SUMMER TRAINING PROJECT

ON

“WORKING CAPITAL MANAGEMENT OF

THERMAX LIMITED THROUGH RATIO
ANALYSIS”

Submitted in partial fulfilment for the degree of

BACHELOR OF BUSINESS ADMINISTRATION
SESSION 2010-2013

GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY

DELHI
Submitted By :- Submitted TO :-
SHIVANI PURTHI Mr. GTVLN CHARYULU
BBA VTH SEMESTER LECTURER, BPIBS
00311401710

BHAI PARMANAND INSTITUTE OF BUSINESS STUDIES

OPP. MADHUBAN, SHAKARPUR, DELHI-110092
 BHAI PARMANAND INSTITUTE OF BUSINESS
STUDIES

SHAKARPUR , DELHI

SELF DECLARATION OF STUDENT

This project is submitted as partial fulfilment of the requirement of Bachelor of
Business Administration of Bhai Parmand Institute of business studies affiliated to
Guru Gobind Singh Indraprastha university, Delhi under the guidance of Mr.
G.T.V.L.N CHARYULU , faculty member, BPIBS, Shakarpur Delhi-110092.

I hereby declare that present project report on “WORKING CAPITAL

MANAGEMENT OF THERMAX LIMITED THROUGH RATIO ANALYSIS” and
Is partially original and a bona fide work done by me and wherever the matter has
been replicated with or without modification the same has been specifically
mentioned with the reasons for its usage.

DATE SHIVANI PRUTHI

ROLL NO – 00311401710

BBA ( V SEM )

BPIBS, DELHI
 CERTIFICATE OF PROJECT GUIDE

This is to certify that the Summer Training Project (BBA 5TH SEM) entitled
“WORKING CAPITAL MANAGEMENT OF THERMAX LIMITED
THROUGH RATIO ANALYSIS“done by Miss Shivani Pruthi, Roll. No.:
00311401710 is an authentic work carried out by her at THERMAX LIMITED
under my guidance. The matter embodied in this project work has not been submitted
earlier for the award of any degree or diploma to the best of my knowledge and
belief.

SIGNATURE OF THE GUIDE

Mr GTVLN CHARYULU
LECTURER, BPIBS
 ACKNOWLEDGEMENT

This project has been prepared as a part of an internship required during the
completion of BBA programme at BPIBS, Shakarpur.

I was involved with THERMAX LIMITED, NOIDA BRANCH, UP, for a

period of 2 months and I came across a lot of people who put in their time and efforts
towards acclimatizing me to the workings of their organization. I express my thanks
to my company guide who was there to introduce me to the idea of Power Business
and what goes behind it. Also under his guidance and leadership I was able to
enhance my inter-personal skills. I would also like to thank him for immense support
and guidance in the selection of the project, its study and preparation of the report.

I would also like to wish a special thanks to my faculty guide GTVLN Charyulu
without whose guidance this project would have been a distant dream.

Last, but definitely not the least, I express my gratitude to the entire staff of
Thermax Limited.

These past 2 months were of utmost importance as they added value towards my
path of knowledge. I would like to end this acknowledgement by thanking the
customers, distributor people at large with whom I have interacted during the course
of my training.

ShivaniPruthi
Roll No.-00311401710
TABLE OF CONTENTS

CHAPTERS TOPICS PAGE NO.

Declaration by the student
Certificate of the project guide
Acknowledgement
Chapter 1 INTRODUCTION
1.1 Introduction
1.2 Objectives of the study
1.3 Types of data
1.4 Research design
1.5 Scope of study
1.6 Limitation of the study
Chapter 2 COMPANY’S PROFILE
Chapter 3 INTRODUCTION TO
WORKING CAPITAL
MANAGEMENT
3.1 Meaning of working capital
3.2 Objectives of working capital
management
3.3 Needs and objectives for
working capital
3.4 Importance of working capital
3.5 Factors determining the
working capital requirements
3.6 Classification of working
capital
3.7 Management of working
 capital
3.8 Advantages of adequate
working capital
3.9 Dangers of inadequate
working capital
Chapter 4 RESEARCH STUDY – RATIO
ANALYSIS
4.1 Introduction
4.2 Objectives of ratio analysis
4.3 Meaning of ratio analysis
4.4 Classification of ratios

1)Liquidity Ratios
2) Long term solvency Ratios
3) Activity Ratios
4) Profitability Ratios
Chapter 5 ANALYSIS AND
INTERPRETATIONS
Chapter6 6.1 Conclusion

6.2 Suggestions and

recommendations
6.3 Bibliography
CHAPTER-1

INTRODUCTION
1.1 INTRODUCTION

Ratio is an arithmetical relation between two related or inter-dependent items. Ratio

analysis is the process of determining and interpreting numerical relationship
between figures of the financial statements. An absolute figure often does not convey
much meaning. Generally, it is only in the light of other information that the
significance of a figure is realized. In other words, business results and situations are
understood properly only when the relevant figures are considered together

The research that is undertaken in Thermax Limited is on “Working Capital

Management through Ratio Analysis”. The research is Descriptive & Analytical in
design and also in today’s world every company must know about their financial
position and it shows the relationship between the two figures.

The objective of making this report is – First to understand the financial position,
secondly to analyze the investment and financing policies adopted by Thermax
Limited.

The data used for research in the form of ratios of which information was available
in the company’s annual reports of last two years. The research is done with the help
of ratio analysis. This is concerned with the calculation of ratio trends, financial
statements requirements, evaluation of financial ratios, pattern of financing and
investment activities.
1.2OBJECTIVES OF THE STUDY

The basic objectives of the study are following: -

 Tounderstand the concept and importance of working capital and basic needs
for the proper working capital management.

