A

PROJECT REPORT
ON
EFFECTS OF CAPITALISATION
AND
UNDER AND OVER CAPITALISATION

SUBMITTED BY

IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE

OF
MASTER OF BUSINESS ADMINISTRATION
IN
FINANCE

DECLARATION

I hereby declare that the project titled Effect of Capitalisation and

over and under capitalisation is an original piece of research work
carried out by me under the guidance and supervision of. The
information has been collected from genuine & authentic sources. The
work has been submitted in partial fulfillment of the requirement of
master in business administration to Pune University.

Date:

Signature

Place:

(Prof.)

Sr. No

TOPIC

EXECUTIVE SUMMARY

OBJECTIVE & SCOPE OF PROJECT

COMPANY PROFILE

RESEARCH METHODOLOGY

THEORETICAL BACKGROUND

DATA ANALYSIS

FINDINGS

LIMITATIONS

CONCLUSION

10

SUGGESTION

11

BIBLOGRAPHY

12

ANEXURE

TABLE OF CONTENTS

Page No.

CHAPTER 1
INTRODUCTION TO STUDY

INTRODUCTION TO THE STUDY

The capitalization allows the enterprise to achieve,
develop and sustain its operating activities. The total amount of funds
available to an undertaking should be neither too much nor too low. An
important question, therefore is the question of Capitalisation of the
company, i.e., the determination of the amount which the company
should have at least its disposal. The total amount of long-term funds
available to the company, therefore, is the Capitalisation of the
company.
The success of modern business depends largely on
the amount of capital employed in the business. Capitalisation refers to
the decision regarding determining the optimal capital requirement of
the business.

CHAPTER 2
COMPANY PROFILE

COMPANY PROFILE
Endurance Systems (I) Pvt. Ltd. Was incorporated under the Indian
Companies Act 1956, on 31 st August 1995. It is the part of the
Endurance

Group.

Which

are

amongst

the

leaders

of

various

automotive components for the Original Equipment Manufacturers.

Products & Manufacturing Facilities
The Commercial Production started in August 2003, and the company
has now crossed the mark of 8,50,000 engine parts per month. It is
poised for a substantial high growth rate every year.
Initially, it started producing painted and highly interchangeable CNC
machined castings, for automotive industry. Now the company has
established plant and machinery for manufacturing of Four-wheeler
Engine parts like Cylinder Head for Tata Motors Ltd. Endurance
Systems (I) Pvt.Ltd , B-20, has its range of Products. The licenses and
installed capacity of the product is as follows:
Sr.

Product

Licensed Capacity
Installed Capacity
No. Description
Engine & 1000000 nos per annum 10000000 nos per annum
1

vehicle
Components
Domestic
Engine &
300000 nos per annum

300000 nos per annum

vehicle
Components
4 wheeler
We believe that in order to achieve the Best in Quality, Investment
must be made for installation of the finest plant and machinery and
supported by advance & modern technology.

BOARD OF DIRECTORS
CHAIRMAN: Mr. Naresh Chandra.
MANAGING DIRECTOR: Mr. Anurang Jain.
DIRECTOR: Mr. Nainesh Jaisingh.
DIRECTOR: Mr. Roberto Testore.

ORGANISATIONAL STRUCTURE

ORGANIZATION STRUCTURE

Endurance Systems (I) Pvt. Ltd.

Date: 25.02.2009

Organization Chart

Managing Director
(Anurang Jain)

Occupier

SBU Head
GM -Operations
(A S Bhalla)
Mgm
Appointee

MANAGEMENT
REPRESENTATI
VE
Manager - QA
(P. R. Joshi)

Plant Head
AGM - Operations
(A. Rahulkumar)

M/C SHOP
Manager Production
(A. S. Killedar)

HRA & ADMIN

Asst. Manager
(D. R. Ambre)

FINANCE
Manager
(S.P.Guad)

QA
Manager QA
(P. R. Joshi)

PAINT SHOP
Manager - PS
(M. S. Kulkarni)

LOGISTICS &
STORE
Manager - Log
D.S. Meher
Asst. Manager
(S. S. Padalkar)
MAINTANAN
CE

Manager Maintenance
(D. V.
Deshpande

10

RESEARCH METHODOLOGY
Area of the Research Finance
Topic for the Research: Capitalisation
It is a tool for finding the financial performance of the Company.
Period of the Research June2009 to August2009
Objective of the Research
To compare the performance of the company for the 2 years.

