EVALUATION AND INFERENCE OF FINANCIAL

PERFORMANCE
PROJECT REPORT

Submitted to the

SCHOOL OF MANAGEMENT
In partial fulfillment of the requirements for the award of
the degree of

MASTER OF BUSINESS ADMINSTRATION

By
ILAKKIYA.I
(Reg.No:3510910264)

Under the guidance of

Ms. Nisha Ashokan

SRM SCHOOL OF MANAGEMENT

SRM UNIVERSITY

KATTANKULATHUR - 603 203

MAY 2011
 Bonafide certificate
Certified that this project report titled “A Study on Evaluation of financial

performance analysis and interpretation” is the Bonafide work of Miss.

Ilakkiya.I, (Reg.no: 3510910264) who carried out the research under my

supervision. Certified further, that to the best of my knowledge the work reported

herein does not from part of any other project report or dissertation on the basis of

which a degree or award was conferred on an earlier occasion on this or any other

candidate.

Submitted for the viva-voce examination held on -----------------------

--------------------------------
-----------------------------
Ms. Nisha Ashokan Dr. JAYSHREE SURESH

(Project Guide) (Dean, MBA)

 ------------------------------------
External Examiner

DECLARATION

I. ILAKKIYA. I,(3510910264) a bonafide student of SRM School of Management, SRM

University, Kattankulathur, hereby declare that the project entitled “EVALUATION
AND INFERENCE OF FINANCIAL PERFORMANCE” submitted in partial fulfillment
for the award of the degree of Master of Business Administration in my original work

Place: Signature

Date: (ILAKKIYA.I)
 ABSTRACT

This study is titled as “EVALUATION AND INFERENCE OF FINANCIAL

PERFORMANCE”. This study was related to the evaluation of the financial
performance of the EVERWIN TEXTILE MILLS PVT LIMITED with reference to
VERVE FINANCIAL SERVICES.

The main objective was to analyze the 4 year financial performance of the
company. The annual report of the company i.e. of financial year 2010-09, 2009-
08, 2008-07 & 2007-06 was retrieved from the company for the purpose of data
analysis. The techniques & tools used for the conduct of the study are Comparative
Statements, Common- Size Statements & Ratio Analysis and Trend Analysis.

The company is the multi- disciplinary consultancy organization. Offering a range of

integrated & innovative & high quality services to various developmental sectors.
 ACKNOWLEDGEMENT

My very special gratitude and heartfelt thanks to our beloved Dr. Jayashree Suresh,
Dean, SRM UNIVERSITY for her blessings and best wishes to carry out my project
work & responsible for molding our thinking to complete this project.

It is my great pleasure to express my sincere gratitude and thanks to my heads of

the department Dr. T. Ramachandran, for his valuable guidance and help.

I am extremely thankful to my project guide Ms. Nisha Ashokan, Department of

management studies for imitating keen interest and giving valuable guidance at
every stage of this project.

I wish to express my sincere thanks to the company guide Miss.S Shyamala Gowri,
who is my external guide for her kind support and guidance to complete my project.

I am also thankful to all the faculty members of the SRM School of Management for
their kind and valuable cooperation during the course of the project. I would also
like to thank my parents, friends and well wishers who encourage me to complete
this project successfully.
 PAGE
CHAPTER CONTENT NO

1 Introduction 1

2 Statement of the problem 23

3 Objectives of the study 24

4 Review of Literature 25

5 Research Methodology 28

6 Limitations of the study 30

7 Company Profile 31

8 Analysis and Interpretation 43

9 Findings 69

10 Suggestions 70

11 Conclusion 71

12 Appendices 72

13 Bibliography 74
 TABLE OF CHARTS

S.NO NAME OF THE CHART PAGE NO

1 Current Ratio 44

2 Liquid Ratio 45

3 Absolute Liquid Ratio 46

4 Debt Equity Ratio 47

5 Proprietory Ratio 48

6 Gross Profit Ratio 49

7 Net Profit Ratio 50

8 Operating Profit Ratio 51

9 Operating Ratio 52

10 Capital Turnover Ratio 53

11 Fixed Asset Turnover Ratio 54

12 Interest Coverage Ratio 55

13 Return on Proprietory Fund 56

14 Net Profit to Total Assets Ratio 57

INTRODUCTION

Every enterprise whether it is big, medium, or small needs finance to carry on its operations and
to achieve the targets. Almost all kind of business activities directly or indirectly involve in
acquisition and use of funds. Without adequate finance, no enterprise can possibly accomplish its
objectives. Financial analysis may be done for a variety of purposes, which may range from a
simple analysis of the short –term liquidity position of the firm to comprehensive assessment of
strengths and weaknesses of the firm in various areas.

According to Metcalf and Titard Financial statement analysis is a process of evaluating the
relationship between component parts of a financial statements to obtaining a better
understanding of a firm.

Financial Statement analysis is a process of selection, relation and evaluation of a set of figures
or facts. Financial statement analysis is defined as the process of identifying financial strengths
and weaknesses of the firm by properly establishing relationship between the items of the
balance sheet and the profit and loss account.

There are various methods or techniques that are used in analyzing financial statements, such as
comparative statements, schedule of changes in working capital, common size percentages, funds
analysis, trend analysis, and ratios analysis.

Financial statements are prepared to meet external reporting obligations and also for decision
making purposes. They play a dominant role in setting the framework of managerial decisions.
But the information provided in the financial statements is not an end in itself as no meaningful
conclusions can be drawn from these statements alone. However, the information provided in the
financial statements is of immense use in making decisions through analysis and Inference of
financial statements.

The following steps are involved in the financial statements analysis:

• Selection of relevant information: It is a simple fact that all the figures or information
given in the financial statements is not useful to all the users.
• Proper arrangement of financial information: This means that current assets may be
so arranged as to find out their capacity to pay short term liabilities.
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OBJECTIVES

• To enable the calculation of not only the present earning capacity of business enterprise
but also to estimate the future earning capacity as well.
• To enable the management to find out the overall as well as department-wise efficiency
of the firm on the basis of available financial information. The management can easily
discover the areas of efficiency or inefficiency.
• To study the solvency of the firm- short and long term- with the help of financial
statement analysis. Short- term solvency position is useful to trade creditors while
debenture holders etc. benefit from the analysis of long- term solvency.
• To make inter- firm comparison. The comparison of two or more firms becomes easy.
• To help in preparing the budgets and analysis of past results in respect of earning and
financial position of the enterprise.
TYPES OF FINANCIAL ANALYSIS

There are two types of financial analysis, namely:

• Based on the persons who are interested in the analysis. Such an analysis is further
classified into two types, namely. External analysis and Internal analysis.
• Based on the method i.e. Horizontal or Dynamic analysis and Vertical or Static analysis.
External analysis: such an analysis of financial statements is made by the persons who are not
directly connected with the business entity and include existing and future investors, credit
agencies, financial editors of newspapers, trade unions etc.. These persons do not have direct
access to the financial records or information of the business entities. They have to depend solely
upon the published financial statements.

Internal analysis: It is made by the insiders of the business enterprises such as the managerial
staff or outside agencies like Govt. regulators e.g., SEBI, RBI etc. and even by courts, who have
full access to the financial records of the business.

Horizontal or dynamic analysis: When financial information is analyzed and reviewed from
year to year, it is known as horizontal or dynamic analysis and is very helpful in comparing and
evaluating the results.

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Vertical or static analysis: In this type, figures of a selected period are taken into account for
analysis and ratios are developed there from. Such analysis is not very useful for comparison as
it is based on figures of one year only.

LIMITATION

Financial statement analysis is subjected to following limitations:

• Window Dressing: It means presentation of unreal position of business enterprise. In

order to present a favorable pictures, incorrect figures as to inventories may be presented
by adopting wrong valuation methods. The depreciation charge may be shown at a lower
figure to inflate the profits.
• Limitations of financial statements: The basis of financial analysis is financial
statements. Comparison of the results of two firms may not be true because financial
statements are affected by accounting principles, personal judgments and use of monetary
items only especially where non- monetary considerations may also be significant such as
efficiency of management, customer care, efficient after- sale service and so on.
• Non- comparable size: It may lead to incorrect results.
• Biasness of financial statement: If it suffers from the biasness or personal judgments of
the analyst i.e. the subjectivity affects the financial statements.
TECHNIQUES AND TOOLS

A number of analytical tool are used in order to simplify the complex or difficult financial
information and to make the financial statements more useful and reliable. Following techniques
are most commonly used for analyzing financial statements:

• Comparative Statements
• Common-size Statements
• Trend Analysis and Ratio Analysis
COMPARATIVE STATEMENT

C Many companies make use of standardized formats in accounting functions that make the
generation of a comparative statement quick and easy.

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The benefits of a comparative statement are varied for a corporation. Because of the uniform
format of the statement, it is a simple process to compare the gross sales of a given product or all
products of the company with the gross sales generated in a previous month, quarter, or year.
Comparing generated revenue from one period to a different period can add another dimension to
analyzing the effectiveness of the sales effort, as the process makes it possible to identify trends
such as a drop in revenue in spite of an increase in units sold.

IMPORTANCE AND USES

The benefits of a comparative statement are varied for a corporation. Because of the uniform
format of the statement, it is a simple process to compare the gross sales of a given product or all
products of the company with the gross sales generated in a previous month, quarter, or year.
Comparing generated revenue from one period to a different period can add another dimension to
analyzing the effectiveness of the sales effort, as the process makes it possible to identify trends
such as a drop in revenue in spite of an increase in units sold. Along with being an excellent way
to broaden the understanding of the success of the sales effort, a comparative statement can also
help address changes in production costs. By comparing line items that catalogue the expense for
raw materials in one quarter with another quarter where the number of units produced is similar
can make it possible to spot trends in expense increases, and thus help isolate the origin of those
increases. This type of data can prove helpful to allowing the company to find raw materials
from another source before the increased price for materials cuts into the overall profitability of
the company.

A comparative statement can be helpful for just about any organization that has to deal with
finances in some manner. Even non-profit organizations can use the comparative statement
method to ascertain trends in annual fund raising efforts. By making use of the comparative
statement for the most recent effort and comparing the figures with those of the previous year’s
event, it is possible to determine where expenses increased or decreased, and provide some
insight in how to plan the following year’s event.

FEATURES OF COMPARITIVE STATEMENTS:-

• A comparative statement adds meaning to the financial data.

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 • It is used to effectively measure the conduct of the business activities.

• Comparative statement analysis is used for intra firm analysis and inters firm analysis.

• A comparative statement analysis indicates change in amount as well as change in

percentage.

• A positive change in amount and percentage indicates an increase and a negative change
in amount and percentage indicates a decrease.

