ratio relates the share holders‟ funds

to total assets. It is calculated by dividing the share holder‟s funds by the total

tangible assets. This ratio indicates the long-term or future solvency position of

the business. It is also known as Equity to total assets ratio or Net Worth to total

Assets ratio.

80
 This ratio throws light on the general financial strength of the company.

Higher the ratio, the better it is for all concerned.

2009-10

Proprietary or Shareholder‟ Funds

Proprietary Ratio = ------------------------------------------------

Total Assets or Total Equities

1893.40

Proprietary ratio = ------------------------- = 0.37

5070.20

This ratio indicates the long term or future solvency position of the business.

Analysis high ratio shows that there is safety for creditors of all types. A ratio

below 50% may be alarming for the creditors since they may have to lose heavily

in the event of company‟s liquidation on account of heavy losses.

(c) Ratio of Fixed Assets to Proprietors‟ funds:

This ratio establishes the relationship between fixed assets and shareholders‟ funds.

The purpose of this ratio is to indicate the percentage of the owners‟ funds invested

in fixed assets.

81
 Fixed Assets (after depreciation)

Fixed Assets to Proprietors‟ Fund = ------------------------------------------

Proprietors‟ funds

3447.89

Fixed Assets to proprietor‟s fund = -------------- = 1.82 or 182%

1893.40

D. Ratio of Current Assets to Proprietors‟ Funds

This ratio establishes the relationship between current assets and share holders‟

funds. The purpose of this ratio is to indicate the percentage of share holders‟

funds invested in current assets.

Current Assets

Current Assets to Proprietors‟ funds Ratio = ----------------------

Proprietors Funds

2009-10

2976.43

Current Assets to Proprietors‟ funds Ratio = ------------- = 1.57 or 157%

1893.40

82
 Solvency Ratio

The difference between proprietary ratio as % and 100 percents the ratio is

solvency ratio. This ratio indicates the relationship between total liabilities & total

assets of the business. So it is also known as „Ratio of total liabilities to total

assets.‟

2009-10

Total Liabilities

Solvency Ratio = -----------------------

Total Assets

4041.77

Solvency Ratio = ----------------------- = 0.63 or 63%

6449.75

(f) Fixed Assets Ratio or Ratio of Capital and Long-Term Funds to Fixed

Assets: The ratio of long-term loans to fixed assets is important and another

aspect of long-term financial policy.

83
Components: Fixed assets will mean cost less depreciation or net fixed assets. It

will also include trade investments. Long-term funds will mean equity share

capital, preference share capital, reserves, debentures and long term loans.

2009-10

Fixed Assets Ratio = Share holders‟ Funds + Long term loans /

Net Fixed Assets

5070.20

Fixed Assets Ratio = --------------- = 1.45

3507.26

It is also known as „Capital Employed to Fixed Assets Ratio.‟

2009-10

Net Fixed Assets

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

Capital Employed

3447.89

Fixed Assets Ratio = ------------------ = 0.76

4521.68

84
This ratio gives an idea as to what part of the capital employed has been used in

purchasing the fixed assets for the concern. If the ratio is less than 1 it is good for

the concern.

G. Debt Service Ratio

This ratio relates the fixed interest charges to the income earned by the business. It

is also known as „Interest Coverage Ratio‟. It indicates whether the business has

earned sufficient profits to pay periodically the interest charges.

2009-10

Net Profit before Interest and Tax

Debt Service Ratio = ------------------------------------------------

Fixed Interest Charges

889.66

Debt Service Ratio = -------------------------- = 2.37

375.24

In 2009, debt service ratio is higher than 2008 & 2007.

85
B. TEST OF PROFITABILITY

The main object of analysis business concern is to earn profit. In general terms,

efficiency in business is measured by profitability. Profit as compared to the

capital employed indicates profitability of the concern. If analysis concern goes on

losing, its financial condition will definitely be bad sooner or later. Profits enable

analysis firm to improve its financial strength; there, ratios based on profitability

are termed “casual” ratios, indicating the causes of the present or expected

financial position. These ratios are designed to highlight overall efficiency of

analysis business concern. Thus, analysis measures of profitability are the overall

measure of efficiency.

