Chapter – I

INTRODUCTION

The signification of financial performance analysis of any business

undertaking in general or in particular hardly needs any emphasis. Notably as a potent
instrument. Proper financial analysis not only helps largely in finding goal deviation
of available both physical and financial.

Its scope is for expansive because the techniques of financial analysis that are
employed for diagnosing the economic health of an enterprise eventually helps both
the internal and external parties concerned with the interest in the profitability of that
enterprise in evaluating its over all performance.

Financial Performance Analysis : the Concept

Simply financial analysis by scientific evaluation of the profitability and
financial strength of any business concern infect, financial analysis in the process of
making a study on the financial and operational data contained in the profit and loss
account and the balance sheet of a give concern and there by satisfying the
information needs of the internal and external users of such data. On the other hand,
financial analysis of the process of scientifically making a proper and comparative
evaluation of the profitability and financial health of the given concern on the basis of
summarized and analyzed data in the output of financial analysis.

Thus it follows the above that the analysis of financial statements as financial
analysis of the results dawn by the analysis (or) management accounts obviously the
analysis of such results is made by the management by decision making process.

Thus, it is evident that the financial analysis being so, starts where the
summarization of financial data in the form of usual profit and loss account and
balance sheet ends. In other words financial analysis is the end of that continuous
flow of accounting cycle which starts from classification, recording, summarizing,
presentation and analysis of data and ends with interpretation of he results obtained
from such an analysis. Notably in practice the entire exercise up to the point of
analysis of the financial and accounting data is performed by the accounts division of
a business enterprise where as analysis (or) evaluation part is the major concern of
management.

Placing the analysis and interpretation of financial statements are an attempt to

determine the meaning and signification of these financial statements so that a
forecast could be made of the prospects for the future earning ability, to pay interest
and debt machines (both current and long term) and profitability of a sound dividend
policy. Financial statement of a business enterprise are valuble in the sense that they
relate how the financial data of the concerned enterprise fit into the facbric of its
accounting system.

The analysis and interpretation of the financial statements results in the

presentation of the information that will aid in decision making by business managers,
investors and creditors as well as other groups who are interested in the financial
status and operating results of a business.

According to more, financial is process, syntheses and summarization of

financial and operative data embodied in the financial statements with a view of
getting an insight with the operative activities of a business enterprise weasels, views
it as technique X – raying the financial position as well as the progress of the
company by establishing strategic relationships between the components of balance
sheet and profit and loss account and other operative data, financial analysis
eventually unveils the meaning and significance of the various items embodied in the
financial statements, also known as the financial blue prints of a business concern.

As mentioned earlier, the major and the most significant financial statements
of a business concern are the profit and loss account and the balance sheet. The profit
and loss account is a dynamic statement that records income(s) and expense(s)
between the two balance sheet dates, the balance sheet is a static statement which
shows the financial position on a certain date. Thus, the latter is an intentions
photograph of the assets, liabilities and the net worth of an enterprise at a particular
unit of time.
 The analysis of both the statements gives a comprehensive understanding of
business operations of the related concern as also of their impact on the financial
health. A careful perusal of profit and loss account throws ample light on the
operating efficiency, inventory management, control over indirect overheands and
other policies pursued by the concern. Moreover, a study of the major individual
items of other statements will measure the activity and the profitability of the
enterprise. Since both the major financial statements are interrelated the exclusive
analysis of either of them would not lead to purposive exercise.

The main purpose of financial is to make available to creditors, shareholders

and general public adequate information about and evaluation of corporation’s
financial conditions.

Special interest to banks and other lenders of funds to corporations, are the
various ratios that enable creditors and investors to analyze the progress of company.
These ratios help in comparing current accomplishments and financial prospects of a
business corporation with those of its past as well as those of similar corporations.

The general public and particularly and particularly the investors in corporate
securities are concerned about the soundness of a business in which they have
purchased or contemplating to purchase a share of ownership. The analysis of a
company’s securities requires valuation of its art performance as reflected in the
previous financial statements and of its probable future performance considering the
overall business environment and futuristic trends.

Meaning and Significance of Ratio Analysis

Finance has many meanings such as management of money, provide with
money, find capital etc., finance places an important role in any organization. Finance
now – a – day became a special function. It requires over all knowledge of the
environment in which it is read.
 Finance includes money banking and credit of different types and classes. It I
viewed different by different people depending upon their interest, like management
promoters, shareholders organization or business enterprise.

Definition
There are many definitions of finance of all the best was Harvard and
UPTON’s definition. They defined finance as “ That administrative area of set of
administration functions in an organization, which have to do with the management of
the flow of the cash so that the organization will have the means to carry out its
objectives as satisfactory as possible and at the same time meet its obligations as they
become due”.

Meaning of Financial Management

Financial management is the managerial activity, which is concerned with
planning and controlling of the financial resources. Financial management is not a
totally independent area. It is an integral part of the overall management.

It draws heavily all related disciplines and fields of study namely economics,
accounting, marketing, production and quantitative methods. Although these
disciplines are interrelated there are key differences among them.

Functions
Managerial finance functions are those functions which require skilful
planning. Control and execution of financial activities. Routine finance functions, on
the other hand, do not require a great managerial ability to carry them out. They are
chiefly clerical in nature and is incidental to the effective handling of managerial
financial functions.

There are 4 important managerial finance functions.

