ANALYSIS OF FINANCIAL STATEMENTS

OF K CENGINEERS PVT. LTD

DECLERATION
I hereby declare that that the project Report titled Analysis of Financial Statements of K.C. Engineers is my own work and has been carried out under the guidance of Prof. Shiladitya Dasgupta, Faculty, Asia-Pacific Institute of Management, New Delhi. All care has been taken to keep this Report error free and I sincerely regret for any unintended discrepancies that might have crept into this report.

Thank You Mrinalini

ACKNOWLEDGEMENT
I express my heartiest feelings of gratitude to my supervisor Prof. Shiladitya Dasgupta, Faculty- Finance, XXXXXXXXXXXX for his keen interest, constant encouragement, and sympathetic attitude, parental advice at every step that enabled us to face and encounter all the difficulties that came in our way to reach this stage. I shall be highly grateful to him always. I would also like to pay thanks to Almighty God for giving us power and the mind to do work efficiently and effectively. At last but not the least we are thankful to all the library members and staff of the computer lab department for every possible help.

CONTENTS CHAPTER ABSTRACT 1. 1.1 1.2 1.3 1.4 2. 2.1 2.2 2.3 2.4 3. 3.1 3.2 4. 4.1 4.2 INTRODUCTION Background Objectives Rational/Relevance of the Study Scope and Uses of Study CONCEPT AND DEVELOPMENT About K.C. Engineers Introduction to Ratio Analysis Advantages and Limitations of Ratio Analysis Various Types of Ratios METHODOLOGY Methodology (Sampling details) Methodology (Various Ratios) DATA ANALYSIS AND FINDINGS Analysis of Classified Data Findings / Results
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PAGE No.

1 to 10 1 3 3

11-50

5. 5.1 5.2 5.3

LIMITATIONS, SUGGESTIONS AND CONCLUSION Limitations of the Study Suggestions Conclusion

APPENDICES Appendix 1 BIBLIOGRAPHY

INTRODUCTION
Rationale The purpose of the research was to criteria on which investment of the company is raised every year and a favorable rate of return is arrived at, increasing the net result of the company as per their budget. Objective The study is aimed at: To gain the overall idea about the organization. To find out the financial performance of the organization To find out the future requirement of finance in business Scope of the Study The study on the financial statements will help the interested parties to know about the overall financial health of the company. The ratios are helpful to forecast the future of the organization based on the past performance.

COMPANY PROFILE

ABOUT US
Emerging leaders: The year, 1989, saw the firm foundation of KC Group in the heart of the industrial town of Ambala, India.

Founded under the phenomenal guidance and foresight of our patron, Mr. KC Kansal, KC Engineers has witnessed surpassing success ever since its creation.

Our potential: Certified as an ISO 9001:2008 company, at KC Group, we have woven quality, customer-care and client empowerment in our genetic make-up.

Our team, being our strongest asset, has a powerful Research & Development division. Steady evolution in our technology, assists our clients to stay ahead of their competitive counter-parts.

Spanning the world: 6

From the Indian expanse of our clientele, we have grown to Middle-East, Africa and South-East Asia. We believe that, vertical limits do exist. But, at KC Group, they are just not applicable.

OUR TEAM

Why Us

K.C. Group has endured to reach perfection in every way, since the year 1989. There are innumerable reasons why you should be associated with us. Our sales, speak for us:

Our Services - Your Competitive Edge: We endows its clients with exceptional services, which keeps them ahead of their competition always. From Product Installation to Maintenance and Repairs, K.C. Group is standing next to its clients at all times. We offer unique and flexible warranty policies, which keeps your investments safe and secure for a lifetime. To know more click here.

Our Team - Your Support: K.C. Group invests in its people. Our team of technical and administrative experts, are our strongest asset. We have grown manifolds as a team.

Your technical support queries shall be attended by experts of the field, directly. On-site support and management shall be under supervision of senior experts. 9

Products: We are the leader in manufacturing and design of Laboratory Equipments for Engineering Education, Research and Development. Our products are extremely reliable, trusted in Educational Institutions and are high in demand. We are serving most Educational Institutions with training equipments to shape the future generation of Engineers and Scientists.

Our Services:

Technical Support with KC Gruop: Installation and handling guidance & training of staff shall be looked after, by our

experts. Provision of clear and precise details about usage of equipments. Provision of exceptional safety measure guidance, during and after the training of your staff.

Product Installation with KC Group: Products purchased from KC Group, are installed at the site as requested by the customer. All installations are carried out by technical experts. Technical guidance is provided to staff at the customers site. Safety norms are precisely explained to the staff at the customers site. 10

Product Demonstrations with KC Group: After we install the equipments, we do an on-site workshop with our clients, in which we give a detailed demonstration of each product. This helps our clients to understand the functions and uses of the products. Our demonstrations can be attended by students for the enrichment of their learning. The on-site demonstration is absolutely necessary as it enumerates and notifies the lab-attendants and students, about the operations & precautions to be observed while using the equipments. KC Group arrange yearly workshops which further carry out the erudition of students and others involved in handling the lab equipments as requested by the customer.