• If the value in the first year is zero then change in percentage cannot be indicated. This is
the limitation of comparative statement analysis. While interpreting the results qualitative
inferences need to be drawn.

• It is a popular tool useful for analysis by the financial analysts.

• A comparative statement analysis cannot be used to compare more than two years
financial data

COMMON SIZE STATEMENT

The common-size statement is a financial document that is often utilized as a quick and easy
reference for the finances of a corporation or business. Unlike balance sheets and other financial
statements, the common-size statement does not reflect exact figures for each line item. Instead,
the structure of the common size statement uses a common base figure, and assigns a percentage
of that figure to each line item or category reflected on the document.

A company may choose to utilize financial statements of this type to present a quick snapshot of
how much of the company’s collected or generated revenue is going toward each operational
function within the organization. The use of a common-size statement can make it possible to
quickly identify areas that may be utilizing more of the operating capital than is practical at the
time, and allow budgetary changes to be implemented to correct the situation.

The common size statement can also be a helpful tool in comparing the financial structures and
operation strategies of two different companies. The use of percentages in the common size

12
statements removes the issue of which company generates more revenue, and brings the focus on
how the revenue is utilized within each of the two businesses. Often, the use of a common-size
statement in this manner can help to identify areas where each company is utilizing resources
efficiently, as well as areas where there is room for improvement.

Common-size statements can be prepared for any review period desired. Companies that choose
to make use of financial statements of this type may choose to utilize this format for quarterly,
semi-annual, or annual reviews. When there is concern about operational costs, the common-size
statement may be prepared on a more frequent basis, such as monthly. Because the common-size
statement is very easy to read and does not necessarily contain information that would be
considered proprietary, the format can often be employed as part of general information that is
released to the public.

FEATURES OF COMMON SIZE STATEMENT

• A common size statement analysis indicates the relation of each component to the whole.
• In case of a Common Size Income statement analysis Net Sales is taken as 100% and in
case of Common Size Balance Sheet analysis total funds available/total capital employed
is considered as 100%.
• It is used for vertical financial analysis and comparison of two business enterprises or two
years financial data.
• Absolute figures from the financial statement are difficult to compare but when converted
and expressed as percentage of net sales in case of income statement and in case of
Balance Sheet as percentage of total net assets or total funds employed it becomes more
meaningful to relate.
• A common size analysis is a type of ratio analysis where in case of income statement
sales is the denominator (base) and in case of Balance Sheet funds employed or total net
assets is the denominator (base) and all items are expressed as a relation to it.
• In case of common size statement analysis the absolute figures are converted to
proportions for the purpose of inter-firm as well as intra-firm analysis

LIMITATIONS
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As with financial statements in general, the Inference of common size statements is subject to
many of the limitations in the accounting data used to construct them. For example:

• Different accounting policies may be used by different firms or within the same firm at
different points in time. Adjustments should be made for such differences.
• Different firms may use different accounting calendars, so the accounting periods may
not be directly comparable.

TREND ANALYSIS

In certain cases, a comparison of financial information of the same company is made to

determine trends or directions of a firm. Trend percentages are used to compare financial
information covering a period of several years. It is known as intra- firm comparison. It is also
called time series analysis. Percents are calculated in the following manner:-

• Selection of number of years to be used for the analysis of financial information.

• The base year is selected. Generally the base year is the earliest year.
• Each item in the base year is assigned the value or index of 100%.
• Each item in other years is expressed as a percentage of the rupee amount in the base
year. In other words, percentage is calculated for each item of subsequent year taking
base year as 100.

FEATURES OF TREND ANALYSIS

• In case of a trend analysis all the given years are arranged in an ascending order.
• The first year is termed as the “Base year” and all figures of the base year are taken as
100%.
• Item in the subsequent years are compared with that of the base year.
• If the percentages in the following years is above 100% it indicates an increase over the
base year and if the percentages are below 100% it indicates a decrease over the base
year.
• A trend analysis gives a better picture of the overall performance of the business.

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 • A trend analysis helps in analyzing the financial performance over a period of time.
• A trend analysis indicates in which direction a business is moving i.e. upward or
downwards.
• A trend analysis facilitates effective comparative study of the financial performance over
a period of time.
• For trend analysis at least three years financial data is essential. Broader the base the
more reliable is the data and analysis.
RATIO ANALYSIS

INTRODUCTION OF RATIO ANALYSIS

The relationship of these two figure expressed mathematically is called a ratio. The ratio
reefers to the numerical or quantities relationship between two variables or times. A ratio is
calculated by dividing one item of the relationship with the other. The ratio analysis is one of the
most useful and common methods of analyzing financial statement. Ratio enables the mass of
data to be summarized and simplified. Ratio analysis is an instrument for diagnosis of the
financial health of an enterprise.

MEANING OF RATIO

A ratio is only a comparison of the numerator with the denominator. The tern ratio reefers to the
numerical or quantitative relationship between two figures and obtained by dividing the former
by the latter.

Ratio analysis is an important and age old technique of financial analysis. The data given
in financial statements ratio are relative form of financial data and very useful techniques to
cheek upon the efficiency of a firm. Some ratio indicates the trend or progress or downfall of the
firm.

IMPORTANCE OF RATIO

Ratio analysis of firm’s financial statement is of interest to a number of parties mainly.

Shareholders, creditor, financial executives etc. shareholders are interested with earning capacity
of the firm: creditors are interested in knowing the ability of firm to meet financial obligation and

15
financial executives are concerned with evolving analytical tools that will measures and compare
costs, efficiency liquidity and profitability with a view to making intelligent decisions.

• Aid to measure general efficiency: Ratios enable the mass of accounting data to be
summarized and simplified
• Aid to measure financial solvency: They point out firm’s liquidity position to meet its
short-term obligation and long-term solvency.
• Aid in forecasting and planning: ratio help to prepare the future plan of action etc.
• Facilitate decision-making: it throws light on the degree of efficiency of the
management and utilization of the assets that is why it is called surveyor of efficiency.
• Aid in corrective action: the highlight the factors associated with successful and
unsuccessful firms.
• Aids in intrude firm comparison: inter firm comparison are facilities. It is an instrument
for diagnosis of financial health of enterprise.
• Evaluation of efficiency: ratio analysis is an effective instrument which, when properly
used is useful to assess important characteristics of business liquidity, solvency,
profitability etc.
• Effective tool: ratio analysis helps in making effective control of the business measuring
performance; control of cost etc. ratio ensures secrecy.
SIGNIFICANCE OF RATIO

Liquidity Position: - The short- term creditors are more interested in the liquidity position of
the firm in the sense that their money would be repaid on the due dates. The ability of the
firm to pay short-term obligations like interest on short- term loans or the principal amount
can be found by computing liquidity ratios.
Long- term solvency: - This is required by long- term creditors, security analysis and the
present and potential shareholders of the company. These persons can know with the help of
capital structure ratios, what sources of long- terms funds are employed, and what is their
relative position, i.e. percentage of various sources of finance. They can also focus on the
earning power of the company in order to find out the interest payment position and also the
repayment of the principal amount.

16
 Operating efficiency: - This aspect of ratio analysis is important for management which can
determine how effectively the assets are being used. Activity ratios are helpful in assessing
the operational efficiency. In fact the solvency of the firm is dependent upon the sales income
generated from the use of various assets. The management can use these ratios with the
standard ratios; by comparing the ratio of the current year with those of the past periods and
by comparing the ratios of the firm with those of others firms in the same industry.
Overall profitability: - Different users of accounting information make use of specific ratios
to meet or satisfy their requirements. But the management is always interested in the overall
profitability and efficiency of the business enterprise.
Trend analysis: - Ratio analysis is important not for the current period but what has
happened in the past. It can be found whether the financial position has been improving or
worsening or has remained constant over the years. This is possible by making use of trend
analysis of ratios for a number of years. Trend analysis will guide the analyst to know
whether the movement is favorable or unfavorable.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis is as already mentioned, a widely used tool of financial analysis. It is because
ratios are simple and easy to understand. But they must be used very carefully. They suffer from
various limitations.

Some of the limitations of ratio analysis are given below:

• Difference in definition: comparisons are made difficult due to difference in definitions

of various financial terms.
• Limitations of according records ratio: Ratio analysis is based on financial statement,
which are themselves subject to limitations.
• Lack of proper standards: it is very difficult to ascertain the standard ratio in order to
make proper comparison. Because it differs from firm to firm, industry to industry.
• Changes in accounting procedure: it different firms for their valuation follow methods
then comparison will practically be of no use.
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 • Limited use of single ratio: a single ratio would not be able to convey anything. It too
many ratios are calculated they are likely to confuse instead of revealing meaningful
conclusions.
• Personal bias: Ratios have to be interpreted and different people may interpret the same
ratio in efferent ways. The analyst has to carry further investigation and exercise. His
judgment in arriving at a correct diagnosis.
TYPES OF RATIO

CURRENT RATIO

Current ratio may be defined as the relationship between current assets

and current liabilities. This ratio is also known as "working capital ratio". It is a
measure of general liquidity and is most widely used to make the analysis for short
term financial position or liquidity of a firm. It is calculated by dividing the total of
the current assets by total of the current liabilities.

Formula:

Current Ratio = Current Assets / Current Liabilities

Components:

The two basic components of this ratio are current assets and current liabilities. Current assets
include cash and those assets which can be easily converted into cash within a short period of
time, generally, one year, such as marketable securities or readily realizable investments, bills
receivables, sundry debtors, (excluding bad debts or provisions), inventories, work in progress,
etc. Prepaid expenses should also be included in current assets because they represent payments
made in advance which will not have to be paid in near future.

Current liabilities are those obligations which are payable within a short period of tie generally
one year and include outstanding expenses, bills payable, sundry creditors, bank overdraft,
accrued expenses, short term advances, income tax payable, dividend payable, etc. However,
sometimes a controversy arises that whether overdraft should be regarded as current liability or
not. Often an arrangement with a bank may be regarded as permanent and therefore, it may be

18
treated as long term liability. At the same time the fact remains that the overdraft facility may be
cancelled at any time. Accordingly, because of this reason and the need for conversion in
interpreting a situation, it seems advisable to include overdrafts in current liabilities.

Significance:

This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety
or cushion available to the creditors. It is an index of the firm’s financial stability. It is also an
index of technical solvency and an index of the strength of working capital.

