Performance evaluation of financial position conducted at dynamatic technologies ltd, bangalore

Performance Evaluation of Financial Position
Introduction

1.1 Introduction:

Performance evaluation of financial position is very much important to know the
wealth and efficiency of the company. Its purpose is to convey the financial aspects of the
firm. Evaluation is done through financial statements which includes income statement,
balance statement, cash flow statement, fund flow statement.

The various techniques are used to evaluate the performance of financial position.
Financial statements are indicators of the segments factors:
Profitability
Financial soundness
Performance evaluation of financial position, therefore, refers to such a treatment of
the information contained in the Income Statements and the Balance Sheet so as to afford
full diagnosis of the profitability and financial soundness of the business.

According to the American Institute of Certified Public Accountants , financial
statements reflect “A combination of recorded facts , accounting conventions and
personal judgments and the judgments and conventions applied affect them materially .“
This implies that data exhibited in the financial statements are affected by recorded facts,
accounting conventions and personal judgments.

The Balance sheet shows the financial condition of the business at a particular
moment of time while the Income Statements discloses the rules of operation of business
over a period of time. However for a better understanding of affairs of the business, it is
essential to identify the movement of working capital or cash in and out of the business
.This information is available in the statement of changes in financial position of the
business. The statements may emphasize any of the following aspects relating to change
in financial position of the business.
A change in the firm’s working capital.
Changes in the firm’s cash position.
Changes in the firms total financial position.

Haranahalli Ramaswamy Institute of Higher Education, Hassan 1

Research Design

Problem statements:
Performance Evaluation of Financial position study conducted at
Dynamatic Technologies limited.

Objectives:
"The main objectives of performance evaluation of financial position are
 To provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making
economic decisions."
 To know the efficiency of financial operations...
 To provide report of assets, liabilities and equity which are directly related to an
organization's financial position
 Evaluation of performance is done through trend analysis, cash flow analysis,
fund flow analysis, ration analysis.

Scope of the study:

 Evaluation of financial position is very much important which shows wealth of the
company
 Evaluation is needed to know efficiency of financial operation
 Evaluation of performance helps in decision economic making

Methodology:
Data collection can be done through Secondary Data
Secondary Data:
Secondary data is data collected by someone other than the user. Common sources of
secondary data for social science include censuses, surveys, organizational records and
data collected through qualitative methodologies or qualitative research.


Sources of secondary Data:
By Staff
By Intranet
By Company records
By Company Journals
By Internet
Limitations of the study:

 Different Accounting Policies-
The choices of accounting policies may distort intercompany comparisons.
Example - IAS 16 allows valuation of assets to be based on either revalued amount or at
depreciated historical cost.
 Ratios are not definitive measures-
Ratios need to be interpreted carefully. They can provide clues to the company’s
performance or financial situation. But on their own, they cannot show whether
performance is good or bad. Ratios require some quantitative information for an informed
analysis to be made.
 Outdated information in financial statement-
The figures in a set of accounts are likely to be at least several months out of date,
and so might not give a proper indication of the company’s current financial position.
 Interpretation of the ratio-
It is difficult to generalize about whether a particular ratio is ‘good’ or ‘bad’. For example
a high current ratio may indicate a strong liquidity position, which is good or excessive
cash which is bad.
 I got less information from the company to do the project work.
 This study is limited to four to five years.
 This study is limited to only one company
 The data of this study has been primarily taken from published annual reports
 Only.
Layout of chapters:
 Introduction
 Profile of the company
 Data analysis and interpretation
 Findings
 suggestions and conclusions


Review of literature.

2. Performance evaluation of financial position:
Performance evaluation of financial position is very much important to know the
wealth and efficiency of the company. Its purpose is to convey the financial aspects of the
firm. Evaluation is done through financial statements which includes income statement,
balance statement, cash flow statement, fund flow statement.

2.1 Financial statements
A financial statement is an organized collection of data according to logical and
consistent according procedures. Its purpose is to convey an understanding of financial
aspects of a business firm. It may show a position at a moment of time as in the case of a
balance sheet, or may reveal a series of activities over a given period of time, as in the
case of income statement.
Thus, the term financial statements generally refer to two basic statements;
The Income Statement,
The Balance Statement,
A statement of Retained Earning and
A Statement of changes in Financial position in addition to the above two Statements.
The meaning and significance of each of these statements is being briefly explained
below ;
The Income Statement:
The Income statement (also termed as Profit and Loss Account)is
generally considered to be the most useful of all financial statements. It explains what has
happened to a business as a result of operation between two balance sheet dates .for this
purpose it matches the revenues and cost incurred in the process of earning revenues and
shows the net profit earned or a loss suffered during a particular period .

The Balance Statement :
It is a statement of financial position of a business at a specified
moment of time . it represents all assets owned by the business at a particular moment
of time and the claims (or equities )of the owners and outsiders against those assets at
that time . it is in a way snapshot of the financial condition of the business at the time.


A statement of Retained Earning:
The term retained earning means the accumulated excess of earning over
losses and dividends .the balance shown by the income statement is transferred to the
balance sheet through this statement, after making necessary appropriations. It is , thus , a
connecting link between the balance sheet and the income statement. It is fundamentally
a display of things that have caused the beginning-of-the-period retained earning balance
to be changed into the one shown in the end-of-the-period retained earnings in the balance
sheet.
The statement is also termed as profit and loss appropriation account in case of
companies.
A statement of changes in financial position:
The Balance sheet shows the financial condition of the business at a particular
moment of time while the Income Statements discloses the rules of operation of
business over a period of time. However for a better understanding of affairs of the
business, it is essential to identify the movement of working capital or cash in and out
of the business .This information is available in the statement of changes in financial
position of the business .the statements may emphasize any of the following aspects
relating to change in financial position of the business;
Changes in the firm are working capital.
Changes in the firm’s cash position.
Changes in the firms total financial position.

2.2 Nature of Financial statements:
According to the American Institute of Certified Public Accountants , financial
statements reflect “A combination of recorded facts , accounting conventions and
personal judgments and the judgments and conventions applied affect them materially .“
This implies that data exhibited in the financial statements are affected by recorded facts,
accounting conventions and personal judgments.
 Recorded facts:
The term recorded facts which have been recorded in the accounting books .Facts
which have not been recorded in the financial books are not depicted in the financial
statements , however material they might be .for example fixed assets are shown at cost
irrespective of their market or replacement price since such price is not recorded in the
books .


 Accounting conventions :
Accounting conventions imply certain fundamental accounting principles which
have been sanctioned by long usage . for example , on account of the convention of
‘conservatism’ , provision is made of expected losses but expected profits are ignored.
This means that the real financial position of the business may be much than what has
been shown by the financial statements .

 Personal judgments:
Personal judgments have also an important bearing on financial statements. For
example the choice of selecting a method of depreciation on the accountant. Similarly ,the
mode of amortization of fictitious assets also depends on the personal judgment of the
accountant.

2.3 Limitations of Financial Statements :
Financial statements are prepared with the object of presenting a periodical review or
report on the progress by the management and deal with the results achieved during the
period under review. Status of the investments in the business.
However .these objectives are subject to certain limitations as given below:
 Financial statements are essentially interim reports:
The profit shown by the profit and loss account and the financial position as
depicted by the balance sheet is not exact . The exact position can be known only when
the business is closed down . Again , the existence of contingent liabilities , deferred
revenue expenditure makes them more imprecise .
 Accounting concepts and conventions :
Financial statements are prepared on the basis of certain accounting concepts and
conventions. On account of this reason the financial position as disclosed by these
statements may not be realistic
Example : Fixed assets in the balance sheet are shown on the basis of ‘Going concern
concept ‘. This means that value placed on fixed assets may not be the same which may
be realized on the on their sale . Similarly on account of convention of conservatisms the
income statements may not disclose true income of the business since probable since
losses are considered while probable income are ignored .


 Influence of personal judgment:
Many items are left to the personal judgment of the accountant
Example : The method of depreciation , mode of amortization of fixed assets ,
treatment of referred expenditure –all depends on the personal judgments of the
accountant . The soundness of such judgment will necessarily depend upon his
competence and integrity .
 Disclose only monetary facts :
Financial statements do not depict those facts which cannot be expressed in terms of
money .
Example : Development of a team of loyal and efficient workers , enlightened
management , the reputation and prestige of management with the public , are matters
which are of considerable importance for the business , but they are nowhere depicted by
financial statements.

