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INTEGRATED THARMO PLASTIC LTD

A STUDY ON

RATIO ANALYSIS
OF

INTEGRATED THARMO PLASTIC LTD


PROJECT REPORT
Submitted in partial fulfillment of the requirements
For the award of the degree of

MASTER OF BUSINESS ADMINISTRAITON


By

Under the guidance of

INTEGRATED THARMO PLASTIC LTD

ACKNOWLEDGEMENT
NO TASK IS A ONE MAN EFFORT
It gives me immense pleasure to present this project report on Ratio Analysis
carried out at Integrated thermo Plastic Ltd.
No work can be carried out without the help and guidance of various persons. I am
happy to take this opportunity to express my gratitude to those who have been
helpful to me in completing this project report.
I take the opportunity to express my sincere gratitude to VENKATA RAO.
Finance Manager, INTEGRATED THARMO PLASTIC LTD for granting
permission to undergo the project and for his support and guidance.
I must thank Mr. ___________________ for making me convenient to
undertake a project work and for his invaluable suggestion and guidance in every
moment of my project. He helped meet my project objective and match the time
and resource framework.

I will remain always indebted to my parents & friends for their moral
support and have been the most caring and the best critics during the course of my
project. My special thank to all the Executives for their active participation without
whom the project work not have been possible.

INTEGRATED THARMO PLASTIC LTD


PREFACE

This report is lifes greatest treasure. The project held was very gainful as it took
me close to real life. Practical exposure in the field of management is extremely
important as it gives a close view of the real business issues. It helps to cover all
part that remained uncovered in the classroom. It helps to gain experience. Just
theoretical knowledge is not sufficient for the success of any business student. So,
one should have practical knowledge about each aspect of life.
I learnt lot of new things from this project, which could never have been learnt
from theory classes.
I have tried to put my maximum effort to get the accurate statistical data, however I
would appreciate if any mistakes are brought to me by the reader. If any findings &
recommendations go in any way to prove some new ground in helping the
company, I shall deem my efforts have duly served the purpose. In the forthcoming
pages an attempt has been made to present report covering different aspects of my
project.

INTEGRATED THARMO PLASTIC LTD

TABLE OF CONTENT
Chapter No.

Content
Executive Summary

Company Profile
Introduction
Vision, Mission
Technical Information
Quality control assurance
Products
Market Network
Exports
Competitors

Design of the study


Need for the study
Objective of the Study
Research Methodology
Limitations

Theoretical framework of Ratio Analysis


Introduction of ratio analysis
Meaning and Rational
Importance of ratio analysis
Limitations of ratio analysis
Precautions for use of ratios
Users of financial analysis
Types of ratios

Ratio analysis of Integrated Thermo Plast Ltd.


Liquidity Ratios
Leverage Ratios
Activity Ratios
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Profitability Ratios
5

Findings

Suggestions

Bibliography

EXECUTIVE SUMMARY

Every countries economic condition depends upon the performance of its Industry.
How the investors are interested in it as it will help in the increment in the flow of
foreign exchange. A sound and well performing industry will always attract
investors as it will give them a return in a less time period. But it is not easy for a
layman to understand or to properly analyze the performance of the company.

To understand the performance of any company we have to do financial statement


analysis. Ratio analysis is a widely used tool of financial analysis. It is defined as
the systematic use of ratio to interpret the financial statements so that the strength
and weaknesses of a firm as well as its historical performance and current financial
condition can be determined. The term ratio refers to the numerical or quantitative
relationship between two variables.

Ratio analysis helps in inter-firm comparison by providing necessary data. An


interfirm comparison indicates relative position. It provides the relevant data for
the comparison of the performance of different departments. If comparison shows a
variance, the possible reasons of variations may be identified and if results are
negative, the action may be initiated immediately to bring them in line.
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In my study I have tried to make out a clear picture of Integrated Themo


Plastic Ltd. and its performance in the industry with the help of Ratio analysis and
Comparative Balance sheet. While doing my interpretation through Ratio analysis I
have focused on 5 main areas:
1. Liquidity
2. Investment/shareholder
3. Gearing
4. Profitability
5. Financial

First chapter contains information about the company and its product. Second
chapter is about the research methodology. Third chapter has detailed study of
theoretical concept of ratio analysis and last part is about the data analysis. I have
taken 5 years data to have financial analysis. Suggestion is made on the basis of
finding.

INTEGRATED THARMO PLASTIC LTD

CHAPTER -1
COMPANY PROFILE

Introduction
Integrated Thermoplastics Limited (ITL), was incorporated on 25th January,
1994 as a Limited Company namely "Torrent Thermo Plastics Limited". It was
subsequently converted into a Public LImited Company on 26th May 1994, the
company name was changed to Integrated Thermoplastics LImited on 5th August,
1994.
In the year 1998, the company was acquired by Nandi Group of Companies
Tremondous changes have been noticed in the production under the dynamic and
energetic leadership of Sri S.P.Y.Reddy, the monarch in manufacturing of Quality
PVC Pipes.
The unit also has World Class Quality assurance systems in place. The products
manufactured meets all relevant ISI, BS, DIN, and ASTM Standards with a view of
effectivily catering to the needs of the international market. The company is
gearing for ISO9001-2000 certification to become a member of select brand of
elite group of companies. In addtion, extensive R & D facilities provide reliable
and committed suport for new product development.

Integrated Thermoplastics Limited (ITL) is well known manufacturer of world


class quality PVC products. With its valued principles and foreseeing vision, today
Co. is counted amongst leading manufacturers and exporters of PVC pipes,
Agricultural pipes, electrial pipes etc.

INTEGRATED THARMO PLASTIC LTD


In addition to this, Co.s concern to maintain a highly affordable pricing structure
has made it one of the most preferred PVC pipe manufacturers from Andhra
Pradesh. Co. is one of the most innovative manufacturers of a vast range of PVC
products i.e from 19mm to 400mm sizes. Co.s entire range of PVC products is
manufactured with only best quality raw materials. Co. uses ISO quality systems to
maintain

unsurpassed

quality

of

entire

production.

Its

state-of-the-art

manufacturing units are empowered with latest machineries.


.
Vision:
To serve people through providing good quality products at reasonable cost.
Mission:

To achieve companys growth innovation and development of resources to


meet organizational goals.

To provide products and services of best value possible to customers,


thereby gaining their respects.

TECHNICAL INFORMATION:
ITL rigid PVC pipes are manufactured in accordance with Indian standards
specifications 4985:1998 and other international specifications. The company also
manufactures special ranges of commercial pipes under different ranges to satisfy
the customer requirements. ITL PVC pipes are normally manufactured in uniform
length of 6 meters with plain ends both the sides and also with self socked one
side. Varied length can be manufactured according to the customer requirement.
Integrated Thermoplastics Limited is manufacturing rigid PVC pipes from 20mm
to 400 mm in conformity to ISI 4985:2000 and other international specifications.
QUALITY CONTROL ASSURANCE:

INTEGRATED THARMO PLASTIC LTD


Integrated Thermoplastics Limited is having well equipped quality
testing machines in their labs as per the ISI standards for testing of all diameters
and gets excellent result. Co. at ITL Pipes are proud to say that it follows worldclass QCM (Quality control management) techniques in its Quality Control lab to
achieve the best quality. Stringent quality control tests are regularly conducted to
ensure top quality production of PVC products.
PRODUCTS
1. Agricultural Pipes:
Nandi Rigid PVC Pipes with their good quality, trouble free service, durability and
economical use are a better choice than mild steel, galvanized steel, cast iron and
plastic pipes.
Slotted pipes are also being manufactured for use in digging bore wells in sandy
areas. Nandi group's PVC plants are located at Nandyal, Hyderabad and Anantapur,
and the HDPE pipes unit at Tirupati.
The company's 'Nandi Gold' brand Agricultural Pipe enjoys ISI recognition
(IS:4985-2000). These pipes are manufactured with virgin material only.

2. Electrical Pipes:
Apart from manufacturing UPVC pipes ITL, is specialized in the manufacture of
entire gamut of other standard products including Electrical conduits, plumbing
and SWR pipes covering all applications in which PVC pipes can be used meeting
the ISI requirements, using cutting-edge technologies to keep pace with the modern
technology and the choice of the customers. The company's Electrical Conduits are
of ISI Standards and are used for domestic & industrial purposes, the pipe sizes
ranging from 16 mm to 63 mm to outer diameter.

