NON-BANKING FINANCIAL INSTITUTIONS (NBFIs) Non-Banking Financial Institutions (NBFIs) play an important role in the Indian financial system given their unique position of providing complimentary and competitiveness to banks. They score over the traditional banks by providing enhancedequity and risk-based products. The Hierarchy of NBFCs in India
NBFIs
Insurance companies
Mutual Funds
Investment Company
Equipment Leasing
Loan Company
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NONB NKING FINANCIAL CO PANY (NBFC) Non-Banking Financial Company (NBFC) i a company regi tered under the Companies Act, 1956. It is engaged in the business of loans, securities, insurance, chit funds etc They also provide products/services that includes margin funding, leasing and hire purchase, corporate loans, investment in non-convertible debentures, IPO funding, small ticket loans, venture capital etc. As in the diagram, NBFCs are classified into four categories 1. 2. 3. 4. Hire- Purchase Leasing Loan Company Investment Company Equipment Leasing Company
Some of the prominent NBFCs in India are Infrastructure Development Finance Corporation (IDFC) Rural Electric Corporation ( REC) Industrial Finance corporation of India (IFCI ) GE Capital
Till March 2009 there were 12,739 NBFCs out of which 336 NBFCs were permitted to accept public deposits
NBFCs: Why are they required? NBFCs are required as they have a greater reach to various markets and have great efficiency in mobili ing funds. Generally banks to reduce their operational costs establish NBFC. NBFC enjoys many liberal policies by RBI in comparison with the commercial banks. However this scenario is changing. RBI now has strict measures for NBFCs also.
NON BANKING FINANCIAL CO PANY Financial institutions in India mainly classified in to two. 1. 2.
NON BANKING FINANCIAL CO PANIE A non- banking financial company (NBFC) can be defined as any hire purchase, housing, financial investment loan equipment leasing or mutual benefit financial company but does not include insurance company or stock exchange or stock broking. Some of the financial institutions have been notified as public financial institutions by the government of India under the section 4A of the companies Act 1956. Today there are large number of Non-banking companies in India, NBFC render financial services similar to commercial banks and financial institutions in the country. NBFC receives deposits from the public in various ways such as issue of debentures, unit certificates, saving certificates, subscriptions etc. They advance loans to wholesale and retail traders, small scale industries and self employee persons. There is no minimum liquidity ratio or cash ratio and specific ratio between their owned funds and deposits in the case of Non-banking companies. In a broad sense unit trust of India, industrial development bank of India and various other state financial corporations and state run chit funds represent NBFI in the public sector. In the private sector loan companies, investment companies, hire purchase companies, leasing companies, chit and fund companies etc come under the group of NBFIs. Technically all financial institutions other than banks belong to the group of NBFIs. Kerala state financial enterprise called KSFE is also non banking financial institution. They market their chitties and gave loans to the society for their welfare and growth. The KSFE Ltd plays a very important role in the fulfillment and welfare of the society. In exact meaning, they market their funds for their growth and development of the society.
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NON BANKING FINANCIAL CO PANIE AND BANKS SIMILARITY BETWEEN NBFC AND BANKS
y
Bank and NBFCs essentially performs the functions of the financial intermediation in the economy
Banks and public deposits accepting NBFCs are also competing for sources of funds in certain schemes of the credit markets.
There regulatory design has serious implication for the efficiency of the financial system, as well as the financial stability
NBFCs cannot accept demand deposits ( Demand deposits are funds deposited in an institution, that are payable immediately on demand e.g.: Savings account, Current account etc)
A NBFC cannot issue cheques, to their customers and is not a part of the payment and settlement system
Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation (DICGC) is not available for NBFC depositors
They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.
They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. (Currently the ceiling rate is 12.5%)
y y
They cannot offer gifts/incentives or any other additional benefit to the depositors. They should have minimum investment grade credit rating, from the credit rating agencies
CLASSIFICATION OF NBFCs ACCORDING TO RBI (i) NBFC accepting deposits from customers (ii) NBFC which does not take deposits from customers
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NBFCs taking deposits from public are referred to as NBFC-D and those who dont take public deposits are referred to as NBFC- ND
Those NBFCs NBFCs-ND with an asset si e of Rs.100 crore and above (as per the last audited balance sheet) are designated as systemically important NBFCsND (NBFCs-ND-SI)
NBFCs-ND-SI are advised to attain minimum CRAR of 12 per cent by March 31, 2010 and 15 per cent by March 31, 2011
All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid certificate of registration with authori ation to accept public deposits can accept/hold public deposits
New NBFCs are not allowed to raise public deposits for period of two years from the date of registration. After completion of two years, detailed review is taken of the company by the regulator
The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand
NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
NBFCs cannot accept deposits from NRI except deposits by debit to NRO account of NRI provided such amount do not represent inward remittance or transfer from NRE/FCNR account.
NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with or without credit rating) are not entitled to accept public deposits
Evaluation of the quality of management in respect of the promoters/directors is taken into consideration while giving allowance for taking public deposits
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The Kerala state financial enterprises limited popularly known as KSFE Ltd It is a profit making institution in Kerala, especially in chit and loan business It was created by the Govt of Kerala for the purpose of providing an alternative to the private and unorgani ed chit operators or make a control on chit fund business and save the public from the hands of cut-throat chit fund operators
y y
It is a non banking financial company Another important is that, funds raised by the KSFE Ltd through chitty and deposits are used by the public in Kerala and not to other state
It provides dividend and other charges to government of Kerala .so it is a major source of fund and profit to the government
HISTORY OF KSFE LTD We have a number of financial companies operating in Kerala. But KSFE marked its longed in golden letters due to its success. Its history is very powerful support to any other financial enterprises. KSFE starts its golden journey from 1969 as a miscellaneous Non Banking Financial Company owned by the Government. Its main objective was to provide an alternative to private chit fund operators with a view to bring a control over chit fund business. Thus the company can save the public from the hands of cut throat chit operators. The KSFE had started its success with a humble manner with a paid up capital of Rs.2 lakhs, 10 branches, and 40 employees. But now, it is showing like a huge tree with more than 4500 employees, directly with a network of 300 branches. Since its inspection, the institution has been registering attractive profit every year. Today KSFE is the number one in chit fund business in India. That company has been on a fast track, as far as the growth of business is concerned. It has been able to register an average annual growth of 3% over the past many years.
