Anand Dave(Mba)1

WELCOME TO INTERNAL AND EXTERNAL EXAMINERS’ OF SIKKIM-MANIPAL UNIVERSITY OF HEALTH, MEDICAL AND TECNOLOGICAL SCIENCES

SIKKIM-MANIPAL UNIVERSITY OF HEALTH, MEDICAL AND TECNOLOGICAL SCIENCES MBA GRAND PROJECT ON ANALYSIS OF FINANCIAL HEALTH INCLUDING RATIO ANALYSIS AND WORKING CAPITAL MANAGEMENT OF CADMACH MACHINERY CO. PVT. LIMITED PREPARED BY ANAND TRILOKBHAI DAVE ( Reg. No. 520561861 )

CADMACH MACHINERY COMPANY PRIVATE LIMITED PLOT NO. 3604/3605, GIDC INDUSTRIAL ESTATE, PHASE IV, VATVA, AHMEDABAD 382 445.

Some Products of Cadmach Machineries  CU Rotary Tablet Press  CMB – 3 (Double Sided Rotary Tableting Machine)  CSGS 500 & 750 (Single Stroke Tableting Machine)  Drying oven  Horizontal mixture  Tablet hardness tester  Granulator  Coating Machine  Colloid Mill  Cad mil (CMS / CM)  CMB – 4 (Square model double sided rotary tablet press)  CTM (high speed of rotary tablet press)  Tube filling machine  Automatic ampoule filling and sealing machine (CAF – 04)  Rotary pelleting press  Cadpress IV machine (CPD IV)  De duster

Some companies to which Cadmach Sells its’ products  Cipla Ltd.  Anil International  Nestor Pharmaceuticals Pvt.Ltd.  Ins-Swift Ltd. (J & K)  Blue Cross Laboratories Ltd.  Khandelwal Laboratories  Cadila Health Care Ltd. Indian Clients

Some International Clients  Guten Exports Pty. Ltd., Singapore  Pharmathen SA, Greece  Guten Export Trade, Indonesia  Huynh Phuong Ltd. Co. Vietnam  W.H.Rosen Meyer & Co. Pty.Ltd., South Africa  Keio Meditech Trading, Malaysia  Inter Pharma, USA

FUNDAMENTALS OF ACCOUNTING What is Accounting ? Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transaction and events which are, in part at least of a financial character, and interpreting the result thereof.

USERS OF ACCOUNTS AND THEIR INFORMATION NEEDS  Generally users of account are classified into two categories, (a) internal management and (b) outsiders .  External users are of seven categories :  Investors  Employees  Lenders  Suppliers and other creditors  Customers  Government and their agencies  Public This project report is prepared keeping in view with major weightage for internal management usage.

FUNCTIONS OF ACCOUNTING DATA  Measurement  Evaluation  Control  Decision making  Forecasting  Stewardship  Government Regulation and Taxation

FINANCIAL INFORMATION ANALYSIS The objectives of financial statements is to provide information about the financial positions, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements are prepared for this purpose to meet the common needs of most users.

OBJECTIVES OF FINANCIAL STATEMENTS i) Providing information for economic decisions. ii) Providing information about financial position. iii) Providing information about performance of an enterprise. iv) Providing information about changes in financial position.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS  Understandability.  Relevance.  Materiality.  Reliability.  Substance.  Neutrality.  Prudence.  Completeness.  Comparability.

DIFFERENT TYPES OF FINANCIAL STATEMENTS  Income Statement.  Balance Sheet.  Statement of Retained Earnings.  Fund Flow Statement.  Cash flow Statement.  Schedules.

LIMITATIONS OF FINANCIAL STATEMENT  Net profit on historical costs basis.  Do not disclose efficiency of the management and maximum usage of capacity.  Technological and economic changes are not covered in financial statements.  Future prospects are not known through financial statements.  Prepared from the view point of share holders.  Accounting policies which may vary front company to company- reliable basis of judgment cannot be formed.