A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its
current obligations in time and when they become due. On the other hand, a relatively low
current ratio represents that the liquidity position of the firm is not good and the firm shall not be
able to pay its current liabilities in time without facing difficulties. An increase in the current
ratio represents improvement in the liquidity position of the firm while a decrease in the current
ratio represents that there has been deterioration in the liquidity position of the firm. A ratio
equal to or near 2: 1 is considered as a standard or normal or satisfactory. The idea of having
doubled the current assets as compared to current liabilities is to provide for the delays and losses
in the realization of current assets. However, the rule of 2:1 should not be blindly used while
making Inference of the ratio. Firms having less than 2 : 1 ratio may be having a better liquidity
than even firms having more than 2 : 1 ratio. This is because of the reason that current
ratio measures the quantity of the current assets and not the quality of the current assets. If a
firm's current assets include debtors which are not recoverable or stocks which are slow-moving
or obsolete, the current ratio may be high but it does not represent a good liquidity position.

Limitations of Current Ratio:

This ratio is measure of liquidity and should be used very carefully because it suffers from many
limitations. It is, therefore, suggested that it should not be used as the sole index of short term
solvency.

• It is crude ratio because it measures only the quantity and not the quality of the current
assets.
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 • Even if the ratio is favorable, the firm may be in financial trouble, because of more stock
and work in process which is not easily convertible into cash, and, therefore firm may
have less cash to pay off current liabilities.
• Valuation of current assets and window dressing is another problem. This ratio can be
very easily manipulated by overvaluing the current assets. An equal increase in both
current assets and current liabilities would decrease the ratio and similarly equal decrease
in current assets and current liabilities would increase current ratio.

LIQUID RATIO

Liquid ratio is also termed as "Liquidity Ratio", "Acid Test Ratio" or "Quick Ratio". It is the
ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay
its short term obligations as and when they become due.

Components:

The two components of liquid ratio (acid test ratio or quick ratio) are liquid assets and liquid
liabilities. Liquid assets normally include cash, bank, sundry debtors, bills receivable and
marketable securities or temporary investments. In other words they are current assets minus
inventories (stock) and prepaid expenses. Inventories cannot be termed as liquid assets because it
cannot be converted into cash immediately without a loss of value. In the same
manner, prepaid expenses are also excluded from the list of liquid assets because they are not
expected to be converted into cash. Similarly, Liquid liabilities means current liabilities i.e.,
sundry creditors, bills payable, outstanding expenses, short term advances, income tax payable,
dividends payable, and bank overdraft (only if payable on demand). Some time bank overdraft is
not included in current liabilities, on the argument that bank overdraft is generally permanent
way of financing and is not subject to be called on demand. In such cases overdraft will be
excluded from current liabilities.

Formula of Liquidity Ratio / Acid Test Ratio:

Liquid Ratio = Liquid Assets / Current Liabilities

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Significance:

The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It
measures the firm's capacity to pay off current obligations immediately and is more rigorous test
of liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Liquid
ratio is more rigorous test of liquidity than the current ratio because it eliminates inventories
and prepaid expenses as a part of current assets. Usually a high liquid ratio an indication that the
firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other
hand a low liquidity ratio represents that the firm's liquidity position is not good. As a
convention, generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory.

Although liquidity ratio is more rigorous test of liquidity than the current ratio , yet it should be
used cautiously and 1:1 standard should not be used blindly. A liquid ratio of 1:1 does not
necessarily mean satisfactory liquidity position of the firm if all the debtors cannot be realized
and cash is needed immediately to meet the current obligations. In the same manner, a low liquid
ratio does not necessarily mean a bad liquidity position as inventories are not absolutely non-
liquid. Hence, a firm having a high liquidity ratio may not have a satisfactory liquidity position if
it has slow-paying debtors. On the other hand, A firm having a low liquid ratio may have a good
liquidity position if it has a fast moving inventories. Though this ratio is definitely an
improvement over current ratio, the Inference of this ratio also suffers from the same limitations
as of current ratio.

ABSOLUTE LIQUID RATIO

Absolute liquidity is represented by cash and near cash items. It is a ratio of absolute liquid
assets to current liabilities. In the computation of this ratio only the absolute liquid assets are
compared with the liquid liabilities. The absolute liquid assets are cash, bank and marketable
securities. It is to be observed that receivables (debtors/accounts receivables and bills
receivables) are eliminated from the list of liquid assets in order to obtain absolute4 liquid assets
since there may be some doubt in their liquidity.

Formula of Absolute Liquid Ratio:

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 Absolute Liquid Ratio = Absolute Liquid Assets / Current Assets

This ratio gains much significance only when it is used in conjunction with the current and liquid
ratios. A standard of 0.5: 1 absolute liquidity ratio is considered an acceptable norm. That is,
from the point of view of absolute liquidity, fifty cents worth of absolute liquid assets are
considered sufficient for one dollar worth of liquid liabilities. However, this ratio is not in much
use.

GROSS PROFIT RATIO

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as apercentage.
It expresses the relationship between gross profit and sales.

Components:

The basic components for the calculation of gross profit ratio are gross profit and net sales. Net
sales mean that sale minus sales returns. Gross profit would be the difference between net sales
and cost of goods sold. Cost of goods sold in the case of a trading concern would be equal to
opening stock plus purchases, minus closing stock plus all direct expenses relating to purchases.
In the case of manufacturing concern, it would be equal to the sum of the cost of raw materials,
wages, direct expenses and all manufacturing expenses. In other words, generally the expenses
charged to profit and loss account or operating expenses are excluded from
the calculation of cost of goods sold.

Formula:

Gross Profit Ratio = (Gross profit / Net sales) × 100]

Significance:

Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be
reduced without incurring losses on operations. It reflects efficiency with which a firm produces
its products. As the gross profit is found by deducting cost of goods sold from net sales, higher
the gross profit better it is. There is no standard GP ratio for evaluation. It may vary from
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business to business. However, the gross profit earned should be sufficient to recover all
operating expenses and to build up reserves after paying all fixed interest charges and dividends.

Causes/reasons of increase or decrease in gross profit ratio:

• It should be observed that an increase in the GP ratio may be due to the following factors.
• Increase in the selling price of goods sold without any corresponding increase in the cost
of goods sold.
• Decrease in cost of goods sold without corresponding decrease in selling price. Omission
of purchase invoices from accounts.
• Under valuation of opening stock or overvaluation of closing stock.

On the other hand, the decrease in the gross profit ratio may be due to the following factors.

• Decrease in the selling price of goods, without corresponding decrease in the cost of
goods sold.
• Increase in the cost of goods sold without any increase in selling price.
• Unfavorable purchasing or markup policies.
• Inability of management to improve sales volume, or omission of sales. Over valuation of
opening stock or under valuation of closing stock

NET PROFIT RATIO

Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage.

Components of net profit ratio:

The two basic components of the net profit ratio are the net profit and sales. The net profits are
obtained after deducting income-tax and, generally, non-operating expenses and incomes are
excluded from the net profits for calculating this ratio. Thus, incomes such as interest on
investments outside the business, profit on sales of fixed assets and losses on sales of fixed
assets, etc are excluded.

Formula:
23
 Net Profit Ratio = (Net profit / Net sales) × 100

Significance:

NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The
ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a
satisfactory return on its investment.

This ratio also indicates the firm's capacity to face adverse economic conditions such as price
competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But while
interpreting the ratio it should be kept in mind that the performance of profits also be seen in
relation to investments or capital of the firm and not only in relation to sales.

OPERATING RATIO

Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales. It is
generally expressed in percentage.

Operating ratio measures the cost of operations per dollar of sales. This is closely related to the
ratio of operating profit to net sales.

Components:

The two basic components for the calculation of operating ratio are operating cost (cost of
goods sold plus operating expenses) and net sales. Operating expenses normally include (a)
administrative and office expenses and (b) selling and distribution expenses. Financial charges
such as interest, provision for taxation etc. are generally excluded from operating expenses.

Formula of operating ratio:

Operating Ratio = [(Cost of goods sold + Operating expenses) / Net sales] × 100

Significance:
24
Operating ratio shows the operational efficiency of the business. Lower operating ratio shows
higher operating profit and vice versa. An operating ratio ranging between 75% and 80% is
generally considered as standard for manufacturing concerns. This ratio is considered to be a
yardstick of operating efficiency but it should be used cautiously because it may be affected by a
number of uncontrollable factors beyond the control of the firm. Moreover, in some firms, non-
operating expenses from a substantial part of the total expenses and in such cases operating ratio
may give misleading results.

FIXED ASSETS TURNOVER RATIO

Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measures
the efficiency and profit earning capacity of the concern.

Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-
utilization of fixed assets. The ratio is calculated by using following formula:

Formula of Fixed Assets Turnover Ratio:

Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets

INTEREST COVERAGE RATIO

Interest coverage ratio is also known as debt service ratio or debt service coverage ratio.

This ratio relates the fixed interest charges to the income earned by the business. It indicates
whether the business has earned sufficient profits to pay periodically the interest charges. It is
calculated by using the following formula.

Formula of Debt Service Ratio or interest coverage ratio:

Interest Coverage Ratio = Net Profit before Interest and Tax / Fixed Interest Charges

Significance of debt service ratio:

25
The interest coverage ratio is very important from the lender's point of view. It indicates the
number of times interest is covered by the profits available to pay interest charges.

It is an index of the financial strength of an enterprise. A high debt service ratio or interest
coverage ratio assures the lenders a regular and periodical interest income. But the weakness of
the ratio may create some problems to the financial manager in raising funds from debt sources.

OPERATING PROFIT RATIO

Operating Profit Means profit earned by the concern from its business operation and not
from the other sources. While calculating the net profit of the concern all incomes either they are
not part of the business operation like rent from tenants, interest on investment etc.. are added
and all non-operating expenses are deducted. So, while calculating operating profit these all are
ignored and the concern comes to know about its business income from its business operations.

Operating Profit Ratio shows the relationship between operating profit and net sales.

Formula:

Operating Profit Ratio = Operating Profit / Net sales *100

DEBTEQUTY RATIO

Debt Equity ratio indicates the relationship between the external equities or outsiders funds and
the internal equities or shareholders funds.

It is also known as external internal equity ratio. It is determined to ascertain soundness of the
long term financial policies of the company.

Formula of Debt to Equity Ratio:

[Debt Equity Ratio = External Equities / Internal Equities]

Or

[Outsiders funds / Shareholders funds]

26
Components:

The two basic components of debt to equity ratio are outsider’s funds i.e. external equities and
share holders’ funds, i.e., internal equities. The outsider’s funds include all debts / liabilities to
outsiders, whether long term or short term or whether in the form of debentures, bonds,
mortgages or bills. The shareholders funds consist of equity share capital, preference share
capital, capital reserves, revenue reserves, and reserves representing accumulated profits and
surpluses like reserves for contingencies, sinking funds, etc. The accumulated losses and
deferred expenses, if any, should be deducted from the total to find out shareholder's funds

Some writers are of the view that current liabilities do not reflect long term commitments and
they should be excluded from outsider's funds. There are some other writers who suggest that
current liabilities should also be included in the outsider's funds to calculate debt equity ratiofor
the reason that like long term borrowings, current liabilities also represents firm's obligations to
outsiders and they are an important determinant of risk. However, we advise that
to calculate debt equity ratio current liabilities should be included in outsider's funds. The ratio
calculated on the basis outsider's funds excluding liabilities may be termed as ratio of long-term
debt to share holders funds.