Lab Planning with KC Group: We give our clients world-class planning and strategies for their labs. During the planning of a particular lab we keep in mind that adequate space has to be allotted to each equipment and for the participants. Space planning and designing is a major aspect of our lab planning process. Our strategies make sure that all the research functions can be conducted without any space issues and the equipments can be fully utilized. A laboratory can be small or have different segments allotted and for each laboratory our strategies and planning are unique and novel.

Maintenance & Repair with KC Group: KC Group offer you the most excellent maintenance and repair services. Every equipment sold at KC Group comes with a protective warranty coverage. We keep in touch on a regular basis with our clients to know about the performance quality of our equipments. Our repair service is a speedy one and takes place within 48-72 working hours of the request lodged.

FINANCIAL ANALYSIS
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INTRODUCTION Financial analysis is the process of identifying the financial strengths and weaknesses of the firm and establishing relationship between the items of the balance sheet and profit & loss account. Financial analysis can be undertaken by the firm or by outside parties, firms owner, creditors, investors and other. Actually the nature of analysis depends upon the parties. Financial analysis consists in separating facts according to some definite plan, arranging them in groups according to certain circumstances, and then presenting them in a convenient and easily read and understandable form. According to Finney and Miller Financial statement analysis is largely a study of relationship among the various financial factors in a business, as disclosed by a single set of statements and a study of the trends of these factors, as shown in a series of statements. According to John N. Myres Feature of Financial Analysis:1. To presents a complex data contained in the financial statement in simple and understandable form. 2. To classify the item contained in the financial statement in the convenient and rational groups. 3. To make comparison between various groups to draw various conclusions. TYPES OF FINANCIAL ANALYSIS 1. Classification on the basis of material used.
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2. Classification on the basis of modus operandi. On the basis of material used :External analysis:Outsiders, who dont have access to the detailed internal accounting record of business firm, do this analysis. These outside parties are potential investors, creditors, government agencies & general public. Internal analysis:The analysis conducted by person who has access to the internal accounting records of a business firm is known as internal analysis. On the basis of modus operand :Horizontal analysis:Horizontal analysis refers to the comparison, of financial data of a company for several years. The figures of this type of analysis are presented horizontally over a number of columns. This type of analysis is also called dynamic analysis. Vertical analysis:This analysis refers to the study of relationship of the various items in the financial statements of one accounting period. It is also known as Static analysis Significance or importance of Financial Analysis :-

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1. Significance for Managers;Planning and Control are the two most important ingredients to a Successful Business. A Business Plan takes most of the guess work out of Business Strategy and Control through solid financial analysis. Financial Data provides a way to gauge where you are in your Strategic Plan, telling you where changes in your Plan are necessary. Because of this, Financial Data Analysis and Management are vitally important to running a successful business. 2. Significance for Investors:Investors are generally considered one of the primary users of financial statements. They use the financial statements to determine the current profitability of the firm and attempt to predict its future profitability. Their interest is in the future growth of a company's stock price and/or the likelihood of the company paying dividends to the owner. Significance for Creditors:In the ongoing relationship between suppliers and a firms financial statement can play several roles consider the relationship between a firm and the suppliers to its loan capital. e.g a bank in the initial loan granting stage of the relationship, financial statement typically are an important items. 3. Significance for regulatory agency:The demand by these bodies can arise in diverse set of areas such as revenue raising e.g for income tax, sales tax ,value added tax collection. Govt. intervention e.g determines weather to provide a govt. backed loan agreement to a financially distressed firm.

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4. Significance for Employess:They are the part of the organization and feel that their effort contributed to the firm profit they would there for prefers to give bonuses and salary increase this also increase expenses of the firm. 5. Significance for others parties:The set of party that demand for financial analysis information of corporation is open ended. diverse party such as academic ,environmental protection organization, and other special interest lobbing groups approach cooperation for detail relating to their financial and other affairs. 6. Significance for Government :Various ministries and department have interest in the firms payments of taxes. Also sees the enactment of law for the industry and the provision of social service to the public. The govt. may also want to ensure that the firm complies with the law on for example wages payments and employees benefit.

Limitation of Financial Analysis :Though analysis of financial statement is essential to obtain relevant information for making several decisions and formulating corporate plans and policies, it should be carefully performed as it suffers from a number of the following limitations.
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1.

Mis lead the users:The accuracy of financial information largely depends on how accurately financial statements are prepared. If their preparation is wrong, the information obtained from their analysis will also be wrong which may mislead the user in making decisions.

2.Not

useful for planning:-

Since financial statements are prepared by using historical financial data, therefore, the information derived from such statements may not be effective in corporate planning, if the previous situation does not prevail.
3.Qualitative

aspects:-

Then financial statement analysis provides only quantitative information about the company's financial affairs. However, it fails to provide qualitative information such as management labor relation, customer's satisfaction, management skills and so on which are also equally important for decision making.
4.Comparison

not possible:-

The financial statements are based on historical data. Therefore comparative analysis of financial statements of different years can not be done as inflation distorts the view presented by the statements of different years. 5. Wrong judgement:The skills used in the analysis without adequate knowledge of the subject matter may lead to negative direction. Similarly, biased attitude of the analyst may also lead to wrong judgement and conclusion.