METHODS OF ANALYSING FINANCIAL STATEMENTS  Comparative financial statements.  Common size statements.  Trends ratios.  Ratio analysis.  Funds flow analysis.  Break-even and Cost-volume profit analysis.  Value added analysis.

What is ratio analysis ? Ratio analysis is an important tool for analyzing financial statements . Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements.

Major limitations of ratio analysis  Bias towards conservatism.  Different measurement bases are used to measure different classes of assets.  Inadequacy to deal with Complex transactions such as options and futures.  Accrual system of accounting relies much on management’s judgment about ‘allocation’ and ‘realisability ’.

Significance of Using Ratios Ω ‘ Benchmark’ ratio or trend analysis. Ω Similar firms should be compared. Ω Consistency in periods, numerator and denominator should be maintained. Ω Analysis should be done for long period.

RATIOS AT A GLANCE 1. Overall performance a. Return on Invested Capital- Higher is better. b. Return on equity- Higher is better. 2. Assessing Operating Management a. Net Margin Ratio- Higher is better. b. Gross Profit Ratio- Higher is better. c. Operating Ratio- Higher is better. 3. Assessing the Efficiency in the Use of Resources a. Asset Turnover- Higher is Better. b. Fixed Asset turnover- Higher is better. c. Current Asset Turnover- Higher is better but not in all situations. d. Working Capital Turnover- Higher is better but not in all situations. e. Sundry Debtors Turnover- Higher is better. f. Inventory Turnover- Higher is better but not in all situations. e. Raw Material Turnover- Higher is better but not in all situations. f. Work-in Process Turnover- Higher is better but not in all situations. g. Finished Goods Turnover- Higher is better but not in all situations. h. Average collection Period- Lower is better. i. Average Payment Period- Higher is better but not in all situations. 4. Assessing the Solvency a. Interest coverage ratio- Higher is better. b. Net Financial Leverage (Gearing)- Lower is better. 5. Assessing the Liquidity a. Current ratio- Higher is better. b. Quick ratio- Higher is better.

What is working capital ? Working capital is defined as ‘ the excess of current assets over current liabilities’.  Working capital is also known as circulating capital, fluctuating capital and revolving capital. Objectives of working capital management  To improve the capital employed of the business.  To meet the current financial obligations.

Types of working capital  G ross W orking C apital ( GWC ) : The total funds needed to meet the day-to-day expenses in carrying on business / manufacturing operations. (GWC = TCA).  N et W orking C apital ( NWC ) : The excess of current assets over current liabilities or in short Margin (NWC = CA – CL). Working capital gap ( WCG ) : The working capital shall be met from the NWC and from current liabilities and still there shall be some gap left to meet the total requirement. Hence, WCG is the Gap between the total working capital required and total funds brought on long term basis and market borrowing available or it can be termed as Total Current assets less current liabilities excluding short term finance available from banks / financial institutions [WCG = TCA – CL {Excl STBB} ].

Operating Cycle Small (Service Sector) (Industry) : Cash > Cash Medium (Trade) : Cash > Receivables > Cash Large: Cash > Raw Material > Stock in process > Finished Goods > Receivables > Cash

Financing strategies Supply Chain Management. Product Development. Sales Growth. Borrowing. R & D.

Figures determining amount of working capital Purchase resources Payment for resource purchase Sell product on credit Receive Cash Inventory convention period Receivable convention period Payable period Cash conversion period Operating cycle

Important Factors Determining Amount Of Working Capital 4. Inventory Turnover 2. Volume of Sales 3.Time 9. Operational and financial efficiency 7. Activities of the firm 8. Terms of purchase and Sales 6. Firm’s size 5. Business turnover 1. Nature of Industry

Principles Of Working Capital Management  Principle of risk variation.  Principle of cost of capital.  Principle of equity position.  Principle of maturity of payment.