(1) Gross Profit Ratio

This ratio shows the relationship of sales with the direct costs such as purchases,

manufacturing cost etc and thus is important.

2009-10

Gross Profit

Gross Profit Ratio = ------------------- * 100

Net Sales

2555.18

Gross Profit Ratio = ---------------- * 100 = 34.74%

7355.36

86
Any fluctuation in this gross profit is the result of a change either in „sales‟ or the

„cost of goods sold‟ or both. Thus, this ratio shows the average margin on goods

sold.

The gross profit is what is revealed by the trading account. It results from the

difference between not sales and cost of goods sold without taking into account

expenses generally charged to the profit and loss account.

Operating Ratio: - This ratio establishes the relationship between operating profit

and sales and is calculated as follows:

2009-10

Operating Profit

Operating Profit Ratio = ----------------------- * 100

Net Sales

1156.72

Operating Profit ratio = -------------- * 100 = 15.73%

7355.36

Where

Operating Profit = Net Profit + Non-Operating Expenses – Non Operating Income

OR
Gross Profit – Operating expenses

87
Operating ratio as follows:

Operating profit Ratio = 100 – Operating Ratio

Operating Profit margin is greater than 2008 and 2007. This ratio indicates the

portion remaining out of every rupee worth of sales after all operating costs and

expenses, have been met. Higher the ratio better it is.

(3) Expenses Ratio: Expenses ratios are calculated to ascertain the relationship

that exists between operating expenses and volume of sales. These ratios are

calculated by dividing the sales into each individual operating expense. It indicates

the portion of sales which is consumed by the various operating expenses. Thus,

such an analysis will throw good light on the levels of efficiency prevailing in

different aspects of the work. It is useful to work out the following ratios which

will total up to the operating ratios:

Ratio of Materials used to sales:

Direct Material cost / Net Sales x 100

Ratio of Labor to sales:

Direct Labor cost / Net Sales x 100

Ratio of Factory expenses to sales:

Factory expenses / Net sales x 100

88
Ratio of Office and Administration exp to sales:

Administrative Exp. Ratio = Office & Admin. Expenses / Net sales x 100

Selling Expenses Ratio = selling & distribution exp / Net sales x 100

Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales x 100

Generally all these ratios are expressed in terms of percentage

2009-10

Operating Exp.

Operating Expenses Ratio = ----------------------- * 100

Net Sales

1665.52

Operating Expenses Ratio = ---------------- * 100 = 22.64%

7355.36

(4) Net Profit Ratio:

We all know that gross profit is not the final profit- it is the net profit which is

really significant. Therefore, a ratio of net profit to sales (also called net margin) is

worked out; but in this case the profit considered is profit before interest. This is

the ratio of net income or profit after takes to net sales. Net Profit, as used here, is

the balance of profit and loss account which is arrived at after considered all non-

operating income such as interest an investment, dividend received etc… and non-

operating expenses like loss on sale of investments, provision for contingent

liabilities, etc
89
2009-2010

Net Profit after tax

Net Profit Ratio = ------------------------- * 100

Net Sales

358.52

Net Profit Ratio = ---------------- * 100 = 4.68%

7667.54

Net profit ratio is the profit after all expenses and income tax and is available to the

owners. So this ratio indicates that forever hundred rupees of sales, Rs. 4.68 are

earned for the owners. This ratio is profitable for the company because it is

increasing time to time.

(2) OVERALL PROFITABILITY RATIO:

(i) Return On Capital Employed:

The prime objective of making investment in any business is to obtain satisfactory

return on capital invested. Hence, the return on capital employed is used as a

measure of success of a business in realizing this objective, otherwise known as

return on investment this is the overall profitability ratio. It indicates the

percentage of return on the capital employed in the business and it can be used to

show the efficiency of the business as a whole.

90
 2009-2010

Operating Profit

Return on Capital Employed = ----------------------- x 100

Capital Employed

878.67

Return on Capital Employed = --------------- * 100 = 19.43%

4521.68

This ratio is increasing in comparison of last year which the favorable position of

the Company and this ratio is helpful for making capital budgeting decisions.