 To find out and analyze the investment policies adopted by management to

manage current assets and current liabilities.

 To find out and analyze the financing policies adopted by management to

manage current assets and current liabilities.

 Evaluate that are these financing and investment policies beneficial for the
smooth running of the business.

 To find out the solutions for the problems which will be discovered during
the analyses of components, trend and requirement of working capital
1.3 TYPES OF DATA

Primary Data:
This includes the information collected mainly from the office. This has served as
primary source of data for this study.

Secondary Data:
A large amount of secondary data has been collected from secondary sources. Some
of the sources are: -
1 Reports of company
2 Articles from Newspapers and magazines.
3 Various websites

1.4 RESEARCH DESIGN

It helps in proper collection and analysis of the data. It helps in further course of
action.The research design used is descriptive research.In this the facts and figures
are analysed and the project is made according to it.

1.5 SCOPE OF STUDY

The purpose of the research was to criteria on which investment of a 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.
1.6LIMITATION OF THE STUDY

Financial ratio analysis and comparison of same with benchmark figures has its
limitations due to a number of factors. These include the following:

1. Variations in accounting policies among various companies

2. Window dressing
3. Lack of understanding of basic principles
4. Current economic and industry scenario
5. Interpretation of results
6. Changes made in groupings in expenses in different years and most importantly
7. Ratios change from company to company based on the mix of capital and the
structuring of capital even when the level of revenue remains the same.
8. Period of study was short.
9. As the data was collected from secondary sources so the disadvantages occurred
due to this will be followed as same.

It is therefore suggested that a long term view is taken by doing a trend analysis,
looking at comparative / benchmark industry performance, and evaluating the extent
of correlation among various ratios. It may be noted that ‘one swallow does not make
a summer
CHAPTER-2

COMPANY PROFILE
COMPANY PROFILE

Thermax Limited is the largest thermal power generating company of India. The
public sector company was incorporated in the year 1975 to accelerate power
development in the country as a wholly owned company of the Government of India.
At present, Government of India holds 89.5% of the total equity shares of the
company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others.

Within a span of 30 years, Thermax has emerged as a truly national power company,
with power generating facilities in all the major regions of the country. Based on
1998 data, carried out by Data monitor UK, Thermax is the 6th largest in terms of
thermal power generation and the second most efficient in terms of capacity
utilization amongst the thermal utilities in the world.
EXECUTIVE LEVELS IN THERMAX LTD

Level wise sanction of executive manpower has been structured on the basis of
objective, which is approved by chief managing director that is as follows:

1. E1-Assistant officer
2. E2- Executive Trainee
3. E2A- Officer
4. E3- Senior officer
5. E4- Deputy manager
6. E5- Manager
7. E6- Senior Manager
8. E7- DGM
9. E7A- AGM
10. E8- GM
11. E9- Executive Director

The above post has been sanctioned by the consultation with the concerned
functional director.

CORE VALUES
 Business Ethics
 Customer Focus
 Organizational and Professional pride
 Mutual respect and Trust
 Innovation and Speed
 Total quality for excellence
 THE VISION

The vision of the company states the fundamental purpose of their existence viz:
“To be one of the world’s largest and best power utilities, powering India’s growth”

The values of the company provide the essential and enduring general guiding
principles in the way it conducts itself in realizing the vision through COMIT.

 Customer Focus
 Organizational Pride
 Mutual Respect and Truth
 Initiative and Speed
 Total Quality

Thermax dreams of building a great company could be achieved through articulation

of this core ideology by involving people in sharing this vision and core values and
taking steps for actualization of the study.
CHAPTER-3

INTRODUCTION
TO
WORKING CAPITAL
MANAGEMENT
3.1 MEANING OF WORKINGCAPITAL

 Working Capital = Current Assets- Current Liabilities.

Working Capital is commonly defined as the difference between current assets and
current liabilities. Efficient working capital management requires that firms should
operate with some amount of working capital, the exact amount varying from firm to
firm and depending, among other things on the nature of industry.

Working capital is the heart of the business. If it is weak business cannot survive
properly. As the working capital is important to the company is important to keep
adequate working capital with the company. Cash is the lifeline of company. The
company must have adequate working capital as much as needed by it. It should
neither be excessive or nor inadequate. Excessive working capital causes funds lying
with the firm without earning any profit. Whereas inadequate working capital shows
that the company doesn’t have sufficient funds for financing its daily needs.

Working Capital Management involves study of the relationship between firm’s

currentassets and current liabilities.
The goal of working capital management is to ensure that a firm is able to continue
its operation. And that is has sufficient ability to satisfy both maturing short term
debt and upcoming operational expenses. The better a company managers its
working capital, the less the company needs to borrow. Even companies with cash
surpluses, need to manage working capital to ensure that those surpluses are invested
in ways that will generate suitable returns for investors.
3.2 OBJECTIVES OF WORKING CAPITAL MGMT.
To ensure that sufficient cash is available to:-
 Meet day to day cash flow needs.
 Pay wages and salaries when they fall due.
 Pay creditors to ensure continued supplies of goods and services.
 Pay government taxation and provide dividends.
 Ensure the long term survival of the business entity.