New hori on college of engineering
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Thus the legend of the growth of the KSFE Ltd started from a small company. The company conduct chitties for different sections of the festivals. That is KSFE start new chittes at the time of festival like onam under the name of Ponnona Chitty. It also provide loans and advances small traders for working capital needs and to acquire house hold durables motor vehicles and equipments. Thus chitty happens to been the main business of the company and it does a yearly chitty business of over 1000 crores in 20072008. STARTING OF KSFE LTD
y y y y y
The KSFE Ltd started on 6th November 1969 by the government of Kerala The working capital was Rs.2 lakh. The head office of KSFE Ltd is placed in Chembukavu at Thrissur. The total number of workers in KSFE was 45. The total number of branches of KSFE at the beginning was 10.
PRESENT SCENARIO OF KSFE LTD Up to the month of july 2008,the following trends are maintained by
y y y y y
KSFE Ltd.
The working capital is Rs.15 crores Total number of employees is more than 4500. The number of branches is nearly 300. The number of customers is more than 20 lakhs Annual business is Rs.5000 crores the company and presently does a
monthly business of curries and loans are over 200 crores, and 135 crores respectively. The company introduced a tie up with western union for money transferred from abroad serving its customers through the branches spread over Kerala. The company also make a tie up with LIC for marketing their life insurance products. The company has also entered into a tie up with National Insurance Company Ltd. The company has also
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entered into a tie up with Bajaj Allianz Insurance Company by a name Santhwanam for the companys chitty prized subscribers as well as loans to cover their future liability. The company offers attractive interest rates for their deposits and also charge reasonable interest on their advances. The deposits are under the guarantee ownership of Gvt of Kerala. The company has its own offices for their business. It has separate loan unit at Thrissur. It handles all loans under the unit. It also provides locker facilities at nominal charges. The company has its own building at Thrissur, Kollam and Trivandrum. The corporate office is at Thrissur under the name called Bhadratha. THE ISSION OF KSFE LTD and
The mission of KSFE Ltd is the wellbeing of the public by its different products like chitties, loans, deposits etc. for the welfare of the society. The chitties are came under the Kerala Chitties Act 1975, which brought into force with effect from 25th august 1975. The act is to give adequacy and safety to the funds of the society and gave good returns to them. It also ensures lesser rate of interest for their loans and advances. THE VISION OF KSFE LTD
y y y y
Providing the whole range of quality services and products to the society. Retaining the superior role in chitty business. Spreading our wings beyond the boarder of Kerala, in international level. Adopting technology and bench mark standards in customer service and performance.
Sustaining commitment to the weaker sections of society, as the neighborhood institutions for support, trust and security.
THE QUALITY POLICY OF KSFE The Quality policy of KSFE is of providing Quick and Better service and their by achieving Customer Satisfaction.
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PRODUCTS AND SERVICE PROFILE The i 1. 2. rtant products introduced by KSFE Ltd are Chitty Loans and advances
y y y y y y y y y y
Chitty passbook loan New chitty loan Golden loan scheme Reliable customization Consumer vehicle loan New housing finance scheme Trade finance scheme Flexi trade loan Fixed deposit loan Tax planning loan
3.
Deposit scheme
y y y y
Fixed deposit and short term deposit Sugama security deposit Chitty deposit in trust Chitty security deposit in trust
4.
Western union money transfer Life insurance as a corporate agent of LIC General Insurance as a corporate agent of NIC Safe Locker facility
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CHITTY Chitty is the main product of KSFE. It is a unique financial product, which blends the advantages of both investment and advance. It is a risk free safe haven for the public as KSFE conducts only chitties fully governed by the provisions of Kerala Chitties Act, 1975. The installment per month for chitties range from Rs. 500 to Rs. 1, 00,000 and the usual duration of chitties are 30 months, 40 months, 50 months, 60 months and 100 months. Other Schemes Offered is given below: 1. Loans & Advances Although Chitty is in essence a loan/advance scheme, for subscribers whose chitties are not getting prized and, at the same time they are in need of money, relief has been provided by two loan schemes built within the chitty scheme, viz. Chitty Pass Book Loan and New Chitty Loan. KSFE offers other loan/advance schemes, comparable to those given by banks and other financial institutions, and the same includes: Gold Loan Scheme, Reliable Customer Loan, Consumer/Vehicle Loan, Special Car Loan, New Housing Finance Scheme, Flexy Trade Loan, Tax Planning Loan Scheme, Fixed Deposit Loan Scheme and Sugama (Akshya) Overdraft Scheme. 2.Deposit schemes Fixed Deposit, Short Term Deposit, Sugama Deposit (which is similar to the savings deposit in Banks), Chitty Security Deposit-in-Trust and Sugama Security Account. 3.Fee Based Activities of KSFE Western Union Money Transfer - as sub agent of Paul Merchants Ltd, Life Insurance as a corporate agent of LIC, and General Insurance as a corporate agent of NIC. 4. Securities: From chitty subscribers and customers who avail loans/advances of KSFE, KSFE accepts various types of securities which include:Fixed Deposits with KSFE or approved Banks, Bank Guarantee, NRI Deposits, LIC Policies, National Savings Certificate (NSC), Kisan Vikas Patra (KVP), Chitty Pass Book of Non-prized Chitties, Gold Security, Post-dated Cheques, Personal surety and Property Security.
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THE GROWTH OF BUSINESS OVER YEARS: Business Chitty Turnover Advances Total Deposit Aggregate Business 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 3641. 1451.15 1595.21 1646.98 1691.07 1786.80 1992.97 2570.49 87 539.99 510.17 479.54 557.89 648.00 850.56 1025.60 1284.1
AREA OF OPERATION KSFE is the biggest non banking organization in kerala. The Corporate Office of KSFE is at Thrissur. It has seven Regional Offices at; i Thiruvananthapuram ii Kollam iii Kottayam iv) Ernakulam v) Thrissur vi) Kozhikode and vii) Kannur for coordinating and controlling the branches, KSFE spreads its business in every districts of Kerala. and it has a number of branches in every district.