2.4 Performance evaluation of Financial position
The various techniques are used to evaluate the performance of financial position
Financial statements are indicators of the segments factors:
Profitability
Financial soundness
Performance evaluation of Financial position, therefore , refers to such a treatment
of the information contained in the Income Statements and the Balance Sheet so as to
afford full diagnosis of the profitability and financial soundness of the business .

Steps involved in the performance evaluation Financial position
The evaluation of the financial position requires:
 Methodical classification of the data given in the financial statements or vertical
analysis.
 Trend analysis or Horizontal analysis.
 Comparative Balance Sheet
 Cash flow and fund flow analysis.
 Comparison of various interconnected figures with each other which is popularly
termed as “ Ratio Analysis”


2.4.1 Methodical classification:
In order to have a meaningful analysis it is necessary that figures should be
arranged properly. Usually instead of the two –column (T form) statements as ordinarily
prepared, the statements are prepared in signal (Vertical) column form “which should
throw up significant figures by adding or subtracting “. This also facilities showing the
figures of a firms or number of years side by side for comparison purpose. Vertical
analysis is the procedure of preparing and presenting common size statements. Common
size statement is one that shows the items appearing on it in percentage form as well as in
rupees form. Each item is stated as a percentage of some total of which that item is a
part. Key financial changes and trends can be highlighted by the use of common size
statements. Common size statements are particularly useful when comparing data from
different companies or from current years to past years.

2.4.2 Trend Analysis or Horizontal Analysis:
Horizontal analysis is facilitated by showing changes between years in both
rupees and percentage. Showing changes in rupees form helps the analyst focus on key
factors that have affected profitability or financial position. Showing changes between
years in percentage form helps the analyst to gain perspective and to gain a feel for the
significance of the changes that are taking place.
2.4.3 Cash flow analysis:
In financial accounting, a cash flow statement is a financial statement that shows
how changes in balance sheet accounts and income affect cash and cash equivalents, and
breaks the analysis down to operating, investing, and financing activities. . Essentially,
the cash flow statement is concerned with the flow of cash in and cash out of the business.
The statement captures both the current operating results and the accompanying changes
in the balance sheet. As an analytical tool, the statement of cash flows is useful in
determining the short-term viability of a company, particularly its ability to pay bills.
The cash flow statement was previously known as the flow of funds statement.
The cash flow statement reflects a firm's liquidity. The cash flow statement includes only
inflows and outflows of cash and cash equivalents; it excludes transactions that do not
directly affect cash receipts and payments. These noncash transactions include
depreciation or write-offs on bad debts or credit losses to name a few. The cash flow
statement is a cash basis report on three types of financial activities: operating activities,
investing activities, and financing activities. Noncash activities are usually reported in
footnotes.



The cash flow statement is intended to
 Provide information on a firm's liquidity and solvency and its ability to change
cash flows in future circumstances.
 Provide additional information for evaluating changes in assets, liabilities and
equity.
 Improve the comparability of different firms' operating performance by
eliminating the effects of different accounting methods.
 Indicate the amount, timing and probability of future cash flows.
 The cash flow statement has been adopted as a standard financial statement
because it eliminates allocations, which might be derived from different
accounting methods, such as various timeframes for depreciating fixed assets.

Cash flow activities:
The cash flow statement is partitioned into three segments, namely: cash flow
resulting from operating activities, cash flow resulting from investing activities, and cash
flow resulting from financing activities.
The money coming into the business is called cash inflow, and money going out from the
business is called cash outflow.
Operating activities
Operating activities include the production, sales and delivery of the company's
product as well as collecting payment from its customers. This could include purchasing
raw materials, building inventory, advertising, and shipping the product.
Under IAS 7, operating cash flows include:[
 Receipts from the sale of goods or services
 Receipts for the sale of loans, debt or equity instruments in a trading portfolio
 Interest received on loans
 Dividends received on equity securities
 Payments to suppliers for goods and services
 Payments to employees or on behalf of employees
 Interest payments (alternatively, this can be reported under financing activities in
IAS 7, and US GAAP)
 Items which are added back to [or subtracted from, as appropriate] the net income
figure (which is found on the Income Statement) to arrive at cash flows from
operations generally include:


 Depreciation (loss of tangible asset value over time)
 Deferred tax
 Amortization (loss of intangible asset value over time)
 Any gains or losses associated with the sale of a non-current asset, because
associated cash flows do not belong in the operating section.(unrealized
gains/losses are also added back from the income statement)
Investing activities
Investing activities are
 Purchase of an asset (assets can be land, building, equipment, marketable
securities, etc.)
 Loans made to suppliers or customers
Financing activities
Financing activities include the inflow of cash from investors such as banks and
shareholders, as well as the outflow of cash to shareholders as dividends as the company
generates income. Other activities which impact the long-term liabilities and equity of the
company are also listed in the financing activities section of the cash flow statement.
Under IAS 7,
 Proceeds from issuing short-term or long-term debt
 Payments of dividends
 Payments for repurchase of company shares
 Repayment of debt principal, including capital leases
 For non-profit organizations, receipts of donor-restricted cash that is limited to
long-term purposes
 Items under the financing activities section include:
 Dividends paid
 Sale or repurchase of the company's stock
 Net borrowings
 Payment of dividend tax

Preparation method:
The direct method of preparing a cash flow statement results in a more easily
understood report. The indirect method is almost universally used, because FAS 95
requires a supplementary report similar to the indirect method if a company chooses to
use the direct method.


Direct method:
The direct method for creating a cash flow statement reports major classes of
gross cash receipts and payments. Under IAS 7, dividends received may be reported
under operating activities or under investing activities. If taxes paid are directly linked to
operating activities, they are reported under operating activities; if the taxes are directly
linked to investing activities or financing activities, they are reported under investing or
financing activities.
Indirect method:
The indirect method uses net-income as a starting point, makes adjustments for all
transactions for non-cash items, then adjusts for all cash-based transactions. An increase
in an asset account is subtracted from net income, and an increase in a liability account is
added back to net income. This method converts accrual-basis net income (or loss) into
cash flow by using a series of additions and deductions.
Rules:
The following rules are used to make adjustments for changes in current assets and
liabilities, operating items not providing or using cash and non operating items.
 Decrease in non-cash current assets are added to net income
 Increase in non-cash current asset are subtracted from net income
 Increase in current liabilities are added to net income
 Decrease in current liabilities are subtracted from net income
 Expenses with no cash outflows are added back to net income (depreciation and/or
amortization expense are the only operating items that have no effect on cash
flows in the period)
 Revenues with no cash inflows are subtracted from net income
 Non operating losses are added back to net income
 Non operating gains are subtracted from net income

2.4.4 Ratio Analysis
Accounting ratios are relationship expressed in mathematical terms between
figures which are connected with each other in some manner. Obviously, no purpose will
be served by comparing two sets of figures which are not at all connected with each other.
Moreover, absolute figures are also unfit for comparison. Management, creditors,
investors, and others to form judgments about the operating performance and financial
position of the firms use the information contained in these statements.


Users of financial statements can get further insight about financial strengths and
weakness of the firm if they properly analyze information reported in these statements.
Management should be particularly interested in knowing financial strengths of the firm
to take suitable corrective actions.

Nature of Ratio analysis :
 Ratio analysis is a powerful tool of Financial analysis. A ratio is defined as “the
indicated quotient of two mathematical expressions” and as “the relationship
between two or more things .
 “In financial analysis , a ratio is used as a benchmark for evaluating the financial
position and performance of a firm.
 Ratio helps to summaries large quantities of financial data and to make
qualitative judgments about the firm financial performance .

