A STUDY ON BALANCE SHEET AND RATIO ANALYSIS OF TVS MOTORS

A MINI PROJECT report submitted to

SRM UNIVERSITY

For the partial fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION BY Ramesh Krishnan.R 3511210385 Under the Supervision of Mr.T.Vel Murugan Asst.Professor

Dept. of Business Administration Faculty of Engineering and Technology Kattankulathur-603203

SEPT - DEC 2012

TABLE OF CONTENTS

S. NO

CONTENT NAME

PAGE NO

1.

INTRODUCTION TO THE STUDY

2.

BALANCE SHEET

3.

RATIO TABLE

4.

INTERPRETATION

CONCLUSION

1. INTRODUCTION TO THE STUDY

RATIO ANALYSIS

Financial Analysis is the process of identifying the financial strength and weaknesses of the firm by property establishing relationships by means of ratio between the firm of the balance sheet and profit and loss account. Ratio Analysis is the most widely used tool of analysis. A ratio is the quotient of tow numbers and is an expression of relationship between the figures or two amounts. It indicates a quantitative relationship, which is used for a qualified judgment and decision-making. The following are the four steps involved in the ratio analysis: Selection of relevant data from the financial statements depending upon the objective of the analysis. Calculation of appropriate ratios from the above data. Comparison of the calculated ratios of the same firm in the past, or the ratios developed from the projected financial statements or the ratios of some other firms or the comparison with ratios of the industry to which the firm belongs. Interpretation of the ratios.

STANDARDS FOR COMPARISON For making a proper use of ratio, it is essential to have fixed standards for comparison. The four most common standards used in ratio analysis in financial management are: 1. Absolute: absolute standards are those, which become generally recognized as being desirable regardless of the types of company, the time, stage of business cycle, or the objective of the analysis. 2. Historical: Historical standards involve comparing a companys own past performance as a standard for the present or future.

3. Horizontal: In the case of Horizontal standards, one company is compared with the average of other companies of the same companies.

4. Budgeted: The Budgeted standards are arrived at after preparing the budget for a period. Ratios developed from actual performance are compared to the planned ratios in the budget in order to examine the degree of accomplishment of the anticipated targets of the firms

LIMATIONS OF RATIO ANALYSIS

Limitations of ratio analysis arise due to difficulties in making comparisons. Though ratio is simple and easy to calculate, they suffer from some serious limitations.

1. Lack of adequate standards. 2. Limited use of a single ratio. 3. Inherent limitations of accounting. 4. Change of accounting procedure. 5. Personal bias. 6. Absolute figure are distort. 7. Window dressing 8. Price level changes. 9. Incomparable. 10. Ratio has on substitutes.

LIQUIDTY RATIOS Liquidity refers to the ability of a concern to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current floating or circulating assets. The current assets should either be liquid or near liquidity. These should be convertible into cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets can be assessed, by comparing them with short-term (current) liabilities. If current assets can pay off current liabilities then liquidity position will be satisfactory. To measure the liquidity of a firm, the following ratios can be calculated.

(1) Current Ratio (2) Quick/ Acid Test Ratio (3) Absolute Liquid Ratio

CURRENT RATIO Current Ratio indicates the firms ability to pay its current liabilities. Current ratio as one which is generally recognized as the patriarch among ratios. A relatively low ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. A high ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time as and when they become due. Current ratio = Current assets/Current liabilities (Ideal ratio = 2:1)

QUICK RATIO The quick ratio (or) Acid test ratio is a fairly stringent measure of liquidity. It is determined by dividing quick assets, i.e., cash, marketable investments and sundry debtors by current liabilities. This ratio is a better test of financial strength than the current ratio as it does not consider inventory, which may be very slow moving. It may be calculated as follows: Quick ratio = Liquid assets/Current liabilities

Liquid assets = current-(inventories + prepaid expenses) A quick ratio of 1:1 considered satisfactory.