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6. Not helpful in price fixation:In financial accounting the cost is not available as an aid in determining prices of the product services production order and product line. 7. Not control on cost:It does not provide for a proper control of materials and suppliers, wages. labors and overheads.
7.

No analysis of losses:-

It does not provided the complete analysis of losses due to defective material, idle time, idle plant and equipment. In other words no distinction is made between avoidable and unavoidable wastage.

. PURPOSE OF FINANCIAL ANALYSIS

The purpose of analysis of financial statements depends upon the need of a person who analysis these statements. These needs may be :1. To know the earning capacity or profitability.
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2. To know the solvency. 3. To know the financial strength. 4. To make comparative study with other firms. 5. To know the capability of payment of interest & dividend. 6. To know the trend of business.

Following statements are including in the list of financial statements:1. Profit and loss account. 2. Balance sheet. 3. P & L appropriation account.
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4. Cash flow statement. 5. Various schedules. 6. Explanatory notes given at the end of financial statement. INCOME STATEMENT OR PROFIT &LOSS ACCOUNT It is an important financial statement. It is a statement of revenues earned and the expenses incurred. NEED OF INCOME STATEMENT 1. To ascertain the cost of production, gross profit, gross loss/ net profit and net loss. 2. To ascertain the cost of goods sold and establishing its relationship with sales. 3. To ascertain the profitability of the business by establishing relationship of gross profit and net profit with sales.

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POSITION STATEMENT OR BALANCE SHEET

Balance sheet is a statement which presents the financial position of a business on a particular date. It is prepared at the end of accounting period.

CHARACTERISTIC OF BALANCE SHEET:1. Balance sheet is prepared on a particular date and it shows the financial position of business on that very particular date. 2. Balance sheet has two columns. It tells the relationship between Assets and Liabilities and the total of both the sides are equal. 3. Balance sheet shows the financial position of a business on going concern value.

CASH FLOW STATEMENT:

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A cash flow statement is a statement which summarizes the sources of cash inflows and uses of cash outflows of a business enterprise during a particular period of time, say a month or year. When cash flow statement is prepared, sources and uses of cash only are taken in to account and even liquid assets like debtors and bill receivable are excluded. since the idea of preparing this statements to summarize the impact of various transaction on the cash position of the firm those transactions which result in increase of cash position are termed as cash inflows and those which result in decrease of cash position are the sources of cash outflows. In short, it may be said that a cash flow statement shows the sources of cash receipts and the purpose of which payments are made.

Classification of Cash flows : According to as-3 (Revised) A cash flow statement should be presented in manner that it report inflows and outflows of cash by classifying them into three categories mainly operating, investing and financial activities. 1. Cash flow from Operating activities : Operating activities are the main revenue generating activities of an enterprise. As such they include cash flows from those transactions and events which enter into the ascertainment of net profit or loss of the enterprise. Examples of cash flows arising operating activities are:
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 Cash receipts from sale of goods and rendering of services, Cash receipts to suppliers for goods and services, Cash receipts from royalties ,fees , commissions and other revenue, Cash payments to and on behalf of employees, Cash receipts or refunds of income taxes unless they can be specifically identified with financing and investing activities. 2. Cash flow form Investing Activities:

Investing activities include the purchases and sale of long term assets such a land, building, plant and machinery etc. not held for resale. These activities also include the purchase and of sale investments which are not included in cash equivalents. Cash flow form investing activities discloses the expenditures incurred for recourses intended to generate future income and cash flows. Examples of cash flow from investing activities are: Cash payments to acquire fixed assets and also pay nets for capitalized research and development costs and self constructed fixed assets. Cash receipts from sale of fixed assets. Cash payments to acquire shares warrants Cash receipts from sale of shares warrants or debt instrument of other enterprise. Cash receipts of interest and dividend.

3. CASH FLOW FROM FINANCING ACTIVITIES:

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Financial activities are the activities that result in change in capital and borrowing of the enterprise. Examples of cash flows arising from financial activities are; Cash receipts from issuing shares or other similar instruments, Cash receipts from issuing debentures, loans, notes and other short term or long term borrowing. Cash repayments of amount borrowed buy back of equity shares redemption of reference shares, debentures notes, bonds etc. Cash payment of interest and dividend.

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TECHNIQUES OR METHODS OF FINANCIAL ANALYSIS:1. Comparative Statements. 2. Trend analysis 3. Common size Statements. 4. Fund flow statements. 5. Cash flow statements. 6. Ratio Analysis.

7. Break even point Analysis.

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COMPARATIVE STATEMENT:This is a simple method for tracing changes in the financial performance of a company. Comparative financial statements will contain items for atleast two periods. Changes increases and decreases in income statement and balance sheet over period can be shown in two ways: (1) Aggregate changes (2) Proportional changes Drawing special columns for aggregate amount or percentage, or both, of increase and decrease, can indicate aggregate changes. Recording percentage calculated in relation to a common base in special columns, on the other hand, shows relative, or proportional changes. An investigation of the comparative financial statements helps to highlight the significant facts and points out the items which need further analysis. Trend Analysis

In financial analysis the direction of changes over a period of years is of crucial importance. Time series or trend analysis of ratios indicates the direction of change. This kind of analysis is particularly applicable to the items of profit and loss account. For the trend analysis, the use of index numbers is generally advocated. The procedure followed is to assign the number 100 to the items of the base year and to calculate percentage changes in each item of other years in relation to the base year. This procedure may be called as Trend Percentage Method.