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NO 1 2 3 4 5 6 7 8 9 10 11 12 13 14
DISTRICT Thiruvananthapuram Kollam Pathanamthitta Alappuzha Kottayam Edukki Eranakulam Thirissur Palakkad Malappuram Kazhikode Vayanad Kannur Kasargode
NUMBER OF BRANCHES 53 40 14 25 31 7 39 21 21 19 24 6 17 5
MANAGEMENT OF THE COMPANY KSFE Ltd has a well management in their operations and functions. The management of the company is vested in the hands of board of directors constituted by the governor from time to time. The number of directors shall not be less than two and not more than nine. The directors shall hold office during the pleasure of the governor. The governor may from time to time appoint two directors other than the MD as the chairman and vice chairman of the board. The first board was constituted as per the Govt. order, G.O(RE) 4876/93 financial dated 1969.The MD is appointed by the governor on such term
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(0487)2332329
(0484)2670624 9447792000
9447799500 9895768608
COMPETITORS INFORMATION KSFE is the biggest non banking financial company in India. They are ruling the chitty business for the past several years. It is full owned by the government of Kerala. There is no other chitty business existing in public sector except KSFE. But now a days they are facing competition from some private sector chitty businesses. And private agencies providing attractive offers to the customers. But the trust and believe of customers towards the government made KSFE, the number one chitty business in India. Some of the competitors are; 1. SREE GOKULAM CHITS 2.SIXAM CHITS PVT Ltd 3.MUTHOOT .M.GEORGE CHITS 4.K L M CHITS SYNDICATE
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INFRASTRUCTURAL FACILITIES
y y y y y y y
Door collection agent Advertisement agencies Water facility Seating Arrangement Fire safety Security guard Locker system
ACHIEVEMENTS AND AWARDS KSFE is the number one non banking financial company in Kerala. KSFE bags PRAVASI BHARATHI (KERALA) SHREYAS AWARD for the year 2010. KSFE is selected for the award on the basis of overall performance of the company during the last year. The Kerala State Financial Enterprises is on a path to progress and modernization. The chit collection of KSFE in 2005-06 recorded at Rs.158 crore has been increased to Rs. 187 crore in 2006-07. In 2007-08, it has crossed Rs 260 crore. The Ponnona chits introduced during last Onam and the golden jubilee chits introduced last year exceeded their target. In the last financial year chit business exceeded Rs. 110 crore which is a remarkable achievement of KSFE in its history. This is the result of the joint efforts of the employees, management and the government. The additional target decided for the Pravasibandhu chits was Rs.15 crore, this has reached a record of Rs.44 crore.
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WORK FLOW MODEL This is the work flow adopted by the KSFE at the time of receiving the deposits or lending loans to their customers. Customers: Customers approaches the KSFE with the intentions of depositing the amount and get returns out of it .the customers also approaching KSFE for getting loans like vehicle loan, passbook loan etc . So the customer will be looking for business plan which pays highest rate of return or lowest rate of interest. Different options are providing by KSFE to the customers like chitty, sugama deposit, fixed deposit etc. Lending money& Accepting Deposits: as like banks KSFE also providing money to the customers by the way of different loans like chitty loan, gold loan, passbook loan, trade financing, flexi trade loan etc. the returns are comparatively higher and because the effective returns are really higher than the published interest rates, because of monthly payment of interest (in the case of all other institutions, the interest is paid quarterly). KSFE accepting deposits from customers by the way of chitty, sugama deposit, fixed deposit etc. the customer can introduced either by any existing customer or an employee of the KSFE, the customer has to necessary documents and furnishes Ration card or any license for address, age, and income proof. Application review and documentation: Once the customer fills all the necessary documents, the manager reviews the applications; KSFE tries to verify the authenticity of the document furnished. Decision Making: After verifying the documents the manager takes his decision on the customer whether they have to provide loans or accept deposits. Deposit Completed or Loan Sanctioned: The final stage of the process money
deposited will be in the account of customers. The annual interest rate in case of deposits from the public is 7% per annum . Interest for chitty prize money deposits is 8% per annum. Due to the monthly payment of interest, the effective rate will be higher than this rate. Senior citizen will get 7.25% for fresh deposits and 8% for prize money deposits.
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Normally
5%
of
the
fixed
deposit
amount
can
be
availed
as
loan.
Customers
Decision Making
AIMS AND OBJECTIVES OF KSFE LTD y The aims and objects of the company as started in memorandum of association of the company are given below. These will give guidelines those who study the objectives of the company. They are y To start conduct promote manage and carry on the business of general and miscellaneous increase of any kind in India or elsewhere. y y To advance money on the security gold and other valuable securities. To start promote conduct and manage the business of dealers agents vehicle machinery goods industrial and commodity use and consumption as a business of the company or as agents of state or central government or anybody of the organization there under or of any other company
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Incidental to mail objectives such as to advance deposits with or land money securities property or deposit from the banks, government or governmental organizations or others
Acting as the collection agent for KSEB, KWA, etc., throughout the state. To construct a multi-storeyed building in KSFE's own premises in Kakkanad, Cochin and to house among others a Staff Training College for itself. Introduction of new schemes like, Educational Loan, Agricultural Overdraft and Cumulative Deposit Scheme. Expanding its door collection facility to loan accounts and deposit schemes suitably, which is expected to create considerable employment opportunities as part of its social objective. Introduction of chitties with simultaneous draw and auction which can be offered as an incentive to regular customers for whom it will be a great attraction, particularly for those with saving attitude. Introduction of Daily/Weekly draw/auction chitties, which is expected to have a wide scope among traders, will raise the Company's market share considerably.
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Enter the arena of Credit/Debit Card business - immediately after branch networking the Company plans to launch the 'Debit Card' business. Starting of Virtual Branch through net worked computer systems for the benefit of NRIs particularly Malayalees in the Gulf & other countries is on the anvil. This will obviate the need for "brick and mortar branches" and will enable customers who have internet access, to transact with the Company through virtual branches. KSFE today is synonymous with chit funds and is presently the biggest chit promoter in India. KSFE's vision is to become a 'financial supermarket', a 'One stop Shoppe' for all financial services.
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The functioning of Kerala State Financial Enterprise Ltd can be better understood with the help of following s 1. Structure 2. Skill 3. Style . Strategy 5. Staff 6. System 7. Shared values 1.STRATEGY Strategy is the plan of action an organization prepares in response to or anticipation of changes in its external environment. Strategy is differentiated by tactics or operational actions by its nature of being premeditated well thought through and often practically
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rehearsed. It deals with essentially three questions 1) where the organization is at this moment in time, 2) where the organisation wants to be in a particular length of time and 3) how to get there. Thus, strategy is designed to transform the firm from the present position to the new position described by objectives, subject to constraints of the capabilities or the potential KSFE offers attractive interest rates for their deposits and also charge reasonable interest on their advances. The deposits are under the guarantee and ownership of Gvt of Kerala. Its main objective was to provide an alternative to private chit fund operators with a view to bring a control over chit fund business. Thus the company can save the public from the hands of cut throat chit operators. It provide loans and advances small traders for
working capital needs and to acquire house hold durables motor vehicles and equipments. Thus chitty happens to been the main business of the company and it does a yearly chitty business of over 1000 crores in 2007-2008. 2.STRUCTURE Business needs to be organized in a specific form of shape that is generally referred to as organizational structure. Organizations are structured in a variety of ways, dependent on their objectives and culture. Traditionally, the businesses have been structured in a hierarchical way with several divisions and departments, each responsible for a specific task such as human resources management, production or marketing. KSFE has 300 branches spread across in Kerala. Each branch will be headed by a branch manager who has the responsibility of overall administration of his or her branch The Head office hosts various functional departments that are instrumental in policy formulations and monitoring of performances of the regions and branches
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AGMs
AGMs
Chief Manager
Chief Manager
Managers
managers
Assistant Managers
officers
Clerks
Clerks
Subordinates
Subordinates
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3.SYSTEMS
Every organization has some systems or internal processes to support and implement the strategy and run day-to-day affairs. For example, a company may follow a particular process for recruitment. These processes are normally strictly followed and are designed to achieve maximum effectiveness. Traditionally the organizations have been following a bureaucratic-style process model where most decisions are taken at the higher management level and there are various and sometimes unnecessary requirements for a specific decision (e.g. procurement of daily use goods) to be taken. KSFE adopted participative leadership style in their organization. Superior subordinate relationships are too participative. a participative leader enables the employees to play a major part in any decision-making process, which is needed to make the employee performance better. Therefore, instead of the leader just throwing direct, stringent orders to the employees, he acts like a guide and mentor for the employees in achieving their goals. So it is like 'let us do it' rather than 'I want you to do... '. And the interfere of government and trade unions are very helpful to make the relation more participative. 4.SKILL
y y
Distinctive capabilities of personnel or of the organization as a whole. KSFE has taken several steps to shift its focus of capacity building initiatives from training to learning
Training policies and programmes are suitably designed modified and updated on continuous basis in order to keep track of changing industry trend
KSFE continues to lay emphasis on the training and development of its human resource through house training and external training
Separate sessions are conducted for newly posted managers and officers with due emphasis in functional areas like chitties, loan schemes etc.