PROPRIETARY RATIO

This is a variant of the debt-to-equity ratio. It is also known as equity ratio or net worth to total
assets ratio.

This ratio relates the shareholder's funds to total assets. Proprietary / Equity ratio indicates the
long-term or future solvency position of the business.

Formula of Proprietary/Equity Ratio:

Proprietary or Equity Ratio = Shareholders funds / Total Assets

Components:

27
Shareholder's funds include equity share capital plus all reserves and surpluses items. Total
assets include all assets, including Goodwill. Some authors exclude goodwill from total assets. In
that case the total shareholder's funds are to be divided by total tangible assets. As the total assets
are always equal to total liabilities, the total liabilities, may also be used as the denominator in
the above formula.

RETURN ON SHAREHOLDERS INVESTMENT OR NET WORTH RATIO

It is the ratio of net profit to share holder's investment. It is the relationship between net
profit (after interest and tax) and share holder's/proprietor's fund.

This ratio establishes the profitability from the share holders' point of view. The ratio is generally
calculated in percentage.

Components:

The two basic components of this ratio are net profits and shareholder's funds. Shareholder's
funds include equity share capital, (preference share capital) and all reserves and surplus
belonging to shareholders. Net profit means net income after payment of interest and income tax
because those will be the only profits available for share holders.

Formula of return on shareholder's investment or net worth Ratio:

[Return on share holder's investment = {Net profit (after interest and tax) / Share holder's fund}
× 100]

CAPITAL TURNOVER RATIO

Managerial Efficiency is also calculated by establishing the relationship between cost of

sales or sales with the amount of capital invested in the business. Capital turnover ratio is
calculated with the help of the following details

Capital Turnover Ratio= Cost of sales/Capital employed

28
 STATEMENT OF THE PROBLEM

The study is an identification and analysis of the financial strengths and weaknesses of
EVERWIN TEXTILE. A financial Analysis tool enables the business owner/manager to spot
trends in a business and to compare its performance and condition

29
OBJECTIVES OF THE PROJECT

• To study all the financial activities of the company on daily basis.

• To collect the information related to the financial conditions of the company

• To collect the financial statements of the company i.e. Balance Sheet & Profit & Loss
Account.
• To record the necessary information of financial statement for further analysis.
• To summarize the financial statement carefully to acquire the reliable & accurate results
from them.
• To analyze the results of financial statement analysis for better understanding.
• To interpret the result for better understanding & explaining the analyzed results in less
complex manner.

30
 REVIEW OF LITERATURE

A perusal of research studies in finance projects reveals that the topic of financial
performance and analysis is of major interest to finance students over the last decades the topic
has been researched by a good number of management students. In this chapter, the researcher
briefly brings to light some of the selected studies on the topic.

K.Srinivas, in his research on “A study on financial analysis of the performance of

Hindustan Teleprinter’s Limited.,” The study revealed that the financial performance of the
company with the help of fund flow analysis, trend analysis, common-size analysis, comparative
financial statement and ratio analysis, comparative financial statement and ratio analysis. His
study suggests a very high quantum of liquid cash in the company.

Prabu, in his research on “A study on the Financial Performance of a Sick Unit

Dharmapuri District Co-operative Spinning Mills Ltd.,” reveals both material and operational
costs were very high. The accumulated losses were also very high.

Saba Tilak, in his study on “A Study on Financial Planning and Financial Performance
Analysis in Madras Refineries Limited.,” the study revealed that the financial position as well as
financial performance of the company was good but could be improved strengthened further by
consciously identifying and cultivating new innovative techniques and methods in financial
management for better management of time as fund.

31
 Sathish Kumar, in his analyzed “A Study on Financial Performance of Associated
Cement Companies Limited.,” and concludes that the company has been better position in the
past five years.

R.Dadraj, in his research “A Study on Measure Technical Efficiency of the Cement

Industry Limited.,” his result suggest that efficiency is time decreasing and ownership type
affects the efficiency of cement industry.

Mirembe Deborah, in his study on “A Study on Cause-Effect Analysis in the Financial

Trends of Anglo French Textile Limited.,” Pondicherry The study revealed that to determine the
trend in the financial performance of the materials in the past ten years. To analyze the financial
position and the working capital management influence on the profitability of the company. His
result suggests that a declining trend in the inventory turnover. The profitability of the firm kept
on worsening during the period under study, indicating the inability for the firm to make any
profits or to produce at a relatively lower cost.

M.Sameti his study “A Study on measures the efficiency of cement manufactures of

Public and Private Sector Companies has experienced the highest productivity level compared
with other sectors.

P.Sathiskumar in his study “A Study on Impact of Working Capital on the Profitability

with Special Reference to Trichy Steel Rolling Mills Limited.,”. The study revealed that the
inventory turnover ratio is said to be satisfactory but the company should try to improve it which
gives the optimum utilization of resources that results in more production which may result in
the reduction of cost and increase in the profit.

S.Raja Thilagar in his study “A Study on Impact of Working Capital on the Productivity
Performance of Madras Cements Limited.,” the study has made the investigator learn as
32
important thing i.e., the productivity of the employees has a direct bearing at the sales area. The
productivity, if increased makes the company perform well. The Madras Cements has been one
of the successful companies in this regards.

33
RESEARCH METHODOLOGY

Research methodology in common language is the science of collecting,

identifying and presenting facts in such a way that it leads to unearthing some truths are angles
of reality.

RESEARCH DESIGN

Descriptive research is used in the study because it will ensure the minimization of bias
and maximization of reliability of data collected. The researcher had to use fact and information
already available through working statements of earlier years and analyze these to make critical
evaluation of the available material. Hence, by making the type of the research conducted to be
both descriptive and analytical in nature.

From the study, the types of data to be collected and the procedure to be used for this
purpose were decided.

PERIOD OF STUDY

The period of the study is 2 months.

METHOD OF DATA COLLECTION

TYPES OF DATA

There are two types of data

• Primary data - The primary data are those which are collected afresh and for the first
time, and thus happens to be original in character.

• Secondary data – The secondary data are those which have already been collected by
someone else and which have already been passed through the statistical process.

SOURCE OF DATA

The research is primarily based on secondary data, with addition information gathered
from the finance department. The main sources are company’s four years annual reports and
schedules.
34
• Annual reports of the company

• Financial statements and

• Published reports

35
LIMITATIONS OF THE STUDY

The following are the various aspects involved in the analysis of the study.

• Time is the major constraint in the study within the stipulated period allowed

• The study in limited 4 years performance of the company.

• The data used in this study have been taken from published annual report only.

• This study in conducted within a short period. During the limited period the study may
not be retailed, fully fledged and utilization in all aspects.

• Financial accounting does not take into account the price level changes.

36
COMPANY PROFILE

Verve is a leader in textile consultancy and has a deep expertise in a wide array of textile specific
business challenges. Each year Verve syndicates over 500 crores for the textile industry to fund
new project, modernization and expansion of textile mills. Our expertise and unique positioning
allows us to continually suggest and implement best practices, giving our clients an unfair
advantage in the marketplace.

Dedicated solely to the textile industry, Verve has an experienced team that includes Chartered
Accountants, former senior executives from top banks, senior consultants from top law firms and
experts with specific functional background in textile. Our deep understanding of the textile
industry allows us to consistently challenge convention and deliver more creative solutions that
yield tangible financial and operation benefits.

MISSION

To promote and strengthen Small and Medium Enterprises (SMEs)by helping them become
more organized in the way they do business.

VISION

Verve Financial will be the most preferred financial services company for Small and Medium
Enterprises (SMEs) by continuously helping businesses we work with develop both operationally
and financially.

COMMIMENT TO EMPLOYEES

We believe our employees are our greatest assets and we endeavor to create a diverse workforce
which enjoys great benefits and an excellent opportunity for growth.

Diversity: We believe employees from a wide variety of backgrounds, with a variety of ideas
and perspectives provide a key competitive advantage for our firm and create a unique value for
our client.

37
Professional Development: Verve offers its employees a broad spectrum of training programs,
skill building exercises and the opportunity to interact with a variety of clients.

Benefits: Verve offers a competitive compensation package to make our employees consider
Verve a viable long-term career option. In addition to a great compensation package, we strive to
make work fun and find a balance between personal and professional lives.

CORE VALUES

Quality: We strive to continuously raise the bar and perform quality work.
Alacrity: We show passion and optimism in all things we do and work to find opportunities in
every problem.
Reliability: We act with honesty, integrity and fairness as we work to serve our clients and
deliver on all promises we make.
Innovation: We continuously look for innovation to provide a superior service to our clients,
develop the talents of our employees and earn the admiration of all those associated with Verve

SERVICES OFFERED BY VERVE

• Capital

• Advisory

• Taxation

• Corporate

• Risk Management

• Technology

• Realty

CAPITAL SERVICES

38
Verve’s Capital Services team has extensive experience in sourcing capital for new project,
capacity expansion, corporate restructuring and insolvency turn-around through refinancing,
recapitalizations, debt renegotiations and merger & acquisition transactions.

Verve’s highly successful track record and established position as the premier capital services
firm for the textile industry serves as the base of our expansion into other industries, including:

• Aviation

• Health Care

• Retail

• Construction

• Hospitality

• Technology

• Media

• Timber

• Energy

DEBT SYNDICATION

The structure and availability of debt to a company is the key for operational efficiency and
achieving sustained growth. Our experience with capital structuring and debt syndication allows
us to assess the client’s capital structuring and market their proposal as a winning proposition to
raise capital from domestic and international banks or large financial institutions. Some of the
financial products that we structure based on the clients requirements include:

• Term Loan

• Working Capital Loan

• Pledge Loan

39
 • Corporate Loan

• Takeover / Enhancement

• Letter of credit and Mortgage Loan

EQUITY SYNDICATION

Equity can help accelerate growth, facilitate significant improvement in efficiency through
economies of scale and give companies a global footprint. Our team of professionals can
leverage our expertise and work closely with investors and various service providers to achieve
the client’s requirements. Verve offers the following solutions for clients seeking equity capital:

• Initial Public Offering

• Private Placement

• Qualified Institutional Placement

• Right Issue

• Private Placement

• Follow-on Public Offering

• Buyback

VENTURE CAPITAL

For Entrepreneurs and SMEs finding the capital required to start the business is sometimes one
of the biggest hurdles in turning their dream into a reality. Our team of professionals can help
talented entrepreneurs and companies in their quest by helping them create a financially viable
business plan, meet Venture Capital or Angel Investment firms and guide them through the
process to securing the required investment. The following are our services relating to Venture
Capital:

• Business Project Formulation

• Business Project Evaluation

40
 • Venture Capital Advisory

• Angel Investor Advisory

ADVISORY

Verve Financial Services provides a whole range of Advisory Services such as Credit Rating
Advisory, Strategic and Tactical Planning, Financial Engineering, Financial Planning, and
CapEx Planning to name a few. Whether you are in a strategic M&A, resolving a dispute, or
restructuring your business to volatile market conditions, or you are faced with critical business
decision, Verve Financial Services has what it takes to deliver specialized business solutions for
unique business situations. Our advisory services spans across various industries and our
professionals have acquired rich experience from hundreds of transactions that we have
successfully undertaken so far. Verve understands that in today’s volatile markets, customary
due diligence may not be enough and the higher risks that financial markets throw up every now
and then, require a highly disciplined approach, which Verve can help its clients to achieve.