Advantages of Ratio analysis :
 Simplifies Financial statements :
Ratio analysis simplifies the comprehension of financial statements .Ratio tell the
whole story changes in the financial condition of the business.
 Facilitates inter-firm compression :
Ratio highlight the factors associated with successful and unsuccessful firms.
They also revel strong firms and weak firms, overvalued and undervalued.
 Helps in planning :
over a period of time a firm or industry develops certain norms that may indicate
future success or failure ,if relationship changes in firm’s data over different time
period .the ratio may provide clues on trends and future problems.
 Facilitates intra –firms compression :
Ratio analysis also makes possible comparison of the performance of the different
division of the firms.



Standards of comparison:
The ratio analysis involves comparison for a useful evaluation of the financial
statements. A signal ratio in itself does not indicate favorable or unfavorable condition. It
should be compared with some standard. Standards of comparison may consist of
 Past ratio: Ratio calculated from the past financial statements of the same firm.
 Competitor’s ratio: Ratio of some selected firms especially the most progressive
and successful competitor at the same point in time.
 Industry ratio: Ratio of the industry to which the firm belongs.
 Projected ratio: Ratio developed using the projected, or Performa, financial
statements of the same firm.

Utility of Ratio Analysis :
The ratio analysis is the most powerful tool of the financial analysis. The many
diverse groups of people are interested in analyzing the financial information to indicate
the operating and financial efficiency, and growth of the firms. These people use ratio to
determine those financial in which they are interested. With the help of ratios, can
determine:
 The ability of the firm to meet its current obligations.
 The extent to which the firm has used its long-term solvency by borrowing funds.
 The efficiency with which the firms is utilizing its assets in generating sales
revenue, and
 The overall operating efficiency and performance of the firm.

Classification of Ratios
Ratios can be classified in to different categories depending upon the basis of
classification.

Traditional classification
Functional classification :


Traditional classification
This classification has been on the basis of the financial statements to which the
determinants of ratios belong. On this basis, the ratios could be classified as:
 Profit and Loss Account Ratios:
That is ratios calculated on the basis of the items of the profit and loss account only
Example: Gross profit ratio, stock turnover ratio, etc
 Balance Sheet Ratios:
Ratios calculated on the basis of the figures of the balance sheet only
Example: current ratio, debt-equity ratio, etc.
 Composite Ratios or Inter-Statement ratios :
Ratio based on figures of profit and loss account as well as the balance sheet
Example: fixed assets turnover ratio, overall profitability ratio, etc.

Functional classification :
The traditional classification has been found to be too crude and unsuitable because
analysis of balance sheet and income statement cannot be done in isolation. They have to
be studied together in order to determine the profitability and solvency of the business. In
order that ratios serve as a tool for financial analysis, they are classified according to their
functions as follows:

 Liquidity ratio
 Leverage ratio
 Activity ratio
 Profitability ratio

1.Liquidity ratios:
It is extremely essential for a firm to able to meet its obligations as they
become due. Liquidity ratios measure the firm’s ability to meet current obligations
(liabilities). leverage ratios show the proportions of debt and equity in financial the firm’s
efficiency in utilizing its assets. In fact, analysis of liquidity needs the preparation of cash
budgets and cash and fund flow statements; but liquidity ratios , by establishing a
relationship between cash and other current assets to current obligations, provide a quick
measures of liquidity. A firm should ensure that it does not suffer from lack of liquidity,
and also that it does not have excess liquidity.


The failure of a company to meet its obligations due to lack of sufficient
liquidity, will result in a poor credit worthiness, loss of creditors’ confidence, or even in
legal tangles resulting in the closure of the company. A very high degree of liquidity is
also bad; idle assets earn nothing. Therefore, it is necessary to strike a proper balance
between high liquidity and lack of liquidity.

The most common ratios, which indicate the extent of liquidity or lack of it, are
 Current Ratio
 Quick Ratio or Acid test Ratio

 Current Ratio:
Current ratio is calculated in order to work out firm’s ability to pay off its short-term
liabilities. This ratio is also called working capital ratio. This ratio explains the
relationship between current assets and current liabilities of a business. Where current
assets are those assets which are either in the form of cash or easily convertible into cash
within a year. Similarly, liabilities, which are to be paid within an accounting year, are
called current liabilities.

Current Ratio = Current Asset
Current Liabilities

Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills
Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses, Accrued
Incomes etc.
Current Liabilities include Sundry Creditors, Bills Payable, Bank Overdraft,
Outstanding Expenses etc.
Objective and Significance:
Current ratio shows the short-term financial statements of the business. This ratio
measures the ability of the business to pay its current liabilities. The ideal current ratio is
suppose to be 2:1 i.e. current assets must be twice the current liabilities. In case, this ratio
is less than 2:1, the short-term financial statements is not supposed to be very sound and
in case, it is more than 2:1, it indicates idleness of working capital.


 Liquid Ratio:
Liquid ratio shows short-term solvency of a business in a true manner. It is also called
acid-test ratio and quick ratio. It is calculated in order to know how quickly current
liabilities can be paid with the help of quick assets. Quick assets mean those assets, which
are quickly convertible into cash.
Liquid Ratio = Liquid Assets
Current Liabilities
Where liquid assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills
Receivable, Short-term Investments etc. In other words, all current assets are liquid assets
except stock and prepaid expenses.
Current liabilities include Sundry Creditors, Bills Payable, Bank Overdraft,
Outstanding Expenses etc.

Liquid ratio is calculated to work out the liquidity of a business. This ratio
measures the ability of the business to pay its current liabilities in a real way. The ideal
liquid ratio is suppose to be 1:1 i.e. liquid assets must be equal to the current liabilities. In
case, this ratio is less than 1:1, it shows a very weak short-term financial statements and
in case, it is more than 1:1, it shows a better short-term financial position.

2.Leverage ratio:
The short term creditors, like bankers and suppliers of raw material, are more
concerned with the firm’s current debt-paying ability. On the other hand, long-term
creditors like debenture holders, financial intuitions etc. are more concerned with the
firm’s long-term financial strength. In fact, a firm should have a strong short-as well as
long-term financial position. To judge the long-term financial statements of the firm,
financial leverage, or capital structure ratios are calculated. These ratios indicates mix of
funds provided by owners and lenders. As a general rule, there should be an appropriate
mix of debt and owners’ equity in financing firm assets.
Leverage ratios may be calculated from the balance sheet items to determine the
proportion of debt in total financing. Many variations of these ratios exist; but all these
ratios indicate the same thing-the extent to which the firm has relied on debt in financing
assets.


Leverage ratios are also computed from the profit and loss items by determining
the extent to which operating profits are sufficient to cover the fixed charges

Classification of Solvency Ratios:
 Debt-Equity Ratio
 Debt to Total Funds Ratio
 Fixed Assets Ratio
 Proprietary Ratio
 Interest Coverage Ratio

Meaning and Objective :
 Debt-Equity Ratio:
Debt equity ratio shows the relationship between long-term debts and shareholders
funds’. It is also known as ‘External-Internal’ equity ratio.
Debt Equity Ratio = Debt
Equity
Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan,
Public Deposits, Loan from financial institution etc.
Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves
and Surplus – Fictitious Assets

This ratio is a measure of owner’s stock in the business. Proprietors are always
keen to have more funds from borrowings because:
(i) Their stake in the business is reduced and subsequently their risk too
(ii) Interest on loans or borrowings is a deductible expenditure while computing
taxable profits. Dividend on shares is not so allowed by Income Tax Authorities.
The normally acceptable debt-equity ratio is 2:1.



 Debt to Total Funds Ratio:
This ratio gives same indication as the debt-equity ratio as this is a variation of debt-
equity ratio. This ratio is also known as solvency ratio. This is a ratio between long-term
debt and total long-term funds.

Debt to Total Funds Ratio = Debt
Total Funds
Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan,
Public Deposits, Loan from financial institution etc.
Total Funds = Equity + Debt = Capital Employed
Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and
Surplus – Fictitious Assets

Objective and Significance: -
Debt to Total Funds Ratios shows the proportion of long-term funds, which have been
raised by way of loans. This ratio measures the long-term financial statements and
soundness of long-term financial policies. In India debt to total funds ratio of 2:3 or 0.67
is considered satisfactory. A higher proportion is not considered good and treated an
indicator of risky long-term financial statements of the business. It indicates that the
business depends too much upon outsiders’ loans.