This is due to improved efficiencies, high level of order for the purchase of

company‟s product and rise in prices of company‟s product and order from abroad

with good margin of profit.

91
(ii) Return on Shareholders‟ Fund

It is the ratio of net profit to shareholders‟ investment. It is also called „Return on

Proprietors‟ Funds‟, or Capital Employed. This ratio establishes the profitability

from the shareholders‟ point of view.

2009-10

Net Profit after Interest & Tax

Return on Shares holder‟s Fund = ---------------------------------- * 100

Shareholders‟ Funds

358.52

Return on Share holders Fund = ------------------ * 100 = 18.94%

1893.40

This ratio is almost half in comparison of last year. The ratio of net profit to share

holders fund shows the decrease to which profitability objective is being loose.

Higher the ratio, the better it is.

92
(iii) Return on Equity Capital

This ratio relates the net profits finally available to equity share holders to the

amount of capital invested by them.

2009-10

Net Profit after tax, interest

& Preference Dividend

Return on Equity Capital = ------------------------------------- * 100

Equity Share holders‟ Fund or Net Worth

358.52

Return on equity capital = ----------------------- * 100 = 18.93%

1893.40

This ratio indicates what percentage of profits earned are enjoyed by equity

shareholders. Return on Equity Share Capital or earnings per share helps to

determine the market price of equity shares of the Company while comparing with

the ratios of other companies. It will indicate whether the capital is effectively

used or not.

93
(iv) Return on Total Assets

This ratio is calculated to measure the profit after tax against the amount invested

in total assets to ascertain whether assets are being utilized properly or not.

2009-10

Net Profit after tax

Return on Total Assets = ----------------------- * 100

Total Assets

358.52

Return on Total Assets = ------------------ * 100 = 5.58%

6424.32

This ratio is increasing in 2009 which shows that assets are being utilized properly

in comparison of 2008.

Explanations:

THE Return on assets shows as to how much is the profit earned by the firm

Per rupees of assets used so 5.58 Rs are realized of 100Rs invested in assets.

94
 ACTIVITY (TURNOVER OR PERFORMANCE) RATIOS

Profit depends on the rate of turnover and the net margin. The importance of good

turnover cannot be over-emphasized. Turnover ratios judge how well the facilities

at the disposal of the concern are being used. In other words, these ratios measure

the effectiveness with which analysis concern uses resources at its disposal. The

result is expressed in integers rather than as a percentage. These ratios are usually

calculated on the basis of sales or cost of sales. Turnover ratios for each type of

assets should be calculated separately. Higher the turnover ratio, better the use of

capital or resources; of course, higher the turnover, the better the profitability ratio.

The following are the import activity (turnover or performance) ratios.

1. Stock Turnover Ratio or Inventory Turnover Ratio:

This ratio establishes relationship between the cost of goods sold during a given

period and the average amount of inventory carried during that period. It indicates

whether stock has been efficiently used or not, the purpose being to checkup

whether only the required minimum has been lock up in stocks. It is usually

considered better to work out the turnover against cost of sales since sales include

an element of profit, where as stock is usually at cost.

95
The ratio is calculated as follows:

2009-10

Cost of Goods Sold

Stock Turnover Ratio = ---------------------------- * 100

Average inventory at Cost

4800.18

Stock Turnover Ratio = ----------------- * 100 = 344.45%

1393.56

Where,

Cost of Goods Sold = Opening Stock + Purchases + Manufacturing Exp. - Closing Stock

OR

Cost of Goods Sold = Sales – Gross Profit

Average Stock = (Opening Stock + Closing Stock) / 2

Higher the ratio, the better it is since it indicates that more sales are being produced

by a unit of investment in stocks. Industries, in which stock turnover ratio is high

usually work on a comparatively low margin of profit. The ratio shows better

performance if it increases, since it means that the investment in stocks is leading

96
to higher sales. The reverse is also true. It should be noted that some people

calculate this ratio on the basis of sales.

Notes:

Coming to KCL the data on purchase, sale and stock etc. and are not available

from the Balance Sheet and the other material provided to the investigators by

company. Hence, it is not possible to calculate the turnover ratio of the Company.