KSFE has embarked on giving training I leadership development, motivation and negotiating skills to middle and senior level officers
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Senior
5.STYLE
y
Its one of the seven levers which top management can use to bring about change in organization
According to McKINSEYS Framework, becomes evident through the patterns of actions taken by the members of top management team over a period of time.
y y
KSFE follows a top to down style of management. It works in participative style, the decision is taken by the top management concerning matters related to the organization, and the decision relating to department is taken by departmental heads.
KSFE follows a democratic leadership style which allows the employees to take part in the decision making process
The employees are free to give any idea, suggestions etc., for the betterment of the organization.
Any decisions taken by the top management will be with active consultation with the employees
6.STAFF
y y
KSFE has very efficient and multi skilled employees has following strengths Complete knowledge about non banking activities and flexibility to work with different departments.
y y
The HR policy of KSFE is focused towards developing employee satisfaction and utilizing the full potentiality of the human resources.
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There are almost 4500 employees are working KSFE . and number of branches is nearly 300 tha is spread across in all districts of Kerala state. The main staffs of KSFE ltd are as follows including managing director, general manager, regional managers, deputy general managers, assistant general managers, liaison officer etc
Mobile. No.
P.C.PILLAI Managing Director P. RAJENDRAN General Manager (Business) S. SARATH CHANDRAN General Manager (Finance) S.K. SANIL Deputy General Manager (P & HR) M. SAJEETH Deputy General Manager (Internal Audit & Vigilance) V.P. SUBRAMANIAN Deputy General Manager (Business & Operations) A.B.NISHA Asst. Gen. Manager (IT) A.PRAMODAN Asst. Gen. Manager (Legal) K. SUDHAKARAN NAIR Asst. Gen. Manager - In Charge (Planning & Business) SREEKALA R SARMA Chief Manager (Central Accounts) K. JAYADEVAN Law Officer M.T. SUJATHA
9447793000
(0487) 2332255
9447122226
(0487) 2332255
9447122225
9447545678
(0487) 2337972
(0487) 2332255
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Chief Manager (IT Dept.) M. SASIDHARAN Chief Manager (Business) JAIN.K.J. Senior Manager (Business) K.M VIJAYARAGHAVAN Senior Manager (General Administration) P.P. JAYACHANDRAN Senior Manager (Revenue Recovery) A.N. SOMANATHAN Senior Manager (PA to MD) Addl. Charge (Planning) J.KUMARADAS Senior Manager(Tax Planning) V.R. MANOJ KUMAR Company Secretary LIAISON OFFICER M. ABDUL SALAM Chief Manager, Regional Office, Thiruvananthapuram.
(0487) 2332255
(0487) 2332255
(0487) 2332255
(0471) 2476289
(0471) 2391544
9447799876
7.SHARED VALUES:
y The core of above 6S is the ground rules of the shared values y Values are those which are shared by the group working together for a common goal y Shared values of KSFE acts a guiding concept and fuel ideas around which a business is built.
KSFE are giving more importance to quality of products, customer care and customer relationship. They are very strict in adopting quality in every product. They have a separate department for checking the quality of products. It was created by the Govt of Kerala for the purpose of providing an alternative to the private and unorganized chit operators or make a control on chit fund business and save the public from the hands of cut-throat chit fund operators
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By providing better quality products, they can maintain better relationship with customer. They are also giving importance to the completion of work within the specific period. All these helps them to keep a good relationship with customer. For keeping or maintaining the quality of their products, they are providing after sale services to all their clients. All the features mentioned above helps the firm to create reputation or a good image in the mind of customer or people.
SWOT ANALYSIS:
STRENGTHS:
y y y y y
Proven products and brand image. High brand loyalty of customer. High market shares in few of the products categories. Skilled work force. Government company.
WEAKNESSES:
y y y y y
Limited product range. Inadequacy of working capital. Aberrance of MIS. Confined to only one state. Poor marketing plans.
OPPORTUNITIES:
y y
NRI funds Diversification into related areas where ever synergy exists.
THREATS:
y y y
Dwindling market for some of the products. Competition from private banks . A threat from other NBFCs.
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The above analysis indicates ample scope and prospects for the company subject to corrective steps being taken early.
LEARNING EXPERIENCE The experience in the company was out of my imagination. It was a great and wonderful experience that I got from the organization. The help and support that I got from the management, staff, and employees were excellent and I am indeed thanking to all of them who are directly and indirectly helped me in completing my project work successfully. This study made me familiar with the practical knowledge about the overall functioning of the organization. It has given me opportunities to study the human behavior and how to face those difficulties that arises when we step into an organization for the first time in future. Each member in the organization supported me in gaining sufficient knowledge about the company and industry this helped me complete the project successfully. The project was informative & educative. It was a practically exposure to me.