1. Investment or long – term assets – mix decision.
2. Financing or capital – mix decision.
3. Dividend or profit allocation decision.
4. Liquidity or short – term asset – mix decision.
Investment Decision
Investment decision or capital budgeting is the oldest area of the recent
thinking in finance. It relates to allocation of capital and involves decisions to commit
funds to long – term assets which would yield benefits in future. It is one of the very
significant aspect in the task of measuring the prospective profitability of new
investments. Because the capital budgeting decision involves risk. Investment
proposals should therefore, be evaluated in terms of both expected return and risk.

Finance Decision
Financing decision is the second important function to be performed by the
financial manager. Broadly, he must decide when, where and how to acquire funds to
meet the firms investment needs. The central issue before him is to determine the
proportion of equity and debt. The mix of debt and equity is known as the firm’s
principle capital structure. Then the financial manager must strive to obtain the best
financing mix on optimum capital structure for his firm. The firm’s capital structure
is optimum then the marker value of the shares is maximized. The use of debt it
always increase risk. Once the financial manager is able to determine the debt
combination of debt and equity, he must raise the appropriate best combination of
debt and equity, among the best available sources.

Dividend Decision
Dividend decision is he third major financial decision. The financial manager
must decide whether the firm should distribute all the profits, or return them, or
distribute a portion and retain the balance. Like the debt policy, the dividend policy
should be determined in terms of its impact on shareholder’s value. The optimum
dividend policy is one, which maximizes the market value of the firm’s shares. Thus,
if shareholders are not indifferent to the firm’s dividend policy, the financing manager
must determine the optimum dividend pay out ratio.

Liquidity Decision
Current assets management which effects a firm’s liquidity is yet another
important finance function, in addition guarding the firm against the dangers of
illiquidity and insolvency. Investment in current assets effects firm’s profitability,
liquidity and risk. A conflict exists between profitability and liquidity while managing
the current assets. If the firm does not invest sufficient funds in current assets it will
become illiquid and it would lose profitability as idle current assets would not earn
anything. So the financial manager should develop sound techniques of managing the
assets. Financial decision thus directly concern the firm’s decision to acquire or
dispose of assets and require commitment or recommitment of funds on a continuous
basis.

Objectives of the Financial Management

The objectives shows that financial management as an academic discipline,
concerned with decision – making in regard to the size to composition of assets and
level of structure of financing. He objectives provide a frame work for optimum
financial decision making.

Scope of the Financial Management

The scope of financial management is divided into two categories.
1. Traditional approach
2. Modern Approach

Traditional Approach
The traditional approach to the scope of financial management refers to its
subject, mathematics in the academic literature in the initial stages of its evolution as
a separate branch of academic study. In the earlier stages financial management was
knows as “corporate finance”. As the name suggests the concern of the corporate
finance functions was treated by the traditional approach in the narrow sense of
procurement of funds by corporate enterprises to meet their financing needs. The term
“procurement” was used in a broad sense so as to include the work of raising funds
externally. This defined, the field of study dealing with finance was tracked as
encompassing three inter-related aspects of raising an administering resources from
outside.

The traditional approach to the scope of the finance function evolved during
the 1920s and 1930s dominated the academic thinking during early fifties. It has now
been described as it suffers from serious limitations. The weakness of the traditional
approach fall into two broad categories.

1. Those relating to the treatrnent of various topics and the emphasis

attached to them.
2. Those relating to the basic concept and analytical framework of the
definitions and scope of the finance.

Modern Approach
The modern approach views the term financial management in a broad sense
and provides a conceptual and analytical framework for financial decision making.
According to it, the issues involved in acquiring external funds, the main concern of
financial management is the efficient and wise allocation of funds to various use
defined in a broad sense, it is viewed as an integral part over-all management.

The new approach is an analytical way viewing the financial problems of a

firm. The main contents of this approach are what is the total volume of funds an
enterprise should commit? The principal contents of modern approach to the financial
management can said to be
i) How large should an enterprise be, and how fast should it grow?
ii) In what form should it hold assets?
iii) What should be the composition liabilities ?

The three questions posed above the major financial problems of the firm. In other
words, financial management according to the new approach is concerned with
the solution of three major problems relating to the financial operations of a firm.
Corresponding the three questions namely investment, financing and dividend
decisions. Thus, financial management, in the modern sense of the firm, can be
broken down into three major decisions as functions of finance they are ;

1. The investment decision

2. The financing decision
3. The dividend policy decision.
Financial Statements
A firm communicates financial information to the users through financial
statements and reports. The financial statements contain summarized information the
firms financial affairs, organized systernatically. They are the means of foreseen the
firms financial situation to users. Preparation of financial statements is the
responsibility of top management. As these statements ate used by the investors and
financial analysts to examine the firm’s performance in order to make investment
decisions. They should be prepared very carefully and contain as mush information as
possible.

Two basic financial statements ate prepared for the purpose of external
reporting to the owners, investors and creditors are
1. Balance sheet
2. Profit and loss Account or Income statement.

Financial statements ate prepared form the accounting records, maintained by

the firm. The generally accepted accounting principles and pricedured are followed to
prepare these statements.

Meaning of the Ratio

A ratio is a mathematical relationship between two related items in expressed
in quantitative from. When the definition of ratio is explained with reference to the
items shown in financial statements, then it is called “accounting ratio”. Hence an
accounting ratio is defined as quantitative relationship between two or more items of
the financial statements connected with each other.