3.3NEEDS AND OBJECTIVES FOR WORKING

CAPITAL
The prime objective of a company is to obtain maximum profit throughout its
business. The amount of profit largely depends upon the magnitude of sales.
However, sales do not convert into cash instantaneously. There is always a time gap
between sale of goods and receipt of cash. The time gap between the sales and the
actual realization of cash is technically termed as operating cycle. Additional capital
is required to have uninterrupted business operations, and the amount will be locked
up in the current assets. Regular availability of adequate working capital is inevitable
for sustained business operations. If the proper fund is not provided for the purpose,
the business operations will be effected. And hence this part of finance is to be
managed well.
Thus, working capital is needed for the following purposes: -
 For the purchase of raw material, component and spares.
 To pay wages and salaries.
 To incur day- to- day expenses and overhead costs such as fuel, power and
office expenses etc.
 To meet the selling costs such as packing, advertising etc.
 To provide credit facilities to the customers.
 To maintain the inventories of raw material, work in progress, store, spares,
and finished stock.
For studying the need of working capital in a business, one has to study the business
under varying circumstances such as a new concern, as a growing and one, which has
attained maturity. A new concern requires a lot of funds to meets its initial
requirement such as promotion and formation etc. These expenses are called
preliminary expenses and are capitalized. The amount needed for working capital
depends upon the size of the company and the ambition of its promoters. Greater the
size of the business unit, greater will be the requirement of the working capital. The
requirement of the working capital goes on increasing with the growth and expansion
of the business until its gains maturity. At maturity, the amount of working capital
required is called normal working capital.

3.4Importance of Working Capital

1. Time devoted to working capital management:-
The largest portion of financial manager’s time is devoted to day to day
internal operation the firm. This may be appropriately sum up under the heading
"WORKING CAPITAL MANAGEMENT".

2. Investment in current assets :-

Current assets represent more than half of the total assets of a business firm.
Because they represent largest investment and because this investment tends to be
relatively volatile, current assets are worthy for the financial manager's careful
attention.

3. Importance for small firm:-

Current assets are similarly important for the financial manager's of small
firms. Further small firms have relatively limited access to the long term markets, it
must necessarily rely on the trade credit and short term bank loan. Both have net
effect on net working capital by increased current liabilities.
3.5FACTORS DETERMINING THE WORKING

CAPITAL REQUIREMENT

1. NATURE OF BUSINESS :-
The requirement of working capital is very limited in public utility undertaking such
as Electricity, Water Supply and Railways because they offer cash sales only and
supply services not products and no funds are tied up in inventories and receivables.
On the other hand, the trading and financial firm requires less investment in fixed
assets but have to invest large amounts in current assets. The manufacturing
undertaking requires sizable amount of working capital along with fixed investments.

2. PRODUCTION POLICY :-
The determinationof working capital needs depends upon the production policy of
the business. The demand for certain products is seasonal i.e.; such products are
purchased in certain months of a year. For such industries, two types of production
policy can be followed. Firstly they can produce the goods in the months of demand
or secondly, they produce for the whole year. If the second alternative were
followed, it would mean that until the time of demand finishes, product would have
to be kept in stock. It would require additional working capital.

3. LENGTH OF PRODUCTION CYCLE:-

The longer the manufacturing time, the raw material and other supplies have to be
carried for a longer time in the process with progressive increment of labor and
service costs before the final product is obtained. Therefore, working capital is
directly proportional to the length of the manufacturing process.

4. RATE OF STOCK TURNOVER :-

There is an inverse co-relationship between the quantum of working capital and the
velocity or speed with which the sales are affected. A firm having a higher rate of
stock turnover will need lower amount of working capital as compared to a firm
having a low rate of turnover.

5. CREDIT POLICY :-
Credit policy affects the working capital requirements in two ways:
(a) Terms of credit allowed by customer to the firm,
(b) Terms of credit available to the firm.
A concern that purchases its requirements on credit and sells its
product/services on cash requires lesser amount of working capital and vice-
versa.
Companies that follow a liberal credit policy need to keep more working capital with
them. Credit availability form suppliers also effects the company’s working capital
requirements. A company doesn’t enjoy a liberal credit from its suppliers will have
to keep more working capital.

6. WORKING CAPITAL CYCLE:-

The speed with which the working cycle completes one cycle determines the
requirements of working capital. Longer the cycle larger is the requirement of
working capital.
Each component of working capital (namely inventory, receivables and payables) has
two dimensions TIME and MONEY. When it comes to managing working capital -
TIME IS MONEY. If you can get money to move faster around the cycle (e.g.
collect monies due from debtors more quickly) or reduce the amount of money tied
up (e.g. reduce inventory levels relative to sales), the business will generate more
cash or it will need to borrow less money to fund working capital. As a consequence,
you could reduce the cost of bank interest or you'll have additional free money
available to support additional sales growth or investment. Similarly, if you can
negotiate improved terms with suppliers e.g. get longer credit or an increased credit
limit, you effectively create free finance to help fund future sales.
7. BUSINESS FLUCTUATION: -
Cyclical changes in the economy also influence the level of working capital. During
boom period, the tendency of management is to pile up inventories of raw materials
and finished goods to avail the advantage of rising prices. This creates demand for
more capital. Similarly, during depression when the prices and demand for
manufactured goods constantly reduce, the industrial and trading activities show a
downward trend. Hence the demand for working capital is low.

8. RATE OF GROWTH AND EXPANSION OF BUSINESS: -

The larger size businesses require more permanent and variable working capital in
comparison to small business. If a company is growing, its working capital
requirements will also go on increasing. Thus, the growing concerns require more

working capital as compared to the stable industries.