INTEGRATED THARMO PLASTIC LTD


3. Plumbing Pipes:
The Company also manufactures Grey Colour plumbing pipes as per
ISI standards (IS:4985-2000)

4. Bluecasing and Submersible Pipes:


Nandi Gold & Nandi Well Casing & Well Screen Pipes- A unique product made
from a special UPVC compound. Both the screen and casing pipes are available in
diameter up to 250mm and can be used upto the depths of 1200 feet's.
Nandi Blue Casing pipes are manufactured under the specification of IS : 12818 1992/CML 6547076 Nandi Gold Casing pipes can be used with submersible pump
and vertical shaft type pumps providing suitable clearance.

5. SWR Pipes:
ITL.,Hyderabad, has been manufacturing 'ITL' brand Un plasticized Polyvinyl
Chloride(UPVC) Plain and Socket end SWR pipes with nominal outside diameter
from 75.90 ,110 & 160mm. These pipes are used in soil and waste discharge
system inside the building including ventilating and rain water applications. The
pipe's surface colour is dark shade of gray.
6. RingFit Pipes:
An innovative new product called "Ringfit" pipe has been developed to overcome
the problems commonly experienced in solvent cement jointing of higher diameter
(above 160 mm) UPVC Pipes. These ITL & SAGAR' branded Ring fit pipes offers
excellent advantages over other UPVC pipes specially for undergoing applications
MARKET NETWORK

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Integrated Thermoplastics Limited covers the national level markets, but their
main target market areas are Andhra Pradesh, Karnataka, Tamil Naidu,
Maharashtra, Bihar and Jharkhand etc.

EXPORTS
Integrated Thermoplastics Limited is trying very hard in exporting
their products like rigid PVC pipes of water, electrical conduits and SWR pipes to
Middle East, Europe, Africa and other Asian countries.

Taking an example

esteemed overseas customers, Co. is proud to say that Co. is associated with
CEYLON ELECTRICTY BOARD SRILANKA supplying electrical conduits
to their project requirements.
COMPETETORS
1. Sudhaker polymers ltd.
2. Finolex industry ltd.
3. Jain irrigation ltd.

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CHAPTER 2
DESIGN OF THE STUDY

NEED FOR THE STUDY


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 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
Financial analysis is the starting point for making plans, before using any
sophistical forecasting and planning procedures. Financial analysis strengths of the
firms to make their best use and to be able to spot out financial weakness of the
firm to state suitable corrective actions.

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The major purpose of the study is to analyze the financial performance of


a firm using ratio analysis as a tool .the ability of the firm to make use its resources
in the best way represents the future of a firm analysis of financial performance is
the process of identifying financial strength and weakness of the firm
OBJECTIVES OF STUDY

To know the financial position of Integrated Thermo Plastic Limited.

To study the general & overall profitability position of the Integrated


Thermo Plastic Limited.

To know about the Liquidity and long term solvency position of the Co.

To find out the financial strengths and weaknesses of the company.


To ascertain the efficiency with which the firm is utilizing its assets in

generating sales revenue.


To draw the conclusions & provide the possible solution.

RESEARCH METHODOLOGY

Research Design
A research design is the arrangement of the condition for collection and
analysis of data. Actually it is the blueprint of the research project.
Research design used will be Descriptive type.

Data Collection

Primary Data: Primary data will be collected through interview of the finance
manager and official staff of the company.

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Secondary Data: The secondary data has been colleted from the annual reports of
last 5 years (i.e.) balance sheet and profit and loss accounts of the company from
20092014.

Data Analysis

Data analysis was done with the help of


Ratio analysis
Common size statement analysis
Comparative Statement
Trend analysis
LIMITATIONS OF STUDY
The analysis was made with the help of the secondary data collected from
the company.
All the limitations of ratio analysis, common-size statement, comparative
statements, and trend analysis and interpret are applicable to this study.
The period of study is 5 years.

The study is academic in nature.

The final conclusion can be also affected by some of the extraneous


variables.

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CHAPTER -3
THEORETICAL FRAMEWORK OF RATIO ANALYSIS
INTRODUCTION OF RATIO ANALYSIS:
As observed, a basic limitation of the traditional financial statement comprising
the balance sheet and the profit and loss account is that they do not give all the
information related to the financial operation of the firm. Nevertheless, they
provide some extremely useful information to the extent that the Balance Sheet
mirrors the financial position on a particular date in terms of the structure of
assets, liabilities and owners equity and so on. The profit and loss account shows
the results of operations during a certain period of time in terms of the revenues
obtained and the cost incurred during the year. Therefore, much can be learnt
about a firm from a careful examination of its financial statements as invaluable
documents/performance analysis. Users of financial statements can get further
insight about financial strengths and weaknesses of the firm if they properly
analyze information reported in these statements. Management should be
particularly interested in knowing financial weakness of the firm to take suitable
corrective actions. The future plans of the firm should be laid down in view of the
firms financial strengths and weaknesses. Thus, financial analysis is the starting
point for making plans, before using any sophisticated forecasting and planning
procedures. Understanding the past is a pre-requisite for anticipating the future.
MEANING AND RATIONALE:
Ratio analysis is a widely used tool of financial analysis. It is defined as the
systematic use of ration to interpret the financial statements so that the strengths
and weaknesses of the firm as well as its historical performance and current
financial condition can be determined. Ratio analysis is a powerful tool of
financial analysis. A ratio is defined as the indicated quotient of two
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mathematical expressions and as the the relationship between two or more
things.
In financial analysis, a ratio is used as a benchmark for evaluating the financial
position and performance of a firm.
The term ratio refers to the numerical or quantitative relationship between two
items/variables. This relationship can be expressed as: Percentages, say, Net
Profits are 25% of Sales (assuming Net Profit of Rs.25,000 and Sales of
Rs.1,00,000),
1.

Fraction (Net profit is 1/4th of Sales) and

2.

Proportion of numbers (the relationship between Net profits and Sales is


1:4).

These alternative methods of expressing items, which are related to each other, are,
for purpose of financial analysis, referred to as ratio analysis. It should be noted
that computing the ratios does not add any information already inherent in the
above figures of profits and sales. What the ratios do is that they reveal the
relationship in a more meaningful way so as to enable us to draw conclusions from
them. The rationale of ratio analysis lies in the fact that it makes related
information comparable. A single figure by itself has no meaning but when
expressed in terms of a related figure, it yields significant inferences. For instance,
the fact that the Net profits of a firm amount to, say Rs. Ten Lakhs throws no light
on its adequacy or otherwise.
The figure of Net profit has to be considered in relation to other variables. How
does it stand in relation to sales? If, therefore, Net profits are shown in terms of
their relationship with items such as Sales, Assets, Capital employed, Equity
capital and so on, meaningful conclusions can be drawn regarding their adequacy.
IMPORTANCE OF RATIO ANALYSIS
As a tool of financial management, ratios are of crucial significance. The
importance of ratio analysis lies in the fact that is presents facts on a comparative
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basis and enables the drawing inference regarding the performance of a firm.
Ratio analysis is relevant in assessing the performance of a firm in respect to the
following aspects.
i. Liquidity position
ii. Long-term solvency
iii. Operational efficiency
iv. Overall profitability
v. Inter-firm comparison, and
vi. Trend analysis
Liquidity position: - With the help of ratio analysis conclusions can be
regarding the liquidity position of a firm. The liquidity position of a firm
would be satisfactory if it is able to meet its current obligations when they
become due. A firm can be said to have the ability to meet its short-term
liabilities if it has sufficient liquid funds to pay the interest on its shortmaturing debt usually within a year as well as to repay the principal. This
ability is reflected in the liquidity ratio of a firm. The liquidity ratios are
particularly useful in credit analysis by banks and other suppliers of short-term
loans.
Long-term solvency: - Ratio analysis is equally useful for assessing the long-term
financial viability of a firm. This aspect of the financial position of a borrower is
of concern to the long-term creditors, security analysts and the present and
potential owners of a business. The long-term solvency is measured by the
leverage/capital structure and profitability ratios, which focus on earning power
and operating efficiency. Ratio analysis reveals the strength and weaknesses of a
firm in this respect. The leverage ratios, for instance, will indicate whether a firm
has a reasonable proportion of various sources of finance or if it is heavily loaded
proportion of various sources of finance or if it is heavily loaded with debt in
which case its solvency is exposed to serious strain. Similarly the various
profitability ratios would reveal whether or not the firm is able to offer adequate
return to its consistent with the risk involved.