This quantitative relationship (i.e., ratio) may be expressed in either of the

following ways :
A. In proportion : In this from the amounts of the two items are being expressed
in a common denominator. The example of this form of expression is the
relationship between current assets and current liabilities “2 :1”.
 B. In rate or times or Co – efficient : In this form a quotient obtained by divide
one item by another item is taken as unit of expression. The example of this
form is sales divide by stock (say it comes 6), thus 6 time is the ratio between
sales and stock. It is important to note that when ratio is expressed in this
form, it is called as “turnover” and is written in “times”.
C. In percentage : In this form a quotient obtained by dividing one item by
another is multiplied by one hundred and it becomes “percentage” form of
expression, for example the relationship between profit and sales may be
expressed as 25 percent.

Need and Significance of Ratio Analysis

The need significance of ratio analysis is due to the following facts :
i) Business facts shown in financial statements do not carry any importance
individually. This importance lies in the fact that they are interrelated.
Hence there is need for established relationship between various but
related items, if any correct and accurate conclusion is to be drawn by their
uses.
ii) Ratio analysis is a tool for the interpretation of financial statements. It is
also significant because ratio help the analyst to have a deep knowledge
into the data given in statement. In fact, they are basically dumb ratio
provide power to speak.
On account of the above facts plus the utility discussed earlier, the use of ratio
analysis has increased considerably. It is now being used as a device to diagnose the
financial health of business concern. It signifies whether the financial health of the
concern is vital, strong, good or poor and weak. Like doctor’s prescription ratios
represent the figures containing the condensed report of the position, progress and
problems of the concern. Like the management, outsiders, creditors, bankers and
shareholders etc., may also use ratio analysis as a tool for financial analysis and
interpretation. Ratio analysis may high light upon the few phases of the business
operations in which the outsiders are most interested by ascertaining the rate and
direction of change and future potentialities. Thus ratio analysis is a powerful tool for
better internal and external analysis.
Objectives of Ratio Analysis
Ratio analysis serves the purpose of various parties interested in financial
statements. Primarily, the object of ratio analysis is to help management in analyzing
and interpreting the financial statements to get adequate information useful for the
performance of various functions like planning, co-ordination, control,
communication and forecasting etc., although each ratio is to some specific utility for
a particular used the general utility or ratio analysis may be summarized as under.

i) Trends in costs, sales profits and other related facts are revealed by the
past ratios and future event can be forecasted on the basis of such trends.
ii) Ideal ratio may be constructed and the relationship found between strategic
ratios can be used for achieving the desired co – ordination.
iii) Ratios may be used as instrument of management control particularly in
the areas of sales and costs.
iv) Ratios also facilitate the functional communication. It can be easily
conveyed through the ratios as what has happened during the two
intervening periods.
v) Ratios may also be used as a measure of efficiency since ratios being
possible.
vi) To helps in investment decisions to make profitability investments.

Procedure of Ratio Analysis

The following is generally followed, while analyzing the financial statements
through ratio analysis.
a) Arrangement of data
b) Classification
c) Interpretation of calculated ratios
d) Projections through ratios

Classification of Ratios
Ratios may be classified from various stand points. Some of the possible
classifications are being mentioned below.
 a) Classification by Statements : This classification is based on those
statements from which information’s are obtained for calculating the ratios,
since accounting information are obtained mostly from two statements i.e.,
balance sheet and profit and loss account. Therefore, the following are
included in this classification.
1. Balance sheet : These are also sometimes called financial ratios and include.
i. Liquidity ratio.
ii. Current ratio
iii. Stock ratio
iv. Capital – generating ratio
2. Balance sheet and profit and Loss account ratios : These are also called
inter statements ratios or combined ratios or mixed ratios and include.
i. Return on capital
ii. Return on shareholders fund
iii. Stock turnover
iv. Debtors turnover
v. Creditors turnover
vi. Working capital turnover
vii. Current assets turnover
viii. Total turnover
ix. Fixed assets
x. Net sales to tangible assets

b) Classification by Users : This classification is based on the parties who are

interested in making the case of these ratios. This classification includes
i) Ratios management
ii) Ratios for creditors
iii) Ratios for shareholders
c) Classification by relative importance : This classification includes
a. Primary Ratios
b. Secondary performance Ratios
c. Secondary credit Ratios
d. Growth Ratios
d) Classification by relative importance
e) Classification by nature
f) Classification by purpose
Thought this ratio analysis identifies the ability of the firm meet its current
obligations, the extent to with the firm has used its long term solvency by borrowing
funds. The efficiency with which the firm is utilizing its various assets in generating
sales revenue and the overall operating efficiency and performance of the firm is net
with out limitations.

Even with these limitations ratio analysis helps in identifying the strengths and
weaknesses of the firm to certain extent. The process of identification of strengths and
weakness is by comparison with standards. The standard may be industrial standards,
firm’s past Ratios and the ratios of the leaders of the industry.

Limitations of Ratios
The following are the limitations of ratios
1. Ratios are not an end in themselves but they are means to achieve a
particular end.
2. A single ratio itself is not important or has limited value because trend
is more significant in the analysis. At the same time, a change in a
particular ratio is meaningful, only when it is studied with reference to
other ratios. The accuracy and correctness of ratios are totally
dependent upon the reliability of the data contained in financial
statements on the basis of which ratios are calculared.
3. Ratios become meaningless if details from which they are derived in
this is more true when there is some sort of window dressing in the
financial statements.
4. Ratios may the comparative study complicated and misleading an
account of changes in price level.
Inherent limitations of financial ratios : Expert’s View

Various financial ratios like current assets to current liabilities, which help to
determine and interpret the strengths and weaknesses of any company are subject to “
inherent limitations”.
 The balance sheet and profit and loss account of a company being a
“combination of recorded facts, accounting conventions, accepted accounting
principles and personal judgments”, the financial ratio derived from these could not
be considered as “exact measures”.