STRATEGIC AND TACTIAL PLANNING

Identifying strategic shifts and positioning our clients in anticipation of several possible
outcomes is the strength of our strategic and tactical planning service. Our Strategic & Tactical
planning team will develop a top-down or bottom-up comprehensive plan for achieving the
strategic goals of your organization. Our Strategic & Tactical Planning engagements may
include:

Competitive Analysis Industry Benchmarking Process Re-Engineering

SWOT Analysis Outcome Assessments Resource Management

FINANCIAL ENGINEERING

In today's complex environment, transactions affect a number of areas from tax to the Company's
credit rating. Further, the fast changing market and regulatory conditions make it difficult for the
entrepreneur/manager to manage all aspects effectively and necessitates the need for experts. We
understand the financial aspects of transactions and our team can help assess the effects of
41
transactions throughout the transactions life cycle.

Whether your objectives are to accelerate growth, improve credit rating, expansion or a new
project, our team can help you achieve your objectives by making the best decisions at every
critical point. The following is our Financial Engineering portfolio:

Transaction Advisory

Capital Expenditure Planning

Financial Statement Advisory Financial Controls Evaluation

CREDIT RATING

The Basel II guidelines, the recommendatory framework for banking supervision require banks
to provide capital on the credit exposure as per credit ratings assigned by approved external
credit assessment institutions. The Basel II norms came into effect from March 31, 2008 and a
credit rating is now often a prerequisite for a loan sanction or for renewal of working capital
facilities. Our team of experienced professionals can leverage their experience and network with
external rating agencies to facilitate and advice companies on the process of obtaining an
appropriate external rating. Our advisory services relating to credit rating are based on the
following offerings:

Bank Loan Ratings Bond/Long-term Rating

SME Ratings Real Estate Rating

MERGER AND ACQUISITION ADVISORY

42
With experience in mergers, acquisitions and turn-arounds in the textile industry, Verve's team of
professionals can provide expert opinion regarding mergers, acquisitions, strategic partnerships,
divestitures and joint ventures. The following is our Merger & Acquisition advisory portfolio:

Due Diligence

Synergy Analysis Valuation Analysis

Reorganization Target Evaluation Negotiation

TAXATION SERVICES

Verve's tax specialist’s technical know-how and personal commitment to meet customers’ needs
will help you and your organization achieve the set commercial objectives. What further
strengthens our position as a competent tax advisor is our unique attribute of being responsive to
the customer's needs and wants, our ability to bring about the positive change, and our repute for
maintaining quality and transparency in everything that we do.

• Individual

• Business

• Tax Exempt Organization

INDIVIDUAL

Tax planning for individuals is an important aspect of family wealth and retirement planning. A
person's tax situation is influenced each year due to job changes, income fluctuation, sale and
purchase of property, asset creation, loans, marriage, child birth or even winning the lottery.
Transactions an individual undertakes during the year can have a major influence on a person’s
tax situation and can even make a person owing additional tax money at the end of the
assessment year. Therefore, it is important to evaluate a person's tax situation continuously
throughout the year and take corrective actions, if necessary. At Verve our tax advisors will plan

43
and monitor your tax strategy based on where you are today and where you plan to be in the
future. By understanding your short-term and long-term goals and being aware of major events in
your life we can work with you to design tax strategies that maximize your tax benefits.
The following are services we provide for individuals:
NRI Tax Planning &
Tax Advisory Tax Filing
Compliance

Major Transaction/Event
Retirement Planning Personal Financial Planning
Advisory

BUSINESS

Due to growing tax laws and regulations, tax planning may seem complex and might not seem
like the most exciting part of running a business. But down the road when it saves a lot of
money, the payoff can be exhilarating. Business tax planning is an important exercise each year
for all businesses and planning ahead can make a significant difference while filing the tax
return. At Verve we believe each business is unique and each business needs a unique tax plan to
help achieve its business objectives. Our tax specialists are experienced in working with SME’s,
Mid-Corporate and Corporate across different sectors and can help design your organization’s
tax planning and compliance procedures that are in sync with the commercial objectives of your
business.

Business Structuring Tax returns preparation Transaction Consulting

Legislation Impact Analysis Financial Statement Advisory Accounts Finalization

TAX-EXEMPT ORGANZATION

The tax rules and regulations concerning Non-profit organizations are as diverse and complex as
rules and regulations concerning businesses and individuals. Even though most tax exempt
organizations are exempt from income tax, the organizations are still required to complete an
income tax return each year and report the sources of revenue and expenses. Further, tax exempt
44
organizations are threatened by steep penalties for non-compliance with tax laws thus requiring
an advisory with comprehensive knowledge of tax rules and regulations pertaining to tax-exempt
organizations. The following are services offered for Tax-Exempt organizations.

Tax Compliance

80 G Application 35 AC Application

CORPORATE SERVICES

Our Corporate Services team can consolidate certain enterprise-wide activities and provide a
specialized service based on knowledge, experience and best practices. Processes involving
government agencies can sometimes be cumbersome and require strong liaison with the
authorities to streamline and finish the process. Our Corporate Service team can leverage
experience and use our network to help with matters relating to Statutory Certifications,
Registrar of Companies, Central Government Approval, SEBI Approval, ROC Approval and
other processes involving the government.

COMPANY FILING

Verve’s Corporate Services team can help with company formation procedures by providing a
fast and professional service. Verve registers Private Companies, Public Companies and Limited
Liability Partnerships (LLPs) to help Entrepreneurs and SMEs take an important business step
with confidence. In addition, to company registration, Verve provides a range of services to
complete your company formation such as:

Company Registration Account Openings Service Tax Registration

Import-Export Code VAT & CST Registration Trademark/Copyright filing

COMPANY REPORT

45
Information about private companies are often required by bankers, customers, vendors and
third-parties for various processes. Verve’s Corporate Services team can provide Search Reports
and Company Reports that provide information about a company’s financials, Directors, share
capital, allotment of shares, charge holders and charge modification. The following are reports
our Corporate Services team can provide:

• Search Report

• Company Report and Company Research Report

PAYROLL MANAGEMENT

To succeed in today’s competitive markets with huge demands and lean profits, business’ must
find ways to improve strategic core functions and simplify the working environment by
outsourcing non-strategic core activities. Verve can help companies of all size outsource their
monthly payroll processing, reimbursement processing and statutory compliances. Through our
powerful self-service, employees can better manage their payrolls. Further, through Verve’s
futuristic payroll services employees have access to a complete view of their financial scenario
and tools that offer guided support to address their needs based on individual situation.

RISK MANAGEMENT

To mitigate risks, improve internal controls and provide to management accurate and timely
information relating to cash transactions, banking transaction, receivable/payable, inventory and
fixed assets, Verve Financial provides Risk Management services for the company’s
management. Verve’s Risk Management Service uses the “STALL” framework, a combination
of structuring internal control, Training personnel, Analyzing transactions, Learning and
Adapting, and Listening, to eliminate risks, improve internal control and help management
manage the business to its best. The “STALL” framework is implemented through risk
assessment models, questionnaires, experienced professionals and innovate concepts.

CASH RISK MANANGEMENT

Most companies transact a significant amount in cash and therefore it is vital to continually
monitor cash and proactively work to deter fraud. Cash is the most targeted asset by fraudsters

46
and nearly 87.7% of all asset misappropriations involve cash. Verve’s Cash Risk Management
service will use the “STALL” Framework and analyze all cash transactions continually
throughout the year to improve internal controls, eliminate risks and improve profitability.

BANKING RISK MANAGEMENT

Banking transactions are often complex and the volume of cash transacted through banks
requires continuous monitoring from management to ensure the business stays successful.
Verve’s Banking Risk Assessment service will continually analyze all bank transactions,
improve internal controls, deter fraud/error involving bank cheques, wire transfers, inaccurate
interest computation, etc., and provide management with a summarized report on their banking
transactions.

RECEIVABLES/PAYABLES MANAGEMENT

Transacting with third parties introduces a new set of threats and opportunities to the company
and requires proactive risk monitoring to ensure profitability. Companies all over the world lose
a significant amount of their profits to bad debts and penal fees due to poor receivables/payables
management. Verve’s Receivables/Payables Risk Management Service will continually monitor
the company’s receivables/payables transactions to deter fraud, improve internal controls and
optimize working capital management to boost profitability.

INVENTORY RISK MANAGEMENT

Most companies hold a significant amount of their assets as inventory in a distributed way at
multiple locations. The nature of inventory leads to unique threats such as shrinkage, theft,
obsolesces and wastage. Verve’s Inventory Risk Management service has the capability to
monitor inventory at multiple locations and provide to management inventory risk management
reports continually throughout the year with key information such as inventory risk score,
inventory level, inventory wastage, inventory theft, etc., to help management take key decisions
relating to inventory with accurate and timely information.

FIXED ASSET RISK MANAGEMENT

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Continuous investment in fixed asset is often necessary to grow the revenue of a company and
significant investment in fixed assets could lead to new challenges in managing and tracking the
fixed assets. Verve’s Fixed Assets Risk Management service can help management keep track of
the usage, condition and location of their fixed assets to manage the assets optimally

TECHNOLOGY SERVICES

Verve’s objective with regards to technology services is to leverage our business expertise and
help our customers achieve operational excellence. Verve offers access to cutting-edge
technologies through strategic partnerships and alliances that are industry-specific. With our
Integrated Solutions methodology we dramatically reduce the time required to execute your IT
strategy and help you become profitable. At Verve, we consider a company’s technology
infrastructure to be a set of applications that build customer and shareholder value by enabling
and optimizing enterprise and inter-enterprise operational and financial information. For us it is
seamless integration of all the information flowing through a company – financial and
accounting, human resource information, supply chain information, and customer information.