Inter- Firm Analysis

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A firm would like to know its financial standing vis--vis its competitors and the industry group. The analysis of the financial performance of all firms in an industry and their comparison at agiven point of time is referred to as cross sectional analysis or theinter-firm analysis. To ascertain the relative financial standing of a firm, its financial ratios are compared either with its immediate competitors or with the industrial average.

Performa Analysis

Sometimes future ratios are used as the standards of comparison. Future ratios can be developed from the projected, or proforma financial statements. The comparison of the current or past ratiosshows the firms strengths and weaknesses in the past and the future.If the ratios indicate weak financial position, corrective actions can beinitiated

RESEARCH METHODOLOGY
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Methodology (Sampling details) Research design Research design helps in proper collection and analysis of the data. It helps in further course of action. Research approaches The most appropriate research is descriptive. This is because the goal of the study is clear research will help to understand to concept better. Classification of data Secondary data This includes the information gathered from various websites. Sample Size The sample size selected is of five years i.e. from 2007-2011. Sampling technique The sampling procedure employed for this is judgmental sampling a convenience sampling technique in which elements are based on the judgment of researcher Software tools used for the data analysis The software tools used for data analysis in MS WORD & MS EXCEL

Methodology (Ratios Used for Financial Analysis) A. Profitability ratios:

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1. Gross profit ratio (GP ratio ):Gross profit ratio is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales.
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 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. Hence, an analysis of gross profit margin should be carried out in the light of the information relating to purchasing, mark-ups and markdowns, credit and collections as well as merchandising policies. 2. 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, nonoperating 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. Net Profit Ratio = Net Profit / Net sales *100
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Here, Operating Net Profit = Gross Profit Operating Expenses such as Office and Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts, Interest on short-term debts etc. Significance: NP ratio is used to measure the overall profitability and hence it is very useful 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 minds that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales. 3. Operating ratio : Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales. It is generally expressed in percentage. It 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

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Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock Operating Expenses = Office and Administration Exp. + Selling and Distribution Exp. + Discount + Bad Debts + Interest on Short- term loans Significance:- Operating Ratio is a measurement of the efficiency and profitability of the business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of goods sold and operating expenses. Lower the operating ratio is better, because it will leave higher margin of profit on sales. 4. Return on share holders investment: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: Significance: Return on Net Worth= {(Net Profit after Tax Preference
Dividend)/Shareholders Fund}*100 This ratio is one of the most important ratios used for measuring the overall

efficiency of a firm. As the primary objective of business is to maximize its earnings, this ratio indicates the extent to which this primary objective of businesses being achieved. This ratio is of great importance to the present and prospective shareholders as well as the management of the company. 5. Return on Equity Capital (ROEC) Ratio
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In real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. (Preference share holders have a preference over ordinary shareholders in the payment of dividend as well as capital. Preference share holders get a fixed rate of dividend irrespective of the quantum of profits of the company). The rate of dividends varies with the availability of profits in case of ordinary shares only. Thus ordinary shareholders are more interested in the profitability of a company and the performance of a company should be judged on the basis of return on equity capital of the company. Return on equity capital which is the relationship between profits of a company and its equity, can be calculated as follows: Formula of return on equity capital or common stock: Formula of return on equity capital ratio is: Return on Equity Capital = {(Net profit after tax- Preference dividend)/Equity share capital}*100

Components: Equity share capital should be the total called-up value of equity shares. As the profit used for the calculations are the final profits available to equity shareholders as dividend, therefore the preference dividend and taxes are deducted in order to arrive at such profits.

Significance: This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Interpretation of the ratio is similar to the interpretation of return on shareholder's investments and higher the ratio better is.
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6. Earnings per Share (EPS) Ratio:- Definition: Earnings per share ratio (EPS Ratio) are a small variation of return on equity capital ratio and are calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. Formula of Earnings per Share Ratio: The formula of earnings per share is:
Earnings Per Share= Net Earnings /Number of shares outstanding

B. Liquidity Ratios 1. Current Ratio: This ratio explains the relationship between current assets and current liabilities of a business. Formula: Current Ratio = Current Assets/ Current Liabilities

Current Assets:-Current assets includes those assets which can be converted into cash with in a years time. Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment + Debtors(Debtors Provision) + Stock(Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expenses. Current Liabilities :- Current liabilities include those liabilities which are repayable in a years time. Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation + Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans Payable within a Year. Significance :- According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio.
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It means that current assets of a business should, at least, be twice of its current liabilities. The higher ratio indicates the better liquidity position. The firm will be able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicates lack of liquidity and shortage of working capital. The biggest drawback of the current ratio is that it is susceptible to window dressing. This ratio can be improved by an equal decrease in both current assets and current liabilities.