9. SEASONAL VARIATION: -
In period of boom, when the business is prosperous, there is a need for larger amount
of working capital due to rise in sales, rise in prices, optimistic expansion of business
etc. On the contrary in time of depression, the business contracts, sales decline,
difficulties are faced in collection from debtors and the firm may have a large
amount of working capital

10. PRICE LEVEL CHANGES:-

Price level changes also affect working capital needs. If the prices of different goods
increase, to maintain same level of production, more working capital is needed.
3.6CLASSIFICATION OF WORKING CAPITAL

Working Capital may be classified on twobasis: -

A. On the basis of Concept:-
On the basis of concept, working capital can be classified as,
 Gross Working Capital
 Net Working Capital
B. On the basis of Time:-
On the basis of time, working capital can be classified as,
 Permanent or Fixed Working Capital
 Temporary or Variable Working Capital

Gross Working Capital: -

The Gross Working Capital is the Capital invested in the total current assets of the
enterprises. Current assets are those assets, which can be converted into cash within
a short period, normally an accounting year.
Gross Working Capital = Total Current Assets

Net Working Capital: -

The term Net Working Capital refers to the excess of current assets over current
liabilities, or say,
Net Working Capital = Current Assets – Current Liabilities

Net Working Capital can be positive or negative. When the current assetsexceeds
the current liabilities the working capital is positive and the negative working
capital results when the current liabilities are more than the current assets. Current
liabilities are those liabilities, which are intended to be paid in the ordinary course
of business within a short period of normally oneaccounting year out of the current
assets of the income of the business. The gross working capital concept is financial
 or going concern concept whereas net working capital is anaccounting concept of
working capital. Both the concepts have their own merits.

Permanent or Fixed Working Capital: -

Permanent or fixed capital is the minimum amount, which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current
assets. Every firm has to maintain a minimum level of current assets is called
permanent or fixed working capital as this part of working capital is permanently
blocked in current assets. As the business, grow the requirement of working capital
also increases due to increase in current assets.

Temporary or Variable Working Capital: -

Temporary or variable working capital is the amount of working capital, which is

required to meet the seasonal demands and some special exigencies. Variable
working capital can further be classified as seasonal working capital and special
working capital. The capital required to meet the seasonal need of the enterprise is
called the seasonal working capital. Special working capital is that part of working
capital which is required to meet special exigencies such as launching of extensive
marketing campaign for conducting research etc.

Temporary working capital differs from permanent working capital in the sense that
it is required for short periods and cannot be permanently employed gainfully in
business.
3.7 MANAGEMENT OF WORKING CAPITAL

MANAGEMENT OF WORKING CAPITAL MEANS MANAGEMENT OF ALL

ASPECTS OF CURRENT ASSETS AND CURRENT LIABILITIES.
BASICALLY, WORKING CAPITAL MANAGEMENT IS CONCERNED
WITH THE PROBLEMS THAT ARISE IN ATTEMPTING TO MANAGE
THE CURRENT ASSETS, CURRENT LIABILITIES AND THE INTER
RELATIONSHIP THAT EXIST BETWEEN THEM.
Financial management should determine the quantum and structure of current assets.
It should also see that current assets are financed from the proper sources.
Management should also see that current liabilities are paid in time, while managing
the working capital.
The main objective of working capital management is to manage current assets and
current liabilities in a manner so that working capital can be kept in a satisfactory
level. It is also taken in to account that the working capital should be neither
excessive nor inadequate. The amount of current assets should be adequate to pay the
current liabilities in time and adequate security margin can be maintained.
Accordingly, proper balance among the different constituents of current assets is
maintained so that no current has more than require amount invested in it.
Management of working capital affects profitability, risk and liquidity of the
business significantly.
Management should, therefore, maintain proper balance among these factors while
managing working capital. If the quantum of working capital is more, it will increase
liquidity, but decrease profitability and risk. If working capital relatively declines, it
will decrease liquidity but cause an increase in profitability and risk. If business
wants to earn more profit, it will have to bear higher risk. Risk means inability of the
firm to pay current liabilities in time.
Working capital management is three dimensional in nature: -
1) It concerned with the formulation of policies with regard to profitability,
liquidity and risk.
2) It is concerned with the decisions about the composition and level of current
assets.
3) It is concerned with the decisions about the composition and level of current
liability.

To maintain the optimum level of working capital in a big organization is really a

challenging task. The three basic components that determine the level of working
capital in any organization are: -

 CASH
 DEBTORS & BILLS RECEIVABLE
 INVENTORY

3.8 Advantages of adequate working capital

Adequate working capital provides certain benefits to the company. Theyare :

1) Increase in debt capacity and goodwill

Adequate working capital represents the financial soundness of the company. If one
company is financially sound it would be able to pay its creditors timely and
properly. It will increase company’s goodwill. It crests confidence among investors
and creditors. Thus a firm with adequate working capital can raise requisite funds
from market, borrow short term credit form banks, and purchases inventories of raw
material etc., for the smooth operations of its business.
 2) In production inefficiency
With adequate working capital the firm can smoothly carryout research and
development actives and thus adds to it production efficiency.

3) Exploitation of favorable opportunities

In the presence of adequate working capital, a company can avail the benefits of
favorable opportunities. Adequate working capital will help the company to have
bulk purchases, seasonal storage of raw material etc., which would reduce the cost of
production, thus adds to its profit.

4) Meeting contingencies adverse changes:

A company can easily face certain business and economic crises a company having
adequate working capital can successfully meet contingencies such as business
oscillations, financial crisis arising from heavy losses etc.,

5) Available cash discount

Maintenance of adequate working capital enables a company to avail the advantage
of cash discount by making cash payment for to the suppliers of raw materials and
merchandise. Obviously it will reduce the cost of production and increase the profit
of the company.

6) Attractive dividend to shareholders

It enables the company to offer attractive dividend to the shareholders so that sense
of security and confidence will increase among them .it also increases the market
values of its shares.
3.9 Inadequate working capital is also bad and has the
following dangers:

1) Loss of goodwill and creditworthiness

As the firm fails to on or its current liabilities it loses it goodwill and
creditworthiness among its creditors. Consequently, the firm finds it difficult to
procure the requisite funds for its business operations on easy terms, which
ultimately results in reduced profitability as well as Production interruption.

2) Firm can’t make use of favorable opportunities

The firm fails to undertake the profitable projects, which not only prevent the fir
from availing the benefits of favorable opportunities but also stagnate its growth.