Fixed Assets Ratio:
Fixed Assets Ratio establishes the relationship of Fixed Assets to Long-term
Funds.
Fixed Assets Ratio = Long-term Funds
Net Fixed Assets
Where Long-term Funds = Share Capital (Equity + Preference) + Reserves and Surplus +
Long- term Loans – Fictitious Assets

Net Fixed Assets means Fixed Assets at cost less depreciation. It will also include trade
investments.



This ratio indicates as to what extent fixed assets are financed out of long-term
funds. It is well established that fixed assets should be financed only out of long-term
funds. This ratio workout the proportion of investment of funds from the point of view of
long-term financial soundness. This ratio should be equal to 1. If the ratio is less than 1, it
means the firm has adopted the impudent policy of using short-term funds for acquiring
fixed assets. On the other hand, a very high ratio would indicate that long-term funds are
being used for short-term purposes, i.e. for financing working capital.

 Proprietary Ratio:
Proprietary Ratio establishes the relationship between proprietors’ funds and total
tangible assets. This ratio is also termed as ‘Net Worth to Total Assets’ or ‘Equity-Assets
Ratio’.
Proprietary Ratio = Proprietors’ Funds
Total Assets
Where Proprietors’ Funds = Shareholders’ Funds = Share Capital (Equity +
Preference) + Reserves and Surplus – Fictitious Assets

Total Assets include only Fixed Assets and Current Assets. Any intangible assets
without any market value and fictitious assets are not included.

This ratio indicates the general financial statements of the business concern. This
ratio has a particular importance for the creditors who can ascertain the proportion of
shareholder’s funds in the total assets of the business. Higher the ratio, greater the
satisfaction for creditors of all types.

 Interest Coverage Ratio:
Interest Coverage Ratio is a ratio between ‘net profit before interest and tax’ and
‘interest on long-term loans’. This ratio is also termed as ‘Debt Service Ratio’.

Interest Coverage Ratio = Net Profit before Interest and Tax
Interest on Long-term Loans


This ratio expresses the satisfaction to the lenders of the concern whether the
business will be able to earn sufficient profits to pay interest on long-term loans. This
ratio indicates that how many times the profit covers the interest. It measures the margin
of safety for the lenders. The higher the number, more secure the lender is in respect of
periodical interest.

3.Activity ratios:
Funds of creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales. Activity
ratios are employed to evaluate the efficiency with which the firm manages and utilizes
its assets. These ratios are also called Turnover ratios because they indicate the speed
with which assets are being converted or turned over in to sales. Activity ratios, thus,
involve a relationship between sales and assets. A proper balance between sales and
assets generally reflects that assets are managed well. Several activity ratios can be
calculated to judge the effectiveness of asset utilization.
Classification of Turnover/Activity/Performance Ratios: -
 Capital Turnover Ratio
 Fixed Assets Turnover Ratio
 Working Capital Turnover Ratio
 Stock Turnover Ratio
 Debt Collection Period

Meaning, Objective and Method of Calculation: -
 Capital Turnover Ratio:
Capital turnover ratio establishes a relationship between net sales and capital
employed. The ratio indicates the times by which the capital employed is used to generate
sales. It is calculated as follows: -
Capital Turnover Ratio = Net Sales
Capital Employed
Where Net Sales = Sales – Sales Return
Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus
+ Long-term Loans – Fictitious Assets.



The objective of capital turnover ratio is to calculate how efficiently the capital
invested in the business is being used and how many times the capital is turned into sales.
Higher the ratio, better the efficiency of utilisation of capital and it would lead to higher
profitability.
 Fixed Assets Turnover Ratio:
Fixed assets turnover ratio establishes a relationship between net sales and net fixed
assets. This ratio indicates how well the fixed assets are being utilised.

Fixed Assets Turnover Ratio = Net Sales
Net Fixed Assets
In case Net Sales are not given in the question cost of goods sold may also be used
in place of net sales. Net fixed assets are considered cost less depreciation.

This ratio expresses the number to times the fixed assets are being turned over in a
stated period. It measures the efficiency with which fixed assets are employed. A high
ratio means a high rate of efficiency of utilisation of fixed asset and low ratio means
improper use of the assets.

 Working Capital Turnover Ratio:
Working capital turnover ratio establishes a relationship between net sales and
working capital. This ratio measures the efficiency of utilisation of working capital.

Working Capital Turnover Ratio = Net Sales or Cost of Goods Sold
Net Working Capital
Where Net Working Capital = Current Assets – Current Liabilities

This ratio indicates the number of times the utilisation of working capital in the
process of doing business. The higher is the ratio, the lower is the investment in working
capital and the greater are the profits. However, a very high turnover indicates a sign of
over-trading and puts the firm in financial difficulties. A low working capital turnover
ratio indicates that the working capital has not been used efficiently.


 Stock Turnover Ratio:
Stock turnover ratio is a ratio between cost of goods sold and average stock. This ratio
is also known as stock velocity or inventory turnover ratio.

Stock Turnover Ratio = Cost of Goods Sold
Average Stock
Where Average Stock = [Opening Stock + Closing Stock]
2
Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

Stock is a most important component of working capital. This ratio provides
guidelines to the management while framing stock policy. It measures how fast the stock
is moving through the firm and generating sales. It helps to maintain a proper amount of
stock to fulfill the requirements of the concern. A proper inventory turnover makes the
business to earn a reasonable margin of profit.

 Debt Collection Period:
Debt collection period is the period over which the debtors are collected on an
average basis. It indicates the rapidity or slowness with which the money is collected
from debtors.
Debt Collection Period = 12 Months or 365 Days/Debtors Turnover Ratio
Or
Debt Collection Period = Average Trade Debtors/Average Net Credit Sales per day
Or
365 days or 12 months x Average Debtors/Credit Sales
It may be noted that some authors prefer to use 360 days instead of 365 days for the sake
of convenience.

This ratio indicates how quickly and efficiently the debts are collected.
The shorter the period the better it is and longer the period more the chances of
bad debts. Although no standard period is prescribed anywhere, it depends on the
nature of the industry.


4.Profitability ratios:
A company should earn profits to survive and grow over a long period of time.
Profits are essential, but it would be wrong to assume that every action initiated by
management of a company should be aimed at maximizing profits irrespective of
concerns for customers, employees, suppliers or social consequences. It is unfortunate
that the world ‘profit’ is locked upon as a term of abuse since some firms always want to
maximize profits at the cost of employees, customers and society. Except such infrequent
cases, it is a fact that sufficient profits must be earned to sustain the operations of the
business to be able to obtain funds from investors for expansion and growth and to
contribute towards the social overheads for the welfare of the society.
Profits are the difference between revenues and expenses over a period of time.
Profit is the ultimate ‘output’ of a company, and it will have no future if its fails to make
sufficient profits.
Profitability ratios are calculated to measure the operating efficiency of the
company. Besides management of the company, creditors and owners are also interested
in the profitability of the firm. Creditors want to get a interest and repayment of principal
regularly. Owners want to get a required rate of return on their investment. This is
possible only one when the company earns enough profits
Profitability ratio includes:
 Gross profits ratio:
The first profitability ratio in relation to sales is the gross profit ratio. It is calculated
by dividing the gross profit by sales.

Gross profit ratio = Gross profit
Sales

The gross profit ratio reflects the efficiency with which management produces each
unit of product. This ratio indicates the average spread between the cost of goods and the
sales revenue. The higher gross profit ratio is a sign of good management.


 Net profit ratio:
Net profit is obtained when operating expenses, interest and taxes are subtracted from
the gross profit. The net profit is measured by dividing profit after tax by sales

Net profit ratio = Profit after tax
Sales

it establishes a relationship between net profit and sales and indicates
management’s efficiency in manufacturing, administering, and selling the products. This
ratio is the overall measure of the firm’s ability to turn each rupee sales into net profit.
This also indicates the firm’s capacity to with stand adverse economic conditions

 Earnings per share:
The profitability of the shareholders’ investment can also be measured in many other
ways. One such measure is to calculate the earnings per share. The earnings per share is
calculated by dividing the profit after taxes by the total number of ordinary shares
outstanding .