Type of Data Secondary Data: It is collected from the published financial

statements and website of the company.
Research Design
It includes following Steps

Calculations of Ratios

Analyzing & interpreting the ratios.

Research Findings

Suggestions

11

OBJECTIVE OF THE COMPANY

To be number 1 in terms of tonnage in India in Aluminium Die

casting Products by 2006.

To be amongst Top Two Auto component manufacturers in terms

of sales value in India in Endurances range of products for 2
wheelers by 2007.

To be a major manufacturer in India of four wheeler struts and

shock absorbers by 2010.

To achieve 2500 Crores of sales by 2010.

To achieve 15% of sales value in exports by 2010

12

REVIEW OF LITERATURE

13

INTRODUCTION TO CAPITALISATION
The success of modern business depends largely on the
amount of capital employed in the business. Capitalisation refers to the
decision regarding determining the optimal capital requirement of the
business.
The Capitalisation is an essential element to strength,
development and sustainability of all kinds of enterprises, whether
they are enterprises with share capital or of social economy.
Broadly speaking Capitalisation refers to the act of deciding
in advance the quantum of fund requirement of a firm and its pattern
and administration of capital in the interest of the firm. Thus, the term
Capitalisation has been used as alternative to the word Financing
Plan.
Capitalisation in the case of company is promotional stage,
whose financing had not been completed, refers to the amount of
shares and debentures which it was permitted to issue under its
Memorandum of Association. For such companies the use of term
Authorize Capitalisation would be the most appropriate. The concept
of Capitalisation is most logical. Capitalisation should comprise all

14

sources of capital, which are employed to raise desired amount of

capital for a firm.

OBJECTIVES:

To calculate the effects of Capitalisation.

To analyze the risk factor in Capitalisation.

To determine the liquidity position of the Company.

15

DEFINATION OF CAPITALISATION
Capitalisation is the par value of the outstanding
stocks and bonds .

Capitalisation as the total accounting value of all the

capital regularly required in the business.

Capitalisation refers only to long term debt and

capital stock, and short term creditors do not constitute suppliers of
capital, is erroneous. In reality, total capital is furnished by short-term
and long term creditors.

16

IMPORTANCE OF CAPITALISATION
To operate, the cooperative needs assets as equipment,
accounts receivable, inventories, etc. To do so the cooperative incurs
commitments towards its users, workers, members and financial
partners.
For the financial partners, the capacity of the enterprise
to meet its financial commitments is an essential factor. The generated
funds should be sufficient to face these following elements:

Reimbursement of capital on the debt,

Replacement of current assets,

Purchase of new fixed assets,

Buyout of social and privileged shares,

Need for working capital required for development.

The capitalization of the enterprise is the most secure

way to face these commitments and the most direct way to increase
the enterprises capacity to make its own choices and maintain its
operating autonomy.

17

THE ADVANTAGES OF A CAPITALIZATION

The main advantages of a good capitalization are financial and
strategic and help the enterprise to:

(I)
Ameliorate its financial viability:

The enterprise is able to absorb the unpredicted events which could

reduce its capacity to generate surpluses such as: Reduction of the
incomes Arrival of a new competitor which affects the enterprises
operations: reduction of quantities and/or selling price or increase of
costs; example: improvement of the after-sales service.
Increase of costs, which cannot be rapidly, absorbed equivalent
by the increase of incomes (example: raising of prices of the raw
materials)
(II) Meet its financial commitments such as

18

Reimbursement of capital of its debts,

Buyout of the shares of members who leave ,

Replacement of fixed assets in order to maintain the capacity to

develop products and services,

Need of working capital in a context of growth.

(III) Seize opportunities such as:

Launching of a new product of service

Acquisition of assets

(IV) Other advantages are also important such as:

Increase of liberty of action and autonomy, which allow
the enterprise to negotiate with its financial and governmental
partners
,

Real concretization of the cooperative mission,

Reduction of the financial cost.