3) Adverse effects of credit opportunities

The firm also fails to avail the attractive credit opportunities but also stagnate its
growth

4) Operational inefficiencies
In leads the company to operating inefficiencies, as day to day commitments cannot
be met.

5) Effects on financial capacity

Inadequacy of working capital also weakness the shock absorbing capacity of the
firm because it cannot meet the contingencies arising from business oscillations,
financial losses, due to shortage of working capital.

6) Non achievement of profit target

The firm cannot implement operational plans due to unavailability of fund. This will
lead to non achievement of profit margin.
.

CHAPTER-4

RESEACH STUDY-RATIO
ANALYSIS
4.1 INTRODUCTION

A ‘Ratio’ is an arithmetical expression of relationship between two related or inter-

dependentitems. Ratios when, calculated on the basis of accounting information, are
called ‘Accounting Ratios’. Accounting ratio is thus, an arithmetical relationship
between two accounting variables. But they assume significance if these variables
have cause and effect relationship.

According to J. Betty, “the term accounting ratio is used to describe significant

relationships which exist between figures shown in a balance sheet, in a profit and
loss account, in a budgetary control system or in any part of the accounting
organization.”

4.2OBJECTIVES OF RATIO ANALYSIS

The objective of ratio analysis is
 To judge the earning capacity
 Financial soundness
 Operating efficiency of a business organization

The use of ratios in accounting and financial management analysis helps the
management to know the profitability, financial position and operating efficiency of
an enterprise.
4.3 RATIO ANALYSIS-

Ratio Analysis compares one figure in one financial statement (say P&L account or
Balance Sheet) with another figure in the same financial statement or in another
financial statement of the company.
A ratio is expressed in the numerator denominator format. Thus the numerator and
denominator can be either from the P&L account or the Balance sheet of the same
company.
Ratio analysis facilitates intra firm comparison. i.e. comparison of your company’s
performance in the current year with your company’s performance in the previous
year.
It also facilitates inter firm comparison. i.e. comparison of your company’s
performance in the current year with your competitor’s performance in the current
year.
Ratios help in ascertaining the financial health of the company and also its future
prospects. These ratios can be classified under various heads to reflect what they
measure. There may be a tendency to work a number of ratios.
When a ratio has a P&L figure both in the numerator and in the denominator or has a
balance sheet figure both in the numerator and in the denominator it is called a
straight ratio. Where it has the P&L figure in the numerator and the balance sheet
figure in the denominator or the balance sheet figure in the numerator and the P&L
figure in the denominator it is called a cross or hybrid ratio.
4.4CLASSIFICATION OF RATIOS

1. LIQUIDITY RATIO (SOLVENCY RATIO):

 Liquidity refers to the speed and ease with which an asset can be
converted to cash.
 Liquidity has two dimensions: ease of conversion versus loss of value.
 Remember any asset can be quickly converted to cash if you slash the
price.
Liquidity or Short term solvency ratios provide information about a firm’s
liquidity. The primary concern is the firm’s ability to pay its bills over the
short run without undue stress. Hence these ratios focus on current assets and
current liabilities. These ratios are particularly useful to the short term
lenders.

A.CURRENT RATIO:
This is the ratio of current assets to current liabilities.

= Current Assets /Current Liabilities

Because current assets are convertible to cash in one year and current
liabilities arepayable within one year, the current ratio is an indicator of short
term solvency. The unitof measure is “times”. To a short term lender,
including a creditor, a high current ratio isa source of comfort. To the firm, a
high current ratio indicates liquidity, but it also may mean inefficient use of
cash and other current assets. A ratio of 1.33 is considered welcome.

B. QUICK RATIO:

This is the ratio of quick assets to current liabilities or to quick liabilities.

 Quick Assets / Current Liabilities
Quick Assets / Quick Liabilities
Quick Assets does not include the following:.
a. Inventory: The book values of inventory are least reliable as measures of
realizablevalue because over time they may become lost, damaged or
obsolete. Further, to anexternal analyst the market value of inventory may
not be available since they arecarried in the books at cost.Large inventories
are often a sign of short-term trouble. The firm may have Overestimated
sales and consequently may have overbought or overproduced leadingto a
substantial part of the liquidity locked in low moving inventory. Hence
inventoryis eliminated from current assets to arrive at quick assets.

b. Prepaid expenses. Prepaid expenses too are deducted from current assets
since theyare not really convertible into cash. They are only adjustments
against futurepayments.

Liabilities’ does not include-

a) Overdraft: In practice, overdraft is not exactly repayable within 12 months

becauseit is almost always renewed. Therefore there is a view that in
computing quickliabilities we must deduct overdraft from current liabilities.

C.NET WORKING CAPITAL RATIO:

NWC (net working capital ratio) refers to excess of current

assets over current liabilities. The greater is the amount of NWC,the greater is the
value of the firm. Accordingly, NWC is a measure of liquidity; inadequate working
capital is the first sign of financial problem for a firm.

NWC=CURRENT ASSETS –CURRENT LIABILITIES

.
2. LEVERAGE/ CAPITAL-STRUCTURE/
LONGTERMSOLVENCY RATIO:
Long term solvency ratios measure the firm’s long term ability to
meet its payment obligations. They are also referred to as leverage ratios. Back in the
chapter CapitalStructure planning you learnt about financial leverage as arising out
of the existence ofDebt in the capital structure. In Introduction to Financial
Management we understood thisas being the first quadrant of the balance sheet.