EVERWIN TEXTILES PROFILE

Textile
A Latin word, originated from texere, it means "to weave". A textile was originally a woven
fabric, but the terms textile and the plural textiles are now also applied to fibers, filaments and
yarns. Natural and manufactured, and most products for which these are a principal raw material.

Textile also refers to the yarns, threads and wools that can be spun, woven, tufted, tied and
otherwise used to manufacture cloth. The production of textiles is an ancient art, whose speed
and scale of production has been altered almost beyond recognition by mass-production and the
introduction of modern manufacturing techniques. An ancient Roman weaver would have no
problem recognizing a plain weave, twill, or satin.

This definition involves, for example. Fiber-based products in the following categories:
threads, cords, ropes and braids; woven, knitted and nonwoven fabrics, lace, nets, and
embroidery; hosiery, knitwear and made-up apparel; household textiles, soft furnishings and

48
upholstery; carpets and other floor coverings; technical, industrial and engineering textiles,
including geotextiles and medical textiles.

Descriptive of textiles as defined above and of the raw materials, processes, machinery,
buildings, craft, technology, personnel used in, and the organisations and activities connected
with, their manufacture.

49
DATA ANALYSIS AND INTERPRETATION

In order to extract meaningful information from the data collected, this data analysis
and Inference is carried out. The data is first edited, coded, and tabulated for the purpose of
analyzing them. The editing, coding, and tabulating is a must when the interviewer has gathered
a huge amount of data concerning.

The analysis is basically aimed at giving inferences of association or difference between

the various variables present in research. The analysis is conducted by using techniques of
financial statement analysis i.e. Comparative Statements, Common- Size Statements, Ratio
Analysis, & Simple Statistical Tools.

Finally, analysis is performed on the date that is gathered. The conclusion, summary and
recommendations of research are based on the analysis and inference drawn.

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 RATIO ANALYSIS OF EVERWIN TEXTILES

CURRENT RATIO

The ability of a company to meet its short-term commitment is normally assessed by

comparing current assets with current liabilities. The current ratio establishes the relationship
between the current assets and the current liabilities. The ideal ratio is 2:1.

Current assets

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

Curent liabilities

CURRENT RATIO
Year Current Assets Current Liabilities Current Ratio
2006-07 1888.6 1295.16 1.46
2007-08 2327.69 1639.27 1.42
2008-09 2589.9 2040.55 1.27
2009-10 3092.25 2287.23 1.35

Inference: Current ratio of the company is not satisfactory because the ratios for four years are
below the standard level 2:1.

LIQUID RATIO:
51
This ratio is used to assess the firm’s short term liquidity. The relationship of liquid assets to
current liabilities is known as liquid ratio. It is otherwise called as Quick ratio or Acid Test
ratio. The ratio is calculated as:

Liquid Assets

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

Current liabilities

Liquid assets mean current assets less stock and prepaid expenses.

LIQUID RATIO
Year Liquid Assets Current Liabilities Liquid Ratio
2006-07 701.76 1295.16 0.54
2007-08 606.98 1639.27 0.37
2008-09 749.09 2040.55 0.37
2009-10 692.07 2287.23 0.3

Inference: Acid test ratio is not more than the normal standard of 1:1. Liquid assets are not quite
sufficient to cover the current liabilities.

52
ABSOLUTE LIQUID RATIO

It is a modified form of liquid ratio. The relationship of absolute liquid assets to liquid liabilities
is known as absolute liquid ratio. This ratio is also called as ‘Super Quick Ratio’. The ratio is
calculated as:

Absolute Liquid Assets

Absolute Liquid Ratio = ———————–——

Liquid Liabilities

Absolute liquid assets mean cash, bank and short term investments. Liquid liabilities mean
current liabilities less bank overdraft.

ABSOLUTE LIQUID RATIO

Year Absolute Liquid Assets Liquid Liabilities Absolute liquid Ratio
2006-07 22.62 1295.16 0.02
2007-08 3.4 1639.27 0.00
2008-09 5.93 2040.55 0.00
2009-10 24.08 2287.23 0.01

Inference: Here the absolute liquid ratio is less than the 0.5:1. The company should increase the
absolute liquid assets.

DEBT EQUITY RATIO:

53
This ratio helps to ascertain the soundness of the long term financial position of the concern. It
indicates the proportion between total long term debt and shareholders’ funds. This also indicates
the extent to which the firm depends upon outsiders for its existence. The ratio is calculated as:

Total long term Debt

Debt-Equity Ratio = ————————

Shareholders’ funds

Total long term debt includes Debentures, long term loans from banks and financial
institutions. Shareholders’ funds includes Equity share capital, Preference share capital,
Reserves and surplus.

DEBT EQUITY RATIO

Year Total Long Term Debts shareholders Funds Debt Equity Ratio
2006-07 1110.01 962.34 1.15
2007-08 1932.03 1020.43 1.89
2008-09 1921.76 1037.39 1.85
2009-10 2096.42 1140.4 1.84

Inference: The ratio shows the financial position of the company is unfavourable because it
shows the ratio above the satisfactory level (ie 1:1)

PROPRIETARY RATIO
It expresses the relationship between net worth & total asset.
54
 PR = Net worth/ Total Assets

Net worth = Equity share capital + preference share capital + Reserve – Fictitious Assets

Total Assets = Fixed Asset + Current Assets

Reserves earmarked specifically for a particular purpose should not be included in

calculation of Net worth. A high proprietary ratio is indicative of strong financial position of the
business. The higher the ratio, the better it is.

PROPRIETORY RATIO
Year Shareholders Funds Total Tangible Assets Proprietory Ratio
2006-07 962.34 3119.75 0.31
2007-08 1020.43 4480.68 0.23
2008-09 1037.39 2132.05 0.49
2009-10 1140.4 5626.22 0.2

Inference: The company should improve the shareholders funds because the ratio shows the
tangible assets value is less than the shareholders funds. The financial and credit strength of the
company is not good.

GROSS PROFIT RATIO

55
 This ratio establishes the relationship between gross profit on sales and net sales items of
percentage indicating the percentage of gross profit earned on sales.

Gross Profit

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

Net Sales

Inference:

The profitability of the company is not good when compare to the 2009-2010 to 2008-2009 and
also the same for the year 2007. A ratio of 25% to 30% consibered as good.

NET PROFIT RATIO:

This ratio establishes the relationship between the amount of net profit or net income and
the amount of sales revenue.

Net Profit

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

56
 Net Sales

Inference:

The ratio shows the very low percent it denotes the overall profitability of the company is not
good.

OPERATING PROFIT RATIO

This ratio is an indicator of the operational efficiency of the management. It establishes the
relationship between Operating profit and Sales. The ratio is calculated as:

Operating Profit Ratio = (Operating Profit/ Sales) *100

Where operating profit is Net profit + Non-operating expenses – Non-operating income. Where,
Non-operating expenses are interest on loan and loss on sale of assets. Non-operating incomes
are dividend, interest received and profit on sale of asset. (Or) Operating profit = Gross profit ––
Operating expenses.

Operating expenses include administration, selling and distribution expenses. Financial

expenses like interest on loan are excluded for this purpose.

57
Inference:

The operational efficiency of the company should be improve when compare to previous year.

OPERATING RATIO

This ratio takes into account the aggrerate of manufacturing cost of goods sold and other
operating expenses on the one hand, and the net sales revenue on the other.

Operating Ratio = (cost of good sold + Operating Expenses/ sales revenue) * 100

58
Inference:

The operating efficiency of the company is satisfactory.

CAPITAL TURNOVER RATIO:

Capital Turnover Ratio establishes a relationship between net sales and capital
employed. The ratio indicates the times by which the capital employed is used to generate sales.

Capital Turnover Ratio=Net Sales/Capital Employed

Net Sales: Sales-Sales Return

Capital Employed: Share capital (Equity & Preference) + Reserve and Surplus +Long Term
Loans – Fictitious Assets.

59
Inference:

The ratio shows that company should utilize the capital.

60
FIXED ASSET TURNOVER RATIO

Fixed Turnover Ratio establishes a relationship between net sales and net
fixed assets. This ratio indicates how well the fixed assets are being utilized

Fixed Assets Turnover Ratio= Net Sales / Net Fixed Assets

Inference:

The ratio indicates the company should utilize fixed assets properly.

INTEREST COVERAGE RATIO

The interest coverage ratio tells you how many times a company can
cover its interest payments without defaulting. It is used as a safety gauge for banks and bond
holders to estimate the probability of loss on the money they've loaned.

Interest Coverage Ratio=NPBIT/Interest on LTL

61
Inference:

The company should improve the NPBIT for the year 2009-2010. It indicates the company have
some difficulties for cover interest.

RETURN ON PROPRITORS FUND

It enables them to compare the earning capacity of the enterprise with that
of other enterprise. There should be a minimum return on investment to shareholders. bankers
and financers will not be ready to finance if it does not show adequate profit.

Net Profit After interest & tax

Return on Proprietors Fund Ratio = -----------------------*100
Proprietors Fund

62
 Inference: The ratio shows the financial and credit strength of the company is satisfactory when
compare to previous year.

NET PROFIT TO TOTAL ASSET RATIO:

This ratio establishes the relationship between the net profit and total
assets. This ratio tries to find out how efficient the company was in utilizing the funds to generate or
earn profit.

Net Profit to Total Assets Ratio = Net Profit /Total Assets

63
Inference:

As per the Net profit to total Asset ratio the company has utilized 0:1 ratio of funds to generate
or earn profit in financial year 2008-09, which increased to 0.01:1 ratio in financial year 2009-
10.