2. Debtors (Receivable) Turnover Ratio:

It indicates the number of times on the average the receivable is turnover in each

year. The higher the value of the ratio, the more is the efficient management of

debtors. It measures the accounts receivable (trade debtors and bills receivables) in

terms of number of days of credit sales during a particular period. Average debtors

are calculated by dividing the sum of debtors in the beginning and at the end by 2.

The ratio is measure of the collectability of accounts receivables and tells about

low the credit policy of the company is being enforce

Net Credit Sales

Debtors Turnover Ratio = -----------------------

Average account receivable (Drs + B/R)

97
Notes:

The data is not available for the calculation of debtor‟s turnover ratio. It shows

more the chances of bad debts efforts should be made to make the collection

machinery efficient so that the amount due from debtors may be realized in time.

3. Creditors (or Account Payable) Turnover Ratio:

This ratio is calculated roughly as the debtor‟s turnover ratio. It indicates the

velocity with which the payments for credit purchase are made to creditors. The

term account payable includes Creditors and Bills payable. This ratio may be

calculated as follows:

Credit Purchases

Creditors Turnover Ratio = -----------------------

Average Accounts Payable (Cr + B/P)

A high ratio indicates that creditors are not paid in time while a low ratio gives an

idea that the business is not taking full advantages of credit period allowed by the

creditors.

98
Sometimes it is also required to calculate the average payment period (or average

age of payable or debt period enjoyed) to indicate the speed with payments for

credit purchase are made to creditors.

Notes:

Coming to KCL the data on purchase sale and stock etc… and are not available

from the Balance Sheet and the other material provided to the investigators by

Company. Hence, it is not possible to calculate the turnover ratio of the Company.

4. Fixed Assets Turnover Ratio or Ratio of Sales to Fixed Assets:

This ratio shows how well the fixed assets are being utilized. If compared with a

previous period, it indicates whether the investment in fixed assets has been

judicious or not. This ratio expresses the number of times fixed assets are being

turned-over in a stated period.

The ratio is important in case of manufacturing concerns because sales are

produced not only by use of current assets but also by amount invested in fixed

assets. The higher is the ratio, the better is the performance. On the other hand, a

low ratio indicates that fixed assets are not being efficiently utilized.

99
2009-10

Cost of Sales (or Net Sales)

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

Fixed Assets (less Depreciation)

7355.36

Fixed Assets Turnover Ratio = ---------------- = 2.1

3447.89

Higher is the ratio the better is the performance it indicates that fixed assets are

being efficiently utilized. An improvement in the ratio indicates better

performance and decline in it would show a declining efficiency or improvident

investment. Increase in Fixed Assets Turnover Ratio indicates that fixed assets

have been used as efficiently as they had been used in previous years.

5. Sales to Capital Employed (or Capital Turnover) Ratio:

This ratio shows the efficiency of Capital Employed in the business by computing

how many times capital employed is turn-over in a stated period.

The higher the ratio, the greater are the profits. A low capital turnover ratio should

be taken to mean that sufficient sales are not being made and profits are lower.

100
 Sales

Capital Turnover Ratio = ----------------------------------------------------

Capital Employed

(i.e. shareholders‟ fund + Long term liabilities)

2009-10 7355.36

Capital Turnover Ratio = ------------------ = 1.62

4521.68

Capital Turnover Ratio establishes the relationship between sales and capital

employed. The objective of working out this ratio is to determine how efficiently

the capital employed is being used and this in turn shows the promise of

profitability and efficiently of management

101
6. Sales to Working Capital (or Working Capital Turnover) Ratio:

This ratio shows the number of times working capital is turned-over in a stated

period.

2009-10

Sales

Working Capital Turnover Ratio = ---------------------------------------

Net Working Capital

(i.e. Current Assets – Current Liabilities)

7355.36

Working Capital Turnover Ratio = ----------------- = 4.70

1562.94

Low working capital turnover ratio indicates that working capital is not efficiently

utilized it may put the concern into financial difficulties. This ratio shows the

efficiency or inefficiency in the use of the whole of the working capital and not

merely a part of it. That invested in stock-it is the whole of the working capital

that leads to sales.