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ANALYSIS AND INTERPRETATION OF DATA STATEMENT OF THE PROBLEM The research is not based on any problem in the Kerala State Financial Enterprise LTD. It is made on my own interest for the assessment of financial position and performance of Kerala State Financial Enterprise. This study makes an attempt to critically evaluate the financial performance of the KSFE. NEED AND IMPORTANCE OF THE STUDY Financial analysts depend primarily on financial statements to diagnose financial performance. It appears that there are three principal reasons 1. Meaningful inferences can be drawn by examining trends in raw data and in financial ratios. 2. Since similar biases characterize various firms in the same industry, inter firm comparisons are useful. 3. Experience seems to suggest that financial analysis works if one is aware of accounting biases and makes adjustments for the same. Properly analyzed and interpreted financial statements can provide valuable insights into a firms performance. Analysis of financial statements is of interest of lenders, investors, security analysts, managers, and all other stakeholders of the company. Financial statement analysis may be done for a variety of purposes. It is helpful in assessing corporate excellence, judging creditworthiness, forecasting bond ratings, predicting bankruptcy, and assessing market risk.
Objectives of the Research: 1. To examine whether the creditors and investors are satisfied from the performance and financial position of the company. 2. To study profitability of the company 3. To study the short-term Liquidity position of the company, 4. To study the long-term liquidity position and solvency position of the company, 5. To offer remedial measures and suggestions wherever found necessary. RESEARCH METHODOLOGY
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a)
Introduction:
The quality of the project work depends on the methodology adopted for the study. Methodology, in turn, depends on the nature of the project work. The use of project methodology is an essential part of any research. In order to conduct the study scientifically, suitable methods & measures are to be followed. b) Research Design:
The type of research used for the collection & analysis of the data is Historical Research Method. The main source of data for this study is the past records prepared by the firm. The focus of the study is to determine the performance of the firm since its inception & to identify the ways in which the performance especially the financial performance of KSFE. The data regarding firm history & profile are collected through the study of secondary sources and discussions with individuals. c) Data Collection Method.
Data has been collected from both primary & secondary sources. Primary Data.
y
Discussions were held with different department managers & officers of the firm to get general information about the firm & its activities.
y y
Having face to face discussions with the firm officials. By taking guidance from firm guide & departmental guide.
Secondary Data
y
Collection of data through firm annual reports, firm manuals and other relevant documents.
y y
By text books & journals. Collection of data through the literature provided by the firm.
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At first literature survey was done to understand various aspects of financial condition of the organization. The title financial performance analysis was chosen as it is used as a devise to analyze and interpret financial health of the enterprise and to draw a conclusion whether the performance of the firm is improving or deteriorating. In order to do the study, secondary data regarding the financial aspects of the organization, was extracted. The source for secondary data from the organization was past annual reports, profit and loss accounts, and balance sheets. Using the available data, different ratios were calculated and compared over the th ree year period (2005-06 to 2008-09). Conclusion was drawn based on the analysis and comparison. d. SOFTWARE or tool USED FOR DATA ANALYSIS The software used for the data analysis is Microsoft Office Excel 2007 and Microsoft Word.
y
Micro Office Excel is a powerful tool used to create and format spreadsheets, analyze and share information to make more informe decisions. With the new d results- oriented interface, rich data visualization and Pivot Table views, professional looking charts are easier to create and use and also makes powerful productivity tools easily accessible.
Microsoft Word is a powerful authoring program that gives you the ability to create and share documents by combining a comprehensive set of writing tools with an easy-to-use interface.
Few of the financial figures were withheld by the organization due to its confidentiality The study is only based on annual reports. The study is entirely based on the book values specified in position and income statements. Market values are ignored. Changes in accounting procedure by the firm may be misleading. Time was a constraint since the research was done in 9 weeks
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RATIO ANALYSIS
The financial statements, Balance Sheet and Income statement depicts the picture what has actually happened to earnings during a specified period and presents a summary of financial position of the company at a given point of time. Ratio analysis is a very powerful tool useful for measuring performance of an organization. The ratio analysis concentrates on the inter-relationship among the figures appearing in the financial statements. The ratio analysis helps the management to analyze the past performance of the firm and to make further projections. Ratio analysis allows interested parties like shareholders, investors, creditors, government, and analysis to make an evaluation of certain aspects of a firms performance. Ratio analysis is a process of comparison of one figure against another, which make a ratio, and the appraisal of the ratios to make proper analysis about the strengths and weaknesses of the firms operations. The calculation of ratios is a relatively easy and simple task but the proper analysis and interpretation of the ratios can be made only by the skilled analyst. Ratios normally pinpoint a business strengths and weakness in two ways:
y y
Ratios provide an easy way to compare present performance with past. Ratios depict the areas in which a particular business is competitively advantage or disadvantaged through comparing ratios to those of other businesses of the same size within the same industry.
1. STEPS INVOLVED IN THE RATIO ANALYSIS: 1. Selection of relevant data from the financial statements depending upon the objective of the analysis. 2. Calculation of appropriate ratios from the above data 3. Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from the projected financial statements or the ratios of some other firms or the comparison with ratios of the industry to which the firm belongs 4. Interpretation of ratios.
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2. CLASSIFICATION OF RATIOS: There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. In view of various users of ratios, there are many types of ratios which can be calculated from the information given in the financial statements. The particulars purpose of the user determines the particular ratios that might be used for financial analysis. 3.VARIOUS ACCOUNTING RATIOS CAN BE CLASSIFIED AS FOLLOWS: a. Functional classification or classification according to the tests: In view of the financial management according to the tests satisfied, various ratios have been classified as below. i. Liquidity ratios: These are the ratios which measure the short term solvency or financial position of a firm. These ratios are calculated to comment upon the short-term paying capacity of a concern or the firms ability to meet its current obligations. The various liquidity ratios are current ratio, liquid ratio and absolute liquid ratio. Further to see the efficiency with which the liquid resources have been employed by a firm, debtors turnover and creditors turnover ratios are calculated. ii. Long-term solvency and liquidity ratios: Long term solvency ratios convey a firms ability to meet the interest cost and repayment schedules of its long term obligations e.g. debt equity ratio and interest coverage ratio. Leverage ratios show the proportions of debt and equity in financing of the firm. These ratios measure the contribution of financing by owners as compared to financing by outsiders. iii. Activity ratios: Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales, e.g., debtors turn over ratio.
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iv. Profitability ratios: These ratios measure the results of business operations or overall performance and effectiveness of the firm, e.g., gross profit ratio, operating profit ratio or return on capital employed. b. Classification according to significance or importance: Some ratios are more important than others and firm may classify them as primary and secondary ratios. The British Institute of Management has recommended the classification of ratios according to importance for inter-firm comparisons. For inter-firm comparisons, the ratios may be classified as primary ratios and secondary ratios. The primary ratio is one which is of the prime importance to a concern; thus return on capital employed is named as primary ratio. The other ratios which support or explain the primary ratio are called as secondary ratios, e.g., the relationship of operating profit to sales or the relationship of sales to total assets of the firm Analysis Of Short-Term Financial Position Or Test Of Liquidity: The short term creditors of a company like suppliers of goods of credit and commercial banks providing short-term loans are primarily interested in knowing the companys ability to meet its current or short-term obligations as and when these become due. The short-term obligations of a firm can be met only when there are sufficient liquid assets. Therefore, a firm must ensure that it does not suffer from lack of liquidity or the capacity to pay its current obligations. If a firm fails to meet such current obligations due to lack of good liquidity position, its goodwill in the market is likely to be affected beyond repair. Therefore, it is very important to have a proper balance in regard to the liquidity of the firm. Two types of ratios can be calculated for measuring short term financial position or short-term solvency of a firm. I. Liquidity ratios. II. Efficiency or Activity ratios.