2. Quick Ratio Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately. Formula: Quick Ratio = Liquid Assets/ Current Liquid Assets means those assets, which will yield cash very shortly. Liquid Assets = Current Assets Stock Prepaid Expenses Significance :- An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better. This ratio is a better test of short-term financial position of the company. C. Activity Ratio or Turnover Ratio Activity Ratio or Turnover Ratio:- These ratio are calculated on the bases of cost of sales or sales, therefore, these ratio are also called as Turnover Ratio. Turnover indicates the speed or number of times the capital employed has been rotated in the process of doing business. Higher turnover ratio indicates the better use of capital or resources and in turn lead to higher profitability. It includes the following :
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a.

Stock Turnover Ratio:- This ratio indicates the relationship between the

cost of goods during the year and average stock kept during that year. Formula: Stock Turnover Ratio = Cost of Goods Sold / Average Stock Here, Cost of goods sold = Net Sales Gross Profit Average Stock = Opening Stock + Closing Stock/2 Significance:- This ratio indicates whether stock has been used or not. It shows the speed with which the stock is rotated into sales or the number of times the stock is turned into sales during the year. The higher the ratio, the better it is, since it indicates that stock is selling quickly. In a business where stock turnover ratio is high, goods can be sold at a low margin of profit and even than the profitability may be quite high. b. Debtors Turnover Ratio :- This ratio indicates the relationship between credit sales and average debtors during the year : Formula: Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R While calculating this ratio, provision for bad and doubtful debts is not deducted from the debtors, so that it may not give a false impression that debtors are collected quickly. Significance :- This ratio indicates the speed with which the amount is collected from debtors. The higher the ratio, the better it is, since it indicates that amount from debtors is being collected more quickly. The more quickly the debtors pay, the less the risk from bad- debts, and so the lower the expenses of collection and increase in the liquidity of the firm.
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By comparing the debtors turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not. c. Working Capital Turnover Ratio: Definition: Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio represents the number of times the working capital is turned over in the course of year and is calculated as follows: Following formula is used to calculate working capital turnover ratio
Working Capital turnover Ratio = Cost Of Sales/Net Working Capital

The two components of the ratio are cost of sales and the net working capital. If the information about cost of sales is not available the figure of sales may be taken as the numerator. Net working capital is found by deduction from the total of the current assets the total of the current liabilities. Significance: The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation.

d. Fixed asset Turnover Ratio: This ratio reveals how efficiently the fixed assets are being utilized. Formula:Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets
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Here, Net Fixed Assets = Fixed Assets Depreciation Significance:- This ratio is particular importance in manufacturing concerns where the investment in fixed asset is quit high. Compared with the previous year, if there is increase in this ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the previous year. D. Leverage or capital structure ratio Leverage or Capital Structure Ratio :- This ratio disclose the firms ability to meet the interest costs regularly and Long term indebtedness at maturity. These ratio include the following ratios : 1. Debt Equity Ratio:- This ratio can be expressed in two ways: First Approach : According to this approach, this ratio expresses the relationship between long term debts and shareholders fund. Formula: Debt Equity Ratio=Long term Loans/Shareholders Funds or Net Worth Long Term Loans:- These refer to long term liabilities which mature after one year. These include Debentures, Mortgage Loan, Bank Loan, Loan from Financial institutions and Public Deposits etc.

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Shareholders Funds :- These include Equity Share Capital, Preference Share Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and Credit Balance of Profit & Loss Account. Second Approach : According to this approach the ratio is calculated as follows:Formula: Debt Equity Ratio=External Equities/internal Equities Debt equity ratio is calculated for using second approach. Significance :- This Ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally, debt equity ratio of is considered safe. If the debt equity ratio is more than that, it shows a rather risky financial position from the long-term point of view, as it indicates that more and more funds invested in the business are provided by long-term lenders. The lower this ratio, the better it is for long-term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders. 2. Proprietary or Equity 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 Ratio = Shareholders Funds/ Total Assets

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Components: 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. Significance: This ratio throws light on the general financial strength of the company. It is also regarded as a test of the soundness of the capital structure. Higher the ratio or the share of shareholders in the total capital of the company better is the long-term solvency position of the company. A low proprietary ratio will include greater risk to the creditors. 3. Fixed Assets to Proprietor's Fund Ratio: Definition: Fixed assets to proprietors fund ratio establish the relationship between fixed assets and shareholders funds. The purpose of this ratio is to indicate the percentage of the owner's funds invested in fixed assets. Formula:

Fixed Assets to Shareholders Fund: Fixed Assets/ Shareholders Fund The fixed assets are considered at their book value and the proprietor's funds consist of the same items as internal equities in the case of debt equity ratio.
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Significance: The ratio of fixed assets to net worth indicates the extent to which shareholder's funds are sunk into the fixed assets. Generally, the purchase of fixed assets should be financed by shareholder's equity including reserves, surpluses and retained earnings. If the ratio is less than 100%, it implies that owners funds are more than fixed assets and a part of the working capital is provided by the shareholders. When the ratio is more than the 100%, it implies that owners funds are not sufficient to finance the fixed assets and the firm has to depend upon outsiders to finance the fixed assets. There is no rule of thumb to interpret this ratio by 60 to 65 percent is considered to be a satisfactory ratio in case of industrial undertakings.