ABSOLUTE LIQUID RATIO

This ratio considers only the absolute liquidity available with the firm. This ratio is also called Cash Position Ratio or Super Quick Ratio. This is a variation of quick ratio. This ratio is calculated when liquidity is highly restricted in terms of cash and cash equivalents. An ideal cash position is 0.50:1. This ratio is a more rigorous measure of a firms liquidity position. It is not a widely used ratio. It can be calculated as follows: Absolute Liquid Ratio = Absolute Liquid Assets/Current Liabilities CASH POSITION RATIO Cash position ratio explains the percentage of current liabilities that can be met with the liquid cash. It expresses the firms ability to meet its current obligations. Cash position Ratio = cash in hand/ current liabilities

SOLVENCY RATIO: In order to know the long-term financial position, leverage ratios are calculated. These are also called capital structure ratios and Leverage ratios. This ratio will indicate the proportion of debt and equity in the capital structure of an organization. These are calculated to know the extent to which operating profits are sufficient to cover fixed interest charges.

DEBT-EQUITY RATIO Debt equity ratio is an important tool of financial analysis. Depicts an arithmetical relation between loan funds and owner funds. This ratio is also known as External Internal Equity Ratio. This ratio is the basic and the most common measure of studying the indebtedness of the firm. This ratio is ascertained to determine long term solvency position of a company. Debt includes both long term and short term loans in the form of bills payable, mortgages, debentures, creditors and outstanding or accrued expenses. A high debt equity ratio indicates the claim of outsiders is greater than creditors may not consider those of owners because it gives lesser margin of safety for them at the time of liquidation of the firm.

A low ratio is considered satisfactory for the shareholders because it indicates that the firm has not able to sue low cost outsiders fund to magnify their earnings.

It may be calculated by dividing the long-term debts by shareholders equity earnings. Debt-Equity Ratio = Outsider Funds / Shareholders Funds i.e. Loan funds/own funds Note: Shareholders funds = Capital + Reserves & Surplus.

PROPRIETARY RATIO It indicates the long-term financial solvency of the firm. The proprietary ratio can never exceed 1:1 i.e., 100%. When there are no outside liabilities, the ratio would be 1:1; Standard ratio would be 60% to 70%. It is also known as equity ratio. It may express as: Equity ratio = Share Holders equity / Total assets The higher the proprietary ratio the lesser is the danger to the creditors in event of company being wound up. The lower the proprietary ratio the greater is the risk to the creditors since in the event of losses a part of their money may be lost besides loss to the proprietors of the business.

SOLVENCY RATIO It is the ratio of total long-term liabilities to total assets. It expresses how far the total assets are financed by the outsiders fund. It also expresses the firms ability to pay its long-term liabilities with its assets. Solvency Ratio = Total Long term liabilities / Total assets

FIXED ASSETS RATIO A variant to the ratio of fixed assets to net worth is the ratio of fixed assets to the long term funds, which is calculated as follows:

Fixed assets ratio = Fixed Assets (after deprecation) / Total Long-term funds. The ratio indicates the extent to which the total fixed assets are financed by long-term funds of the firm. Generally, the total of fixed assets should be equal to the long-term funds or say the

ratio should be 100%. The ratio should not be more than 1. If it is less than one, it shows that a part of the working capital has been financed through long-term funds.

FIXED ASSETS TO NETWORTH RATIO It is used to assess how far the fixed assets are financed by shareholders fund. It helps to assess the solvency position of the firm. A ratio between 60-65 percent is considered to be satisfactory. Fixed assets to net worth ratio = Fixed assets (after depreciation) / Share fund * 100

CURRENT ASSETS TO PROPRITORS FUND RATIO The purpose of the ratio is to show percentage of proprietors fund to the current assets. The ratio indicates the extent to which proprietors funds are invested in current assets. The ratio is calculated as follows: Current assets to proprietors funds ratio = Current assets / Proprietors fund * 100

PROFITABILITY RATIOS: Profitability ratios indicate the profitability of a company during an accounting year and profitability from the point of view of shareholders of the company. A lower profitability may arise due to the lack of control over the expenses. Generally, profitability ratios are calculated either in relation to sales or in relation to investments. The various ratios are: (1) (2) (3) (4) (5) Gross profit ratio Net profit ratio Return on assets Return on capital employed Return on shareholders investments

GROSS PROFIT RATIO Gross Profit Ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. It is calculated as: Gross profit Ratio = (Gross Profit / Net sales) * 100 Note: Gross Profit = Sales Cost of Goods Sold

NET PROFIT RATIO It indicates the relationship between net profit and net sales. Higher ratio indicates higher profitability and lower ratio indicates lower profitability. NPR = Profit after tax / sales * 100 The ratio is thus an effective measure to check the profitability of the business.