102
7. Total Assets Turnover Ratio:

This ratio is calculated by dividing the net sales by the value of Total Assets.

A high ratio is an indicator of over-trading of total assets while a low ratio reveals

ideal capacity. The Traditional Standard for the ratio is two times.

2009-10

Net Sales

Total Assets Turnover Ratio = -----------------

Total Assets

7355.36

Total Assets Turnover Ratio = ---------------- = 1.1

6449.75

A high ratio is an indicator of over trading of total assets while a low ratio reveals

ideal capacity.

103
 LEVERAGE RATIOS:

The leverage ratios explain the extent to which the debt is employed in the capital

structure of the concerns. Always Concerns use debt funds along with equity

funds, in order to maximize the after tax profits, thereby optimizing earning

available to equity shareholders. The basic facility of debt finds is that after tax

cost of tem will be significantly lower and which can be paid back depending upon

their terms of issue. Further debt funds will not dilute the equity holders control

position.

Leverage refers to an increased means of accomplishing some purpose. In

financial management, it refers to employment of funds to accelerate rate of return

to owners. It may be favorable or unfavorable when earning are more than the

fixed cost of the funds, it is called favorable. An unfavourable leverage exists if

the rate of return remains to be low. It can be used as a tool of planning by finance

manager. Leverage may be.

(i) Operating Leverage

(ii) Financial Leverage

(iii) Combined Leverage.

104
Operating Leverage: It is the relation between contribution and EBIT (earning

Before Interest & Tax) and is measured as:

Contribution (Sales – Variable Cost)

OL = ----------------------------------------------------------

EBIT

It signifies the change that will result in EBIT for any change in sales. If OL is 3,

it will mean that for every 1% change in sales, the change in EBIT will be 3%. I.e.

three times. A high ratio would indicate a high business risk and low ratio

business risk.

Financial Leverage: It is the relationship between (EBIT) and (EBT) when a firm

process debt capital to finance its needs, it is said to have Financial Leverage. It

tells the extent of the change in earning before fax (EBT) due to change in

operating income (EBIT). It is calculated with the help of the following formula:

2009-10

Earnings before interest and Tax

Financial Leverage = -----------------------------------------------

Earnings before tax

105
 7227.17

Finance Leverage = ---------------- = 14.04

514.42

It may be favorable or unfavorable. If the rate of return or investment (ROI) of a

firm is higher than the cost of debt capital, it is said to have favorable financial

leverage. On the other hand, if the rate of return on investment (ROI) is lower than

the cost of debt capital, the firm is said to have unfavorable financial leverage.

Favorable financial leverage is also referred to trading on equity.

Combined Leverage:

It is the combination of operating leverage and financial leverage

CL = OL x FL

(1) Capital Gearing Ratio

Closely related to solvency ratios is the Capital Gearing Ratio which is mainly

used analysis the capital structure of the company. The term „Capital Gearing‟ is

used to describe the ratio between the equity share capital and fixed interest –

bearing securities of a company. Where the holders of fixed income bearing

106
securities have acquired lion‟s share in the income of a business enterprise, it is

said to be „highly geared‟. The situation is manifested most commonly where

there is a small equity holding compared with fixed income bearing securities.

Variable Cost Bearing Capital

Capital Gearing Ratio = ----------------------------------------------

Fixed Cost Bearing Capital

OR

Equity Share Holders‟ Funds

Capital Gearing Ratio = ---------------------------------------------

Fixed Cost Bearing Capital

Components:

Equity-share holding for the purpose of capital – gearing ratio, includes all

revenue as well as all appropriations of Profits.

Fixed interest bearing funds include debentures, preference share capital and

other – long term loans.

Significance:
107
 Capital Gearing Ratio belongs to the family of „leverage‟ ratios and is

important not only to prospective investors but also to the company. It must be

carefully planned in as much as it affects the company‟s capacity to maintain an

even divided distribution policy during difficult trading periods that may occur.