4. Current Assets to Proprietor's Fund Ratio: Current Assets to Proprietors Fund Ratio establishes the relationship between current assets and shareholder's funds. The purpose of this ratio is to calculate the percentage of shareholders funds invested in current assets. Formula:

Current Assets to Proprietors Fund Ratio: Current Assets / Shareholders Fund

Significance: Different industries have different norms and therefore, this ratio should be studied carefully taking the history of industrial concern into consideration before relying too much on this ratio. 5. Interest Coverage Ratio:
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This ratio is also termed as Debt Service Ratio. This ratio is calculated as follows: Formula:
Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges

Significance :- This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges. This ratio measures the margin of safety for long-term lenders. This higher the ratio, more secure the lenders is in respect of payment of interest regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the company also , as nothing will be left for shareholders. An interest coverage ratio of 6 or 7 times is considered appropriate.

40

Data Analysis

Profitability Ratios 1. Gross Profit Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Gross Profit Margin 32.62 33.28 25.31 19.48 21.1

41

Gross Profit Margin 35 30 25 20 15 10 5 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 32.62 33.28 25.31 19.48 21.1

Gross Profit Margin on K.C. Engineers was 32.62% in 2008-2009 it went upto 33.28 in 2009-2010 but than it had fallen for consecutive 2 yrs to reach to the levelof 19.48 in 200809. It showed some improvement in 2009-10 but reached only till 21.1% not even close to the earlier levels. The reduction in the profits could be due to inefficiency or even may be because on the global economic slow down. But even in the slowdown period it was enough to recover the operating expenses and maintain reserves

42

Net Profit Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Net Profit Margin 20.2 19.39 18.51 18.11 17.72

Net Profit Margin 20.2 19.39 18.51 18.11 17.72

20.5 20 19.5 19 18.5 18 17.5 17 16.5 16

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

The net profit margin for K.C. Engineers for the year 2006-07 was 20.2 since then it has been decreasing constantly reaching a level of 17.72 in the year 2010-11. The constant fall in the net profit shows loss to the proprietors.

43

2. Operating Ratio
Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Operating Ratio 28.4 31.13 31.07 25.11 26.81

Operating Ratio 35 30 25 20 15 10 5 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 28.4 31.13 31.07 25.11 26.81

Operating Profit Margin for K.C. Engineers for the Year 2006-07 has been 28.4% then it showed some improvement for the next two years by reaching upto the level of 31.07% in the year 2008-09 but slipped to 25.11% in the year 2011-2012 then again recovered in 200910 and reached to 26.81%.

3. Return On Shareholders Investment

44

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Return on Net worth 12.95 14.13 13.66 13.9 13.69

Return on Net worth 14.4 14.2 14 13.8 13.6 13.4 13.2 13 12.8 12.6 12.4 12.2 14.13 13.9 13.66 13.69

12.95

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

Return on Net worth for K.C. Engineers in the year 2006-07 has been 12.95 then it increased in 2007-08 and is fluctuating

45

Return on Equity Capital

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Return on Equity Capital 0.71 0.83 0.9 1 1.06

Return on Equity Capital 1.2 1 0.8 0.6 0.4 0.2 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 0.71 0.83 0.9 1.06

4. Earnings Per Share

46

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

EPS 7.06 8.33 8.99 9.995 10.59

EPS 12 10 8 6 4 2 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 7.06 8.33 8.99 10.59

9.995

47

Liquidity Ratios 1. Current Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Current Ratio 2.11 2.42 2.36 2.89 2.81

Current Ratio 3.5 3 2.5 2 1.5 1 0.5 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2.11 2.42 2.36

2.89

2.81

48

2. Quick Ratio
Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Quick Ratio 1.84 2.18 2.16 2.59 2.5

Quick Ratio 3 2.5 2 1.5 1 0.5 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 1.84 2.18 2.16 2.59

2.5

Activity Ratios
49

1. Inventory Turnover Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Inventory Turnover Ratio 12.31 14.1 33.59 28.21 27.54

Inventory Turnover Ratio 40 35 30 25 20 15 10 5 0

33.59 28.21 27.54

12.31

14.1

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

50

2. Debtors Turnover Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Debtors Turnover Ratio 23.32 30.78 17.52 12.78 9.06

Debtors Turnover Ratio 35 30 25 20 15 10 5 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 23.32 17.52 12.78 9.06 30.78

51

3. Working Capital Turnover Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Working Capital Turnover Ratio 131.98 167.21 171.01 173.56 154.07

Working Capital Turnover Ratio 200 180 160 140 120 100 80 60 40 20 0 173.56 154.07

167.21 131.98

171.01

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

52

4. Fixed Assets Turnover Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Fixed Assets Turnover Ratio 0.76 0.82 0.7 0.67 0.7

Fixed Assets Turnover Ratio 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.82 0.7 0.67 0.7

0.76

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

Leverage Ratios 1. Debt Equity Ratio

53

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Debt Equity Ratio 0.46 0.52 0.5 0.59 0.59

Debt Equity Ratio 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 0.46 0.52 0.5

0.59

0.59

54

2. Proprietary Ratio
Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Proprietary Ratio 0.69 0.66 0.66 0.63 0.63

Proprietary Ratio 0.7 0.69 0.68 0.67 0.66 0.65 0.64 0.63 0.62 0.61 0.6 0.69 0.66 0.66 0.63 0.63