This aspect is highlighted in a background paper circulated to bankers to

merchant bankers participating in a tow-day programme on “project appraisal” which
is opened and organized by the Industrial and Technical Consultancy Organisation of
Tamil Nadu (ITCOT)

Any single financial ratio by itself could not give a complete picture. Because
over emphasis in a past ratio without considering other ratios could lead wrong
inferences. Therefore all relevant ratios should be taken together and their effects
should be assessed before arriving at a correct conclusion. Each ratio makes its own
contribution to the interpretation of financial condition. So, it must be considered in
connection with other ratios to obtain a clear picture of soundness or weakness of a
concern.
 COTTON INDUSTRY PROFILE
Cotton:
Cotton is a white gold, natural vegetable fiber of great economic importance
as a raw material for cloch. Its wide speed use is largely due to the case with which its
fiber are spun in to yarn. Cotton’s strength, absorbency, and capacity to be washed
and dyed also make it adoptable to a considerable variety of textile products. Cotton
it’s fashionable, natural and versatile
History:
The oldest cotton fibers and boil fragments, dated from around 5000 B.C.,
were discovered in Mexico. In 5000 B.C., the greek historian Herodotus reported of a
pant that “bore fleece” cotton has been in India and Egypt forever 5000 years. Cotton
was grown by Native Americans as early as 1500. in England in the 1700s, it was
against the law import or manufacture fabric made of cotton since it was a threat to
the sheep and wool industry. American colonists were able to grow lots of cotton, but
processing was difficult. It was not until the 1700s that the cotton industry flourished
in the United states.
It was ten that Slater, an Englishmen, built the first American Cotton mill
these mills converted cotton fibers into yarn and cloth. In 1793 Eli whitney developed
the cotton gin, which mechanically separates the seed from the lint fiber. Whitney
named his machine a “gin, “short for the word “engine technology has improved over
the past centuries making cotton growth and production much more efficient
Cotton Plant
Cotton is produced by small trees and shrubs which bear botanical mane
“GOSSIPIER”. One or two week after showing shoots appear and 50 to 80 days later
flowering begins. First buds are formed. After three weeks blossoms appear after
blossoming the petals fall offend the offspring or the boll develops. The bolls divided
by partition into 3-5 sections contain seeds. Fiber grows on the seeds. The plant has
certainly been grown and used in India for at least 5000 years and probably for much
longer. Cotton was used also by the ancient Chinese, Egyptians, and North and South
Americans.
I nearly spring seeds are planted one to three in seed, by mechanical planters,
seed beds. Plants are irrigated fertilized and weeded, as needed, during the 25 week
growing cycle. The first true leaves appear after two to four weeks with the bud, also
known as a “square” appearing about five seven weeks after planting. The white
blossoms become pollinated, turn light pink and then wither at about nine weeks
letting the cotton boll develop, producing the fibers and seeds that are harvested.
The cotton bolls open naturally over time and defoliant chemical is applied
grounder air to ensure top quality. This helps the leaves dry and fall off and any
remaining closed bolls to open. A mechanical cotton harvester moves though the field
picking the cotton, which then packed into truck load sized “modules” and taken to
the gin. The gin separated the cotton fibers from the seeds. Cleaning equipment
removes twigs and other debris. The fiber, now called lint, is packed into 500 pound
bales and then transported to textile mills.
He cotton is carded roomed, making all of the fibers run parallel, and then
spun in to thread. Some whole cotton seed is fed to cattle. Some seed is further
processed. The fine “linter” fibers are removed and the seed is pressed and cooked,
producing cotton seed oil ad meal.

Variets:
There are five main varieties grown throughout the world Egyptian. American
pima, sea island, Asiatic and upland. The most prominent types of cotton grown in
California are upland, whose fiber lengths are 13/16” to 11/4” in length, and
American pima, whose fiber lengths are 15/16” to 11/2” seventeen states in the nation
produce cotton with over 14 million acres of cotton planted annually.

TYPES OF COTTON:
India grows all the four major types of cotton G arbor turn, G hirsute, G
herbaceous, and barb dense the first hybrid in the cotton crop was developed in India,
in surat, by dry C T patel (H4 intra hirsute in 1970) more than 200 varieties and
hybrids were evolved in the subsequent five decades. Hybrids occupy around 45% of
cotton crop in India, as in 1998. important landmarks in the Indian cotton history
include the development and release of native hybrids like G got DH37, G got 9,
DDH 2 and drought tolerant straights varieties like SRT 1, renuka, LRA 5166, anjali
and Rajat.
CULTIVATION:
Successful cultivation of cotton requires alone growing season, plenty of
sunshine and water during the period growth, and dry weather for harvest. It
cultivated in countries with hot climate as India, China, USA, Pakistan. Cotton
producing areas in India are spread thought out the country. Panjab, Hariyana,
maharastra, Andhra Pradesh, Thailand and Karnataka are the major cotton producing
states.
Cotton is shown around May & Jane and harvested around September, to
December. In different parts of the country a number of methods, chemical and
mechanical, have been used to control weeds and grass, including intensive spraying
of herbicide before and after planting.