Moreover, its immediate effect may be to enable a company to pay higher equity

dividends when there is only a narrow margin of profits but its long – range effects

on the efficiency of a company are far-reaching. Distribution policies and the

building up of reserves, as well as a stable dividend policy, are all affected by

company‟s „gear-ratio‟.

(2) Total Investment to Long-term Liabilities:

This ratio compares share capital to loan capital. Generally a high proportion of

long-term liabilities are risky to any company, which this ratio enables one to find

out.

Long Term Funds

Ratio of Total Investment

to Long-Term Liabilities = ---------------------------------------

Long Term Liabilities

108
Long term liabilities are decreasing while long term funds are increasing in

comparison of last year. It shows better position of company.

(3) Current Liabilities to Proprietors‟ Funds:

This ratio compares current Liabilities to Proprietors‟ Funds. It measures the

amount of funds raised by the proprietors as against these rose by short-term,

borrowings. A high ratio indicates that the firm will be slow in paying its bills

because, if owner have not put enough of their own funds in the business, suppliers

of long-term funds would be unwilling to expose themselves to the risks and the

firm will have to resort to short-term stop-gap financing to a large extent. The

standard for this ratio is 35 percent.

2009-10

Current Liabilities

Ratio of Current Liabilities

to Proprietors‟ Funds = -----------------------

Proprietors‟ Funds

1413.49

Ratio of Current Liabilities

To proprietor‟s Funds = -------------------------- = 0.74

1893.94

109
Coming to KCL the ratio of current liabilities to proprietors funds is 0.74: 1 in

2009 which is too high when compare to the ideal ratio we would be 0.35 : 1.

However, on observation of the data for 2007, 2008 & 2009. We find that the

ratio as a falling trend which is a healthy sign.

4. Ratio of Reserves to Equity Capital:

The ratio establishes relationship between reserves equity capital. It is important in

a much as it reveals the policy pursued with regard to growth shares. If a

conservative policy regarding the distribution of dividend is followed, the ratio

may be unduly high. It also indicates the extent to which value of equity shares

has gone up by the plugging back of profits. This ratio shows the strength of

company and the strength of Share / Equity.

Ratio of Reserves to Reserves 1746.23

Equity Capital = ----------------------------- = ------------- = 11.86

Equity Share Capital 147.17

Coming to KCL we find that the ratio is increasing over a period of time, it was

9.52: 1 in 2008 and increased 11.86: 1 in 2009. This is due to high profitability

and good management because of liberal dividend policy has been followed by the

company.
110
 Ratio for Prospective Investors

(1) Book Value per Share:

Book Value per Share means the value which is payable of liquidation of a

company

2009-10

Shareholders‟ Funds

Book Value Per Share = -------------------------------

Number of Shares

189,34,00,000

Book Value Per Share = -------------------------------- = 25.73 (Rs)

735,83,580

(2) Earning Ratio ;

Under this category the following ratios are calculated.

(i) Earnings Per Share

(ii) Price Earnings Ratio
(iii) Capitalization Ratio

111
(I) Earnings per Share

This helps in determining the market price of equity shares of the company and in

estimating the company‟s capacity to pay dividend to its equity Shareholder.

The Performance and prospects of the company are affected by earning Per Share.

If earning per share increases, there is possibility that the company may pay more

dividend or issue bonus shares. In short the market price of the share of a company

will be affected by all these factors. A comparison of earning per share of the

company with another company will also help in deciding whether the equity

capital is being effectively used or not.

2009-10

Net Profit after Tax & Preference Dividend

Earnings Per Share = ------------------------------------------------------------

Number of Equity Shares

35,85,20,000

Earning Per Share = ------------------------ = 4.87 (Rs)

7,35,83,580

Coming to KCL we find a greater degree of fluctuation in earning per share it was

1.21 Rs in 2008 and now it increased to 4.87 Rs, 302.47 % increment in Eps 2009.

112
(ii) Price Earning Ratio:

This ratio indicates the market value of every rupee earning in the firm and is

compared with industry average. High ratio indicates the share is overvalued and

low ratio shows that shares are undervalued. It is computed by the following

formula:

2009-10

Market Price Per Share

Price Earning Ratio = -----------------------------------

Earning Per Share

55.50 ( 31st march 10, at BSE)

Price Earnings Ratio = --------------- = 11.39

4.87

It is a very important ratio in order to know whether the Shares of the company are

undervalued or in predicting the further market price. Helps the shareholders to be

purchased then it indicates the possibility of Capital appreciation.