EPS = Profit after tax
Number of share outstanding

EPS calculations made over years indicates whether or not the firms earning power on
per share basis has changed over that period. The EPS of the company should be
compared with the industry average and the earnings per share of the other firms


 Dividends per share :
The net profits after taxes belongs to shareholders. But the income which they really
receive, is the amount of earnings distributed as cash dividends. Therefore, a large
number of present and potential investors may be interested in DPS, rather than EPS.
DPS is the earnings distributed to ordinary shareholders dividend by the number of
ordinary shares outstanding

DPS = Earning paid to shareholders (dividends)
Number of ordinary shares outstanding

Objectives and Significance:
The company distributed per share as dividend out of earned per share. The
difference per share is retained in the business.


Profile of Dynamatic Technologies Ltd.,

3.1 INTRODUCTION
Dynamatic® Technologies Limited (DTL) was incorporated on 8th March 1973,
promoted by Mr.J.K. Malhoutra, the present Chairman. DTL was established with
technical collaboration from Dowty Hydraulic Units Limited, U.K. They were then
known as Dynamatic Hydraulics Limited. In 1984, they indigenized the technology and
ended the collaboration with Dowty, becoming one of the key players in the hydraulics
field in India and worldwide.
Their product range covers over 2800 varieties of Hydraulic Gear Pumps and
Hydraulic Systems, which is their forte. They also have diversified applications in the
Defense and Aerospace Sectors and in Metallurgy.

With that start thirty three years ago, they have now come a long way with ever
increasing scale of operations and plans for expansion. Their main manufacturing plant as
well as the Head Office is situated at Dynamatic Park, Peenya, Bangalore. They have two
plants in Chennai and one plant in Swindon, United Kingdom.

In 1998, the company established JKM DAERIM Automotive Limited, a
73Persentage owned subsidiary in partnership with DAERIM Enterprise Co, Limited,
Korea. This is now the largest in the company’s portfolio.

Leveraging off the company engineering skills, a small aerospace and defense
business was established to support research and development by various defense PSUs.
In an era where the government is now encouraging private sector participation, your
company has a head start in an exciting new industry.

In keeping with the company’s philosophy of excellence, Dynamatic has entered
into strategic alliance with ATOS, Italy, Walvoil, Italy, for national level distribution of
the ATOS range of electro-hydraulic products, the Walvoil range of mobile control valves
and Oleo star cartridge.


3.2 Nature of the business:
With a proven track record spanning over a quarter of a century, DTL are the
largest producer of Hydraulic Gear pumps in Asia. In addition to leading the Indian
market with a share of 70Persentage, it has also made a mark in the international arena as
the fourth largest producer world-wide.
DTL are the original equipment manufacturer for all the major tractor and earth moving
equipment manufacturers in India like
Mahindra and Mahindra, Eicher, Punjab Tractors, TAFE, HMT, BEML, BHEL,
Telco, Godrej and Boyce, Bajaj, Larsen and Toubro, McNeill Engineering, Ingersoll
Rand, Ashok Leyland, Hindustan Motors, Greaves, etc.
In the recent past DTL has made inroads into the Aerospace and Defense sectors,
expanding the horizons. The Pilot less Target Aircraft LAKSHYA was a prestigious
project for industry aerospace division, where they manufactured its wings and rear
fuselage. DTL has also bagged the National Award for Excellence in Indigenization of
Defense Equipment awarded by the Ministry of Defense.

3.3 VISION AND MISSION:
Be it the ISO 9000 certification for quality systems or the ISO 14000 certification
for environmental standards, DTL believes that the role in society is that of a responsible
and accountable organization, that is actively contributing to the society.
DTL vision has been to
 Develop products and technologies in line with national priorities
 Achieve global competence
 To operate at the international level, to think global and to be the world’s largest
producer of hydraulic gear pumps.
 Transform our organization into a knowledge based organization
 DTL value system too reflects the commitment to quality and innovation in a
societal context.
DTL believes in
 Integrity
 Being a quality driven organization
 Being a knowledge based organization
 Being non parochial meritocracy
 Conforming to the highest environmental standards
 Raising the standard of living of all employees



3.4 MISSION STATEMENT:
“To achieve GLOBAL LEADERSHIP through TOTAL CUSTOMER
SATISFACTION”
 Aimed to develop diversified products
 To expand towards more functional areas
 Focused on continuous quality management
 To achieve rapid growth

3.5 DTL quality policy
A Dynamatic technology limited is involved in the design and manufacture of highly
engineered components and systems for Hydraulic, Aerospace and Automotive
applications.
 It is our policy to provide creative and innovative solution to delight our
customers at cost-effective prices on a continuous basis.
 By delivering superior value to our customers, we will build a successful business
model for ourselves, capable of returning high yields to investors and improving
the quality of life of all employees.
 All processes will be eco friendly and be designed to eliminate wastage, and all
employees will strive to constantly expand the boundaries of knowledge through
imagination and diligence.

This policy is implemented through our quality system, which operates in accordance
with ISO 9001, the international quality standard.

Dynamatic Technologies Limited is Asia’s largest producer of Hydraulic Gear Pumps
and one of the top five worldwide, and now aspires to lead the world in this business in
the next few years.
The company is now supplying Hydraulic Gear pumps to all the 14 tractor
manufactures in INDIA. Over 85Persentage of all agricultural tractors and constructions
equipment produced in INDIA are powered by pumps produced by Dynamatic
Hydraulics. 45Persentage of all passengers cars made in India are built using critical
engine and transmission products manufactured by JKM DAERIM.


3.6 CORPORATE STRUCTURE OF DYNAMATIC TECHNOLOGIES

CEO & Managing Director
Udayant Malhotra
Chairman of the Board
Vijai kapur

Directors:
Dr.K. Aprameyan
Airchief.Marshal. Krishnaswamy
Ms. Shanti Ekambaram
Mr.Govind Mirchandani
Malavika Jayaram
Mr.Raymond Keith Lawton

3.7 Organization Structure of Dynamatic technologies Limited
The success of the organization depends upon the functional efficiency of various
departments. The departmental functions are co-related and interrelated, so That the
coordinated effort of the departments leads to success of the organization. During my
tenure of one month of study I have noticed the functioning of the following departments.



3.7.1.Organization Structure:

CEO and managing Director

President and Group CFO

SGM and Head Executive Executive Vice President
SBU Director and director and COO Aerospace
Power metric COO COO
Hydraulics and Automotive
Dynametal



3.7.2 Organization chart:

Chairman

Managing Director

Director Director
operator commercial

Sr G.M operation Sr. Manager
HRD

Sr. G.M R and Sr. manager
D Sales

General
manager

PPC dept Quality Maintenan
control ce dept

Marketing Material Production
dept Dept dept


3.8 Product profile
Dynamatic Technologies Limited produces highly engineered products for the
following applications:
 Automotive Sector
 Aerospace Sector
 Agricultural Equipment Industry
 Construction Equipment Industry

DTL is the largest supplier of pumps for the tractor industry and major force in
 Earth moving Equipments
 Drilling Equipments
 Material Handling Equipments
 Machine Tools

A part from Gear Pump, DTL also produces
 Hand Pumps
 Manually Operated DC Valves
 Hydraulic Motors

A brief classification of the product range:
Hydraulic gear pumps-for tractors, earthmoving equipments and machine tools.
 Hydraulic gear motors, Hydraulic power packs
 Directional Control Valves
 Servo Test Control Equipments for Helicopters
 Hydraulic Biogases Compactors.
 Automatic Depth & Control Valves for Tractors.
 Aluminium Casting.
 Especially Heat treated components.
 High Precision Airframe Structures.
 Break Actuating Systems for Battle tanks.
 Transmission products for Battle tanks.
 Load Sensing Hydraulic Valves.
 Ground Support Equipment for Military Jets.
 Complete Tractor Hydraulic system.


Automotive components
 Water Pumps
 Oil Pumps
 Intake Manifold
 Exhaust Manifold
 Rocker Arms
 Rocker Covers
 Shift Forks
 Rear Case Oil Seals.

DTL now stand as a medium scale, precision engineering, ISO 9001 and ISO
14000 certified company. Dynamatic Technologies Limited is a medium scale-
engineering unit, which produces highly engineered products for applications in the
AUTOMOTIVE SECTOR, DEFENCE SECTOR, AGRICULTURE and
CONSTRUCTION EQUIPMENT INDUSTRY.