COTTON INSECTS AND DISEASE:

In addition to the flowers. The under side of each leaf of the cotton plant
contains a small cuplike structure holding nectar. These deposits and the succulent
stem make the plant attractive to a variety of insert pests. Chief among these is the
boll weevil. The use of early maturing strains of cotton plus the application of several
comical and control methods have greately reduce loses from boll-weevil infestation
the boll worm the pink larva of a small month is beloved to have been a native of
India but is now parasitic on cotton all over the world. Quarantine, fumigation of
seed, and destruction of trash removed from the cotton in ginning arecontrol measures
boll-worm tobacco budworm also is one of the most damaging cotton pests in terms
of loses and control costs. Army worm, trips, lygus, and red spider are among other
scientific pests.

PROCESSING:
Raw cotton kappa’s which is picked from fileds contains seed. To separate the
seed from raw cotton it is taken to machine called gins. Where seed is separated from
kappas. The kappa’s with seeds so generated is called lint. It is in loose from the
cotton above lint is pressed and packed in bal from in hydraulic/pneumatic press and
taken to mills.
USES:
Like lumber, cotton comes in many varieties and qualities, each suitable fro
different purposes. The longlint fibres are used for many thins, most of which begin
with a thread, yarn or cotton fabric. Clothing and bedding items are common
products. The smaller cotton fibers. As linters, are removed from the seed and are
used as stuffing for furniture and components of linoleum, plastics and inulation.

MARKETING:
In determining the value of cotton samples are drawn from random bale and
evaluated according to staple, grade, and character. Staple refers to fiber length. Fiber
length can be classified into three grades i.e., 1. short staple, 2. medium staple, 3. long
staple.
Grader refers to color, brightness, and amount of foreign matter. Color groping
indicates the degree of whiteness. Character refers to the diameter, strength, body,
maturity, uniformity, and smoothness of the fiber.

COTTON SEED:
Once a waste-disposal problem for gains, cotton seed is a valuable by-
product. The seed goes to oil mills, where it is deleted of its linters in an operation
similar to ginning. The brae seed is then cracked and the kernel removed. The meal
that remains after the oil has been extracted is high in protein. Linters are used for
padding in furniture and automobiles, for absorbent cotton swabs, an for miniature of
many celloulose products such as rayon, plastics, lacquers and smokeless power for
munitions.
The hulls, or husks, are used as feed for cattle. Kernels, or meats, provide
cotton seed oil refining, provides fatty acids for industrial products also in India cotton
seed is directly expelled and cotton seed cake containing oil up to 6% is directly used
as a cattle feed.

PRODUCTS:
Cotton is still a principal raw material for the world’s textile industry, but its
dominant position has been seriously eroded by synthetic fiber. Increased global
production, emergence of synthetic as an alternative to cotton textile and improved
productivity are mainly contributing for world supply. World demand for cotton
continued to be erotic, and some groups lobbied for increased price supports. But an
up word trend began in the 1980s.
World production of cotton in the early 1990s stood at 18.9 million metric tns
annually. The leading producers include USA China, India, Pakistan and Turkey.
Cotton textiles commend a significant share in exports from India it accounts for
nearly 22% of the total exports.

TOP PRODUCTING COUNTRIES:

The majority of the cotton is produced in the cotton belt of the. United States,
ranging along the southern part of the nation from California to Florida and Virginia.
In the 2004, cotton was produced in 13 California countries from as for north as glen
country ands far south as imperial country. Major production areas Fresno, kings and
Merced countries.

COTTON EXPORTS FROM INDIA:

As late as 1815, India exported to England alone goods worth $1,300,000.
One third of contemporary Indies exports earnings the textile sector. Cotton alone
constitute around 60% of the raw material. Cottons shares in world textiles
manufacturing is around 45% where as in India, its share is around 70%.
• LINT : Blouses, shirts, Yarn, Rugs, Pants, Rope,
Money, Towels, Sheets.
• DEBRIS : Tilled into soil, compost.
• COTTONSEED : Planting seed, margarine, cosmetics, soaapsalad
dressing.
• LINTERS : Paper, bandages and gauze, cellophane,
linoleum.

INDIAN TEXTAILE INDUSTRY:

• Largest gross and net foreign exchange earner
• 31% of the exports earnings with practically no import content.
• 31% of the incastrial production
• 7% of GDP.
• Direct employment to nearly 3 crows of people.
 • 10% of excise revenue.

PROFILE OF THE INDIAN TEXTILE INDUSTRY

Organization sector Installed capacity
No.of mills 1875
Ring spinning 36 Mn spindles
OE spinning 3,79,579 rotors
Looms 1,19,033 (mill sector)

SSI SECTON
No.of mills 861
Ring spinning 1.65 Mn spindle
OE spinning 37,702 rotors
 FINDINGS
The following are the findings after a detailed study about working capital
management in “Sri Dhana Lakshmi Cotton & Rice Mills (p) Ltd”.