Increase the capacity to solve

operations problems

Increase the
capacity to
replace the
enterprise
assets

CAPITALIZATION

Increase the capacity to fulfill

its mission towards
19 users,
members and the partners

Increase the
capacity to
negotiate with
partners

EFFECTS OF CAPATALISATION
The decision to capitalize some items depends on management. As
such, this choice will have an impact on a company's balance sheet,
income statement and cash flow statement. It will also have an impact
on a company's financial ratios.

Here is what the decision will have an impact on:

NET INCOME:
Capitalizing costs and depreciating them over time will
show a smoother pattern of reported incomes. Expensing firms have
higher variability in reported income. In terms of profitability, in the
early years, a company that capitalizes costs will have a higher
profitability than it would have had if it expensed them. In later years,

20

the company that expenses costs will have a higher profitability than it
would have had if it capitalized them.

STOCKHOLDERS' EQUITY
Over a long time frame, the choice of expensing a cost or
capitalizing it will have little effect on a shareholders' total equity. That
said, expensing firms will have a lower stockholders' equity at first
(less profit, thus smaller retained earnings)
CASH FLOW FROM OPERATIONS
A company that capitalizes its costs will display higher net
profits in the first years and will have to pay higher taxes than it
would've had to pay if it expensed all of its costs. That said, over a
long period of time, the tax implications would be the same. But the
choice for capitalizing over expensing have a much larger effect on the
reported cash flow from operations and cash flow from investing. If a
company expenses its cost it will be included in cash flow from
operations. If it capitalizes, then it will be included in cash flow from

21

investing (lower investment cash flow and higher cash flow from
operations).

ASSETS REPORTED ON THE BALANCE SHEET

A company that capitalizes its costs will display higher
total assets.

FINANCIAL RATIOS
A company that capitalizes its costs will display higher
profitability ratios at the onset and lower ratios in the later stages.
Liquidity ratios will experience little impact, except for the CFO ratio,
which will be higher under the capitalization method. Operationefficiency ratios such as total asset and fixed-asset turnover will be
lower under the capitalization method, due to higher reported fixed
assets. Furthermore, at the onset, equity turnover will be higher under
the capitalization method (lower total equity due to lower net profit).
Companies that capitalize their costs will initially report higher net
income, lower equity and higher total assets. Remember that, on
average, an equal dollar effect on a numerator and denominator will
produce a higher net result. That said, on average, ROE & ROA will

22

initially be higher for capitalizing firms. Solvency ratios are better for
firms that capitalize their costs because they have higher assets, EBIT
and stockholders' equity. Consider figure below for an overview of the
effect of capitalizing and expensing on key financial ratios.

IMPACT OF ASSETS, PROFITABILITY, FINANCIAL RATIOS

INITIALLY (2007)
OVERALL

LATER (2008)

Capitalizing

Expensing

Net Income

Higher

Lower

Lower

Higher

EBIT

Higher

Lower

Higher

Lower

No effect

No effect

No effect

No effect

Higher

Lower

Capitalizing

Expensing

EBITDA
Total Assets

LIQUIDITY RATIOS

Capitalizing

Higher

Expensing

Lower

Capitalizing

Expensing

Cash Flow from

Op. Ratios

Higher

ACTIVITY RATIOS

Capitalizing

Total Asset Turnover

Lower

Higher

Lower

Higher

Fixed Asset Turnover

Lower

Higher

Lower

Higher

INVESTMENT RATIOS

Capitalizing

Capitalizing

Expensing

ROA

Higher

Lower

Lower

Higher

ROE

Higher

Lower

Lower

Higher

SOLVENCY RATIOS

Capitalizing

Debt to Equity Ratio

Higher

Lower

Expensing

Expensing

Expensing

Lower

23

Lower

Higher

Capitalizing

Capitalizing

Expensing

Expensing

Time Interest Earned

Higher

Lower

Lower

Higher

CFO to Debt

Higher

Lower

Lower

Higher

CAPITALIZATION CONSIST OF TWO THEORIES :-

(I) Cost Theory:

According to the cost theory of capitalization, the value of a
company is arrived at by adding up the cost of fixed assets like plants,
machinery patents, etc., the capital regularly required for the
continuous operation of the company (working capital), the cost of
establishing business and expenses of promotion. The original outlays
on all these items become the basis for calculating the capitalization of
company. Such calculation of capitalisation is useful in so far as it
enables the promoters to know the amount of capital to be raised. But
it is not wholly satisfactory. On import objection to it is that it is based
o a figure (i.e., cost of establishing and starting business) which will
not change with variation in the earning capacity of the company. The
true value of an enterprise is judged from its earning capacity rather
than from the capital invested in it. If, for example, some assets
become obsolete (out of date) and some others remain idle, the

24

earnings and the earning capacity of the concern will naturally fall. But
such a fall will not reduce the value of the investment made in the
company's business

(II) Earnings Theory:

The earnings theory of Capitalization recognizes the
fact that the true value (capitalization) of an enterprise depends upon
its earnings and earning capacity. According to it, therefore, the value
or Capitalization of a company is equal to the capitalized value of its
estimated earnings. For this purpose a new company has to prepare
an estimated profit and loss account. For the first few year of its life,
the sales are forecast and the manager has to depend upon his
experience for determining the probable cost. The earnings so
estimated may be compared with the actual earnings of similar
companies in the industry and the necessary adjustments should be
made. Then the promoters will study the rate at which other
companies in the same industry similarly situated are earnings. The
rate is then applied to the estimated earnings of the company for
finding out the capitalization.

25

CAPITALIZATION IS OF TWO TYPES:-

UNDER-CAPITALIZATION:
If the owned capital of the business is much less
than the total borrowed capital than it is a sign of under capitalization.
This means that the owned capital of the company is disproportionate
to the scale of its operation and the business is dependent upon
borrowed money and trade creditors. Under-capitalization may be the
result of over-trading. It must be distinguished from high gearing.
Incase of capital gearing there is a comparison between equity capital
and fixed interest bearing capital (which includes reference share
capital also and excludes trade creditors) whereas in the case of under
capitalization, comparison is made between total owned capital (both
equity and preference share capital) and total borrowed capital (which
includes trade creditors also). Under capitalization is indicated by:

Low proprietary Ratio

26

Current Ratio

High Return on Equity Capital

The effects of under capitalization may be:

Payment of excessive interest on borrowed capital.

Use of old and out of date equipment because of inability to

purchase new plant etc.

High cost of production because of the use of old machinery.

27

OVER-CAPITALIZATION:
A concern is said to be over-capitalized if its
earnings are not sufficient to justify a fair return on the amount of
share capital and debentures that have been issued. It is said to be
over capitalized when total of owned and borrowed capital exceeds its
fixed and current assets i.e. when it shows accumulated losses on the
assets side of the balance sheet.
An over capitalized company can be like a very fat person who cannot
carry his weight properly. Such a person is prone to many diseases
and is certainly not likely to be sufficiently active. Unless the condition
of overcapitalization is corrected, the company may find itself in great
difficulties.

28

Causes of Over Capitalization

Some of the important reasons of over-capitalization are:

Idle funds:
The Company may have such an amount of funds that it
cannot use them properly. Money may be living idle in banks or in the
form of low yield investments.

Over-valuation:
The fixed assets, especially good will, may have been
acquired at a cost much higher than that warranted by the services
which that asset could render.

Fall in value:
Fixed assets may have been acquired at a time when
prices were high. With the passage of time prices may have been
fallen so that the real value of the asset may also have come down
substantially even though in the balance sheet the assets are being

29

being shown at book value less depreciation written off. Then the book
values will be much more than the economic value.

Inadequate depreciation provision:

Adequate provision may not have been provided on the
fixed assets with the result the profits shown by books may have been
distributed as dividend, leaving no funds with which to replace the
assets at the proper time.
Over-capitalization can be remedied by reducing its capital so as to
obtain a satisfactory relationship between proprietors funds and net
profit. In case over-capitalization is the result of over-valuation of
assets then it can be remedied by bringing down the values of assets
to their proper values.

30

DATA ANALYSIS AND INTERPRETATIONS

31

CASH FLOW STATEMENT FOR THE YEAR ENDED

31STMARCH, 2008

2007-08

2006-07
Rs.

Rs. In
Million
Sr.
A

Rs.