3.9 Milestones of the Organization

Year Achievements

1973 Incorporation of Dynamatic technologies

1990 Establishment of a small non ferrous foundry Dynametal division at Chennai.

1991 A small R and D facility was set up to develop new iterations that world find
application outside the tractor industry.

1995 Dynamatic Aerospace produced Airframe structure and precision Aerospace
components for LAKSHAY; India pilotless largest aircraft.

1997 A joint venture between Dynamatic Technology Limited and Dea Rim Enterprise
company Limited.

1998 Establishment JKM Dae Rim Automotive Limited

1999 Dynamatic Aerospace successfully produced the first five prototype of wings and
rear fuselage for which the division received a reward for creative partnership with
HAL

1999 ISO: 9001 Lloyd’s REGISTER QUALITY ASSURANCE

1999 Quality policy was introduced in organization

2000 LRQA Approves DTL’s Quality Management System

2003 HAL successful test flow the prototype intermediate Jet trained IJT-36 developed
at R and D of Dynamatic

2003 The division produced the Hydraulic Transmission System for India T-72 Battle
Tank

2003 DTL receives National Award for Excellence

2003 Hyundai-DTL : Partner’s in progress

2003 HAL Best Vendor Award for Dynamatic Aerospace

2003 Efficient Collaboration for customer satisfaction

2003 DTL Engineers follow- the-sun to innovate

2003 Dynamatic bags maiden order from John, Deere, Germany

2005 Dynamatic Aerospace launches facilities


2006 First major Airframe structure for SUKHOI 30HKI delivered by Dynamatic
Aerospace to Hindustan Aeronautics limited(HAL)

2006 JKM Dae Rim Rides the global sourcing wave

2007 Dynamatic Technologies and Cobham Announce partnership

2007 North troop Grumman, Dynamatic Technologies limited to team on potential
Defense Electronics Opportunities in India

2007 Dynamatic technologies inaugurates Science Block

2007 Dynamatic acquires Hydraulics Business Division in UK

2008 The Board of directors approved the allotment of 617,143 equity share the
shareholders of JKM Daerim Automotive consequent to the merger of JKM
Daerim Automotive with the company.

Areas Of Operation:
The main manufacturing plant as well as the Head Office is situated at Dynamatic
Park, Peenya, Bangalore. There are two plants in Chennai and one plant in Swindon,
United Kingdom. The company is planning to acquire more companies in next few years.
It’s among the top strategies of the management too, as we learnt it by the HR manager.

Ownership pattern
Dynamatic technologies limited are a widely held public limited Company and the
Shares of the company are listed on Bangalore and Bombay Stock Exchanges.

SHARE HOLDING PATTERN in Percentage
(As on 30 June 2008)
Promoters 25.26

Banks and Institutions 0.01


Mutual Funds 0.98

FIIs (incl. GDRs) 10.2

Corporate Bodies 31.91

Public 31.64

Compotator’s Information:
DTL is a market leader in Hydraulics as learnt in the beginning it holds
70Persentage of the Indian market. In other Industries the company in an infant, but still it
is doing well. Not much information about its competitors is given. As they are all well
known co’s like,
Bosch Limited
Eaton Corporation
Yuken India Limited


These are all the competitors in the field of Electro components.
Competitors Hydraulic pumps for Industrial pumps
tractors

DYNAMATIC 85 percentage 60 – 70 Percentage

BOSCH EATON 15Percentage ------

RESIROTHA EATON ------- 30 – 40 Percentage
YUKEN INDIA LTD

In aerospace industry though the competition is not that much because of the
sustained conservative approach of the govt. and complementing nature of the industry,
which makes the companies dependent on each other rather than making them rivals.
Automotive industry is a vast Industry and in world context there are
thousands of companies, and Bosch stands as the rival again, but there are some
components which the company has control over for which there are no competitors.

Infrastructural Facilities:
The company is situated in the Industrial area of Peenya, in a vast area under
its operation. The age old perception of the factories being very congested is being
proved wrong by such companies.
The premise has the following infrastructural facilities:
 Easy access to the company
 A canteen with hygienic atmosphere
 A Medical Inspection room
 First aid kits in all floors
 Dustbins at a regular distance
 Beautiful gardens all around


 R and D building etc.
 Good security system
 Ample parking place for both employees and visitors.

This information is neither displayed nor is it told to us by anyone in the
company, it was learn by us.The company follows shift policy and we could see that
the employees had soothing rest rooms to relax.
One incident I witnessed could be recalled… during our initial days, The HR
assistant met with an accident while he was visiting a plant. He was treated with the
first aid kit, and moved immediately to the M-1 room. From there, in time he was taken
to the Hospital to avert and serious injury.

3.10Achievements and Awards:

 DTL receives National Award for Excellence
DTL proudly walked away with a National Award for Excellence in
Indigenization of Defense Equipment, instituted by the Ministry of Defense (Department
of Defense Production and suppliers) at the Awards function held in Delhi, on January 25,
2000. It has successfully indigenized the hydraulic pumps for lubrication and
transmission used in the T-72 Tank.

 DTL’s Quality Management System approved by LRQA
DTL has been constantly striving to improve, expand and innovate itself to
attain the highest quality standards. So the approval from Lloyd’s Register Quality
Assurance, a leading international accredited certification body for quality assurance,
comes as little or no surprise.The company attributes its success to the employees and the
quality policy, particular in Hydraulics.
 HAL Best Award for Dynamatic Aerospace
Dynamatic Aerospace has bagged the HAL Best Vendor Award for the year
2002-03 from the Aircraft Division oil Hindustan Aeronautics Limited, Bangalore. This


award has been presented to Dynamatic Aerospace for quality workmanship and on-time
deliver.

Workflow model:
DTL uses a generic model for all the components, though some slight changes
are made at the floor level by the people responsible. A typical can be depicted like this’

PURCHASE

PLANT FOR
PRODUCTION
PACKING AND GOODS
FINISHED
PRODUCTION
FINAL DESIGN
DISTRIBUTION


WORK FLOW MODEL (END TO END)
 Purchase order; DTL that is taking (purchase) order from, which is one regular
customer.
 Plan for production: According to the purchase order of quality quantity, the
production department is preparing the schedule for production.
 Production and assembly: The production department is producing the product and
services and the basis of schedule and requirements. Than they will assign in
assembly department.
 Finished goods: The finally company is preparing the finished products according
to purchase order.

 Final inspection: The final inspection is taken by the inspection department of the
company on quality and quantity of products.
 Final design: The final design is one of lost stage of finished products and that is
involving the packing of the products.
 Packing list: The Company is taking care of packing list that is dividing a basis
quantity and customer requirement.
 Delivery: After packing the products the company is taking initiative to delivery
products through various mode of transportation.

Future growth and prospects:
Today’s economy favours, and is the reason why many businesses are
spreading their wings to encompass newer markets. With such rapid expansion in the
pipeline for most business, integration processes and infrastructure can be a nightmare.
With Dynamatic Technologies Limited, through, the task is made easier. For over a
decade, DTL has catered to the varying needs of business across industries with its
portfolio of products. DTL is the largest producer of Hydraulic Gear Pumps in Asia.
Estimated turnover is around 3000 lakhs.
Planned for increasing scale of operations and expansion
3.11 SWOT Analysis:
SWOT stands for strength, weakness, opportunity and threats, strengths and
weakness are with in the company whereas opportunities and threats are external factors.
SWOT analysis is the tool for auditing and organization the environment. It is the first
stage of planning and helps organization to focus on key issues. Once key issues have
been identified, they feed into organization objectives. It can be used in conjunction with
other tools of audit and analysis.
STRENGTHS
The company’s consistent urge to grow contiguously by providing innovative and
creative solutions to the customers over the last 15 years is its strength. The company’s
philosophy of proactively pursuing balanced and sustained business policies are its
strength. Highly experienced, competitive and creative staff of the company is their main
strength.
WEAKNESS
Any drastic change in monsoon and climatic conditions can fluctuate the
production of company as it being manufacturer of tractor based hydraulic pumps.
Inconsistency in the supply of raw materials due to poor supplier evaluation.