RETURN ON ASSETS Returns on assets are the relationship between profit after tax and interest and average assets. The ratio is calculated as under: Return on assets = Profit after tax and interest / Average assets * 100

RETURN ON CAPITAL EMPLOYED The ratios express the ability of the firm to generate profit from the total capital employed. It shows how far the firm was able to generate profit by properly utilizing the capital employed. Return on capital employed = Profit after tax and interest / Total capital employed * 100

RETURN ON SHAREHOLDERS INVESTEMENT Return on shareholders investment (or) Shareholders fund are the relationship between net profit (after interest and taxes) and the shareholders fund. ROI = Profit after tax and interest / Shareholders funds * 100

The two basic components of this are net profit and shareholders fund. This ratio is one of the most important ratios used for measuring the overall efficiency of the firm. As this ratio reveals how well the resources of a firm are being used, higher the ratio, better are the results.

RETURN ON EQUITY CAPITAL It shows the earnings capacity of proprietors funds. A high ratio gives scope for more retained earnings, which can be used for expansion, diversification and consequential development of business. It is calculated as follows: Return on Total Equity = Profit after tax / Equity share capital * 100

EARNING PER SHARE It indicates the earning power of equity share capital. EPS is of considerable importance in estimating the market price of shares. It is expressed as follows: Earnings per Share = Net profit after tax / No: of equity shares

ACTIVITY RATIOS: Activity ratios measure the efficiency of effectiveness with which a firm manages its resources or assets. These ratios are called turnover ratio because they indicates the speed with assets are converted or turned over into sales. These ratios are based on the relationship between the level of activity represented by sales or cost of goods sold, and levels of various asters. As both the current ratio and the quick ratio the movement of current assets, it is important to calculate the following turnover or efficiency ratios to comment upon the liquidity or the efficiency with which the liquid resources are being used by a firm. The various turnover ratios are: (1) Inventory turnover ratio (2) Debtors turnover ratio (3) Creditors turnover ratio

(4) Working capital turnover ratio INVENTORY (STOCK) TURNOVER RATIO It indicates the number of items its average inventory has been sold and replaced during the year. An important factor controls profitability of the firm. Inventory turnover ratio = Cost of goods sold / average inventory Note: Average inventory = opening stock + closing stock / 2 A ratio of six or seven times is considered satisfactory. A high inventory turnover ratio is an indication of good inventory management. A low inventory turnover ratio indicates excessive inventory including slow moving and obsolete items resulting in blocking of funds.

RECEIVABLE OR (DEBTORS) TURNOVER RATIO It indicates the number of times on the average the receivable is turnover in each year. The higher the value of ratio, the more is the efficient management of debtors. It measures the accounts receivables in terms of number of days of credit sales during a particular period. It is calculated as follows: Debtors Turnover Ratio = Net credit / Average debtors

AVERAGE COLLECTION PERIOD This ratio is a measure of the collectibles of accounts receivables and tells about how the credit policy of the company is being enforced. It indicates on an average that credit sales are pending uncollected by the concern. It shows the quality of debtors since it ventilates the speed at which debtors arte collected. The ratio may be calculated as: Collected period = 365 / Debtors turnover ratio (Or) Average debtors / Net credit sales * No of working days

CREDITORS or (ACCOUNTS PAYABLE) RATIO Creditors turnover ratio gives the average period enjoyed from the creditors and is calculate as: Creditors turnover ratio = Credit purchases / Average accounts payable Note: Average accounts payable = Creditors + Bills payable A higher ratio indicates that creditors are not paid in time while a low ratio gives an idea that the business is not talking full advantage of credit period allowed by the creditors.

AVERAGE PAYMENT PERIOD Average payment period indicate the speed with which payments for credit purchases are made to creditors. It is calculated as: Average age of payables = Months (days) in a year / Creditors turnover ratio (Or) Average accounts payable / Credit purchases * Months (days) in a year. Lower the ratio, the better is the liquidity position of the firm and higher the ratio it denotes the greater credit period enjoyed by the firm.