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Operating Efficiency: - Another dimension of the usefulness of the ratio analysis,
relevant from the view point of management, is that it throws light on the degree of
efficiency in the management and utilization of its assets. The various activity
ratios measure this kind of operational efficiency.
Overall Profitability: - Unlike the outside parties, which are interested in one
aspect of financial position of a firm, the management is constantly concerned
about the over-all profitability of the enterprise. That is, they are concerned about
the ability of the firm to meet its short-term as well as long-term obligations to its
creditors, to ensure a reasonable return to its owners and secure optimum
utilization of the assets of the firm. This is possible if an integrated view is taken
and all the ratios are considered together.
Inter-firm Comparison: - Ratio analysis not only throws light on the financial
position of a firm but also serves as a stepping stone to remedial measures. This is
made possible due to inter-firm comparison and comparison with industry
averages. A single figure of a particular ratio is meaningless unless it is related to
some standard or norm. One of the popular techniques is to compare the ratios of a
firm with the industry average. An inter-firm comparison would demonstrate the
firms position vis--vis its competitors.
Trend Analysis: - Finally, ratio analysis enables a firm to take the time dimension
into account. In other words, whether the financial position of a firm is improving
or deteriorating over the years. This is made possible by the use of trend analysis.
The significance of a trend analysis of ratios lies in the fact that the analysis can
know the direction of movement, the is, whether the movement is favorable or
unfavorable. For example, the ratio may be low as compared to the norm but the
trend may be upward. On the other hand, though the present level may be
satisfactory but the trend may be a declining one.
LIMITATIONS OF RATIO ANALYSIS:
Ratio Analysis is a widely used tool of financial analysis. Yet, it suffers from
various limitations. The operational implication of this is that while using ratios,
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the conclusions should not be taken on their face value. Some of the limitations,
which characterize ratio analysis, are
i.

Difficulty in comparison.

ii.

Impact of Inflation, and

iii.

Conceptual Diversity

Difficulty in comparison: -

One serious limitation of ratio analysis arises

out of the difficulty associated with their comparability. One technique that
is employed is inter-firm comparison. But such comparison is vitiated by
different procedures adopted by various firms.
Differences in basis of inventory valuation (e.g.:- last in first out,

average cost and cost);


Different depreciation methods (i.e. straight line Vs. written down

basis);
Estimated working life of assets, particularly of plant and

equipment;
Amortization of deferred revenue expenditure such as preliminary

expenditure and discount on issue of shares;

Capitalization of lease;

Treatment of extraordinary items of income and expenditure; and so


on.
Secondly, apart from different accounting procedures, companies may have
different accounting procedures, implying differences in the composition of
assets, particularly current assets. For these reasons, the ratios of two firms
may not be strictly comparable.

Impact of Inflation: - The second major limitation of the ratio analysis is a tool of
financial analysis is associated with price level changes. This in fact is a weakness
of the traditional financial statements, which are based on historical cost. An
implication of this feature of the financial statements as regards ratio analysis is
that assets acquired at different periods are, in effect, shown at different prices in
the balance sheet, as they are not adjusted for changes in the price level. As a

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result, ratio analysis will not yield strictly comparable and therefore, dependable
results.
Conceptual Diversity: - The factor that influences the usefulness of ratios is that
there is

difference of opinion regarding the various concepts used to compute

the ratios. There is always room for diversity of opinion as to what constitutes
shareholder`s equity, debt, assets, profit and so on.
Finally, ratios are only a post-mortem analysis of what has happened between two
balance sheet dates. For one thing the position in the interim period is not revealed
by ratio analysis. Moreover, they give no clue about the future.
In brief, ratio analysis suffers from serious limitations. The analyst should not be
carried away by its over simplified nature, easy computation with high degree of
precision. The reliability and significance attached to ratios will largely depend
upon the quality of data on which they are based. They are as good as the data
itself. Nevertheless, they are an important tool of financial analysis.

Precautions for use of ratios:


The calculation of ratios may not be a difficult task but their use is not easy. The
information on which these are based, the constraints of financial statements,
objectives for using them, the caliber of the analyst, etc, are important factors,
which influence the use of ratios. Following guidelines/factors may be kept in
mind interpreting various ratios.

The reliability of ratio is linked to the accuracy of information in financial


statements.

Before calculating ratios one should see whether proper

concepts and conventions are used for preparing financial statements of not.
Competent auditors should properly audit the statements.
The purpose of the user is also important for the analysis of ratios. A
creditor, a banker, an investor, a shareholder, all has different objects for
studying ratios. The purpose (or) object for which ratios are required to be
studied should always be kept in mind for studying various ratios.
Different objects may require the study of different ratios.
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Another precaution in ratio analysis is the proper selection of appropriate


ratios. The ratios should match the purpose for which these are required.
Calculating a large number of ratios without determining their need in the
present context may confuse the things instead of solving them. Only those
ratios should be selected which can throw proper light on the matter to be
discussed.

Unless otherwise the ratios calculated are compared with certain standards
one will not be reach at conclusions. These standards may be a rule of
thumb as in current ratio (2:1), may be industry standards, may be projected
ratios etc. The comparison of calculated ratios with the standards will help
the analyst in forming his opinion about financial situation of the concern.

The ratios are only the tools of analysis but their interpretation will depend
upon the caliber and competence of the analyst. He should be familiar with
various financial statements and the significance of changes etc.

A wrong interpretation may create havoc for the concern since wrong
conclusions may bad to wrong decisions. The utility of ratios is linked with
expertise of the analyst.

The ratios are only guidelines for the analyst; he should not base his
decisions entirely on them.

He should study any other relevant

information, situation in the concern, general economic environment etc.,


before reaching final conclusions.
The study of ratios in isolation may not always prove useful. The
interpretation should use the ratios as guide and may try to solicit any other
relevant information which helps is reaching a correct decision.
Users of financial analysis:

Financial analysis is the process of identifying the financial strengths and


weaknesses of the firm by properly establishing relationships between the
items of balance sheet and profit and loss account. Financial analysis can

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be undertaken by management of the firm, or by parties outside the firm,
viz., owners, investors and others.
The nature of analysis will differ depending on the purpose of the analyst.
Trade creditors are interested in firms ability to meet their claims over a
very short period of time. Their analysis will, therefore, confine to the
evaluation of the firms liquidity position.
Suppliers of long-term debt on the other hand are concerned with the firms
long-term solvency and survival. They analyze the firms profitability over
time, its ability to generate cash to be able to pay interest and repay
principle and the relationship between various sources of funds. (Capital
structure relationship).
Investors, who have invested their money in the firms share, are most
concerned about the firms earnings. They restore more confidence in those
firms that show steady growth in earnings. As such, they concentrate on
the analysis of the firms present and future profitability. They are also
interested in the firms financial structure to the extent it influences the
firms earnings ability and risk.
Management of the firm would be interested in every aspect of the financial
analysis. It is their overall responsibility to see that the resources of the
firm are used most effectively and efficiently, and that the firm`s financial
condition is sound.
Types of Ratios
Several ratios, calculated from the accounting data, can be grouped into various
classes according to financial activity or function to be evaluated. As stated earlier,
the parties interested in financial analysis are short-term and long-term creditors,
owners and management. Short-term creditors` main interest is in the liquidity
position or the short-term solvency of the firm. Long-term creditors`, on the other
hand, are more interested in the long-term solvency and profitability of the firm.
Similarly, owners concentrate on the firms profitability and financial condition.
Management is interested in evaluating every aspect of the firms performance.
They have to protect the interests of all parties and see that the firm grows

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profitably. In view of the requirements of the various users of ratios, we may
classify them into the following four important categories:
LIQUIDITY RATIOS
LEVERAGE RATIOS
ACTIVITY RATIOS
PROFITABILITY RATIOS
1. LIQUIDITY RATIOS
It is extremely essential for a firm to be able to meet its obligations as they become
due. Liquidity ratios measure the firms ability to meet current obligations.
In fact, analysis of liquidity needs the preparation of cash budgets and cash and
Fund Flow statements; but liquidity ratios, by establishing a relationship between
cash and other current assets to current obligations provided a quick measure of
liquidity. A firm should ensure that it does not suffer from lack of liquidity, and
also that it does not have excess liquidity. The failure of a company to meet its
obligations due to lack of sufficient liquidity, will result in a poor creditworthiness,
loss of creditors` confidence, or even in legal tangles resulting in the closure of the
company. A very high degree of liquidity is also bad; idle assets earn nothing. The
firms funds will be unnecessarily tied up in current assets. Therefore, it is
necessary to strike a proper balance between high liquidity and lack of liquidity.