OPPURTUNITIES
The market for tractors in India constitutes 36Percentage of the world market, and
is expected to increase, as farming is still not fully mechanized in India, thus creating an
opportunity for the company. The rapidly growing infrastructure sector has opened a
gateway to the company.Emerging other product categories, changing economic scenario
has thrown great opportunities being a market leader the company has the monopoly is
price strategy.
THREATS
Climatic conditions are one important threat, as tractors being agriculture based
product and are empowered by hydraulic pumps. Banking conditions is another threat, as
farmers are not able to invest on the farm mechanization.

STRENGTHS
 The company is Asia’s largest producer of Hydraulic Gear pumps and one of the
top five in worldwide.
 Company is now supplying hydraulic gear pumps to all 14 tractor manufacturers
in India.
 Over 85percent of all agricultural tractors and construction equipment produced in
India are powered by pumps produced by Dynamatics Hydraulics.
 The company has relentless drive to eliminate operational inefficiencies,
introduction of more value added products the company’s net profit has grown by
52percent.
 The improved overall performance has been leveraged by the company to
negotiate substantial reductions in financial costs.
 The company imparts training to workmen for working on multiple machines
along with combination of reengineering of processes, which has constantly
increased the productivity levels.
 Company has leveraged the deep relationships and large market share built – up
over the years with existing customers, to offer additional products which
incorporate state-of-the-art features at attractive price levels.
 The extensive training programs includes 5s quality system in the company.
 Six-Sigma problem-solving techniques have been employed.
 Exports continue to be the growth driver. Company has now been approved as a
global strategic source by the world’s leading agricultural and construction


 equipment manufacturers such as John Deere, Case New Holland, CLAAS, JCB,
etc

WEAKNESS:
 Power intensive, dependant on power and any miscarriage here results in under-
utilization of capacity.
 Needs updating with the times in terms of plant and machinery.
 No funds raised on a short term basis which have been used only for long term
investment.
 Variation of share prices of the company in stock market.

For example:

MONTH HIGH LOW
(Rs/share) (Rs/share)
October 2006 1,285.00 715.00

November 2006 1,016.00 779.00

December 2006 1,248.00 901.00

OPPORTUNITIES:
 The automotive components industry is poised to witness significant change over
the next decade.
 The outsourcing boom in auto component industry offers great opportunities for
growth.
 Company presently operates predominantly in the highway vehicle segment which
is characterized by high volumes and thin margins.
 However, growth opportunities available in this segment make it very
attractive for any business.


 Company is continuing to develop numerous variants of pumps used in the
industrial sector, with an aim of increasing penetration in this lucrative and
growing market.
 With an aim to trap into the rapidly growing infrastructure sector, company is
putting in serious R&D efforts, to develop a range of cast- iron body pumps. This
will open up new revenue streams for your company.
 Company as approved at the last annual general meeting, has incorporated a
subsidiary during the year, JKM global pvt. Limited, based in Singapore, with the
aim of better focusing its efforts on the opportunities in the global market.
 Company wishes to grow rapidly in this segment and counter the pricing pressures
by adding global customers like ford, Nissin & PSA and build
 Higher value-add in its existing supplies by graduating to supplying complete
assemblies wherever possible rather than only parts.

THREATS:
 Enormous pricing pressures from customers can seriously pressurize margins
which appear to be the biggest threat to this industry.
 With the customs duty levels continuing to drop (and projected to reach WTO
levels by 2008-09), the pricing structure may have to be suitably modified to
counter expected imports. Cost-push inflation, in terms of spiraling aluminum
price increases, is a cause of concern.

Analysis and Interpretation

4.1 Comparative Balance sheet:


2005 2006 Increase or 2007 Increase or 2008 Increaseor 2009 Increase or
(base year) decrease decrease (Rs 000) decrease (Rs 000) decrease
SOURCES OF FUNDS

Shareholders’ Funds
Capital 41,935,600 41,935,600 - 41,935,600 - 48,107 6172 54,147 12,212
Reserves and Surplus 158,374,485 221,031,943 62,657,458 296,040,461 137,665,976 610,994 452,620 1,294,737 1,136,363

Loan Funds
Secured Loans 294,240,799 334,133,844 39,893,045 459,694,485 165,453,686 1,222,019 927,779 1,868,284 157,044
Unsecured Loans 64,060,391 64,970,687 910,296 57,307,511 -6,752,880 176,165 112,105 182,066 118,006
Deferred Tax Liability 42,837,355 37,002,348 -5,835,007 55,103,206 12,265,851 148,315 105,478 209,775 166,918
601,448,630 699,074,422 97,625,792 910,081,263 308632633
Total 2,205,60 -380888 3,609,009 3,007,651
APPLICATION OF FUNDS
Fixed Assets
Gross Block 534,381,096 588,718,023 54336927 699,896,534 165,515,438 2,156,308 1,621,657 2,875,390 2,341,009
Less: Depreciation 263,176,231 296,486,878 33310647 319,859,766 56,683,535 703,394 440,218 873,454 610,278
Net Block 271,204,865 292,231,145 21026280 380,036,768 11,763,535 1,452,914 1,181,710 2,001,936 1,730,732
Capital Work-in-progress 4,969,243 61,491,790 56522547 185,051,776 180,082,533 165,503 160,534 301,642 296,673
Incidental Expenditure during
Construction Period - 13,895,158 13895158 34,101,682 34,101,682 - - - -
276,174,108 367,618,093 91443985 599,190,226 3,23,016,118 1,618,417 1342243 2,303,578 2,027,404

Investments 78,606,253 78,644,151 37899 78,544,151 -62,102 85,388 6782 509,857 431,251
Current Assets, Loans and Advances
Inventories 118,669,489 155,048,189 36378700 163,336,943 44,667,454 339,799 221,130 403,457 284,788
Sundry Debtors 228,481,808 288,302,155 59820347 339,342,118 110,860,310 631,546 403065 724,314 495,833
Cash and Bank Balances 17,493,847 17,685,119 191272 16,907,751 -586,096 52,891 35398 72,985 55,492
Other Current Assets 12,411,582 12,864,449 452867 17,291,555 4,879,973 26,968 14557 36,161 23,750
Loans and Advances 50,503,036 61,320,960 10817924 86,087,334 35,584,298 206,278 155775 298,182 247,679
427,559,762 535,220,872 107661110 622,965,701 195,405,939 1,257,482 829923 1,535,099 1,107,540
Less: Current Liabilities and Provisions
Liabilities 171,971,864 248,281,899 76310035 346,669,311 174,697,447 708,316 536345 697,609 525,638
Provisions 13,113,313 34,126,795 21013482 43,949,504 30,836,191 47,371 34258 41,916 28,803
185,085,177 282,408,694 97323517 390,618,815 208,533,638 755,687 570602 739,525 554,440

Net Current Assets 242,474,585 252,812,178 10337593 232,346,886 -10127699 501,795 259321 795,574 553100

Miscellaneous Expenditure 4,193,684 - -4193684 - - - - - -

Total 601,448,630 699,074,422 97625792 910,081,263 308632633 2,205,600 1604152 3,609,009 3007561

Inference :
 The above compared balance sheet shows that increased or decreased in
source of funds and application of funds.
 In 2006, 2007, 2009 has increased in its source of funds which is compared to
base year 2005, and it is decreased in 2008.
 In 2009, the investment is more compare to 2006, 2008 and in 2007
investment has not made.


 The ideal current ratio is suppose to be 2:1 i.e. current assets must be twice the
current liabilities, in 2009’s balancing figures shows that current assets are
twice the current liabilities.
 Miscellaneous expenditure is made in the 2005.