 The net working capital position of Sri Dhana Laksmi Cotton & Rice Mills (P)
Ltd is gradually increasing thought out the study period of 2002-2003 to 2006-
07.
 It is observed that the current Ratio is more than the standard norm i.e, 2:1
under the period of study.
 The quick ratio Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd shows
increasing trend under the period of study 2002-03 to 2006-07.
 It is found that the company cash & bank balances gradually increased from
the study period of 2002-03 to 2006-07.
 The Inventory turnover ratio had been fluctuated through out the study period
of 2002-03 to 2006-07.
 From the debtors turnover ratio It is observed that the debtors are collecting
rapidly.
 It is observed that the working capital turnover ratio had been fluctuated under
the period of study.
 It is found that the Creditors Turnover Ratio of Sri Dhana Lakshmi Cotton &
Rice Mills (P)Ltd is under fluctuating trend from the period of Study 2002 -03
to 2006-07.
 The Debt Equity Ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd had
been fluctuated through out the study period of 2002-03 ot 2006-07.
 SUGGESTIONS
 The net Working capital of Sri Dhana Lakshmi Cotton & Rice Mills (P)
Ltd had been increasing year to year. It is suggested that the company
should continue the same level of net working capital in future to make the
profits.
 The Current Ratio is more than the standard norm. it is good to the
organization. It is advised to maintain in future also……..
 It is suggested to maintain same levels of quick ratio for the up coming
years to meet the current requirements of Sri Dhana Lakshmi Cotton &
Rice Mills (P) Ltd .
 The company cash and bank balances increased gradually year by year. It
should be maintain in future also for meet the liquidity operations.
 The inventory turnover ratio of Sri Dhana Lakshmi Cotton & Rice Mills
(P) Ltd is in fluctuated during the study period of 2003-07 it is not
factorable to the company. So, the company must try to maintain optimum
inventory levels to meet the stock requirements.
 The Debtors turnover ratio is under satisfactory position. It is suggested to
maintain the same levels in future for better liquidity of debtors.
 The company should maintain same collection period in case of debtors
for better trade credit management in future.
 The working capital turnover ratio of Sri Dhana Lakshmi Cotton & Rice
Mills (P) Ltd is decreasing year by year. It indicates less efficiency of firm.
So, that company must try to improve it and make more sales by utilization
of working capital.
 The Debt equity ratio of Sri Dhana Lakshmi Cotton & Rice Mills (P) Ltd
show that the total debt is less that the total share holder funds. It is
advised to maintain the same proportion in future to make better financial
soundness of company.
 The company payable management is not favorable. It is suggest that to
maintain optimum ratio for better trade credit management.
 CONCLUSION
By observing the study we may conclude that, the present study has been
conducted to analyzed and evaluated the working capital position of Sri Dhana
Lakshmi Cotton & Rice Mills (P) Ltd through ratios.

The performance of company is observed through the Liquidity, leverage,

Turnover Ratios. With reference of the study we can observe that……

The liquidity position of the company is under satisfactory condition. Thus,

the company is in a position which can satisfy the current obligations. There is some
fluctuations in Turnover Ratios and Leverage Ratio. The profitability of the firm
increasing significantly through out the study period of 2002-03 to 2006-07. the long
–term solvency of the firm is under satisfactory position.

The recommendations and given, if adopted will improve position of the

company substantial and optimal profitability coupled with better service and
satisfactions for the investors may be achieved.
 BIBLIOGRAPHY

AUTHOR NAME TITLE OF THE PUBLICATIONS

BOOK
M.Y. KHAN & P.K. FINANCIAL TATA McGRAW-
JAIN MANAGEMENT HILI PUBLISHING
TEXT AND COMPANY
PROBLEMS LIMITED, NEW
DELHI
PRASANNA FINANCIAL TATA McGRAW-
CHANDRA MANAGEMENT HILI PUBLISHING
THEORY AND COMPANY
PRACTICE LIMITED, NEW
DELHI
I.M.PANDEY FINANCIAL VIKAS PUBLISHING
MANAGEMENT HOUSE PVT.LTD,
NEW DELHI

 ANNUL REPORTS OF SRI DHANA LAKSHMI COTTON & RICE MILLS

PVT.LTD.,

WEBSITES :

www.sridhanalakshmi.com
www.cottonindia.com
Liquidity Ratios
CA
Current ratio :
CL

Year Current Assets Current Ratio

Liabilities
2002-03 50,66,42,016 16,55,64,081 3.06
2003-04 46,60,76,935 9,01,97,262 5.17
2004-05 55,50,12,846 13,80,70,153 4.02
2005-06 57,86,56,641 10,68,33,433 5.42
2006-07 69,33,82,521 10,23,58,861 6.77
2007-08 92,74,28,861 13,15,35,985 7.05
2008-09 85,69,81,023 12,08,43,915 7.09
 QuickAsset s
Quick Ratio :
CurrentLib ilities

Year Quick Assets Current Ratio

Liabilities
2002-03 19,62,93,228 16,55,64,081 1.19
2003-04 15,96,92,453 9,01,97,262 1.77
2004-05 20,74,79,783 13,80,70,153 1.50
2005-06 21,66,06,426 10,68,33,433 2.03
2006-07 21,85,49,696 10,23,58,861 2.14
2007-08 28,90,09,002 13,15,35,985 2.2 (2.197)
2008-09 26,07,07,727 12,08,43,915 2.16
 Cash + BankBalanc e
Cash Ratio :
CurrentLia bilities

Year Cash + Bank Current Ratio

Liabilities
2002-03 1,24,83,161 16,55,64,081 0.08
2003-04 1,06,18,526 9,01,97,262 0.12
2004-05 1,5360,979 13,80,70,153 0.11
2005-06 1,73,76,708 10,68,33,433 0.16
2006-07 1,67,09,680 10,23,58,861 0.16
2007-08 2,20,57,637 13,15,35,985 0.17
2008-09 1,70,01,772 12,08,43,915 0.14
Leverage Ratios:
Longtermde bt
Cash Ratio : Shareholde r ' sequity