WORKING CAPITAL TURNOVER RATIO This ratio shows the number of times working capital is turned-over in a sated period. It is calculated as follows: Working capital turnover ratio = Sales / Net working capital Note: Net working capital = Current assets Current Liabilities

LEVERAGE RATIO: The term capital structure refers to the relationship between various (long-term) Preference share capital and equity share capital including reserves and surplus. Leverage or capital structure ratio is calculated to test the long-term financial position of a firm. It helps in assessing the risk arising from the use of debt capital.

RATIO OF CURRENT LIABILITIES TO PROPRIETORS FUND The ratio of current liabilities to proprietors fund establishes the relationship between current liabilities and the proprietors funds and indicates the amount of long-term funds raised by the proprietors as against short-term borrowing. This ratio may be calculated as: Ratio of current liabilities to proprietors fund = current liabilities / proprietors fund

TOTAL INCESTEMENT TO LONG TERM LIABILITIES This ratio is calculated by dividing the total of long term funds by the long term liabilities. It is calculated as: Total investment to long term liabilities = Shareholders funds + Long term liabilities / Long-term liabilities

RESERVE TO EQUITY CAPITAL This ratio indicates the relationship between the reserves and equity. It may be expressed as: Reserve to equity capital = Reserves/Equity share capital * 100 The ratio indicates how much profit the firm generally allocates for future growth. Higher the ratio generally, better is the position of the firm

BALANCE SHEET In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, business partnership, a corporation or other business

organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". [1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities. Another way to look at the same equation is that assets equal liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing." A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they cannot, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities. TYPES OF BALANCE SHEET: A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. We have two forms of balance sheet. They are the report form and the account form. Individuals and small businesses tend to have simple balance sheets. Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report. Large businesses also may prepare balance sheets for segments of their businesses. A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison. Personal balance sheet A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.

US small business balance sheet A small business bump that balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities. Public Business Entities balance sheet structure Guidelines for balance sheets of public business entities are given by the International Accounting Standards Board and numerous country-specific organizations/companies. Balance sheet account names and usage depend on the organization's country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses. If applicable to the business, summary values for the following items should be included in the balance sheet: Assets are all the things the business owns, this will include property, tools, cars, etc. Assets Current assets
1. 2. 3. 4.

Cash and cash equivalents Accounts receivable Inventories Prepaid expenses for future services that will be used within a year

Non-current assets (Fixed assets) Property, plant and equipment Investment property, such as real estate held for investment purposes Intangible assets Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents) 5. Investments accounted for using the equity method 6. Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.
1. 2. 3. 4.

Liabilities See Liability (accounting) Accounts payable Provisions for warranties or court decisions Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds 4. Liabilities and assets for current tax 5. Deferred tax liabilities and deferred tax assets 6. Unearned revenue for services paid for by customers but not yet provided
1. 2. 3.

Equity The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. It comprises: Issued capital and reserves attributable company (controlling interest) 2. Non-controlling interest in equity
1.

to

equity holders

of

the parent

Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual. Regarding the items in equity section, the following disclosures are required:
1. 2.

3. 4.
5. 6.

7.

Numbers of shares authorized, issued and fully paid, and issued but not fully paid Par value of shares Reconciliation of shares outstanding at the beginning and the end of the period Description of rights, preferences, and restrictions of shares Treasury shares, including shares held by subsidiaries and associates Shares reserved for issuance under options and contracts A description of the nature and purpose of each reserve within owners' equity

Definition of 'Balance Sheet' A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The

balance

sheet must

follow

the

following

formula:

Assets = Liabilities + Shareholders' Equity

2. BALANCE SHEET
TVS Motor Company

Balance Sheet Year Months Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves

______ _ Mar '12 12

_______ _ Mar '11 12

_______ _ Mar '10 12

in Rs. Cr. Mar '09 12

___________ _ Mar '08 12

47.51 47.51 0 0 1,121.79

47.51 47.51 0 0 951.9

23.75 23.75 0 0 841.63

23.75 23.75 0 0 789.38

23.75 23.75 0 0 797.83

Revaluation Reserves Net worth Secured Loans Unsecured Loans Total Debt Total Liabilities