In

In

Million

Rs. In
Million Million

PARTICULARS
Cash Flow from Operating Activities
I) Net Profit / (loss) before Tax and earlier
year Expense
II) Adjustment for Add :
Depreciation
Loss on Sales of Asset
Provision for Leave Encashment
Provision for Gratuity
Unrealised FOREX fluctuation Loss
Provision for Doubtful Debts / Advances
Interest Paid
Less :
Provision for warranty written back
Unrealised FOREX fluctuation Gain
Provision for Gratuity
Interest received
III) Operating Profits before Working
Capital Changes
IV) Adjustment for Add :

(15.67)
120.69
0.02
1.68
1.37
0
3.47
73.84
2.72
13.86
0
6.5

201.07

113.78
0.26
1.45
0
0.38
0
60.8

175.67

23.16

1.33
10.78
0.19
8.97

21.27

162.24

32

19.29

173.69

Increase / (Decrease) in Trade and Other

Payables
Less Increase / (Decrease) in Inventories
Increase / (Decrease) in Trade and Other
Receivables
V) Cash Generated from Operations
Less :
Income Tax and FBT paid
Wealth Tax Paid

188.34

129.52

11.67

139.35

111.19
6.73
0.06

Net Cash from Operating Activities

B

65.48
227.72
6.79

112.75
58.79
0.05

220.93

Cash flow from Investing Activities

Add :
Interest received
Sales of Fixed Assets

12.55
37.53

Less :
Purchase of Fixed Assets
Purchase of Investment In Subsidiary

109.37
33.48

50.07

11.62
39.78

Net Cash Used in Financing Activities

Net increase in Cash and Cash Equivalents
Opening Cash and Bank Balance on 1st
APRIL *
Closing Cash and Bank Balance on 31st
MARCH *

33

51.4

142.79
142.79

(92.78)

Cash flow from Financing activities

Add :
Increase or (Decrease) in Term Loans
Increase or (Decrease) in Cash Credit
Increase or (Decrease) in Unsecured loans
Less :
Interest Paid

58.84
(7.73)

142.85
Net cash used in Investing Activities

(122.58)
51.11

(91.39)

(105.45)
(10.44)
83.58

(45.04)
(25.19)
235.71

73.23

60.19
(105.54)
22.62

105.29
6.17

128.95

122.78

151.57
22.62

128.95
6.17

BALANCE SHEET AS ON 31ST MARCH, 2008

Rs.in
Million

Rs.in
Million
31.03.2008 31.03.2007

Schedule
I

SOURCES OF FUNDS
1 Shareholders Funds :
a) Share Capital
b) Reserves & Surplus
2

Loan Funds :
a) Secured Loans
b) Unsecured Loans

1
2

22
365.65
387.65

22
371.47
393.47

3
4

381.53
613.82
995.35
86.91
1469.91

507.8
530.23
1038.03
97.29
1528.79

1343.76
509.01
834.75
21.24
855.99
50.55

1295.47
404.33
891.14
12.57
903.71
17.08

7
8
9
10

250.99
470.24
151.57
293.09
3.68
1169.57

239.32
470.22
128.95
176.26
9.65
1024.4

11
12

595.67
10.53
606.2
563.37

406.17
10.23
416.4
608

Deferred Tax Liability Net

Total

II

APPLICATION OF FUNDS
1
Fixed Assets :
a)
Gross Block
b)
Less : Depreciation/Amortization
c)
Net Block
d)
Capital Work - In Process
(including Capital Advances)
2
Investments :
3
Current Assets, Loans & Advances
a)
Inventories
b)
Sundry Debtors
c)
Cash & Bank Balances
d)
Loans & Advances
e)
Interest accrued on Fixed Deposit
Less : Current Liabilities & Provisions :
a)
Current Liabilities
b)
Provisions

Net Current Assets

Notes forming part of the Accounts
Schedules 1 to 12 and 17 form part of this Balance

34

17

Sheet
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH 2008

INCOME

SCHEDULE

SalesManufactured Goods/component including excise duty

Trading Goods
Less: Excise duty
Net Sales
Wind power Generated, captively consumed
Job work receipts
Other Income