Pipeline Concept Of Working Capital Processes Warehouse Collection Inputs Output Delivery Cash Cash 1 2 3 Cash Cycle

Consumption of Funds Notes : F = Initial Payment on procurement of facilities , I = Input inventory , P = Process interval , W = Warehouse interval , C = Collection interval F I P W C Period based disbursements during cash cycle. Cash

ASSESSMENT OF WORKING CAPITAL CA minus CL = NWC Long-term funds Owners’ equity: Owners’ initial contribution; and preference shares redeemable after a long period. Retained profits and free reserves. Creditors’ equity: Term borrowings by way of loans from institutional sources. Deferred payment arrangements with suppliers. Debentures, preference shares redeemable within a short period and long-term deposits. Short-term funds Credit from suppliers of goods and services. Provisions; example for income tax Short term deposits or loans from public or other sources.

ANALYSIS AND FINDINGS  Overall performance  (a) ROIC = NOPLAT. Higher is better Invested Capital Findings : Profit after tax of the company has marginally increased from 6990.15 in the year 2004 to 11893.55 in the year 2006 which resulted in increase in return on invested capital. The company profit is showing growing trend. The loans amounting to Rs. 1721 thousand had been repaid by the company from the year 2004 to 2006. The reserve of the company has also increased marginally which resulted in the improvement of the return on invested capital.

ROE = PAT Net Worth Findings : The profitability to ordinary shareholders is strong and showing an upward trend. Note that the return in 2004 as in all the years is after tax and the shareholders should be extremely comfortable with these returns. 2004: 11.30%, 2005: 14.30%, 2006: 15.07% Higher is better :

Assessing Operating Management Findings : The net margin ratio shows that the margin is fairly stable over time with improvement from 3.92% to 4.95% in 2005 and 5% in 2006 . However, to know how well the firm is performing one has to compare this ratio with the industry average or a firm dealing in a similar business. (a) Net Margin = PBIT Net Sales : Lower is better

Gross Profit Ratio = Net Sales – Cost of Goods Sold Net Sales Higher is better Findings : This is an alarming issue for the company. In spite of having increasing trend in the net margin, gross margin shows decreasing trend. It has been decreased from 35.23% in 2004 to 32.91% in 2006. This might be due to increase in manufacturing expenses of Rs. 18556 thousand from 2004 to 2006. Material consumption has increased drastically from 2004 to 2006.

Operating Ratio = Operating Expense Net Sales Higher is better Findings : The ratio indicates that operating management is efficient. Ratio shows growing trend. Turnover has increased marginally in proportion to increase in operating expenditure which is good sign for the company 2004: 12.89%, 2005: 12.82%, 2006: 14.19%

Assessing The Efficiency in the Use of Resources Findings : It appears that the activity of the business is relatively growing, with an upward trend. Both sales and total assets are increased. However, to know how well the firm is performing one has to compare this ratio with the industry average or a firm dealing in a similar business. 2004: 3.96, 2005: 4.11, 2006: 4.38 times Asset Turnover = Net Sales Invested Capital : Higher is better

Fixed Asset Turnover = Net Sales Net Fixed Assets Higher is better Findings : The ratio shows increasing trend but it should be analyzed in conjunction with asset turnover ratio. Here both the ratio shows increasing trend. Company is doing fixed assets addition regularly but still needs to be improved. It’s very important for the growing company to make continuous addition to the fixed assets. 2004: 6.36, 2005: 7.15, 2006: 8.26 times

Working Capital Turnover = Net Sales Working Capital Higher is better, “ but not in all situations ”. Findings : Generally higher ratio is preferable but working capital should be controlled as increase in working capital is not good for any company. Here ratio shows fluctuating trend. Working capital increased marginally from 2004 to 2006. Sundry debtors and loans & advances have increased drastically which resulted into increase in working capital. 2004: 8.63, 2005: 8.33, 2006: 8.41 times

Sundry Debtors Turnover = Net Sales Sundry Debtors Higher is better Findings : Ratio shows decreasing trend which is not the healthy sign for the company. Debtors of the company have increased from 2004 to 2006 by Rs.33787 thousand which is fairly high margin. This may result into increased bad debts.