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

55

3. Ratio of Fixed assets to shareholders fund

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Fixed Assets to Shareholder's Fund 0.51 0.53 0.48 0.56 0.54

Fixed Assets to Shareholder's Fund 0.58 0.56 0.54 0.52 0.5 0.48 0.46 0.44 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 0.51 0.48 0.53

0.56 0.54

4. Current Assets to Proprietors Fund

56

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Current Assets to Shareholders Fund 0.075 0.093 0.11 0.12 0.17

Current Assets to Shareholders Fund

0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2008-2009 2009-2010 2010-2011 2011-2012 0.075 0.093 0.11 0.12

0.17

2012-2013

57

5. Interest Coverage Ratio

Year 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Interest Coverage Ratio 11.59 9.49 10.28 11.91 12.18

Interest Coverage Ratio 14 12 10 8 6 4 2 0 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 12.18

11.59 9.49

11.91 10.28

58

Limitations

The Limitations for the research are The data analysed that is the financial statements for the five years is not exhaustive to determine the future performance on the company. The data analysed is only quantitative and not qualitative like the human resource available to the company in the form of its management. The factors analysed are only the internal factors the external factors that is the effect of the changes in the economy are not considered.
59

60

FINDINGS, SUGGESTIONS AND CONCLUSION

FINDINGS, SUGGESTIONS AND CONCLUSION

The electricity supply has been in the public domain in most of the developing countries.
61

Under public ownership, the sector has not been able to catch up with the growing demand for electricity. The operational inefficiency and financial losses often lead to poor quality of supply and underinvestment. A wave of reforms has swept through a number of developing countries. These reforms were primarily targeted to improve the performance of the state owned companies and to provide a conducive atmosphere for private investment in the sector. The erstwhile vertically integrated SEBs in India has been riddled with inefficiencies due to a lack of accountability and administrative bottlenecks. Reforms in the Indian power sector were initiated to restructure the SEBs and to set up independent regulatory institutions. The Electricity Act 2003 led to deepening of the reform process by enabling competition in the wholesale electricity market and retail electricity supply, in phases. Thirteen SEBs have so far unbundled into separate generation, transmission and distribution companies. Beginning with the establishment of an independent regulatory commission in Orissa in 1996, the SERCs have been set up in all states. Some of the smaller states in the North East have established a Joint Electricity Regulatory Commission. The process of tariff determination has become more transparent and limited tariff rationalization has been undertaken against consumer opposition and political meddling. The emerging competition in the bulk power market and phased direct access to large consumers is aimed at reducing the risks associated with sales to financially weak state utilities. The policy and regulatory developments are promising, but more needs to be done to improve the performance of distribution utilities. Amongst other factors, the autonomy to manage these utilities in a commercial manner remains a key issue. In the long-run, the states objectives are best served by nurturing a financially sustainable sector that can improve access for poor and rural consumers. This research undertook a review of the policy and regulatory developments in the Indian power sector. A review of the literature and a comparative policy analysis helped us to unravel some of the lessons to be learned for the process of reform in developing countries in general. The initial phase of power sector reform in India allowed commercially-oriented IPPs to sell power to financially weak SEBs, which do not rely on sound commercial principles. This marriage of convenience is not sustainable. The initial phase of reforms in developing countries should be aimed to restructure the sector and to set up an independent regulator. As private participation grows,
62

it would be suitable to introduce competition in the sector. This would not only help lower the cost of power purchase, it would also provide greater incentive for performance improvement. The experience of private sector investment in Latin American countries relied on the introduction of commercial interest in the bulk power market by inviting IPPs as well as introducing commercial principles at the end of buyer utilities through their divestiture. The experience in East Asia and Latin America suggests that macroeconomic stability remains a key to attracting sustainable and increased investment in the infrastructure sectors. India continues to demonstrate macroeconomic stability along with prudent currency management. Future growth prospects in the power sector hold substantial potential for private investment. However, the financial performance of the state owned distribution utilities remains a key concern for investors. A positive outcome of existing distribution privatization programs would guide such future plans, which remain politically sensitive. The regulatory challenge is to provide incentives for improvement in technical efficiency and financial performance. The unavailability of sovereign guarantees can be adequately addressed if state utilities become viable through greater commercialization, if not privatization. Inability of the domestic capital market to provide long-term debt for the power sector needs to be adequately addressed by encouraging contractual saving through life insurance and pension funds, and channel zing these for the power sector. Securitization of project loans after the construction period and development of secondary bond market would help garner funds for investment in the sector. The long-term interest of the consumers can only be served if reasonably priced electricity is available over the long-run. Political interests would best be served by depoliticizing tariffs, which would be beneficial to consumers in the long-term through improved quality and reliability of supply. Given the objective to electrify all villages by 2010 and to double the generating capacity in the country by 2012, the need to improve the policy environment and strengthen the regulatory framework cannot be ignored.