13

EXPENDITURE
Materials
Expenses
Interest
Depreciation/amortisation

14
15
16
5

Profit/loss before taxation

Provision for taxation-current tax
- wealth tax
- deferred tax(refer note 17)
Short/(Excess) provision for income tax for earlier years
-FBT
Profit/loss for the year
Add: Profit brought forward
Balance profit available for appropriation
APPROPRIATION
Transferred to general reserve
Balance Carried to balance sheet
Earning per share a) basic rupees
refer note 9 b) diluted rupees
Notes forming part of the accounts
schedules 13 to 17 form part of this p/L account

17

35

Rs.in
Million
31.03.2008

Rs.in Million
31.03.2007

4,079.04
215.76
516.62
3,778.20
11.43
53.71
100.94
3,944.28

3,969.92
154.24
538.26
3,587.90
11.69
75.05
89.63
3,764.27

3,042.23
723.19
73.84
120.69
3,959.95
(15.67)

2,920.25
650.15
60.80
113.78
3,744.98
19.29

0.04
(10.38)
(1.31)
1.80
(5.82)
311.97
306.15

4.50
0.06
0.85
0.52
1.35
12.01
299.96
311.97

306.15
306.15
(2.65)
(2.65)

311.97
311.97
5.46
5.46

ANALYZING LIQUIDITY POSITION THE FIRM:

The liquidity position of the firm can be determined by the current
ratio and the quick ratio.
The first step in liquidity analysis is to calculate the
company's current ratio. The current ratio show how many times over
the firm can pay its current debt obligations based on its assets.

The second step in liquidity analysis is to calculate the

company's quick ratio. The quick ratio is a more stringent test of
liquidity than is the current ratio. It looks at how well the company can
meet its short-term debt obligations without having to sell any of its
inventory to do so.

CALCULATIONS:

36

(current asset-Inventory)
Quick ratio = ------------------------------------------Current liabilities

YEAR
(Current asset-Inventory)
Current Liabilities
Ratio

2008
(1169.57-250.99)=918.58
606.20
1.51

2007
(1024.4-239.32)=785.08
416.40
1.88

Quick Ratio = Current Assets-Inventory/Current Liabilities. For

2008, the calculation would be the following:
Quick Ratio = 918-250.99/606.20= 1.51
This means that the firm cannot meet its current (short-term) debt
obligations without selling inventory because the quick ratio is 1.51
which is more than 1.0. In order to stay solvent and pay its short-term
debt without selling inventory, the quick ratio must be at least 1.0.
If you calculate the quick ratio for 2007, you will see that it
was 1.88. So, the firm improved its liquidity by 2007 itself. Hence the
firm is not in liquidity position regarding the previous year.

Year
Current Ratio =

Current
2008 Assets

2007

-------------------------------------Current Liabilities
37

Current Assets

1169.57

1024.40

Current Liabilities

606.20

416.40

Ratio

1.93

2.461

38

For 2008, the calculation would be the following:

Current Ratio = 1169.57/606.20= 1.93
This means that the firm can meet its current (short-term) debt
obligations 1.93 times over. In order to stay solvent, the firm must
have a current ratio of at least 1.0 , which means it can exactly met its
current debt obligations. So, this firm is solvent.
In this case, however, the firm is a little more liquid than that. It can
meet its current debt obligations and have a little left over.
If you calculate the current ratio for 2007, you will see that the
current ratio was 2.461. So, the firm improved its liquidity in 2007
which, in this case, is good since it is operating with relatively high
liquidity. The above ratio shows that the company is not solvent in the
year 2008 relevant to previous year.

Effects of capitalisation can be calculated or

overviewed from the above ratios: -

SOLVENCY RATIOS:

39

Total liabilities
Debt to equity ratio =

---------------------------------------Shareholders Equity

2008

2007

Total Liabilities

606.20

416.40

Shareholders Equity

22

22

Ratio

27.56

18.93

A high debt/equity ratio generally means that a company

has been aggressive in financing its growth with debt. As a

40

rule, this means if the sales double, the assets--including

inventory, receivables and fixed assets-should also double.

Net Income
Time Interest Earned = -------------------------Interest

Year
Net Income
Interest
Ratios

2008
53.42
73.84
0.73

41

2007
61.91
60.80
1.02

Operating Cash Flow

CFO/Debt = --------------------------------Total liabilities

Year
Operating cash flow
Total liabilities
Ratios

2008
220.93
606.20
0.37

42

2007
(7.73)
416.40
(0.02)

Solvency ratios Since assets, EBIT and stockholders' equity are

higher; all solvency ratios will be overstated. Hence from the above
ratios there is an impact on capitalization.