4.2 Trend analysis:
% 2006 % 2007 % 2008 % 2009 %
2005

(R
(R s
(Rs s (Rs 000
(Rs 000) 000) 000) 000) )

(base
year)
S
sINCOM

E

Sales and 1,068,9 1,282 3,237 3,314
Services 866,382 100 12 123 ,356 148 ,772 374 ,841 383

Less:
Excise
duty
included 167,9 494,2 378,2
therein 114,474 100 135,642 118 27 147 81 432 60 330

1,114 2,743 2,936
Net Sales 751,908 100 933,270 124 ,428 148 ,491 365 ,581 391

Other 45,33 83,84 76,12
Income 24,900 100 39,078 145 9 182 0 337 2 306

Total 1,159 2,827 3,012
income 776,808 100 972,348 125 ,767 149 ,331 364 ,703 388

EXPENDI
TURE:

Materials 585,2 1,590 1,661
Consumed 343,213 100 451,592 132 68 171 ,289 463 ,952 484

Employee 137,9 296,0 379,8
Cost 108,296 100 119,704 111 10 127 68 273 00 351

Other
Operating 210,8 430,0 531,7
Expenses 174,855 100 199,933 114 77 120 45 246 20 304

Total
Expenditu 934,0 2,316 2,573
re 626,365 100 771,231 123 57 149 ,402 370 ,472 411

Profit 201,11 225,7 510, 34 439,
or loss 150,443 100 7 134 10 150 929 0 231 292

Inference :
Trend analysis shows that income and expenditure is increasing year after
year.
Wealth and efficiency of the company is well because the income is more than

expenditure and company is retaining profit.


In the 2007, as per trend analysis the income and expenditure is equal, that is 149%
and there is profit and loss.
As per the trend analysis the profit percentage is more in the 2008.

4.3 Cash flow analysis:
Cash flow statement for the year ended

2009 2008 2007
Rs.000 Rs.000 Rs.000
A. Cash Flow from Operating Activities:
Profit before Taxation and before
Extraordinary/ Exceptional items 114,792 302,234 145,991


Adjustments for:
Depreciation 172,120 120,703 41,203
Interest Expense 152,319 87,992 38,515

Interest Income (13,708) (6,940) (2,355)
(Profit)/Loss on Fixed Assets sold 279 1,173 622
Income from Investment - Dividends - - (14,600)
Miscellaneous Expenditure written
off - 42 -
Debts / Advances Written off 22 837 1,756
Provision for bad and doubtful
Debts/ advances 2,999 5,034 3,369
Liability no longer required
written back (554) (631) (454)
Provision for Gratuity and
Leave Encashment 8,828 1,425 3,680
Unrealised foreign exchange
(gain) /loss 22,955 (4,872) 176
Warranty provision
written back (52) 4,320 454

Operating profit before working
capital changes 460,000 511,317 218,426

Adjustments for Changes in Working Capital :
- (INCREASE)/DECREASE in
Sundry Debtors (95,767) (16,593) (57,668)
- (INCREASE)/DECREASE in
Other Receivables (76,099) (42,399) (20,730)
- (INCREASE)/DECREASE in Inventories (63,658) (41,547) (8288)
- INCREASE/(DECREASE) in Trade and
Other Payables (87,483) (66,890) (85492)
Adjustment t for Unrealised Foreig


Exchange Gain/(Loss) (22,955) (3,168) -

Cash Generated From Operations 114,038 340,720 217,231

- Direct Tax paid (25,206) (74,655) (29,379)

- Fringe Benefit Tax paid (7,325) (4,410) (1,936)

Net cash from operating activities 78,827 259,053 185,915
B.Cash Flow From Investing Activities:
Purchase of fixed assets (477,463) (400,832) (265,137)
Proceeds from Sale of fixed assets 3,918 3,482 5,742
Proceeds from Sale of Investments - 15 100

Purchase of investments (408,469) (65,258) -
Loans/ICDs given (4,898) (98,494) -
Interest Received (Revenue) 8,018 2,588 1,210
Dividend Received - 14,600 5,840
Acquisition of Wind farm (320,813) - -
Adjustment for Unrealised Foreign
Exchange Gain/(Loss) - 354 -

Net cash used in investing activities (1,199,707) (543,545) (252,245)

C. Cash Flow from Financing Activities:
Proceeds from Long
Term Borrowings 870,631 276,212 128,752
Proceeds from Issue of Shares 736,577 - -
Proceeds from short
Term Borrowings - - (10.000)
Repayment of Long Term


Borrowings (212,380) (149,393) (29,456)
Repayment of Inter
Corporate Deposits (5,000) (5,000) -
Repayment of Loan
from Directors - (800) -
Repayment of public deposits (592) (177) -
Proceeds from Cash Credits/ Working
Capital Loans (86,392) 247,230 26,028
Proceeds from Buyer’s Credit 11,477 80,787 -
Proceeds from fixed deposits - - 1,929
Interest Paid (145,960) (85,285) (37,357)
Dividend (23,980) (51,452) (12,580)
Dividend Tax Paid (3,407) (8,743) (1,764)
Adjustment for Unrealised Foreign
Exchange Gain/(Loss) - 7,686 -
Net cash used in Financing Activities 1,140,974 311,065 65,552
Net Increase/(Decrease) in Cash and
Cash Equivalents 20,094 26,573 (778)

Cash and cash equivalents as
at end of last year 52,891 16,908 17,685
Cash and cash equivalents acquired
on merger - 9,410 -
Cash and cash equivalents as
at end of this year 72,985 52,891 16,907
20,094 26,573 (778)

Cash flow analysis is done by using chart.

1.Cash flow from operating activities:( C1)



Inferrence :

This chart shows the cash flow from operating activties. In the year 2008 the
cash flow from operating activites is more compare to 2007 and 2009.

Operating profit before working capital changes is more in the 2008,compare
2009 and 2007

2.Cash flow from investing activities:(C2)



Inferrence :

This chart shows the cash flow used in investing activities. In the year
2009, the investment is more in purchase of assets and purchase of investments .

3.Cash flow financing activies :(C3)

Inferrence:

This chart shows the cash flow used financing activites.1n 2009, the cash
flow used in finacing activities is more compare to 2008 and 2007.

4.Net cash and equivalent (C4)



Infereence :

This chart shows net cash and cash equivalents . In 2008 net cash is more.

4.4 Ratio analysis:


1.Liquidity ratios:
 Current ratio :

Current Ratio = Current Assets
Current Liabilities

2009 = 1535099
739525 = 2.0:1
2008 = 1257482
755687 = 1.6:1

2007= 622965
390618 = 1.5:1

2006= 533968
281156 = 1.8:1

Inference:
This ratio measures the ability of the business to pay its current liabilities. The
ideal current ratio is suppose to be 2:1 i.e. current assets must be twice the current
liabilities. In 2008,2007,2006 the ratio is less than 2:1, the short-term financial statements
is not supposed to be very sound and in 2009, it is more than 2:1, it indicates idleness of
working capital.

 Liquid Ratio:



Liquid Ratio = Liquid Assets
Current Liabilities

2009 = 1534099-403457
739525 = 1.6:1
2008 = 1257482-359799
75568 = 1.2:1

2007= 622965-163336
39061 = 1.17:1

2006= 533968-155048
281156 = 1.34:1

Inference:
This ratio measures the ability of the business to pay its current liabilities in a real
way. The ideal liquid ratio is suppose to be 1:1 i.e. liquid assets must be equal to the
current liabilities. In case, this ratio is less than 1:1, it shows a very weak short-term
financial statements and in all 4 years, it is more than 1:1, it shows a better short-term
financial position.

2.Leverage ratio:


 Debt-Equity Ratio
Debt Equity Ratio = Debt
Equity

2009 = 209626
1348884 = 1.55:1
2008 = 1437922
659101 = 2.18:1
2007 = 571705
337975 =1.69:1
2006 = 436105
262966 = 1.6:1
Inference:
This ratio is a measure of owner’s stock in the business. Proprietors are always
keen to have more funds from borrowings because:
(i) Their stake in the business is reduced and subsequently their risk too
(ii) Interest on loans or borrowings is a deductible expenditure while computing taxable
profits. Dividend on shares is not so allowed by Income Tax Authorities. The normally
acceptable debt-equity ratio is 2:1.
In 2009,2007,2006, the ratio is less than 1:1, it shows a very weak short-term
financial statements and in 2008, it is more than 2:1, it shows a better short-term financial
position.

 Debt to Total Funds Ratio:


Performance evaluation of financial position conducted at dynamatic technologies ltd, bangalore

Performance evaluation of financial position conducted at dynamatic technologies ltd, bangalore

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