A. Total debt ratio:This is the ratio of total debt to total assets.

Total Debt / Total assets

The term “total debt” means all debt; both long term and short term i.e. it includes
currentliabilities. The term “total assets” means all assets; both fixed assets and
current assets.
There are two variants to this ratio namely debt-equity ratio and equity multiplier.
a. The debt equity ratio is measured as total debt to total equity.
b. The equity multiplier is the ratio of total assets to total equity
The equity multiplier is 1 plus debt equity ratio.

B. PROPRIETARY RATIO:

The ratio indicates the proportion of total assets financed by owners.

It is equal to

PROPRIETAR’S FUNDS/TOTAL ASSETS *100

C. DEBT EQUITY RATIO:
The relationship between borrowed funds and owner’s capital is a
popular measure of the long term financial solvency of a firm. This relationship
is shown by the debt-equity ratio. This ratio reflects the relative relative
Claims of creditors and shareholders against the assets of the firm. The debt
considered here is exclusive of current liabilities. The shareholders’ equity
includes equity and preference share capital, past accumulated profits but
excludes fictitious assets like past accumulated losses, discount on issue of
shares.

D.FIXED ASSETS RATIO:

It refers to relationship between long term fund or capital employed and
fixed assets of the firm

E.INTEREST COVERAGE OR DEBT SERVICE RATIO:

It is also known as time-interest-earned ratio’. This ratio measures
the debt servicing capacity of a firm in so far as fixed interest on long term loan is
concerned.It is determined by dividing the operating profits or earnings before
interest and taxes(EBIT)by the fixed interest charges on loans.
3.ACTIVITY OR EFFICIENCY RATIO:
Activity ratio is concerned with measuring the efficiency in asset management.
These ratios are called efficiency ratios or asset utilization ratio The funds of
creditors and owners are invested in various assets to generate sale and profit. Better
the management of these assets the larger the amount of sale and profit. These ratios
indicate the speed with which assets are being converted or turned over into sale.
That is why these ratios are called turnover ratios or sales ratio . An activity ratio is
the relationship between sales or cost of goods sold and investment in various assets
of the firm.

A. INVENTORY TURNOVER RATIO:

Inventory turnover ratio normally establishes a relationship between cost of sale and
average inventory. This ratio reveals the number of times finished stock is turned
over during a given accounting period in relation to sale.
High ratio is better`
High ratio reflect more profit
High ratio is also good from the view point of the company.

B. DEBTOR OR RECEIVABLE TURNOVER RATIO

The debtor turnover ratio throws lights on the collection and credit policies of the
firm
Debtors = debtors + B/R +discounted B/R + sales tax
Sales = net credit sales + sales tax
Provision for doubtful debts shall not be deducted
High ratio efficiency in collection
Debtors are being collected more promptly
 c. ASSETS TURNOVER RATIO
This ratio is also known as investment turnover ratio. It is based on the
relationship between the cost of goods sold and assets or investment of a firm.
Depending upon the different concepts of assets employed, there are many variants
of this ratio.
C1. Total assets turnover ratio:

Total assets = fixed assets after depreciation+ current assets + intangible

assets(goodwill , patent)
Not include FICTITIOUS Assets like loss, discount on issue on debenture
Only operating assets→→ so Investment not considered

↑RATIO →effective utilization of assets

↓RATIO → ineffective utilization of assets

C2. FIXED ASSETS TURNOVER RATIO:

Investment in fixed assets is made for the ultimate purpose of efficient sale , the ratio
is used to measure the fulfillment of the objective.
Investment will not be included in fixed assets.
C3.CAPITAL TURNOVER RATIO:

↑RATIO→HIGH PROFIT
↓RATIO→LOWER PROFIT

C4.CURRENT ASSETS TURNOVER RATIO:

 It reflects the efficiency and capacity of working capital.

 Useful for non-factoring unit or those manufacturing units require lesser
working capital

C5. WORKING CAPITAL TURNOVER RATIO:

↑RATIO →LOW INVESTMENT→MORE PROFIT OR OVER

TRADING → EFFICIENT MANAGEMENT
↓RATIO →HIGH INVESTMENT→LOW PROFIT OR UNDER
4.PROFITABILITY RATIO:-
The profitability ratios measure how efficiently a company manages it assets and
how efficiently it manages its operation. The focus is on profits. All of these ratios
are expressed in terms of a percentage.
Each firm wants to earn maximum profit not only in absolute term but also in
relative term. The firm’s ability to earn maximum profit by the best utilization of its
resources is called profitability

A. GROSS PROFIT RATIO OR MARGIN RATIO:-

The term gross profit refers to the difference between sales and works cost.

↑RATIO →high margin Due to

 Higher selling price
 Lower cost of goods sold
 Excess combination of selling price and cost where margin is more
 Increase in item of excess margin

B. OPERATING RATIO :-

Operating cost = operating expenses + cost of goods sold

OPERATING EXENSES→ office and administration exp as salary, rent,
depreciation, director fees, Electricity, insurance and selling &distribution exp.
NON OPERATING EXPENSES→ interest, discount provision for doubtful debts,
provision for tax,
Abnormal exp. preliminary expenses donation, share or debenture Issue expenses.
↓ RATIO → HIGH OPERATING PROFIT
C. OPERATING PROFIT RATIO:-
The term operating profit is the difference between gross profit and
administration and selling overheads. Non operating income and expenses are
excluded. Interest expenditure is also excluded because interest is the reward for
a particular form of financing and has nothing to do with excellence.

OR

100- OPERATING RATIO

“This ratio indicates the net profitability of the main business i.e. operating
efficiency of a firm”
↑ RATIO→ firm is able to increase sale and can cut down its operating cost.

D. NET PROFIT RATIO:

The term net profit refers to the final profit of the company. It takes into account all
incomes and all expenses including interest costs.
FOR MANAGERIAL EFFICIENCY

FOR OWNER’S PURPOSE

CHAPTER-5

ANALYSIS
AND
INTERPRETATION
 A. CURRENT RATIO:
.