Year Cash + Bank Current Ratio

Liabilities
2002-03 35,33,05,469 40,13,61,305 088
2003-04 34,20,86,587 43,14,37,865 0.79
2004-05 42,13,67,714 52,77,67,132 0.80
2005-06 47,08,67,122 68,41,21,724 0.69
2006-07 62,88,88,305 84,28,36,431 0.75
2007-08 72,36,97,146 97,48,46,023 0.74
2008-09 79,36,50,247 104,87,75,186 0.76
 Earningsaf tr int erst + taxes
Net Profit Ratio :
Sales

Year Earning Sales Ratio

interest +
Taxes
2002-03 3,13,32,218 176,44,15,544 0.018
2003-04 3,00,76,560 143,54,63,619 0.021
2004-05 9,63,75,756 157,24,07,472 0.061
2005-06 16,07,26,312 175,47,60,942 0.092
2006-07 13,32,00,297 196,24,83,183 0.083
2007-08 13,86,79,655 238,19,02,558 0.058
2008-09 7,84,14,753 246,86,12,971 0.032
 Sales
Sales to Capital Employed Ratio : Capitalemp loyed

Year Sales Capital Ratio

Employed
2002-03 176,44,15,544 46,43,56,047 3.8
2003-04 143,54,63,619 45,64,36,900 3.15
2004-05 157,24,07,472 60,18,52,200 2.61
2005-06 175,47,60,942 75,18,61,555 2.33
2006-07 196,24,83,183 95,96,53,355 2.05
2007-08 238,19,02,558 99,66,16,187 2.39
2008-09 246,86,12,971 123,85,21,669 1.99
 Sales
Sales to Fixed Assets Ratio :
NetF . A

Year Sales Net Fixed Ratio

Assets
2002-03 176,44,15,544 46,28,56,047 3.81
2003-04 143,54,63,619 45,33,97,714 3.17
2004-05 157,24,07,472 59,67,74,259 2.63
2005-06 175,47,60,942 74,22,15,791 2.36
2006-07 196,24,83,183 86,34,91,249 2.27
2007-08 238,19,02,558 97,70,75,676 2.44
2008-09 246,86,12,971 122,91,94,757 2.008 (2.01)
 NetSales
Total Assets Turnover Ratio :
TotalAsset s

Year Sales Total Assets Ratio

2002-03 176,44,15,544 96,94,98,063 1.82
2003-04 143,54,63,619 92,10,13,835 1.56
2004-05 157,24,07,472 115,53,65,046 1.36
2005-06 175,47,60,942 132,90,18,196 1.32
2006-07 196,24,83,183 165,15,35,876 1.19
2007-08 238,19,02,558 192,25,45,048 1.24
2008-09 246,86,12,971 197,31,58,777 1.25
 NetSales
Fixed Asset Turnover Ratio :
FixedAsset

Year Net Sales Fixed Assets Ratio

2002-03 176,44,15,544 71,97,83,043 2.45
2003-04 143,54,63,619 74,56,86,630 1.93
2004-05 157,24,07,472 92,21,75,382 1.71
2005-06 175,47,60,942 111,43,32,198 1.58
2006-07 196,24,83,183 128,52,76,650 1.53
2007-08 238,19,02,558 145,25,43,717 1.64
2008-09 246,86,12,971 178,51,85,652 1.38
 CurrentAss ets
Current Assets to Fixed Assets Ratio :
Fixedasset s

Year Current Assets Fixed Assets Ratio

2002-03 50,66,42,016 46,28,56,047 1.095
2003-04 46,60,76,935 45,49,36,900 1.024
2004-05 55,50,12,846 60,03,52,200 0.924
2005-06 57,86,56,641 75,03,61,555 0.771
2006-07 69,33,82,521 95,81,53,355 0.723
2007-08 92,74,28,861 99,51,16,187 0.932
2008-09 85,69,81,023 123,70,21,669 0.693
 Sales
Working Capital Turnover Ratio : Networking capital

Year Sales Net Working Ratio

Capital
2002-03 176,44,15,544 34,10,77,935 5.17
2003-04 143,54,63,619 37,58,79,673 3.82
2004-05 157,24,07,472 41,69,42,693 3.77
2005-06 175,47,60,942 47,18,23,208 3.72
2006-07 196,24,83,183 59,10,23,660 3.32
2007-08 238,19,02,558 79,58,92,876 2.99
2008-09 246,86,12,971 73,61,37,108 3.35
Receivable Turnover Ratio
Sales
Debtor’s Turnover Ratio :
Debtors ( +Bils Re ceivable )

Year Sales Debtors Ratio

2002-03 176,44,15,544 15,06,89,851 11.71
2003-04 143,54,63,619 11,64,16,643 12.33
2004-05 157,24,07,472 15,20,08,848 10.34
2005-06 175,47,60,942 13,39,96,417 13.09
2006-07 196,24,83,183 14,73,96,417 13.31
2007-08 238,19,02,558 20,59,73,689 11.56
2008-09 246,86,12,971 13,75,34,380 17.95
 Noofday sin ayear
Average Collection Period :
Debtorstur noverratio

Year Days Debtors Collection

turnovers period
Ratio
2002-03 365 11.71 31
2003-04 365 12.33 30
2004-05 365 10.34 35
2005-06 365 13.09 28
2006-07 365 13.31 27
2007-08 365 11.56 32
2008-09 365 17.95 21
 Sales
Inventory Turnover Ratio : Inventory