0 1,169.30 356.7 358.76 715.46 1,884.76 Mar '12 12 mths

0 999.41 565.93 219.49 785.42 1,784.83 Mar '11 12 mths 1,972.25 1,034.66 937.59 57.39 661.13 527.92 270.62 5.94 804.48 464.09 0.07 1,268.64 0 1,047.94 91.98 1,139.92 128.72 0 1,784.83 204.19

0 865.38 829.98 173.31 1,003.29 1,868.67 Mar '10 12 mths 1,909.14 953.41 955.73 27.05 739.26 289.73 220.31 39.74 549.78 410.98 61.27 1,022.03 0 838.62 66.87 905.49 116.54 30.09 1,868.67 121.27

0 813.13 622.42 283.56 905.98 1,719.11 Mar '09 12 mths 1,865.36 869.42 995.94 40.43 477.71 320.55 181.56 42 544.11 427.11 0.05 971.27 0 776.08 65.49 841.57 129.7 75.33 1,719.11 170.1

0 821.58 452.68 213.66 666.34 1,487.92 Mar '08 12 mths 1,790.97 774.49 1,016.48 26.57 338.96 405.38 87.86 3.44 496.68 342.87 0.29 839.84 0 725.71 60.99 786.7 53.14 52.77 1,487.92 135.65

Application Of Funds Gross Block 2,142.43 Less: Accum. Depreciation 1,116.86 Net Block 1,025.57 Capital Work in Progress 52.51 Investments 930.92 Inventories 584.56 Sundry Debtors 234.07 Cash and Bank Balance 13.03 Total Current Assets 831.66 Loans and Advances 299.84 Fixed Deposits 0 Total CA, Loans & Advances 1,131.50 Deferred Credit 0 Current Liabilities 1,149.47 Provisions 106.27 Total CL & Provisions 1,255.74 Net Current Assets -124.24 Miscellaneous Expenses 0 Total Assets Contingent Liabilities 1,884.76 212.51

Book Value (Rs)

24.61

21.04

36.43

34.23

34.59

3. RATIO ANALYSIS

Ratio Mar '12

Years Mar '11 Mar '10 Mar '09 Mar '08

12 months Current ratio Quick ratio Debt equity ratio Long term debt equity ratio Inventory turnover ratio Fixed asserts turnover ratio Total asserts turnover ratio Assets turnover ratio 0.73 0.47 1.58 1.21

12 months 1.01 0.53 1.55 1.41

12 months 1.2 0.72 1.87 1.87

12 months 1.21 0.64 1.78 1.78

12 months 1.07 0.41 1.07 1.07

11.8 2.71 3.97 2.71

12.07 2.63 3.36 2.63 1.94 1.94 4.12 135.41

14.83 2.05 2.28 2.05 0.72 0.72 3.45 191.28

11.73 1.72 1.89 1.72 -1.65 -1.65 1.81 157.73

8.95 1.58 2.10 1.58 -0.84 -0.84 2.17 137.68

Net profit margin ratio 1.78 Adjusted net profit margin Cash profit margin Net operation profit per share 1.78 3.90 156.18

Profit before interest and tax margin Operation profit margin Operating profit per share

4.04 6.18 9.66

2 4.13 5.59

0.28 3.3 6.32

-2.06 1.45 2.29

-3.26 0 0

4. INTERPRETATION

Current ratio After calculating the current ratios using the balance sheet the current ratio decreases compare to previous year due to gradual increase is more in current liability than the current assets. Quick ratio After calculating the current ratios using the balance sheet the quick ratio decreases due to increase in inventories compared to previous years. Debt equity ratio After calculating the current ratios using the balance sheet the debt equity ratio increases for the present year with respect to total liabilities as there is no major change in share holder equity. Long term debt equity ratio

Inventory turnover ratio

Fixed asserts turnover ratio

Total asserts turnover ratio

Assets turnover ratio

Net profit margin ratio

Profit before interest and tax margin

Operation profit margin

Operating profit per share

SUGGESTION:

TVS MOTORS is the ideal company for the investor to invest, creditors to give product on credit and good for employees as they are assured for their salary as it has a very good financial position.

CONCLUTION: This company is having a great potential for growth both for investors, shareholders, employees and business partners.