64
 Comparative Balance Sheet

COMPARATIVE BALANCE SHEET

Amount as Amount as on Increase/Dec Increase/Decr
on 31/3/2009 31/3/2010 rease ease
Particulars Rs Rs Rs (%)
Assets
Fixed Assets :
NetBlock 1768.56 2023.39 254.83 14.41
Investment : 0 52.62 52.62 0
Deferred Tax
Assets :
Cash & Bank Balance 5.93 24.08 18 306.07
Sundry Debtors 743.16 667.99 -75 -10.11
Other Current Assets 1840.8 2400.18 559 30.39
Loans & Advances 688.89 423.78 -265.11 -38.48
Mis.Expenses 0 0 0 0
TOTAL ASSETS 5047.34 5592.04 544.7 10.79
Shareholders
funds &
Liabilities
Shareholders funds
Share Capital 625 650 25 4
Reserves & Surplus 412.39 490.4 78.01 18.92
Deferred Tax 6.24 13.31 7.07 113.3
Loans and Funds
Secured Loans 3874.58 4117.23 242.65 6.26
Unsecured Loans 41.41 54.68 13.27 32.05
Current Liabilities & 87.72 266.42 178.7 203.72
Provision
Total Shareholders 5047.34 5592.04 544.7 10.79
funds & Liabilities

Inference:

• The Comparative Balance Sheet of the company reveals that during 2010, there has been
an increase in fixed assets of Rs.254.83 (ie 14.41%). Loans and funds are increased by
38.31% and share capital has increased by 4%. This fact depicts that the policy of the

65
 company is to purchase fixed assets from loan and funds thereby not affecting the
working capital.
• Current Assets have increased by Rs.502 (ie 326.35%) and cash has increased by
306.07%.On the other hand current liabilities increased Rs.178.7 (ie 203.72%). This
further confirms that the company has raised long term financés even for the current
assets resulting into an improvement in the liquidity position of the company.
• Increase in reserve and surplus denotes the profitability of the concern
• The overall financial position of the company is satisfactory.

66
 COMPARATIVE BALANCE SHEET
Amount as Amount as on Increase/Decr Increase/Decr
on 31/3/2008 31/3/2009 ease ease
Particulars Rs Rs Rs (%)
Assets
Fixed Assets :
NetBlock 1761.99 1768.56 6.57 0.37
Investment : 0 0 0 0
Deferred Tax Assets :
Cash & Bank Balance 3.4 5.93 3 74.41
Sundry Debtors 603.58 743.16 140 23.13
Other Current Assets 1720.71 1840.8 120 6.98
Loans & Advances 705.05 688.89 -16.16 -2.29
Mis.Expenses 0 0 0 0
TOTAL ASSETS 4794.73 5047.34 253 5.27
Shareholders
funds & Liabilities
Shareholders funds
Share Capital 625 625 0 0
Reserves & Surplus 395.43 412.39 16.96 4.29
Deferred Tax 1.21 6.24 5.03 415.7
Loans and Funds
Secured Loans 3465.04 3874.58 409.54 11.82
Unsecured Loans 208.2 41.41 -166.79 -80.11
Current Liabilities & 99.84 87.72 -12.12 -12.14
Provision
Total Shareholders
funds & Liabilities 4794.72 5047.34 252.62 5.27

Inference:

• During 2009, there has been an increase in fixed assets 0f 0.37%

• Current Assets have increased by 104.52% it shows the short term financial position.
• Loan and funds are decreased it shows the decrease in interest liability.
• Profitability of the concern is good it means some increase in reserve and surplus.
• Overall financial position is good.

COMPARATIVE BALANCE SHEET

67
 Amount as on Amount as on Increase/Decr Increase/Decr
31/3/2007 31/3/2008 ease ease
Particulars Rs Rs Rs (%)
Assets
Fixed Assets :
NetBlock 1094.19 1761.99 667.8 61.03
Investment : 0 0 0 0
Deferred Tax Assets :
Cash & Bank Balance 22.62 3.4 -19.22 -84.97
Sundry Debtors 679.14 603.58 -75.56 -11.13
Other Current Assets 1186.84 1720.71 533.87 44.98
Loans & Advances 575.14 705.05 129.91 22.59
Mis.Expenses 0 0 0 0
TOTAL ASSETS 3557.93 4794.73 1236.8 34.76
Shareholders
funds & Liabilities
Shareholders funds
Share Capital 625 625 0 0
Reserves & Surplus 337.34 395.43 58.09 17.22
Deferred Tax 1.54 1.21 -0.33 -21.43
Loans and Funds
Secured Loans 2445.92 3465.04 1019.12 41.67
Unsecured Loans 0 208.2 208.2 0
Current Liabilities & 148.13 99.84 -48.29 -32.6
Provision
Total Shareholders
funds & Liabilities 3557.93 4794.72 1236.79 34.76
Inference:

• The current financial position of the company is not good because the current asset is less
than the current liabilities.
• During this year the fixed assets are increased by 61.03% at the same time loans and fund
are also increased this denotes the company use the funds to raise the fixed assets.
• Reserve and surplus denotes the profitability of the company is not good.
• Overall the financial position of the company is not satisfactory

68
 COMPARATIVE INCOME STATEMENT
Particulars Amount as Amount as on Increase/Decr Increase/Decr
on 31/3/2009 31/3/2010 ease ease
Rs Rs Rs (%)
Sales 2968.98 3532.18 563.2 15.94
Less : Sales Return 0 0
Net Sales 2968.98 3532.18 563.2 15.94
Less : Cost of goods 0
sold
Raw Material 1770.46 2281.6 511.14 22.4
Power and Fuel 354.68 397.44 42.76 10.76
Gross Profit 843.84 3532.18 2688.34 76.11
Income
Operating Income 0 0 0 0
Increase in Stock 90.49 117.68 27.19 23.11
Other Income 16.56 66.3 49.74 75.02
Total Income 950.89 183.98 -766.91 -416.84
Expenditure
Remuneration 90.41 119.36 28.95 24.25
Manufacturing
Expenses 200.34 175.45 -24.89 -14.19
Admin. & Selling
Expenses 70.77 78.66 7.89 10.03
Interest & Financial
Charges 377.82 380.18 2.36 0.62
Depreciation 186.09 182.84 -3.25 -1.78
Total Expenditure 925.43 3615.53 2690.1 74.4
Total Income
(Before Tax) 25.46 100.63 75.17 74.7
Less : Provision of
Tax 8.49 22.62 14.13 62.47
Total Income (After
16.97 78.01 61.04 78.25
Tax)

Inference:

• The Comparative Income Statement shows that the increase in sales in not more than the
increase in cost of goods sold. So the profitability is not good.
• Gross Profit is sufficient to cover the total expenses because the gross profit is increased
when compared to total expenses.
• The progress of the concern is good which is shown by the net profit.
69
 COMPARATIVE INCOME STATEMENT
Particulars Amount as on Amount as on Increase/Decr Increase/Decr
31/3/2008 31/3/2009 ease ease
Rs Rs Rs (%)
Sales 3058.56 2968.98 -89.58 -2.93
Less : Sales Return 0 0 0 0
Net Sales 3058.56 2968.98 -89.58 -2.93
Less : Cost of goods
sold 0 0 0 0
Raw Material 1852.99 1770.46 -82.53 -4.45
Power and Fuel 295.86 354.68 58.82 19.88
Gross Profit 909.71 843.84 -65.87 -7.24
Income
Operating Income 0 0 0 0
Increase in Stock 63 90.49 27.49 43.63
Other Income 20.8 16.56 -4.24 -20.38
Total Income 993.51 950.89 -42.62 -4.29
Expenditure
Remuneration 78.43 90.41 11.98 13.25
Manufacturing
Expenses 161.43 200.34 38.91 24.1
Admin. & Selling
Expenses 62 70.77 8.77 14.15
Interest & Financial
Charges 303.99 377.82 73.83 24.29
Depreciation 167.06 186.09 19.03 11.39
Total Expenditure 772.91 925.43 152.52 19.73
Total Income
(Before Tax) 220.6 25.46 -195.14 -88.46
Less : Provision of
Tax 137.01 8.49 -128.52 -93.8
Total Income
(After Tax) 83.59 16.97 -66.62 -79.7

Inference:

• The statement show negative figure of sales and cost of goods so the profitability is not
good.
• Total expenses is increased that the gross profit. It is not sufficient to cover the expenses.

70
 COMPARATIVE INCOME STATEMENT
Particulars Amount as Amount as on Increase/Decr Increase/Decr
on 31/3/2007 31/3/2008 ease ease
Rs Rs Rs (%)
Sales 2948.8 3058.56 -109.76 -3.59
Less : Sales Return 0 0 0 0
Net Sales 2948.8 3058.56 -109.76 -3.59
Less : Cost of goods
sold 0 0 0 0
Raw Material 2010.06 1852.99 157.07 8.48
Power and Fuel 275.42 295.86 -20.44 -6.91
Gross Profit 663.32 909.71 -109.76 -3.59
Income
Operating Income 0 0 0 0
Increase in Stock 134.42 -63 197.42 -313.37
Other Income 9.52 20.8 -11.28 -54.23
Total Income 807.26 867.51 186.14 21.46
Expenditure
Remuneration 72.18 78.43 -6.25 -7.97
Manufacturing
Expenses 137.45 161.43 -23.98 -14.85
Admin. & Selling
Expenses 61.26 62 -0.74 -1.19
Interest & Financial
Charges 222.12 303.99 -81.87 -26.93
Depreciation 142.26 167.06 -24.8 -14.84
Total Expenditure 635.27 772.91 -1.01 -0.13
Total Income
(Before Tax) 171.99 94.6 77.39 702.27
Less : Provision of
Tax 7.17 11.02 -3.85 -34.94
Total Income
(After Tax) 164.82 83.5 81.24 97.29

Inference:

• The statement shows that the sales in negative, so the profitability is not good
• Gross profit is enough to cover the total expenses.
• Net profit shows the positive figure shows that the progress is good.

71
 COMMON SIZE BALANCE SHEET
Financial Year 2009-10 Financial Year 2008-09
Particulars Amount Percent (%) Amount Percent (%)
Assets
Fixed Assets :
NetBlock 2023.39 36.18 1768.56 35.04
Investment : 52.62 0.94 0 0
Deferred Tax Assets :
Cash & Bank Balance 24.08 0.43 5.93 0.12
Sundry Debtors 667.99 11.95 743.16 14.72
Other Current Assets 2400.18 42.92 1840.8 36.47
Loans & Advances 423.78 7.58 688.89 13.65

TOTAL ASSETS 5592.04 100 5047.34 100

Shareholders funds &
Liabilities
Shareholders funds
Share Capital 650 11.62 625 12.38
Reserves & Surplus 490.4 8.77 412.39 8.17
Deferred Tax Liability 13.31 0.24 6.24 0.12
Loans and Funds
Secured Loans 4117.23 73.63 3874.58 76.76
Unsecured Loans 54.68 0.98 41.41 0.82
Current Liabilities & Provision
266.42 4.76 87.72 1.74

Total Shareholders funds &

Liabilities 5592.04 100 5047.34 100

Inference:

• Company has sufficient working capital to meet the day to day activities.
• Fixed assets are increased by the loans and funds
• Statement shows no investment in the company during the year.