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Liquidity ratios : Liquidity refers to the ability of a concern to meet its current obligations as and when these become due. The short term obligations are met by realizing amounts from current floating or circulating assets. The current assets should be liquid or near to liquidity. These should be convertible into cash for paying obligations of shortterm nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term current liabilities. If current assets can pay off current liabilities then liquidity position will be satisfactory. On the other hand if current liabilities may not be met easily met out of current assets then liquidity position will be \bad. The bankers suppliers of goods and other short-term creditors are interested in the liquidity of the concern.
Current assets Current ratio= ----------------------Current liabilities
They will extend credit only if they are sure that current assets are enough to pay out the obligations. To measure the liquidity of a firm the
following ratios can be calculated: i Current ratio ii Quick or Acid test or Liquid ratio iii Absolute liquid ratio or Cash position ratio i Current ratio: Current ratio may be defined as the relationship between current assets and current liabilities. This ratio is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position or liquidity of a firm. It is calculated by dividing the total of current assets by total of the current liabilities. Current assets include cash and those assets which can be converted into cash within a short period of time generally one year such as marketable securities sundry receivables bills receivables inventories work in progress etc. Prepaid expenses shoul d
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also be included in current assets because they represent payment made in advance which will not have to be paid in near future. Current liabilities are those obligations which are payable within a short period of generally one year and include outstandi g expenses n bills payable sundry debtors income tax payable dividend payable etc. bank overdraft should also generally be included in current liabilities because it represents short -term arrangement with the bank and is payable within a short period. An increase in the current ratio represents improvement in the liquidity position of a firm while a decrease in the current ratio indicates that there has been deterioration in the liquidity position of the firm. As a convention the minimum of two to one is referred banker s rule of thumb or arbitrary standard of liquidity of a firm. A ratio equal or near to the rule of thumb of 2: i.e. current assets double the current liabilities are considered to be satisfactory. ii Quick or Acid test or Liquid test ratio: Quick ratio also known as Acid test or Liquid test ratio is a more rigorous test of liquidity than the current ratio. The term liquidity means firm s ability to pay its short term obligations as and when they become due. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash within a short period without loss of value. In that sense cash in hand and cash at bank are the most liquid assets. The other assets which can be included in liquid assets are bills receivables sundry debtors marketable securities and short-term or temporary investments. Inventories and prepaid expenses are excluded from the quick assets because they are not expected to be converted into cash immediately. The quick ratio can be calculated by dividing the total of the quick assets by total current liabilities. Thus
Quick/liquid assets Quick/liquid ratio= ------------------------------Current liabilities New horizon college of engineering Page 35
Usually a high acid test ratio is an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a lo quick w ratio represents that the firm s liquidity position is not good. As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. iii Absolute liquid ratio: Absolute liquid assets include cash in hand and bank and marketable se curities or temporary investments. The acceptable norm for this ratio is 50% or 0.5:1 or 1:2 i.e. Re 1 worth absolute liquid assets are considered adequate to pay Rs 2 worth current liabilities in time as all the creditors are not expected to demand cash at the same time and then cash may also be realized from debtors and inventories. The absolute liquid ratio can be calculated by dividing absolute liquid assets by current liabilities. Thus
Absolute liquid assets Absolute liquid ratio= ------------------------------Current liabilities
II Efficiency or Activity ratios: Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets the larger is the amount of sales and the profits. Activity ratios measure the efficiency or effectiveness with which a firm manages its resources or assets. These ratios are also called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose a number of turnover ratios can be calculated as debtors turnover ratio stock turnover ratio capital turn over ratio etc. i Inventory turnover ratio or Stock turnov ratio: er Inventory turnover ratio also known as stock velocity is normally calculated as sales/average inventory or cost of goods sold/average inventory. It would indicate
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whether inventory has been efficiently used or not. The purpose is to see whetheronly the required minimum funds have been locked up in inventory. Inventory turnover ratio indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. The ra is tio calculated by dividing the cost of goods sold by the amount of average inventory at cost.
Cost of goods sold Inventory turnover ratio= -------------------------------------Average inventory at cost
Average inventory is calculated by adding the stock in the beginning and at the end of the period and dividing it by two. In case of monthly balance of stocks all the monthly balances are added and the total is divided by the number of months for which the average is calculated. Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually a high inventory turnover/stock velocity indicates efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. A low inventory turnover ratio indicates an inefficient management of inventory. ii Debtors or receivable turnover ratio and average collection period: Debtor s turnover ratio includes two kinds of ratios which are helpful to evaluate the quality of debtors. a.Debtors/ Receivables turnover or debtors velocity Debtor s turnover ratio indicates the velocity of debt collection of firm. In simple words it indicates the number of times average debtors are turned over during a year thus:
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Net annual credit sales Debtors turnover/ velocity= --------------------------------Average trade debtors
Debtors velocity indicates the number of times the debtors are turned over during the year. Generally the higher the value of debtors turnover the more efficient is the management of debtors/ sales or more liquid are debtors. Similarly low debtors turnover implies inefficient management of debtors/ sales and less liquid debtors. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm depending upon the nature of the business. b. Average collection period ratio: The average collection period represents the average number of days forwhich a firm has to wait before its receivables are converted into cash. The ratios can be calculated as follows:
365 Average collection period= ----------------------------------------Debtors Turnover Ratio
The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of e debtors. Generally the shorter the averag collection period the better is quality of debtors as a short collection period implies quick payment by debtors. Similarly higher average collection period implies as inefficient collection performance which in turn
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adversely affects the liquidity or short- term paying capacity of the firm out of its resources. iii Creditors/ Payables turnover ratio: The analysis for creditors turnover is basically the same as of debtor s turnover ratio except that in place of trade debtors the trades creditors are taken as one of the components of the ratio and in the place of average daily sales average daily purchases are taken as the other component of the ratio. Same as debtor s turnover ratio creditor s turnover ratio can be calculated as follows:
Net annual credit purchases Creditors/ Payable turnover ratio= ----------------------------------------------Average trade creditors (Cr + B/P)
The average payment period ratio represents the average number of days taken by the firm to pay its creditors. Generally lower the ratio the better is the liquidity position of the firm and higher the ratio less liquid is the position of the firm. iv Working capital turnover ratio: Working capital of a concern is directly related to sales. The current assets like debtors bills receivables cash stock etc change the increase or decrease in sales. The working capital is taken as Working capital = current assets current liabilities
Working capital turnover ration indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of a year.