= Current Assets /Current Liabilities

YEAR CURRENT CURRENT CURRENT

ASSETS(incror LIABILITIES(i RATIO
es) n crores)
2009-2010 216391 79299 2.7
2010-2011 244145 106886 2.3
Projected 2011- 257886 107581 2.3
2012

The current ratio throughout is very high which shows the necessary fund is being
block but the trend shows improvement.
 B. QUICK RATIO:

=Quick Assets / Current Liabilities

=Quick Assets / Quick Liabilities

YEAR QUICK ASSETS(in CURRENT RATIO

crores) LIABLITIES(in
crores)
2009-2010 189634 55483 3.4
2010-2011 211711 74391 2.8
Projected 2011-2012 224409 76876 2.9

The ratio is very high which raise concern about working capital management but the
trends shows improvement.
 C.NET WORKING CAPITAL RATIO:

NWC=CURRENT ASSETS –CURRENT LIABILITIES

YEAR CURRENT CURRENT NWC

ASSETS(in LIABILITIES(in
crores) crores)
2009-2010 216391 79299 137092
2010-20011 244145 106886 137259
Projected 2011- 257886 107581 150305
2012

There is high liquidity in the firm but it implies blockage of funds.

 2. LEVERAGE/ CAPITAL-STRUCTURE/
LONGTERMSOLVENCY RATIO:

A. Total debt ratio =Total Debt / Total assets

YEAR TOTAL DEBT(IN TOTAL RATIO

CRORES) ASSETS(IN
CRORES)
2009-2010 271906 702111 0.4
2010-2011 345678 837571 0.4
Projected 2011- 377970 926542 0.4
2012

Debt to total assets ratio remains the same because the financing pattern over the
years is same.
 B. PROPRIETARY RATIO

=PROPRIETAR’S FUNDS/TOTAL ASSETS *10

YEAR PROPRIETAR’S TOTAL RATIO

FUNDS(in crores) ASSETS(in crores)
2009-2010 526386 702111 0.74
2010-2011 573701 837571 0.68
Projected 2011- 624375 926542 0.67
2012

Owner investment in total assets has been around 70% over the year which shows
that the financing pattern is same over the years.
 C. DEBT EQUITY RATIO:

YEAR TOTAL DEBT(IN NET WORTH(IN RATIO

CRORES) CRORES)
2009-2010 271906 526386 0.5
2010-2011 345678 573701 0.6
Projected 2011- 377970 624375 0.6
2012

Debt to equity ratio has been increasing because of CERC tariff regulation 2009-
2014 which says debt equity ratio should be 70:30
 D.FIXED ASSETS RATIO:

YEAR CAPITAL FIXED RATIO

EMPLOYED(IN ASSETS(IN
CRORES) CRORES)
2009-2010 526386 485720 1.08
2010-2011 573701 593426 0.96
Projected 2011- 624375 668656 0.93
2012

There is decrease in the fixed assets ratio .

 E.INTEREST COVERAGE OR DEBT SERVICE RATIO:

Interest Coverage Ratio = EBIT/INTEREST

YEAR EBIT(IN INTEREST RATIO

CRORES)
2009-2010 94034 17981 5.22
2010-2011 81931 19962 4.10
Projected 2011- 97475 18089 5.38
2012

High interest coverage ratio over the years is says that the capacity to repay the
interest is good.
3.ACTIVITY OR EFFICIENCY RATIO:

A. INVENTORY TURNOVER RATIO:

YEAR COST OF GOODS SOLD(IN CRORES) AVERAGE RATIO

INVENTORY(IN
CRORES)
2009- 249542 26757 9.32
2010
2010- 306849 32955.5 9.31
2011
Projected 331708 29595.5 11.20
2011-
2012

Inventory turnover ratio is increasing over the years which mean turnover is high.
B. DEBTOR OR RECEIVABLE TURNOVER RATIO

Debtors = debtors + B/R +discounted B/R + sales tax

Sales = net credit sales + sales tax

YEAR NET CREDIT AVERAGE RATIO

SALE(IN RECEIVABLE
CRORES) (IN CRORES)
2009-2010 370936 29827 12.43
2010-2011 419752 35842 11.71
Projected2011-2012 463777 66514 6.97

Debtor’s turnover ratio is reducing which is because of applicability of tariff

regulation which grants 60 days to debtors.
 D.ASSETS TURNOVER RATIO

C1. Total assets turnover ratio:

Total assets = fixed assets after depreciation+ current assets + intangible

assets(goodwill, patent)

YEAR COST OF GOODS TOTAL RATIO

SOLD(IN ASSETS(IN
CRORES) CRORES)
2009-2010 249542 702111 0.35
2010-2011 306849 837571 0.36
Projected2011- 331708 926542 0.35
2012

The ratio remains same because most of the investment is in long term assets.
 C2. FIXED ASSETS TURNOVER RATIO:

YEAR COST OF GOODS FIXED RATIO

SOLD(IN ASSETS(IN
CRORES) CRORES)
2009-2010 249542 485720 0.51
2010-20011 306849 593426 0.51
Projected2011- 331708 668656 0.49
2012

The trend of the ratio is same because investment is in long term fixed assets.
 C3.CAPITAL TURNOVER RATIO:

↑RATIO→HIGH PROFIT
↓RATIO→LOWER PROFIT

YEAR COST OF GOODS CAPITAL RATIO

SOLD(IN EMPLOYED(IN
CRORES) CRORES)
2009-2010 249542 663478 0.37
2010-2011 306849 710960 0.43
Projected2011- 331708 774680 0.42
2012

The ratio has slightly increased which shows the trend of the increasing profit.
 C4.CURRENT ASSETS TURNOVER RATIO:

YEAR COST OF GOODS CURRENT RATIO

SOLD(IN ASSETS(IN
CRORES) CRORES)
2009-2010 249542 216391 1.15
2010-2011 306849 244145 1.25
Projected2011- 331708 257886 1.28
2012

The ratio has increased over the years because the investment in current assets has
decreased with respect to COGS.
C5. WORKING CAPITAL TURNOVER RATIO:

↑RATIO →LOW INVESTMENT→MORE PROFIT OR OVER

TRADING → EFFICIENT MANAGEMENT
↓RATIO →HIGH INVESTMENT→LOW PROFIT OR UNDER
TRADING
YEAR COST OF GOODS NET WORKING RATIO
SOLD(IN CAPITAL(IN
CRORES) CRORES)
2009-2010 249542 137092 1.82
2010-2011 306849 137259 2.23
Projected2011-2012 331708 150305 2.20

The ratio is increasing because the investment in working capital has decreased in
comparison to COGS.
 PROFITABILITY RATIO:-

A. GROSS PROFIT RATIO OR MARGIN RATIO:-

YEAR GROSS NET

PROFIT SALES GPR=

2009- 10 121394 370936 32.7

2010- 11 112903 419752 26.9

Projected2011- 132069 463777 28.5

12

The gross profit has decreased because increase in COGS.

 B. OPERATING RATIO :-

YEAR OPERATING NET SALES

COST OPT.RATIO=

2009-10 94034 370936 25.4

2010- 11 81931 419752 19.5

Projected2011 97475 463777 21.0

- 12

The ratio has decreased because of the increasing operating cost

 C. OPERATING PROFIT RATIO:-

OR
= 100- OPERATING RATIO

YEAR OPERATING NET SALES

PROFIT OPT.RATIO=

2009- 10 94034 37,091.00 25.4

2010- 11 81931 41,975.20 19.5

Projected2011- 97475 46,377.70 21.0

12

The operating profit ratio for the year 2010-2011 has reduced because of increase in
operating cost but the ratio is improving in the next year.
 D. NET PROFIT RATIO:

FOR MANAGERIAL EFFICIENCY

FOR OWNER’S PURPOSE

YEAR NET PROFIT NET SALES

NPR=

2009- 10 74148 37,091.00 20.0

2010- 11 83263 41,975.20 19.8

Projected2011 89282 46,377.70 19.3

- 12

The net profit has increased but the ratio has decreased because net sales has not
picked up in comparison with net profit.
CHAPTER-6
6.1CONCLUSION

The project had undergone a deeper understanding of the company. That included
knowing the corporate culture of the company.

Gained the first-hand experience of the culture and pace of one of the “Maharatna”
of India. It also helped to learn from the managers who were managing of such a
huge size and understanding how the different department in the public sector
interact with each other to increase the overall productivity.

We gained knowledge of the jargon, the magazines employees read, the valued
outcomes, the practiced cultural values, the performance measures, and the other real
details that define a career in Thermax.

The research spent on the first two weeks on the summers in a full-throttle learning
mode, learning the nuts and bolts of how Thermax delivers its services. By summer's
end, could draw and explain Thermax financial positions and were able to understand
the various ratios in sufficient depth.
 6.2 SUGGESTIONS AND RECOMMENDATIONS

Although THERMAX LTD. has satisfied the ratios. The following are the suggestion
being made out by me as observed during study of the performance through ratio
analysis:

 Company should increase its sales of all the production units with increase in the
sales of the company that can be able to increase its financial position.

 Company should decrease the operating expenses to increase its operating profit.
 Maximize the production capacity.
 Maintain the amount of current sales level and try to increase it.
 Maximize the utilization of fixed assets and working capital.
 All other management, personal and administrative suggestion to be
incorporated.

 To follow the strict credit collection policy.

 Reduce the current assets and quick assets ratio to maintain the standard ratio.
 Return on investment is in satisfactory position and then try to maintain it in
future.

 Try to start those companies, which are closed due to non-availability of funds.
 Try to best utilization of the available resources
6.3BIBLIOGRAPHY

1. Blake, David ,1992,Financial Market Analysis, McGraw-Hill, London

Francis, J.C., 1986, Investments-Analysis and Management, McGraw-Hill,
New York.
Singh, Preeti,1993, Investment Management,Himalaya Publishing, Mumbai

2. The company’s Annual Report

( The Directors’ Report; Management discussion on business environment
and prospects, audited Balance Sheet; audited Profit &Loss Account;
Schedules & Notes to accounts; Accounting policies; Trend analysis and past
performance data).

3. Company’s website (www.thermaxindia.com).

4. Company’s returns filed with various authorities such as Income Tax, Excise,
Sales Tax, PF Departments etc.

5. Information provided to Banks and financial institutions.

6. Information available with industry bodies and trade associations, Chambers

of Commerce etc.

7. Information published in financial newspapers and magazines by experts in

the industry.
PERFORMANCE APPRAISAL
PROJECT REPORT

Student Name: Shivani Pruthi

Programme: BBA (Gen.)-[2010-2013]

You are required to provide your opinion on the following parameters.

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 Technical knowledge gathered about the industry and the job he/she was
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 Communication skills: Oral / Written / Listening skill.
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 Ability to take initiative.
 Ability to develop a healthy long term relationship with client.
 Ability to relate theoretical learning to the practical training.
 Creativity and ability to innovate with respect to work methods and
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 Presentation skills.
 Documents skills.
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 His/her ability and willingness to put in hard work.
 In what ways do you consider the student to be valuable to the
organization?
Consider the student’s value in term of:
 Qualification
 Skills and abilities
 Activities/ roles performed
 Punctuality.
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comments_____________________________________________________
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