Year Sales Inventory Ratio

2002-03 176,44,15,544 31,03,48,788 5.69
2003-04 143,54,63,619 30,63,84,482 4.69
2004-05 157,24,07,472 34,75,33,063 4.52
2005-06 175,47,60,942 36,20,50,215 4.85
2006-07 196,24,83,183 47,48,32,825 4.13
2007-08 238,19,02,558 63,84,19,859 3.73
2008-09 246,86,12,971 59,62,73,296 4.14
 No .of .day sin ayear
Inventory Period : InventoryR atio

Year Days Inventory Period

Ratio
2002-03 365 5.69 64.15
2003-04 365 4.69 77.83
2004-05 365 4.52 80.75
2005-06 365 4.85 75.26
2006-07 365 4.13 88.38
2007-08 365 3.73 97.86
2008-09 365 4.14 88.16
 Pr ofitaftert ax
Net Profit Margin :
sales

Year Profit after tax Sales Ratio

2002-03 3,13,32,218 176,44,15,544 0.0178 ≈0.02
2003-04 3,00,76,560 143,54,63,619 0.021 ≈ 0.02
2004-05 9,63,75,756 157,24,07,472 0.061 ≈ 0.06
2005-06 16,07,26,312 175,47,60,942 0.092 ≈ 0.09
2006-07 16,32,00,297 196,24,83,183 0.083 ≈ 0.09
2007-08 13,86,79,655 238,19,02,558 0.058 ≈ 0.06
2008-09 7,84,14,753 246,86,12,971 0.032 ≈ 0.03
 PAT
Return on equity : , Net worth = share Capital + Reserve
Networth

Year PAT Net Worth Ratio

2002-03 3,13,32,218 40,13,61,305 0.078
2003-04 3,00,76,560 43,14,37,865 0.069
2004-05 9,63,75,756 52,77,67,132 0.183
2005-06 16,07,26,312 68,41,21,724 0.235
2006-07 16,32,00,297 84,28,36,431 0.194
2007-08 13,86,79,655 97,48,46,023 0.142
2008-09 7,84,14,753 104,87,75,186 0.075
 Totaldebt
Debt Ratio :
Totaldebt + Networth

Year Total Net worth TD + NW Ratio

Debt
2002- 35,33,05, 40,13,61,3 75,46,66,77 0.468
03 469 05 4
2003- 34,20,86,587 43,14,37,8 77,35,24,45 0.442
04 65 2
2004- 42,13,67,714 52,77,67,1 94,91,34,84 0.444
05 32 6
2005- 47,08,67,122 68,41,21,7 115,49,88,8 0.408
06 24 46
2006- 62,88,88,305 84,28,36,4 147,17,24,7 0.427
07 31 36
2007- 72,36,97,146 97,48,46,0 169,85,43,1 0.426
08 23 69
2008- 79,36,50,247 104,87,75, 184,24,25,4 0.431
09 186 33
 PAT
EPS (Earnings per Share) : No .of .Shares

Year PAT No. of Shares EPS

2002-03 3,13,32,218 31,95,000 9.81
2003-04 3,00,76,560 31,95,000 9.41
2004-05 9,63,75,756 31,95,000 30.16
2005-06 16,07,26,312 31,95,000 50.31
2006-07 16,32,00,297 31,95,000 51.08
2007-08 13,86,79,655 31,95,000 43.41
2008-09 7,84,14,753 31,95,000 24.54
 Netprofits beforetaxe s
Return on net worth Ratio :
Networth

Year PBT NW Ratio

2002-03 5,11,12,368 40,13,61,305 12.73
2003-04 6,45,38,958 43,14,37,865 14.95
2004-05 12,90,50,405 52,77,67,132 24.45
2005-06 19,19,35,727 68,41,21,724 28.05
2006-07 19,87,80,917 84,28,36,431 23.58
2007-08 20,94,49,946 97,48,46,023 21.49
2008-09 11,71,17,490 104,87,75,186 11.17
 Currentass erts
Current Asserts =
CurrentLia bilities

Current − inventorsi es
Quick ratios =
CurrentLia bilities

Cas + marketable Securities

CASH RATIO =
CurrentLia bilities

Cash + Marketable Securities

NetWorking Capital
Net Working Capital Ratio =
NetAssets

Tataldebt
Debt Ratio =
Totaldebt + NetWorth

TotalDebt
Debt Equity Ratio =
NewWorth

Openinginv enty − clo sin ginventory

Inventory Turnover Ratio =
2

MaterialCo nsumed
Raw material inventory turnover ratio = AverageRaw Material

Costof Pr oduction
Work-in-process inventory turnover ratio : AverageWor k − in − process

CreditSale s
Debtors Turnover Ratio = AverageDeb tors

Sales
Net Assets Turnover Ratio =
NetAssets

Sales
Total Assets Turnover Ratio =
TotalAsset s
 Sales
Working Capital Turnover Ratio =
NetCurrent Assets

Sales − cos tofgoodsso ld

Gross Profit Margin =
Sales

Pr ofitafterT ax
Net Profit Margin =
Sales

PoeratingE xpenses
Operating Expenses Ratio =
Sales

EBIT ( I −T )
Return on Investment =
TotalAsset s

Pr ofitafterT ax
Return on Equity =
NetWorth

profitafte rTax
Earning per Share = NumberofSh ares

Dividends
Dividend per share = NumberofSh ares

Dividendpe rShare
Dividend payout Ratio = Earningper Share

MarketValu eperShare
Price Earning Ratio = Earningper Share