2. LEVERAGE RATIOS

The short-term creditors like bankers and suppliers of raw material are more
concerned with the firms` current debt-paying ability. On the other hand, longterm creditors like debenture holders, financial institutions etc., are more
concerned with the firms` long-term financial strength. In fact, a firm should have
strong short-as well as long-term financial position. To judge the long-term
financial position of the firm, financial leverage, or Capital structure, ratios are
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calculated. These ratios indicate mix of funds provided by owners and lenders. As
a general rule, there should be an approximate mix of debt and owners equity in
financing the firms` assets.
The manner in which assets are financed has a number of implications. First,
between debt and equity, debt is more risky from the firms` point of view. The
firm has a legal obligation to pay interest on debt holders, irrespective of the
profits made or losses incurred by the firm. If the firm fails to debt holders in
time, they can take legal action against it to get payment and in extreme cases, can
force the firm into liquidation.
Secondly, use of debt is advantageous for shareholders in two ways:
a.

They can retain control of the firm with a limited stake and

b.

Their earnings will be magnified, when the firm earns a rate of return on
the total capital employed higher than the interest rate on the borrowing
funds. The process of magnifying the shareholders return through the use
of debt is called financial leverage or financial gearing or trading on
equity.

Leverage ratios may be calculated from the balance sheet to determine the
proportion of debt in total financing. Many variations of these ratios exist; but all
these ratios indicate the same thing-the extent to which the firm has relied on debt
in financing assets. Leverage ratios are also computed from the profit and loss
items by determining the extent to which operating profits are sufficient to cover
the fixed charges.
3. ACITIVITY RATIOS
Funds creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales.
Activity ratios are employed to evaluate the efficiency with which the firm
managers and utilizes its assets. These ratios are also called Turnover Ratios
because they indicate the speed with which assets are being converted or turned
over into sales. Activity ratios, thus, involve a relationship between sales and
24

INTEGRATED THARMO PLASTIC LTD


assets. A proper balance between sales and assets generally reflects that assets are
managed well. Several activity ratios can be calculated to judge the effectiveness
of asset utilization.

4.

PROFITABILITY RATIOS

A company should earn profits to Survive and Grow over a long period of time.
Profits are essential, but it would be wrong to assume that every action initiated by
management of a company should be aimed at maximizing profits, irrespective of
social consequences.
Profit is the difference between revenues and expenses over a period of time
(usually a year). Profit is the ultimate Output of a company, and it will have no
future if it fails to make sufficient profits. Therefore, the financial manager should
continuously evaluate to the efficiency of the company in term of profits. The
profitability ratios are calculated to measure the operating efficiency of the
company. Besides management of the company, creditors and owners are also
interested in the profitability of the firm. Creditors want to get interest and
repayment of principle regularly. Owners want to get a required rate of return on
their investment. This is possible only when the company earns enough profits.

CHAPTER - 4

DATA ANALYSIS AND INTERPRETATION

25

INTEGRATED THARMO PLASTIC LTD

1. LIQUIDITY RATIO

Liquidity refers to the ability of a concern to meet its current obligations as &
when there becomes due. The short term obligations of a firm
can be met only when there are sufficient liquid assets. The
short term obligations are met by realizing amounts from
current, floating (or) circulating assets. The current assets
should either be calculated liquid (or) near liquidity. They
should be convertible into cash for paying obligations of short
term nature. The sufficiency (or) insufficiency of current assets
should be assessed by comparing them with short-term
current liabilities. If current assets can pay off current
liabilities, then liquidity position will be satisfactory.
It is extremely essential for a firm to be able to meet its obligations as they
become due. Liquidity ratios measure the ability of the firm to meet its current
obligations. In fact, analysis of liquidity needs the preparation of cash budgets and
cash and fund flow statements; but liquidity ratios, by establishing a relationship
between cash and other current assets to current obligations, provide a quick
measure of liquidity. A firm should ensure that it does not suffer from lack of
liquidity, and also that it does not have the excess liquidity. The failure of company
to meet its obligation due to lack of sufficient liquidity, will result in a poor
creditworthiness, loss of creditors confidence, or even legal tangles resulting in
the closure of the company. A very high degree of liquidity also bad; idle asset earn
nothing. The firms funds will be unnecessarily tied up in current assets. Therefore
it is necessary to strike a proper balance between high liquidity and lack of
liquidity.
The most common ratios which indicate the extent of liquidity and the
lack of liquidity are:o

Current Ratio and

Quick Ratio.

26

INTEGRATED THARMO PLASTIC LTD

A. CURRENT RATIO

Current ratio may be defined as the relationship between current assets and current
liabilities. This ratio also known as Working capital ratio is a measure of general
liquidity and is most widely used to make the analysis of a short-term financial
position (or) liquidity of a firm.
Current assets include cash and those assets which can be converted into cash
within one year, such as marketable securities, debtors and inventories. Prepaid
expenses are also included in the current assets as they represent the payments that
will not be made by the firm in future. All obligations maturing within a year are
included in the current liabilities. Current liabilities include creditors, bills payable,
accrued expenses, short-term bank loan, income-tax liability and long term debt
maturing in the current year.
FORMULA:

Current Ratio = Current Asset/ Current Liability

OBJECTIVES:
The objective is to measure the ability of the firm to meet its short term
obligations and to reflect the short term financial strength/ solvency of a firm. It
suggests whether firm can meet its short term obligation from short term Assets.

(IN CRORES)
Particulars

2009-10

2010-11

2011-12

2012-13

2013-14

Inventory

463.29

584.75

808.69

807.60

854.87

27

INTEGRATED THARMO PLASTIC LTD


Sundry debtors

443.02

538.85

281.27

409.42

257.81

Cash and bank

37.89

62.50

57.72

53.66

56.88

Loan balance
and advances

141.08

215.08

274.46

294.17

288.55

assets Asset
Total Current

1085.28

1401.18

143.48
1565.62

175.52
1740.37

1458.11

Total CL

594.39

902.30

530.31

643.07

766.96

Current ratio

1.82

1.55

2.95

2.71

1.90

Other Current

Interpretation:
A current ratio of 2:1 indicates a highly solvent position. . The constituents of the
current assets are as important as the current assets themselves for evaluation of
companys solvency position. It indicates rupees of current assets available for
each rupee of current liability. A very high current ratio adverse impact on the
profitability of the organization.
ITL current ratio in 2009-10 was 1.82, which was good nearby ideal ratio2:1. But
later the ratio had decreased 1.55 in 2010-2011 which is not good for the
companys financial position. In 2011-2012 it had increased to 2.95 which is much
more high in last 5 years so it was beneficial for companys financial strength.
Further 2012-2013, it has fallen to 2.71 due to increase in current liabilities. But in
28

INTEGRATED THARMO PLASTIC LTD


the 2013-14 some reason other assets are decreased so current ratio was 1.90. As
current ratio is almost equal to ideal one, we can say that companys liquidity
position is sound and company is having enough current assets to meet short term
obligations.