INVESTMENT RATIOS:

Net Income
Return of Assets =

--------------------------

Average Total Asset

Year
Net Income
Average Total Assets
Ratios

2008
3944.28
1012.78
3.90

43

2007
3764.27
964.05
3.91

Net Income
Return on Equity =

-------------------------Average Shareholder Equity

Year
Net Income
Average shareholder
Equity
Ratios

2008
3944.28

2007
3764.27

22

22

179.29

171.11

44

ROE is useful for comparing the profitability of a company to

that of other firms in the same industry. This reveals the
relative performance and the strength of the company in
attracting future investments.

45

ACTIVITY RATIO:

Net sales
Year Asset Turnover =
Fixed

2008
2007
-------------------------------

Net Sales

3778.2

Fixed assets

855.99

903.72

Ratios

4.42

3.98

46

Fixed Asset

3587.9

OVERALL RATIO:

Year

2008

2007

Net Income

3944.28

3764.27

(Interest)-(Tax)
EBIT=

-------------------------------Profit(Loss)

47

Year

2008

2007

(Interest)-(Tax)

63.99

53.52

Profit(Loss)

(5.82)

12.01

Ratios

58.17

65.53

(Net sales-Expenditure)
EBITDA = --------------------------------------Expenditure

Year

2008

48

2007

(Net salesExpenditure)

3959.67

Expenditure

3944.28

49

3744.98
3764.27

The decision to capitalize interest will have an effect on a

company's:
Net income In the current period earnings will be
higher (overstated).
Assets Total assets will be overstated because they
include the capitalized interest.
Solvency ratios Since assets, EBIT and stockholders'
equity will be higher, all solvency ratios will be
overstated.

50

FACTS AND FINDINGS

FINDINGS & OBSERVATION

1.

The Profit before Tax for the financial year 2007-2008

is showing the negative balance. The reason for this is
increase in the amount of depreciation and also the
amount of Interest paid on Loans borrowed, which
shows the effect on company capitalization.

51

2.

Overstated Net Income : The Net Income in the

financial year 2007-2008 was overstated as the sales
were increase to an small extent and the operating
cost were higher. This affects the Net Income of the
Company.

3.

The firms liquidity position: Since the long term

debts are more it may deteriorate the liquidity position
of the firm further.

52

LIMITATIONS

LIMITATIONS OF PROJECT
The study in titled Effect of Capitalisation and Over and Under
Capitalisation has been conducted at Endurance Systems Pvt. Ltd.

53

The researchers have taken 2 years data for the purpose of finding
out position of company while carrying out the study. Following are
various limitations occurred.

Due to the limited time constraint, deep study on this issue was not
possible.

The management authority did not provide confidential data to the

researcher pertaining to the topic.

54

SUGGESTION

SUGGESTION OF PROJECT

There is marginal increase in the amount of sales as

compared to the last year. However increase in the
expenditure is more as compared to the last year. The
reason for this could be the recession effect and

55

because of the recession the sales target could not be

achieved. The expenditure should be maintained.
The company should have a right kind of capital to
operate effectively.
Valuation of a going concern business on the basis that
the operations will continue to yield constant and
regular yield.
The firm should generally used those assets that are
easily convertible into cash at a given point of time to
maintain its liquidity.
The Company financial position should be manage
better.

56

CONCLUSION

The firm is generally insolvent i.e. not in a liquidity position,

its net income is overstated as the sales were high and
besides of keeping the operating cost low, the firm operating
cost is higher than expected.

57

58

BIBLOGRAPHY
&
WEBLOGRAPHY

WEBLOGRAPHY
Accountingformanagement.com/cs/investinglessons/1/
blles3currat.htm
Investopedia.com/study-guide/cfa-exam/level1/assets/cfa1s.asp
Basiccollegeaccounting.com/financial-ratio-proprietaryratio/
Accountingformanagement.com/current_ratio.htm

59

 Bizfinanceabout.com/od/financialratios/ss/overview1liq
uidityanalysis_2.htm

TEXT BOOK REFERRED

Financial Management by R.M.Srivastava

60