113
 (iv) Capitalization Ratio:

2009-10

Earning Per Share

Capitalization Ratios = ----------------------------

Market Price Per Share

4.87

Capitalization Ratio = ---------------------- = 0.08

55.50

114
 Dividend Yield Ratio:

Distributed dividend 735, 80,000

Dividend per Share = ------------------------------- = --------------------- = 1.00

No. of Equity share 735, 83,580

Dividend Per Share

Dividend Yield Ratio = ------------------------------ * 100

Market Price Per Share

1.00

Dividend Yield Ratio = -------------------- * 100 = 1.80%

55.50

This ratio is important for these investors who are interested in the dividend

income. As the Shareholders purchases the Shares in the open market, so his yield

(rate of return) is not equal to the dividend declared by the company.

115
2009-10

Dividend Per Equity Share

Dividend Payout Ratio = -------------------------------------- X 100

Earning Per Share

1.00

Dividend Payout Ratio = ------------------------- * 100 =20.53%

4.87

This ratio indicates as to what proportion of earning per share has been used for

paying dividend and what has been retained for plugging back. This ratio is very

important from Shareholders‟ point of view as it tells him that if a company has

used whole or substantially the whole of it‟s earning for paying dividend and

retained nothing for future growth and expansion purposes, then there will be very

dim chances of capital appreciation in the price of shares of such company. In the

other words, an investor who is more interested in capital appreciation must look

for a company having low pay-out ratio.

116
 CONCLUSIONS

The study in the preceding pages reveals some important and interesting

conclusions. The theoretical portion reveals the conclusion of academic

importance and when the Financial Data of Kajaria Ceramics Ltd has been

analyzed, the financial position of the company is brought to surface. The overall

financial position of the company is quite healthy and over the last years which

covered the period of study, the financial position has improved. The current

Ratio, Acid Test Ratio, Debt equity Ratio and Proprietary Ratio all have improved

over the period 2008 to 2009. The credit for this improvement goes to efficient

management, Long term vision of the management, team spirit among the employs

of the company higher level of orders in the hands of the company, better

realization and better overall economic condition of the economy with increased

emphasis of government on expansion and strengthening of economic

infrastructure, it is expected that KAJARIA will gain a lot, its financial Ratio will

improve further and so the financial strength of the company.

117
 RECOMMENDATIONS

The Tiles industry is huge and has huge potential for growth. The company

should try and revamp its operations, they should lower the price.

It can be done by increase production, achieve economies of scale and then

increase market penetration.

The product is doing reasonably well in most of the market. So they should

promote the product accordingly e.g. free sampling, discounts, prominent

hoardings etc.

Home Solution:

Taff under this Brand name they have got a group of labor who are properly

trend and capable of laying down good tiles. Give training to the Massion,

Technical training in sanitary ware. Only company Employee will go and fit.

(Which are properly trend by company in Jakogi ware.)

Whenever we get any tile approved we should take proper supply schedule

from the client. Proper SAMPLE should be provided to the ARCHITECH &

BUILDER office because they choose the product from sample.

More boards and hoarding should be placed in side of roads and public places.

They should use mass media like TV, newspapers, etc to promote company

product. This will help in increasing the sales volume.

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 BIBLIOGRAPHY

The help have been taken from the following secondary data to analysis the

financial report.

 INTERNET SITES:-

www.kajariaceramics.com

 Annual Report 2009-10 of Kajaria Ceramics Ltd.

BOOKS PREFERRED

 PRINCIPAL OF FINANCIAL MANAGEMENT

Author……… Mr. R.P. Rustogi….Galgotia Publishing Co.

 FINANCIAL MANAGEMENT

Author……….Mr. I.M. Pandey…. Vikas,2004 9th Ed.

 CORPORATE FINANCE

Author……….Mr. M.Y. Khan & Jain TMH,5TH Ed.

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