B.QUICK RATIO
Quick Ratio establishes a relationship between quick, or liquid, assets and current
liabilities. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset. Other assets
which are considered to be relatively liquid and included in quick assets are
debtors and bills receivables and marketable securities. Inventories are considered
as less liquid asset, because they require some time for realizing cash; their value
also has a tendency to fluctuate. The quick ratio is found out by dividing quick
assets by current liabilities.
FORMULA
Quick Ratio = Quick Assets(Current Assets-Inventories) / Current Liabilities

TABLE-QUICK RATIO OF ITL


Particulars
Quick assets
Current
Liabilities
Quick ratio

2009-10
621.99
594.39
1.05

(IN CRORES)

2010-11
816.43
902.30

2011-12
756.93
530.31

.90

1.43

29

2012-13
932.77
643.07
1.45

2013-14
603.24
766.96
0.79

INTEGRATED THARMO PLASTIC LTD

Interpretation
The ideal quick ratio is 1:1 from the analysis it is found that in year 2009-2010 the
quick ratio was.1.05, which is more than ideal ratio so it was good for liquidity. It
has become.90, which is near to the ideal ratio. Further it had increased to 1.43 in
2011-2012, which is high last 2 years and 2012-13 it has risen to 1.45. It shows that
the company is efficiently using its liquid assets. But in 2013-14 it had fallen .79
because other assets are decreased. Overall we can say that company is having
enough liquid assets to meet current liabilities.
2. LEVEARGE RATIO

These ratios indicate the degree to which the activities of a firm are supported by
creditors funds as opposed to owners as the relationship of owners equity to
borrowed funds is an important indicator of financial strength. The debt requires
fixed interest payments and repayment of the loan and legal action can be taken if
any amounts due are not paid at the appointed time. A relatively high proportion of
funds contributed by the owners indicates a cushion (surplus) which shields
creditors against possible losses from default in payment.
Financial leverage will be to the advantage of the ordinary shareholders as long as
the rate of earnings on capital employed is greater than the rate payable on
borrowed funds.
30

INTEGRATED THARMO PLASTIC LTD

The leverage or solvency ratio refers to the ability of a concern to meet its long
term obligations. Accordingly, long term solvency ratios indicate firms ability to
meet the fixed interest and costs and repayment schedules associated with its long
term borrowings.
Leverage ratios may be calculated from the balance sheet items to determine the
proportion of debt in total financing. Many variations of the ratios exist; but all
these ratios indicate the same thing the extent to which the firm has relied on debt
in financing assets. Leverage ratios are also computed from the profit loss items by
determining the extent to which operating profits are sufficient to cover the fixed
charges.
Classification of leverage ratio

Debt ratio
Debt equity ratio
Interest coverage ratio
Capital gearing ratio
Proprietary ratio

A. Debt ratio:

This compares a company's total debt to its total

assets, which is used to gain a general idea as to the amount of


leverage being used by a company. This is the measure of
financial strength that reflects the proportion of capital which has
been funded by debt, including preference shares.

Several debt ratios may be used to analyse the long term solvency of a firm . the
firm may be interested bearing debt (also called funded debt) in the capital
structure . it may , therefore , compute debt ratio by the dividing total debt (TD) by
capital employed (CE) or net assets (NA).
Total debt will include short and long term borrowings from financial institutions,
debentures/bonds, deferred payment arrangement for buying capital equipments,
bank borrowings, public deposits and any other interest bearing loan.
Formula:
31

INTEGRATED THARMO PLASTIC LTD

Debt Ratio = Total debt / Total debt + Net worth

TABLE-Total debts OF ITL


Particulars
Secured loan
Unsecured
loan
Total Debt
Total Assets
Total debt
ratio

(IN CRORES)

2009-10
756.54

2010-11
1001.83

2011-12
1256.41

2012-13
1375.96

2013-14
1141.37

328.53

545.38

527.03

611.18

239.97

1085.07
2369.4

1547.21
3191.1

1783.44
3634.26

1987.14
4042.25

1381.34
3654.24

0.46

0.48

0.49

0.49

0.38

Interpretation:
The debt ratio of ITL in 2009-10, 0.46 which is very low that means lenders has
financed 0.46 per cent of total assets. It obviously implies that owners have
financed 1-0.46= .54 percent of total assets. But in 2010-11 and up to 2012-13,
debt ratio shows steady trend and reached to 0.49. Again in 2013-14, debt ratio was
decreased and reached to 0.38. This is good sign for the company as lower the
company's reliance on debt for asset formation, the less risky the company is since
excessive debt can lead to a very heavy interest and principal repayment burden.

32

INTEGRATED THARMO PLASTIC LTD


This shows that company is less risky as it cut downs debt and hence interest
burden has reduced.
B. Debt equity ratio: This ratio measures how much suppliers,
lenders, creditors and obligors have committed to the company
versus what the shareholders have committed. This ratio
indicates the extent to which debt is covered by shareholders
funds.

Debt-Equity is the basic & the most measure of studying the indebt of the firm.
The Debt-Equity ratio is based on the assumption that the extent to which a firm
should employ the debt should be viewed in terms of the size of the cushion
provided by the shareholders funds. The Debt-Equity ratio is based on the
assumption that the extent to which a firm should employ the debt should be
viewed in terms of the size of the cushion provided by the shareholders funds.
Formula:

Debt Equity Ratio = Total debt / Total Net worth

Debt equity ratio of ITL


Particulars

2009-10

Total Debt
Net worth
Debt equity

1085.07
525.53
2.06

(IN CRORES)
2010-11
1547.21
554.05
2.79

ratio

33

2011-12

2012-13

2013-14

1783.44
1149.27
1.55

1987.14
1268.53
1.57

1381.34
1329.61
1.04

INTEGRATED THARMO PLASTIC LTD

Interpretation:
The debt equity ratio indicates the proportion of owner's stake in the business.
Ideal ratio is 2:1. Excessive liabilities tend to cause insolvency. The ratio indicates
the extent to which the firm depends upon outsiders for its existence. The ratio
provides the margin of safety to the creditors. It tells the owners the extent to
which they can gain benefits and maintain the control with the limited investments.

The debt equity ratio of ITL in 2009-2010 was 2.06 was good as in comparing with
the ideal ratio of 2:1. In 2010-2011 the ratio had improved to 2.79 and further it
had fallen to the 1.55 in 2011-2012, it means that companys debt in 2010-2011 are
more in compare to the previous year ratio. But in 2012-2013 the ratio has
increased to 1.57. It is over debtness in the present scenario. But in 20013-14 it has
reduce to 1.04. Companys composition of debt and equity has reduced and this
shows that company is less risky in terms of lenders.

C. Interest coverage ratio: Debt ratios described above are static in nature,
and fail to indicate the firms ability to meet interest and other fixed
obligations. The interest coverage ratio is used to test the firms debt

34

INTEGRATED THARMO PLASTIC LTD


servicing capacity. The interest coverage ratio is determined by dividing
earnings before interest and taxes by interest charges.

Objective:The objective is to measure the debt servicing capacity of a firm so far fixed
interest on long term debt and debenture is concerned.
Formula:

Interest Coverage Ratio = EBIT / Interest on long term debt

EBIT = PBDIT Depreciation


TABLE-Interest coverage ratio of ITL
Particulars

2009-10

2010-11

2011-12

2012-13

2013-14

EBIT

221.9

146.4

94.3

251.6

204.61

Interest on

49.4

79.1

87.6

150.4

88.56

long term debt


Interest

4.49

1.85

1.07

coverage ratio

35

1.67

2.31

INTEGRATED THARMO PLASTIC LTD

Interpretation: Interest coverage ratio shows the number of times the amount of
interest on long term debt is covered by the profits out of which that will be paid.
It indicates the limit beyond which the ability of the firm to service its debt would
be adversely affected.
Higher the ratio, greater the firms ability to pay interest but very high ratio may
imply lesser use of debt and very efficient operations. Interest coverage ratio is
4.49 in 2009-10 and fallen to 1.85 in the year 2010-11 and 1.07 in 2011-12. Again
after 2011-12, it shows increasing trend and reached to 2.31 in 2013-14.
This shows that the firms ability to pay interest is high and there is less use of
debt.

D. Long term Fund to Fixed Assets:

This ratio explains whether the firm has raised adequate long term funds to meet its
fixed assets requirements. It is expressed as follows Fixed assets/long-term funds.
The ratio should not be more than 1.if less than one; it shows that the part of
working capital has been financed through long-term funds. This is desirable to
some extend because a part of working capital termed as core working capital is
less of fixed nature .

36

INTEGRATED THARMO PLASTIC LTD


The ideal ratio is 0.67. Fixed asset include net fixed asset (original costdeprecation to date) and trade investments including shares in subsidiaries. Long
term funds include share capital reserve and long term loans.
Formula:

Long term funds to fixed assets Ratio = long term funds / fixed
assets

Long term funds to fixed assets of ITL


TABLE-LONG TERM FUND OF FIXED ASSETS OF ITL
(IN CRORES)
Particulars

2009-10

Long term funds

1085.07

1547.21

Fixed asset

1272.45

1780.81

Long term fund to

0.85

2010-11

2011-12

0.86

2012-13

2013-14

1783.44

1987.14

1381.34

2056.60

2288.84

2183.37

0.86

fixed asset

37

0.87

0.63

INTEGRATED THARMO PLASTIC LTD

Interpretation
This ratio indicates the proportion of long term funds deployed in fixed assets. The
long term fund to fixed assets ratio were approximate same in last four years and
the ideal ratio is .67 so company have sufficient funds and fixed assets . The higher
the ratio indicates the safer the funds available in case of liquidation .but in 201314 due to some reason the ratio had fallen .63 which was low to ideal ratio .67. It
shows that the proportion of long term funds that is more invested in working
capital.