63

APPENDIX

64

Balance Sheet of K.C. Engineers

Mar '07 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 8,245.50 8,245.50 0 0 36,713.20 0 44,958.70 6,173.50 14,464.60 20,638.10 65,596.80 Mar '07 Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions 45,917.60 22,950.10 22,967.50 13,756.00 19,289.10 2,340.50 867.8 176.8 3,385.10 6,555.10 8,294.60 18,234.80 0 4,910.30 3,740.30 8,650.60 50,604.20 25,079.20 25,525.00 16,962.30 16,094.30 2,510.20 1,252.30 750.1 4,512.60 8,781.70 12,564.50 25,858.80 0 5,422.20 5,280.30 10,702.50 53,368.00 27,274.30 26,093.70 22,478.30 15,267.20 2,675.70 2,982.70 473 6,131.40 9,936.20 14,460.20 30,527.80 0 5,548.40 7,360.60 12,909.00 62,353.00 29,415.30 32,937.70 26,404.90 13,983.50 3,243.40 3,584.20 271.8 7,099.40 7,826.10 15,999.80 30,925.30 0 7,439.20 3,249.50 10,688.70 8,245.50 8,245.50 0 0 40,351.30 0 48,596.80 7,479.60 17,661.50 25,141.10 73,737.90 Mar '08 8,245.50 8,245.50 0 0 46,021.90 0 54,267.40 7,314.70 19,875.90 27,190.60 81,458.00 Mar '09 8,245.50 8,245.50 0 0 50,749.40 0 58,994.90 8,969.60 25,598.20 34,567.80 93,562.70 Mar '10 Mar '08 Mar '09 Mar '10

(in Rs. Cr.) Mar '11 8,245.50 8,245.50 0 0 55,478.60 0 63,724.10 9,079.90 28,717.10 37,797.00 1,01,521.10 Mar '11

66,663.80 32,088.80 34,575.00 32,290.60 14,807.10 3,347.70 6,651.40 634 10,633.10 6,357.10 13,825.50 30,815.70 0 7,896.80 3,070.50 10,967.30 65

Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

9,584.20 0 65,596.80 16,429.80 54.53

15,156.30 0 73,737.90 25,218.80 58.94

17,618.80 0 81,458.00 29,361.80 65.81

20,236.60 0 93,562.70 66,083.20 71.55

19,848.40 0 1,01,521.10 40,044.00 77.28

Profit & Loss account of K.C. Engineers

Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

------------------- in Rs. Cr. ------------------Mar '07 Mar '08 Mar '09 Mar '10 Mar '11

26,318.60 175.7 26,142.90 2,897.90 0 29,040.80 25 16,497.10 1,137.50 705.1 353.2 247.2 -256.4 18,708.70 Mar '06

32,817.30 185.6 32,631.70 2,875.60 0 35,507.30 23.7 19,947.60 1,362.60 842.9 410.8 292.4 -418.4 22,461.60 Mar '07

37,302.40 211.4 37,091.00 3,119.70 0 40,210.70 26.8 22,160.70 2,229.30 920 389.8 368.2 -544.7 25,550.10 Mar '08

42,196.80 221.6 41,975.20 3,012.80 0 44,988.00 31 27,292.30 2,897.60 940 473.2 394.9 -637.4 31,391.60 Mar '09

46,623.60 245.9 46,377.70 2,872.80 0 49,250.50 31.1 29,689.10 2,946.80 1,096.60 578.5 436.4 -866.9 33,911.60 Mar '10

Operating Profit PBDIT Interest

7,434.20 10,332.10 2,004.60

10,170.10 13,045.70 2,055.70

11,540.90 14,660.60 1,982.20

10,583.60 13,596.40 1,737.00

12,466.10 15,338.90 1,861.90 66

PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value(Rs)

8,327.50 2,047.70 1.3 6,278.50 633.7 6,912.20 1,082.40 5,820.20 18,683.70 0 2,308.70 323.8

10,990.00 2,075.40 9.9 8,904.70 134.2 9,038.90 2,163.70 6,864.70 22,437.90 0 2,638.50 389.6

12,678.40 2,138.50 3.1 10,536.80 -114 10,422.80 2,994.20 7,414.80 25,523.30 0 2,885.90 490.5

11,859.40 2,364.50 3.6 9,491.30 1,305.20 10,796.50 2,554.70 8,201.30 31,360.60 0 2,968.30 501.7

13,477.00 2,650.10 4.3 10,822.60 616.1 11,438.70 2,682.70 8,728.20 33,880.50 0 3,133.20 527.6

82,454.64 7.06 28 54.53

82,454.64 8.33 32 58.94

82,454.64 8.99 35 65.81

82,454.64 9.95 36 71.55

82,454.64 10.59 38 77.28

Cash Flow of K.C. Engineers

------------------- in Rs. Cr. ------------------Mar Mar '08 Mar '09 Mar '10 Mar '11 67

'07 Net Profit Before Tax Net Cash Flow From Operating Activities 6271.2 6206.4 2713.6 1099.7 8896.5 8065.3 10529.4 10171.1 9467.8 9688.1 10807.6 10594.2

Net Cash (used in)/from Investing Activities

-3145.8

-6203.8

-7500.4

-10498

Net Cash (used in)/from Financing Activities

-76.3

-2348.7

-849.3

-1908.6

Net (decrease)/increase In Cash and Cash Equivalent

2393.1

4843.2

1618.6

1338.4

-1812.1

Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents

6078.3 8471.4

8471.4 13314.6

13314.6 14933.2

14933.2 16271.6

16271.6 14459.5

68