Average Collection Period = Sundry Debtors Average Net Sales per Day Lower is better Findings : Receivable days had been increased fro 87 days to 96 days from 2004 to 2005 and 2006. It may be due to increase in sundry debtors.

Average Payment Period = Trade Creditors Average Purchase per Day Higher is better, “ but not in all situations ”. Findings : The ratio shows decreasing trend. Number of days for the Payment to creditors has reduced. This may result into increase into working capital.

Inventory Turnover = Net Sales Inventory Higher is better, “ but not in all situations ”. Findings : The company turned over stock approximately 4 times in 2004, 6 times in 2005, 7 times in 2006 . As the company is involved in manufacturing activity inventory turnover ratio is lower. Sales of the company have increased prominently from 2004 to 2006 which resulted in growth of inventory turnover ratio. It also shows that operation management of the company is working efficiently. Higher ratio also indicates that there is less requirement of working capital for the company.

Assessing The Solvency Findings : The company’s major forms of credit are non-interest bearing (trade creditors) which results in the business enjoying very healthy interest coverage rates. In 2004 the company could pay their interest bill 29.28 times from earnings before interest and tax. However there is a massive increase from 112.75 times in 2005 and 707.59 times in 2006 due to reduction in interest payment. Interest Coverage = PBIT : Higher is better Interest

Assessing the Liquidity Findings : In 2004 , the company only had 138% worth of current assets for every rupee of liabilities. This grew to 140% in 2005 and 142% in 2006 indicating increasing trend on liquidity; however the company is still unable to support its short-term debt from its currents assets. Current Ratio = Current Assets Current Liabilities From creditors’ perspective , higher is better . From managers’ perspective , lower is better .

Quick Ratio = Current Assets–Inventory–Prepaid Expenses Current Liabilities-bank overdraft Findings : This ratio indicates that the company is holding high inventory and large amount of debtors. The ratio of almost 1:1 in 2005 and 2006 indicates highly solvent position. From creditors’ perspective, higher is better.

E arning P er S hare ( EPS ) = Profit After Tax No. Of Equity Shares Findings : The return to share holder has fairly increased from 2004 to 2006. Earnings per share are satisfactory.

Observations And Suggestions  Return on invested capital is increasing marginally during last three years due to increase in overall profitability of the company.  Company has repaid huge amount i.e. Rs. 1721 thousand between 2004 to 2006, which indicates that company is mainly dependent on their own funds.  The fact that a business works on a very low margin need not cause alarm because there are some sectors in the industry that work on a basis of high turnover and low margins.  Normally the gross profit has to rise proportionately with sales but here despite of fair increase in sales, gross margin shows decreasing trend which is harmful for the operation management of the company.

 Sales of the company have grown relatively with profit during 2004 to 2006. Sales include two components, i.e. machineries and punches-dies & spares parts. Installed capacity utilization is also satisfactory.  Company’s total asset turnover increases which indicates the efficiency with which the uses all its assets to generate sales. There is reasonable addition in the fixed assets. Company has growing trend in fixed assets turnover, which indicates company is having sufficient amount of fixed assets to generate sustainable amount of sales.

Gross working capital ( GWC ) : GWC = TCA Net working capital ( NWC ) : NWC = CA – CL

 Company does not have any short term bank borrowings.  Working capital should be kept at minimum. Increase in working capital is harmful for any kind of business.  Debtors are increasing drastically over a period of three years which is negative sign for the company. It should be controlled, so as to reduce bad debts. It also affects the working capital negatively. Average collection period had also increased from 87 days in 2004 to 96 days in 2005 and 2006. And payment period has reduced so it is negative sign for the company’s cash flow.

 Company is running with 5% profitability, which can be improved by increasing the manufacturing capabilities. Company should concentrate on substantial cost reduction and productivity improvement for improvement in profitability.  Capital investment in fixed assets should be increased to achieve sustainable long term growth.  Company should utilized their reserves and surplus to reduce the burden of interest bearing long term loans.

Anand Dave(Mba)1

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