E.PROPRIETARY RATIO:

A variant to the debt-equity ratio is the proprietary

ratio which is also known as equity ratio. This ratio establishes relationship
between share holders funds to total assets of the firm. This ratio focuses the
attention on general financial strength of business enterprise.
This ratio is of particular importance to the creditors who can find out proportion
of shareholders funds in the total assets employed in business. A low proprietary
ratio will indicate greater danger to the creditors. A ratio below 50% may be
alarming for the creditors since they may have to suffer heavily

Formula:
38

INTEGRATED THARMO PLASTIC LTD

Proprietary Ratio = Share holders funds / total assets*100

Particulars
Share holders fund
Total assets
Proprietory ratio

2009-10
525.53
2369.4
22.18

2010-11
554.05
3191.1
17.36

2011-12
1149.27
3634.26
31.62

2012-13
1740.37
4042.25
31.38

Interpretation:
This ratio indicates the extent to which the assets of the firm have been financed
out by proprietars fund. It determines the long-term solvency of the firm. This
ratio indicates the extent to which the assets of the company can be lost without
affecting the interest of the company.
In 2009-10, proprietory ratio is 22.18 and reduced in 2010-11 to 17.36. Again it
shows increasing trend up to the year 2013-14 and reached to 36.83.

39

2013-1
1329.6
3654.24
36.38

INTEGRATED THARMO PLASTIC LTD


It implies that the proportion of shareholders in the assets of the company is getting
high. This may be a good condition for the creditors who have invested, since they
may not suffer at the time of winding up of the company.

3. ACTIVITY RATIO

Funds are invested in various assets in business to make sales and earn profits. The
efficiency with which assets are managed directly affects the volume of sales.
Activity ratios measure the efficiency (or) effectiveness with which a firm manages
its resources (or) assets. These ratios are also called Turn over ratios because
they indicate the speed with which assets are converted or turned over into sales.
Activity ratios are employed to evaluate the effi3ciency with which the
firm manages and utilizes its assets. The ratios are also called turnover
ratios because they indicate the speed with which the assets are being
converted or turned over into sales. A proper balance between sales
and assets generally reflects that the assets are managed well. Several
ratios can be calculated to judge the effectiveness of asset utilization.

. Debtor turnover ratio


Total assets turnover ratio
Working capital turnover ratio
Inventory turnover ratio
Fixed assets ratio

a. DEBTORS TURNOVER RATIOS:-

A firm sells goods for cash and credit. Credit is used as a marketing tool by a
number of companies. When the firm extends credit to its customers, debtors are
created in the firms accounts. Debtors are expected to be converted into cash over
a short period and, therefore, are included in the current assets. The liquidity
position of the firm depends upon the quality of the debtors to a great extent.

40

INTEGRATED THARMO PLASTIC LTD


Quality of the debtors can be identified with the analysis of Debtors Turnover &
Collection Period.
Formula:

Debtor turnover Ratio = credit sales / Average debtors

Collection Period
The average number of days for which debtors remain outstanding is called the
average collection period, and can be calculated as follows:
Collection Period= 365/ Debtors Turnover
TABLE- COMPONENTS DEBTOR TURNOVER
Particulars
Gross sales
Average
debtor
Debtors

2009-10
2392
443

2010-11
2764
490

2011-12
2573
409

2012-13
3500
345

2013-14
3519
334

5.72

5.96

6.77

10.76

10.90

64

60

54

34

35

turnover
ratio
Avg.
collection
Period in
days

41

INTEGRATED THARMO PLASTIC LTD

Interpretation
It shows the efficiency of collection policy of the firm. It is always a good idea to
collect quickly money from debtors as uncertainty of collection increases with
credit policy being liberal. However a firm should undertake cost benefit study of
liberal credit policy, if benefit is more than cost than it should increase credit
period.
Debtors turnover ratio is 5.72 for the year 2009-10 and shows increasing trend up
to the year 2013-14 and reached to 10.9. This shows that debtors are collected quite
fast and quality of debtors is good.
A higher debtors turnover ratio means shorter average collection period. It
indicates efficiency in collection of debt. Debtors are not allowed to linger their
payment.

B.TOTAL ASSETS TURN OVER RATIO:


This ratio indicates the efficiency with which the firm uses all its assets to generate
.some analysts like to compute the total assets turnover in addition to or instead of
the net assets turnover. This ratio shows the Firms ability in generating sales from
all financial resources committed to total assets

42

INTEGRATED THARMO PLASTIC LTD

Total assets turnover Ratio = Sales / total assets

Formula
Table of Total assets ratio of ITL
(IN CRORES)
Particulars
Sales
Total assets
Result

2009-10

2010-11

2011-12

2012-13

2013-14

2392

2764

2573

3500

3519

2369.4

3191.1

3634.26

4042.25

3654.24

1.07

.92

.73

.91

.99

Interpretation:
This ratio suggests how a rupee of asset contributes to earn sales more the ratio
more efficiently assets are used in gainful operation. The total assets ratio also
indicates the number of times total assets are being turned over the year.

43

INTEGRATED THARMO PLASTIC LTD


Total assets turnover ratio is 1.07 in 2009-10 to which was good. But in 2010-11
ratio had fallen to 0.87 and in 2011-12 to 0.71. After 2011-12, it shows increasing
trend and reached to 0.99.
This shows total assets are used efficiently to generate sales.

C.WORKING CAPITAL TURNOVER RATIO:


Working capital of a concern is directly related to sales. It indicates the velocity of
the utilization of net working capital. This indicates the no. of times the working
capital is turned over in the course of a year. A higher ratio indicates efficient
utilization of working capital and a lower ratio indicates inefficient utilization.
A high working capital ratio shows efficient use of working capital and quick
turnover of current assets like stock and debtors. A low working capital turnover
ratio indicates under- utilization of working capital. However, a very high turnover
ratio of working capital is also dangerous, as it is a sign of over trading, i.e., may
put the concern in financial difficulties.
Formula.

Working capital turnover Ratio = Net Sales / working capital

Table-Working capital ratio of ITL


(IN CRORES)
Particulars
Sales

2009-10
2392

2010-11
2764

44

2011-12

2012-13

2013-14

2573

3500

3519

INTEGRATED THARMO PLASTIC LTD


Working capital

491

498

1035

1097

691

Working capital

4.87

5.56

2.45

3.19

5.09

turnover ratio

Interpretation
The working capital ratio indicates the capability of the organization to achieve
maximum sales with the minimum investment in working capital. This ratio
indicates the extent of working capital turned over in achieving sales of the firm.
Working capital turnover ratio is 4.87 for the year 2009-10 and increased to 5.56 in
2010-11. Again in 2011-12, it decreased drastically and shows increasing trend
after wards. In 2013-14, it reached to 5.09. This shows that firm is able to achieve
maximum sales with minimum investment in working capital. And company is
using its working capital efficiently to generate sales.
D.INVENTORY TURNOVER RATIO:
It indicates the efficiency of the firm in producing and selling its product. This ratio
indicates whether stock has been efficiently used or not. It shows the speed with
45

INTEGRATED THARMO PLASTIC LTD


which the stock is rotated in to sales or the number of times the stock is turned into
sales during the year. The higher ratio, the better it is, since it indicates that stock is
selling quickly. In a business where stock turnover ratio is high, goods can be sold
at s low margin of profit and even then the profitability may be quite high.
This ratio can be used for comparing the efficiency of sales policies of two firms
doing same type of business. The stock policy of the management of that firm,
whose stock turnover ratio is higher, will be treated as more efficient.
Formula.

Inventory turnover Ratio = cost of good sold / average stock

Table - Inventory turnover ratio of ITL


(IN CRORES)
Particulars

2009-10

2010-11

2011-12

2012-13

2013-14

Sales

2392

2764

2573

3500

3519

Average Inventory

463

524

696

808

831

Inventory

5.17

5.27

3.70

turnover ratio

46

4.33

4.23

INTEGRATED THARMO PLASTIC LTD


Interpretation:It indicates the speed with which the inventory is converted into sales. In general, a
high ratio indicates efficient performance. However, too high ratio and too low
ratio should be called for further investigation. A too high ratio may be the result of
a very low inventory levels which may result in frequent stock outs and thus the
firm may incur high stock out costs. On the other hand, a too low ratio may be
the result of excessive inventory levels, slow moving or obsolete inventory and
thus, the firm may incur high carrying costs. Thus, a firm should have neither very
high ratio nor low ratio.
Inventory turnover ratio for the year 2009-10 is 5.17 which increased to 5.27 in the
year 2010- 11. It reduced to 3.7 in 2011-12 and showed increasing trend up to the
year 2013-14.
This measures how many times a company inventory has been sold during the
year. As inventory turnover ratio shows increasing trend, we can say that
companys inventory management is efficient and inventory is converted into sales
quite fast.