72
 COMMON SIZE BALANCE SHEET
Financial Year 2007-08 Financial Year 2006-07
Particulars Amount Percent (%) Amount Percent (%)
Assets
Fixed Assets :
NetBlock 1761.99 36.75 1094.19 30.75
Investment : 0 0 0 0
Deferred Tax Assets :
Cash & Bank Balance 3.4 0.07 22.62 0.64
Sundry Debtors 603.58 12.59 679.14 19.09
Other Current Assets 1720.71 35.89 1186.84 33.36
Loans & Advances 705.05 14.7 575.14 16.17

TOTAL ASSETS 4794.73 100 3557.93 100

Shareholders funds &
Liabilities
Shareholders funds
Share Capital 625 13.04 625 17.57
Reserves & Surplus 395.43 8.25 337.34 9.48
Deferred Tax Liability 1.21 0.03 1.54 0.04
Loans and Funds
Secured Loans 3471.47 72.4 2445.92 68.75
Unsecured Loans 201.77 4.21 0 0
Current Liabilities & Provision
99.84 2.08 148.13 4.16
Total Shareholders funds &
Liabilities 4794.72 100 3557.93 100

Inference:

• The percentage ratio of gross profit to sales was 28.42 in 2009, which was reduced to
24.15 in 2010
• The operating expenses in decreased in the year 2010. This increase the percentage ratio
of net income after tax to sales from 0.57% in 2009 to 2.21 % in 2010.
• The operating efficiency of the concern is satisfactory during the period.

COMMON SIZE INCOME STATEMENT

73
 Financial Year 2008- Financial Year 2009-
09 10
Percent
Particulars Amount (%) Amount Percent (%)
Sales 2968.98 100 3532.18 100
Less : Sales Return 0 0 0
Net Sales 2968.98 100 3532.18 100
Less : Cost of goods sold
Raw Material 1770.46 59.63 2281.6 64.59
Power and Fuel 354.68 11.95 397.44 11.25
Gross Profit 843.84 28.42 853.14 24.15
Income
Operating Income 0 0 0 0
Increase in Stock 16.56 0.56 117.68 3.33
Other Income 90.49 3.05 66.3 1.88
Total Income 950.89 32.03 1037.12 29.36
Expenditure
Remuneration 90.41 3.05 119.36 3.38
Manufacturing Expenses 200.34 6.75 175.45 4.97
Admin. & Selling Expenses 70.77 2.38 78.66 2.23
Interest & Financial Charges 377.82 44.77 380.18 10.76
Depreciation 186.09 6.27 182.84 21.43
Total Expenditure 925.43 31.17 936.49 26.51
Total Income (Before Tax) 25.46 0.86 100.63 2.85
Less : Provision of Tax 8.49 0.29 22.62 0.64
Total Income (After Tax) 16.97 0.57 78.01 2.21

Inference:

• The percentage ratio of gross profit to sales was decreased in 2010.

• The operating expenses in decreased in the year 2010. This increases the percentage ratio
of net income after tax to sales from 0.57% in 2008 to 2.21 % in 2009
• The operating efficiency of the concern is satisfactory during the period.

74
 COMMON SIZE INCOME STATEMENT
Financial Year 2008- Financial Year 2009-
09 10
Particulars Amount Precent(%) Amount Percent (%)
Sales 2968.98 100 3532.18 100
Less : Sales Return 0 0 0
Net Sales 2968.98 100 3532.18 100
Less : Cost of goods sold
Raw Material 1770.46 59.63 2281.6 64.59
Power and Fuel 354.68 11.95 397.44 11.25
Gross Profit 843.84 28.42 853.14 24.15
Income
Operating Income 0 0 0 0
Increase in Stock 16.56 0.56 117.68 3.33
Other Income 90.49 3.05 66.3 1.88
Total Income 950.89 32.03 1037.12 29.36
Expenditure
Remuneration 90.41 3.05 119.36 3.38
Manufacturing Expenses 200.34 6.75 175.45 4.97
Admin. & Selling Expenses 70.77 2.38 78.66 2.23
Interest & Financial Charges 377.82 44.77 380.18 10.76
Depreciation 186.09 6.27 182.84 21.43
Total Expenditure 925.43 31.17 936.49 26.51
Total Income (Before Tax) 25.46 0.86 100.63 2.85
Less : Provision of Tax 8.49 0.29 22.62 0.64
Total Income (After Tax) 16.97 0.57 78.01 2.21

Inference:

• The percentage ratio of gross profit to sales was 22.49 in 2007, which was increased to
29.74 in 2008
• The operating expenses in increased in the year 2008. This decreases the percentage ratio
of net income after tax to sales from 5.69% in 2007 to 2.73 % in 2008
• The operating efficiency of the concern is satisfactory during the period.

75
 Trend Analysis
Trend Percentages
Particulars Year end (Rs in Thousands) Base Year 2007
2007 2008 2009 2010 2007 2008 2009 2010
1186.8 1720.7 2400.1 144.9 106.9 130.3
Stock 4 1 1840.8 8 100 8 8 9
123.1
Debtors 679.14 603.58 743.16 667.99 100 88.87 3 89.89
174.4 406.0
Cash 22.62 3.4 5.93 24.08 100 15.03 1 7
Total Current 1888. 2327. 2589. 3092. 123.2 111.2
Assets 6 69 89 25 100 5 6 119.4
Less
Current 148.1 266.4 303.7
Liabilities 3 99.84 87.72 2 100 67.4 87.86 2
Working 1740. 2227. 2502. 2825. 112.3 112.9
Capital 47 85 17 83 100 128 1 4

Inference:

The trend analysis shows the working capital of the company is good. The growth trend in
working capital is reassuring.

76
FINDINGS

• The company should improve the NPBIT for the year 2009-2010. It indicates the
company have some difficulties for cover interest.

• The company should utilize fixed assets properly.

• The company has not made any investments in the year 2007-08 & 2006-07.
• The company has not raised any outsiders’ funds in the year 2007-08 & 2006-07.
• Current ratio of the company is not satisfactory because the ratios for four years are
below the standard level 2:1.
• Liquid assets are not quite sufficient to cover the current liabilities.
• The ratio shows the financial position of the company is unfavourable because it shows
the ratio above the satisfactory level (ie 1:1)
• Here the absolute liquid ratio is less than the 0.5:1. The company should increase the
absolute liquid assets.

77
SUGGESTIONS

• The company’s current ratio is not ideal ratio so it has to raise its current assets worth in
order to arrive at 2:1 ratio.
• In 2009-2010 capital turnover ratio is smaller than the 2006-2007 at the same time it is
increase when compared to 2008-2009. The company should increase it.
• Company raised the fixed assets by raising loans and funds so they utilize the fixed assets
properly.
• In 2009-2010 the interest coverage ratio is too low it indicates the interest on long term
loan is higher than the Net profit before interest and tax, so the company increases the
Net profit before interest and tax.
• Company shows the profit after tax is less than the shareholders funds, this indicates the
company pays minimum return to the shareholders. This is not good sign to the company,
so they should increase the profit after tax.
• In 2009-2010 reserve and surplus shows company has good profitability condition, they
should maintain

78
CONCLUSTION OF THE STUDY

The recommendations have been put forward to management for its consideration. Even though
the recommendations are done based on the projections of the historical data available for the
books of accounts, the management has to take efforts to implement the necessary steps by
looking into the financial performance of the previous year.

Actually speaking, a successful financial executive is interested not in maintain a

good current ratio but in maintaining an adjustable account of current assets so that the business
may operate smoothly. Thus the ratio analysis concepts are more important to the management in
order to maintain the current assets and current liabilities.

APPENDICES
79
 Profit and Loss Account for the year ended 31st March,2010 and 31st
March,2009
For the year For the year For the year For the
ended ended ended year ended
Particulars
31.3.2010 31.3.2009 31.3.2008 31.3.2007
(Rs) (Rs) (Rs) (Rs)
A. INCOME
Sales 353218109 296897925 305856449 294880201
Other Income 6629671 1655602 2079821 952274
Increase in stock 11768267 9048726 [6299503] 13441506
Total 371616047 307602253 301636767 309273981
Expenditure
Raw Material 228160128 177045965 185298533 201006380
Power and Fuel 39744069 35468077 29586284 27542070
Remuneration to
Employees 11936063 9041008 7842866 7217901
Manufacturing Expenses 17545097 20034109 16142735 13745410
Admin.&Selling Expenses 7865674 7077277 6199799 6125961
Interest & Finance
charges 38017781 37782071 30398816 22212469
Depreciation 18284210 18609198 16706090 14225712
Total 361553022 305057705 292175123 292075903
C.NET PROFIT BEFORE
TAX(A-B) 10063025 2544548 9461644 17198078
D.PROVISION
Income Tax 1554738 262089 1072004 1929625
Deferred Tax 706994 502836 [32411] [1366518]
Fringe Benefits Tax 0 84019 62590 154268
E.PROFIT AFTER
TAX(C-D) 7801293 1695604 8359461 16480703

80
 BALANCE SHEET
Particulars 2010 2009 2008 2007
SOURCE OF FUNDS
A. SHARE HOLDERS FUND
SHARE CAPITAL 65000000 62500000 62500000 62500000
RESERVES AND SURPLUS 49040387 41239094 39543490 33734293
11404038 10373909 10204349
7 4 0 96234293
B. LOANS FUNDS
SECURED LOANS 411723002 387458449 347147002 244592087
UNSECURED LOANS 5468073 4140565 20177396 NIL
C. DEFERRED TAX LIABILITY 1330925 623931 121095 153506
53256238 49596203 46948898 34097988
TOTAL (A+B+C) 7 9 3 6

APPLICATION OF FUNDS
D. FIXED ASSETS
GROSS BLOCK 322604654 291250211 275997388 193290679
LESS : DEPRECIATION 120265428 114394131 99798536 83872155
20233922 17685608 17619885 10941852
NET BLOCK 6 0 2 4
E. INVESTMENTS 5262000 NIL NIL NIL
F. CURRENT ASSETS,LOANS
AND ADVANCES
INVENTORIES 240017554 184080297 172070991 118683924
SUNDRY DEBTORS 66799102 74316280 60358304 67914333
CASH AND BANK BALANCES 2408350 593058 339577 2262134
ADVANCES AND DEPOSITS 42378255 68888635 70505039 57514187
35160326 32787827 30327391 24637457
1 0 1 8
LESS: CURRENT LIABILITIES AND
PROVISIONS 26642100 8772311 9983780 14813216
32496116 31910595
NET CURRENT ASSETS 1 9 293290131 231561362
53256238 49596203 46948898 34097988
TOTAL (D+E+F) 7 9 3 6

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BIBILIOGRAPHY

1. Books
Accounting for Managers
By Jelsy Joseph Kuppapally.
Financial management
By M.Y.Khan & P.K.Jain

Management Accounting

By T.S. Reddy and Y. Hariprasad Reddy.

2. Annual report of Ever win textile limited

3. Websites

www.accountingformanagement.com

www.universalteacher4u.com

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