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This ratio measures the efficiency with which working capital is being used by a firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. This ratio can be at best be used by making of comparative and trend analysis for different firms in the same industry and for various periods. Analysis of Long-Term Financial Position or Tests of Solvency: The term solvency refers to the ability of a concern to meet its long -term obligations. The long-term indebtedness of a firm includes debenture holder financial institutions providing medium and long-term loans and other creditors selling goods on installment basis. The long-term creditors of a firm are primarily interested in kno wing the firm s ability to pay regularly interest on long -term borrowings repayment of the principal amount at the maturity and the security of their loans. Accordingly long -term solvency ratios indicate a firm s ability to meet the fixed interest and costs and repayment schedules associated with its long-term borrowings. The following ratios serve the purpose of determining the solvency of the concern. i. Debt- Equity ratio: Debt-equity ratio is also known as external-internal equity ratio is calculated to measure the relative claims of outsiders and the owners (shareholders) against the firm s assets. This ratio indicates the relationship between external equities or the ou tsider s funds and the internal equities or the shareholders funds thus
Long term Debts Debt-equity ratio= ----------------------------------Shareholder funds
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The outsiders funds include all the debt/liabilities to outsiders whether long -term or short-term or whether in the form of debenture bonds mortgages or bills. The shareholders funds consist of equity share capital preference share capital capital reserves revenue reserves and reserves representing accumulated profits and surpluses like reserves for contingencies sinking fund etc. The accumulated losses and deferred expenses should be deducted from the total to find out shareholders funds. A ratio of 1:1 may be considered to be a satisfactory ratio although there cannot be a rule of thumb or standard norm for all types of business. ii. Proprietary ratio: A variant to debt-equity ratio is the proprietary ratio which is also known as equity ratio or net worth to total assets ratio . This ratio establishes the relationship between shareholders funds to total assets of the firm. The ratio of proprietor s funds to total funds is an important ratio for determining long-term solvency of a firm. The ratio can be calculated as under
Shareholders funds Proprietary ratio= -----------------------------------Total Tangible assets
As equity represents the relationship of owner s funds to total assets higher the ratio or the share of the shareholders in the total capital of the company better is the long -term solvency position of the company. This ratio indicates the extent to which the assets of the company can be lost without affecting the interest of creditors of the company.
iii. Solvency ratio: This ratio is a small variant of equity ratio and can be simply calculated as 100 equity ratio. The ratio indicates the relationship between the total liabilities to outsiders to total assets of a firm and can be calculated as follows.
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Generally lower the ratio of total liabilities to total assets more satisfactory or stable is the long-term solvency position of a firm. iv. Fixed assets to net worth ratio: The ratio establishes the relationship between fixed assets and shareholder s funds i.e. share capital plus reserves surpluses and retained earnings. The ratio can be calculated as follows:
Fixed assets (after depreciation) Fixed assets to net worth ratio = -----------------------------------------------Shareholders funds
There is no rule of thumb to interpret this ratio but 60% to 65% is considered to be satisfactory ratio in case of industrial undertaking. If the ratio is less than 100% it implies that owner s funds are more than total fixed assets and a part of the working capital is provided by the shareholders. When the ratio is more than 100% it implies that owners funds are not sufficient to finance the fixed assets and the firm has to depend upon outsiders to finance the fixed assets. v. Fixed assets ratio: A variant to the ratio of fixed assets to net worth is the ratio of fixed assets to long term funds which is calculated as:
Fixed assets (after depreciation) Fixed assets ratio = -----------------------------------------------Total long-term funds
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This ratio indicates the extent to which the totals of fixed assets are financed by long -term funds of the firm. vi. Ratio of current assets to proprietors funds: This ratio is calculated by dividing the total of cur ent assets by the r amount of shareholder s funds. The ratio of current assets to proprietor s funds in terms of percentage would be The ratio indicates the extent to which proprietors funds are invested in current assets. There is no rule of thumb for this ratio and depending upon the nature of the business there may be different ratio for different firms.
Current assets Current assets to proprietors funds = --------------------------------Shareholders funds
vii. Interest coverage ratio: This ratio is calculated by dividing the net profit before interest and taxes by fixed interest charges. Interest coverage ratio indicates the number of times interest is covered by the profits available to pay the interest charges. Generally higher the r atio safer is the long-term creditors because even if earnings of the firm fall the firm shall be able to meet its commitment of fixed interest charges.
Net profit (before interest taxes) Interest coverage ratio = ------------------------------------------Fixed interest charges
PROFITABILITY RATIOS: The primary objective of a business undertaking is to earn profits. Profit earning is considered essential for the survival of the business. Generally profitability ratios are calculated either in relation to sales or in relation to investments. The various operating ratios are as follows.