E. FIXED ASSETS TURNOVER RATIO


This ratio indicates the firm may wish to know its efficiency of utilizing fixed
assets and current assets separately.
Formula.

Fixed assets turnover ratio = Net sale / Net fixed assets

Net fixed assets = total fixed assets depreciation


Table fixed assets turnover ratio
47

INTEGRATED THARMO PLASTIC LTD

(IN CRORES)
Particulars

2009-10

Sales

2392

Fixed asset

1029

Fixed asset

2.32

2010-11

2011-12

2764

2573

2012-13

2013-14

3500

3519

1672

1757

2227

2124

1.65

1.46

1.57

1.66

turnover ratio

Interpretation
In the year 2009-2010, the ratio was 2.32 and showed decreasing trend up to the
year 2011-12 and reached to 1.46. Again it started rising and reached to 1.66 in the
year 2013-14. From the analysis it is found out that since last four years company
is investing average more than 70% of its long-term fund in fixed assets. There is
more investment in fixed assets so if that excess fund can be utilized effectively at
some other place that should be done.
It indicates the firms ability to generate sales per rupee of investment in fixed
assets. In general, higher the ratio, the more efficient the management and

48

INTEGRATED THARMO PLASTIC LTD


utilization of fixed assets is and vice versa. This ratio showed that company is
utilizing its fixed assets efficiently to generate sales.
4. PROFITABILITY RATIO

A company should earn profits to survive and grow over a long period of time.
Profits are essential, but it would be wrong to assume that every action initiated by
the management of the company should be aimed at maximizing profit,
irrespective of social consequences. It is unfortunate the word profit is looked
upon as a term of abuse since some firms always wanted to maximize profits at the
cost of employees, customers & society. Except such infrequent cases, it is fact that
sufficient profit must be earned to sustain the operation of the business to be able
to obtain funds from the investors for the expansion and growth and to contribute
towards the social overheads for the welfare of the society.
Profit is the difference between revenues and expenses over a period of time
(usually one year). Profit is the ultimate output of the company, and it will have no
future if it fails to make sufficient profits. Therefore, the financial manager should
continuously evaluate the efficiency of the company in terms of profits. The
profitability ratios are calculated to measure the operating efficiency of the firm.
Beside management of the company, the creditors and owners are also interested in
the profitability of the firm. Creditors want to get interest and repayment of
principal regularly. Owners want to get a required rate of return on their
investment. This is possible only when the company earns enough profits.
Generally two major types of profitability ratios are calculated.
Profitability in relation to sales.
Profitability in relation to investment.

In relation to Sales
a) Gross profit ratio
b) Net profit Ratio

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INTEGRATED THARMO PLASTIC LTD


C) Operating profit ratio
In relation to Investment
a)
b)
c)
d)

Return on Cap. Employed


Return on Equity
Earning per share
Return on total assets
a) NET PROFIT RATIO

Net profit ratio establishes a relationship between net profit (after tax) and sales
and indicates the efficiency of the management in manufacturing, selling
administrative and other activities of the firm.
This ratio also indicates the firms capacity to withstand adverse economic
conditions. A firm with a high net margin ratio would be in an advantageous
position to survive in the face of falling selling prices, rising costs of production or
declining demand for the product. It would be really difficult for a low net margin
firm to withstand these adversities. Similarly, a firm with high net profit margin
can make better use of favourable conditions, such as rising selling prices, falling
costs of production or increasing demand for the product. Such a firm will be able
to accelerate its profit at a faster rate than a firm with a low net profit margin.
Formula

Net profit ratio = Net profit / Net sales * 100

Table- Components net profit of ITL


(CRORES)
Particulars

2009-10

2010-11

2011-12

50

2012-13

2013-14

INTEGRATED THARMO PLASTIC LTD


Net profit

118

44

673

123

84

Net sale

2392

2767

2573

3500

3519

Net profit

4.93

1.6

26.16

3.51

2.39

After tax

ratio

Interpretation:
This ratio indicates (a) an average net margin earned on a sale of Rs. 100 (b) what
portion of sales is left to pay dividend and to create reserves, and (c) firms
capacity to withstand adverse economic conditions when selling price is declining.
In the year 2009-2010, the ratio was 4.93, which was low. In 2010-2011 the ratio
again had fallen to 1.6 which was low in last 5 years. It would be very difficult of
any company to stand with low margin net profit ratio. But in 2011-2012 the ratio
had tremendous increased 26.16 this reflected higher net profit margin ratio and it
could make better use of favourable conditions. Further it has decreased to3.51 in
2012-13. In 2013-14, it had again decreased to 2.39. From the analysis it is found
51

INTEGRATED THARMO PLASTIC LTD


out that the net profit margin ratio is inadequate, the firm will fail to achieve
satisfactory return on investment.

b) RETURN ON INVESTMENT

The term investment may refer to total assets. The funds employed in net assets in
known as capital employed. Net assets equal net fixed assets plus current assets
minus current liabilities excluding bank loan. Alternatively, capital employed is
equal to net worth plus total debt.
The conventional approach of calculating return on investment is divide PAT by
investment. Investment represents pool of funds supplied by shareholders and
lenders, while PAT represent residue income of shareholders; therefore, it is
conceptually unsound to use PAT in the calculation of ROI.
Objective:
The objective is to find out how efficiently the long term funds supplied by the
Debenture holder and shareholders have been used.
Formula

Return on investment = EBIT / Total assets

* 100

Table- Components of Return on investment


Particulars
EBIT

2009-10
221.9

2010-11
146.4
52

(IN CRORES)
2011-12
94.3

2012-13
251.6

2013-14
204.61

INTEGRATED THARMO PLASTIC LTD

Total

2369.4

3191.1

3634.26

4042.25

3654.24

assets
Return on

9.36

4.58

2.59

6.22

5.59

investment

Interpretation:Higher the ratio, the more is the efficient management and utilization of Capital
Employed.
This ratio also helps in working the rate of return of company earns on the capital
invested in fixed and current assets. In ITL this ratio has not shown continuous
increase i.e.in 2009-10 it was highest 9.36 from then it decreased to 4.58 in 201011. It was again decreased to 2.59 in 2011-12. But in 2012-13, it had risen to 6.22
so it was good for company. Further now in 2013-14 it was 5.59 which decreased
after the year. So company has low earning on the capital invested. It indicates ITL
was efficient management and utilization of capital employed.
B.RETURN ON EQUITY
It measures how much the shareholders earned for their investment in the
company. Common or ordinary shareholders are entitled to the residual profits. the
rate of dividend is not fixed; the earning may be distributed to shareholders or

53

INTEGRATED THARMO PLASTIC LTD


retained in the business. Nevertheless, the net profits after tax represent their
return.
ROE indicates how well the firm has used the resources of owners. In fact, this
ratio is one of the most important relationships in financial analysis. The earning of
a satisfactory return is the most desirable objective of business. The ratio of net
profit to owners equity reflects the extent to which has been accomplished. This
ratio is , thus, of great interest to the present as well as the prospective shareholders
and also of great concern to management , which has the responsibility of
maximizing the owners welfare.
Objective:The objective is to find out how efficiently the funds belonging to the shareholders
(equity and preference) have been used.
Formula

Return on Equity = PAT / Equity * 100

Table- components return on equity of ITL


(CRORES)
Particulars
Net profit

2009-10

2010-11

2011-12

2012-13

2013-14

118

44

673

123

84

525.53

554.05

1149.27

1268.53

1329.61

22.43

7.94

58.55

9.7

6.31

After tax
Equity share
+
Reserve &
surplus
Return on
Equity
54

INTEGRATED THARMO PLASTIC LTD

Interpretation
This ratio indicates the firms ability of generating profit per 100 rupees of
shareholders funds. Higher the ratio, the more efficient the management and
utilization of shareholders funds. In 2009-10 it was 22.43 which was financially
beneficial for company. In 2010-11, it had gone down to 7.94, but in 2011-12, it
was tremendous increased to 58.55. Further in 2012-13 it was decreased to 9.7 and
after that in 2013-14 it had again fallen 6.3 so we can observe that company is not
having efficient management and utilization of shareholders funds.

C.EARNING PER SHARE :


The profitability of the shareholders investment can also be measured in many
other ways. One can measure is to calculate the earnings per share.
EPS calculations made over years indicate whether or not the firms earnings
power on per-share basis has changed over that period. The EPS of company
should be compared with the industry average and the earning per share of the
firms. EPS simply shows the profitability of the firm on per-share basis; it does not

55

INTEGRATED THARMO PLASTIC LTD


reflect how much is paid as dividend and how much is retained in the business. But
as a profitability index, it is a valuable and widely used ratio.
Formula

Earning per share = PAT / Number of share outstanding

Table-components of earning per share ratio


(IN CRORES)
Particulars
PAT
Number of share
outstanding
EPS

2009-10
118
16.60

2010-11
44
16.60

7.1

2.65

2011-12
673
16.60
40.5

2012-13
123
16.60
7.5

Interpretation:
In, general, higher the EPS, better it is and vice versa. EPS helps in determining the
market price of the equity shares of the company. It also helps in estimating the
companys capacity to pay dividend.
56

2013-14
84
16.60
5.1

INTEGRATED THARMO PLASTIC LTD


Earnings per share ratio are used to find out the return that the shareholders earn
from their shares. After charging depreciation and after payment of tax, the
remaining amount will be distributed by all the shareholders. In the year 20092010 the EPS ratio was 7.1. But in 2010-11, it has fallen to 2.6. It would be very
difficult of any company to stand with low EPS ratio. But in 2011-2012 the ratio
had tremendous increased 40.5. This reflected higher EPS ratio and it could make
better use of favourable conditions. Further it has decreased to7.51 in 2012-13. In
2013-14, it had again decreased to 5.1. The ratio is also helpful in estimating the
capacity of the company to declare dividends on equity shares. In the year 2011 it
shows the growth in EPS was more relevant and indicates the good track of
profitability. With low EPS, companys capacity to pay dividend is a big question
mark.

Consolidated Balance Sheet for 5 years as on 31st March


Particulars
SOURCES OF FUNDS
Shareholder's Funds
Share Capital
Reserves & Surplus
Minority Interest
Loan Funds
Secured
Unsecured
Deferred Tax Liabilities(net)
Total Funds Employed
APPLICATION OF FUNDS
Fixed Assets
Gross Block
Less: Depreciation
Net Block
Capital Work in Progress
Investments
Current Assets, Loans & Advances
Inventories
Sundry Debtors

2009-10

2010-11

2011-12

2012-13

2013-14

33.34
492.19
525.53
17.73

33.34
520.71
554.05
17.42

33.34
1115.93
1149.27
-

33.34
1235.19
1268.53
-

33.34
1296.27
1329.61
-

756.54
328.53
1085.07
146.68
1775.01

1001.83
545.38
1547.21
170.12
2288.8

1256.41
527.03
1783.44
171.24
3103.95

1375.96
611.18
1987.14
143.91
3399.58

1141.37
239.97
1381.34
176.33
2887.28

1458.43
429.62
1028.81
243.64
1272.45
11.67

2187.16
514.68
1672.48
108.33
1780.81
9.11

2390.76
634.14
1756.62
299.98
1422.14
155.52

3001.55
774.94
2226.61
62.23
2288.84
13.44

3053.9
929.83
2124.07
59.3
2183.37
12.76

463.29
443.02

584.75
538.85

808.69
281.27

807.6
409.42

854.87
257.81

57

INTEGRATED THARMO PLASTIC LTD


Cash & Bank Balances
Loans & Advances
Other Current Assets

37.89
141.08
1085.28

62.5
215.08
1401.18

57.72
274.46
143.48
1565.62

53.66
294.17
175.52
1740.37

56.88
288.55
1458.11

531.21
63.18
594.39
490.89
1775.01

836.1
66.2
902.3
498.88
2288.8

438.8
91.51
530.31
891.83
3103.95

533.34
109.73
643.07
1097.3
3399.58

654.04
112.92
166.96
691.15
2887.28

Less: Current Liabilities &


Provisions
Current Liabilities
Provisions
Net Current Assets
Total Funds Utilized

CHAPTER 5
FINDINGS
1. The companys overall position is at a good position. Particularly
the current years position is well due to raise in the profit level
from the last year position. It is better for the organization to
diversify the funds to different sectors in the present market
scenario.

58

INTEGRATED THARMO PLASTIC LTD


2. Current ratio for the year 2013-14, is almost equal to ideal one,
we can say that companys liquidity position is sound and
company is having enough current assets to meet short term
obligations.
3. Quick ratio for 2013-14 had fallen to 0.79 but still over all
company is having enoug3h liquid assets to meet current
liabilities.
4. In 2013-14, debt ratio was decreased and reached to 0.38. This is
good sign for the company as lower the company's reliance on
debt for asset formation, the less risky the company is since
excessive debt can lead to a very heavy interest and principal
repayment burden.
5. Companys composition of debt and equity has reduced and this
shows that company is less risky in terms of lenders.
6. Interest coverage ratio is 2.31 in 2013-14. This shows that the
firms ability to pay interest is high and there is less use of debt.
7. Proprietory ratio shows increasing trend up to the year 2013-14
and

reached

to 36.83.

It implies that the

proportion

of

shareholders in the assets of the company is getting high. This


may be a good condition for the creditors who have invested.
Since they may not suffer at the time of winding up of the
company.
8. Debtors turnover ratio in 2013-14 reached to 10.9. This shows
that debtors are collected quite fast and quality of debtors is
good.
9. Total asset turnover ratio shows increasing trend and reached to
0.96. This shows total assets are used efficiently to generate
sales
10.
Working capital turnover ratio is 5.09 for 2013-14. This
shows that firm is able to achieve maximum sales with minimum
investment in working capital. And company is using its working
capital efficiently to generate sales.
11.
As inventory turnover ratio shows increasing trend, we can
say that companys inventory management is efficient and
inventory is converted into sales quite fast.
12.
Fixed asset turnover ratio indicates the firms ability to
generate sales per rupee of investment in fixed assets. In
general, higher the ratio, the more efficient the management and
utilization of fixed assets is and vice versa. This ratio showed that
company is utilizing its fixed assets efficiently to generate sales.

59

INTEGRATED THARMO PLASTIC LTD


13.

Net profit ratio is inadequate, the firm will fail to achieve

satisfactory return on investment.


14.
Return on investment indicates

ITL

was

efficient

management and utilization of capital employed.


15.
ROE in 2013-14 had again fallen 6.3 so we can observe
that company is not having efficient management and utilization
of shareholders funds.
16.
With low EPS, companys capacity to pay dividend is a big
question mark.

CHAPTER -6
SUGGESTION

60

INTEGRATED THARMO PLASTIC LTD


1. The companys net profit over the last 3 years has been
decreasing when compare to previous years. The company must
take steps to increase profit level.

2. Net fixed asset of the company has increased and even though
they are not utilizing enhanced technology to increase the sales.
So the management should take steps to reduce the borrowed
capital.
3. Company should raise funds through short term sources for short
term requirement of funds, which comparatively economical as
compare to long term funds.
4. Company should properly utilize its fixed asset to generate sales.
5. Company should have proper management and utilization of
share holders fund to generate profit.
6. Company should take control on debtors collection period which
is major part of current assets.
7. The liquid position of the company is quite satisfactory and this
must be improved be further for the propose of proper utilization
of the liquid assets of the company.

8. Debt has always increased. So the company has reduced the loan
for the more long term borrowings from the outsiders.

9. The management must also the study of market position and it


also find the demand prevailing in the market for the products
and thus this will guide them to enhance their sales volume.

CHAPTER - 7

BIBLIOGRAPHY
61

INTEGRATED THARMO PLASTIC LTD


Books:
FINANCIAL MANAGEMENT

- I.M.PANDEY

FINANCIAL MANAGEMENT

- PRASANNA CHANDRA

FINANCIAL MANAGEMENT

- KHAN & JAIN

ANNUAL REPORTS OF

INTEGRATED THERMOPLASTICS LIMITED.


Websites:
www.integratedthermo.com
www.yahoo.com
www.scribd.com

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INTEGRATED THARMO PLASTIC LTD

63