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i.Gross profit ratio. This ratio expresses relationship between Gross Profit and Sales. It is expressed as Gross Profit Gross Profit Ratio = --------------------- X 100 Net Sales Gross Profit = Sales (Cash Sales + Credit Sales Returns) - Cost of Goods Sold ii. Operating ratio. This ratio established relationship between operating cost (i.e. cost of goods sold + operating expenses) and sales. This ratio is usually expressed as a percentage. It is calculated as: Operating Cost Operating Ratio = -------------------------- X 100 Net Sales iii. Operating profit ratio. This ratio establishes relationship between operating profit and sales. It is expressed as: Operating Profit Operating Profit Ratio = -------------------------- X 100 Net Sales Operating Profit Ratio = 100 Operating Ratio Operating Profit = Net Sales Operating Cost Operating Profit =Net Sales (Cost of Goods sold + Administrative and Office Expenses + Selling and Distribution Expenses) Operating Profit = Net Profit + Non Operating Expenses Non Operating Income
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Expenses ratio. These ratios are calculated to establish relationship between the various expenses incurred by a business enterprise for its sales. These ratios supplement the information provided by operating ratio. Hence, they are also called as supporting ratios to operating ratio. The important expenses ratios are: Cost of Goods Sold Cost of Goods sold Ratio = ---------------------------- X 100 Net Sales Administrative & Office Expenses Administrative & Office Expenses Ratio= --------------------------------------------- X 100 Net Sales Selling and Distribution Expenses Selling & Distribution Expenses Ratio = -------------------------------------------- X 100 Net Sales Utility of Expenses Ratio: These Ratios indicate the economy and efficiency with which the various expenses are incurred to attain the goal of maximizing profits and minimizing costs. i.Net profit ratio. The ratio establishes relationship between net profit and sales and is generally expressed as a percentage. It is calculated as: Net Profit Net Profit Ratio = ------------------- X 100 Net Sales Utility of Profit Ratio: It indicates operational efficiency for inefficiency of an enterprise. High Net Profit Ratio is the index of better operational efficiency for
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inefficiency of an enterprise. High Net Profit Ratio is the index of better Operation efficiency. Return on investment / net worth ratio This ratio is also known as Net Worth ratio or Return on Shareholders Funds. ROI establishes relationship between Net Profit after Tax and Shareholders funds. It is expressed as: Net Profit after Tax Return on Investment = --------------------------------- X 100 Share Holders Funds Significance of Return on Investment: is very significant in measuring. The overall profitability or operational efficiency of a Company, it enables the managements to know whether the basic objectives of the business maximization of profits is achieved or not and the shareholders to decide whether their investments is safe and remunerative or otherwise. The growth or otherwise of a company can also be measured by means of a trend ratios calculated several numbers of years. ii.Return on equity capital. Equity Shareholders are the true owners of a company. They bear more risk. They are entitled to get their share of dividend only after the payment of risk. They are entitled to get their share of dividend only after the payment of fixed dividend to equity Share holders varies depending upon the quantum of profits available to them. High return on equity capital attracts more investments. It is calculated to establish relationship between net profits available to equity shareholders and equity share capital it is expressed as: Net Profit after Tax Preference Dividend Return on Equity Capital = ---------------------------------------------------------- X 100 Paid up Equity Share Capital
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Return on capital employed. The Return on Capital Employed is the ratio calculated to establish relationship between profits actually earned and the capital actually employed in the business capital employed the term Capital Employed refers to the total investment made in the business. It is defined in many ways as stated below: Gross Capital Employed = Fixed Assets + Current Assets Net Capital Employed = Fixed Assets + Current Assets Current Liabilities Opening Capital + Closing Capital Average Capital Employed = ----------------------------------------------2 Net Profit (Adjusted) Return on Gross Capital Employed = -------------------------------- X 100 Gross Capital Employed Net Profit (Adjusted) Return on Net Capital Employed= ----------------------------- X 100 Net Capital Employed Net Profit (Adjusted) Return on Average Capital Employed= ----------------------------------- X 100 Average Capital Employed Earnings per share. Earning per Share is calculated by dividing Net Profit after Tax (NPAT) less preference dividend by the total number of equity shares held. Net profit after Tax Preference Dividend Earning Per Share = -----------------------------------------------------
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Number of Equity shares It is very useful to know whether the earning capacity of the company is improved or declined by facilitation comparisons of EPS of a company with similar other companies. It is a small variant of return of Equity Capital.
BENEFITS OF RATIO ANALYSIS: 1. Helps in communication: Ratios help in communication and enhance the value of the financial management. The financial strengths and weakness of a firm are communicated in a more easy and understandable manner by the use of ratios. 2. Helps in financial forecasting and planning: Ratio analysis is much help in financial forecasting and planning. Planning is looking ahead and the ratios calculated for a number of years work as a guide for the future. Meaningful conclusions can be drawn for future from these ratios. 3. Helps in co-ordination: Ratios even help in co-ordination which is of utmost importance in effective business management. 4. Helps in decision-making: Financial statements are prepared primarily for decision-making. But the information provided in financial statements is not an end in itself and no meaningful conclusions can be drawn from these statements alone. Ratio analysis helps in making decisions from the information provided in these financial statements.
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LIMITATIONS OF RATIO ANALYSIS:: y y The study is restricted to corporate office . The information is availed from the statements annual reports and records of the company. y The study conducted had time factor as one of the constraint that is the duration of the project was very short. y As it is Government sector undertaking certain data and information were not revealed which were needed for the study. y y Certain financial functions were carried outside the office. The fluctuations in the asset or liabilities that may be occurs between the period of any two balance sheet may have their implication on the cash management. y The finding of the study cannot be generalized.
PROFITABILITY RATIOS: 1.Operating profit ratio: It is computed by dividing operating income i.e. gross profit selling expenses and general expenses and administration expenses excluding interest by sales. Operating profit ratio = Operating profit Net sale (in Lakhs) X 100
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0.7
0.6 0.5
0.4
0.3 0.2
0.1
0
2004-2005
2005-2006
2006-2007
2007-2008
Interpretation This ratio indicates the proportion that the costs of sales bear to sales. Cost of sales includes direct cost of goods sold as well as other operating expenses which have matching relationship with sales and excludes income and expenses which have no bearing on production and sales. Lower the ratio the better it is. Higher the ratio the less favorable it is because it would have smaller margin of operating profit for the payment of dividends and the creation of reserves. It is inferred from the above table operating profit of KSFE Ltd which was .62 in 200405 has decreased to .58 in 2005-06 but increased in sales. In 2006-0 operating profit again slightly increased to .59. There is an decrease of operating profit from .59 to .45 in 200 -2008.so the lower ratio is better for the company.
2 Net profit ratio This ratio establishes the relationship between net profit and sales Net profit ratio = Net profit X 100
Net sales
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(in lakhs)
0.1 0.09
0.08
0.07 0.06
0.05
0.0
0.03 0.02
0.01
0 200 -2005
Interpretation This ratio explains per rupee profit generation capacity of sales. If lower the net profit per sales lower will be the sales efficiency. This ratio is very useful to the proprietors and prospective investors because it reveals the overall profitability of the concern.Higher the ratio the better it is because it gives idea of improving efficiency of the concern. The net profit margin of KSFE Ltd that was .0 3 in the year 2004-05 but slightly increased to .089 in the year 2005-06 and it declined to .045% in 2006-0 .again the net profit declined from .045 to .0156 in the year 200 -2008. But there was increase of sales from 2004-05 to 200 -2008.
2005-2006
2006-2007
2007-2008
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3.Current ratio This is the most widely used ratio. It is the ratio of current assets to current liabilities. It shows a firm s ability to cover liabilities with its current assets. The current ratio is a measure of the firm s short term solvency. It incates the availability of current assets in rupees for every one rupee of currentliability.A ratio greater than one means that the firm has more current assets than current claim against them. Current ratio = Current asset Current liabilities
(in lakhs) Year 2004-2005 2005-2006 2006-200 200 -2008 Current asset 5305.29 88441.84 81 30.91 90884.92 Current liability 162 51.40 1 1485.69 14346 .23 19622 .62 Ratio(times) .46 .52 .5 .46
2004-2005
2005-2006
2006-2007
2007-2008
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Interpretation An increase in the current ratio represents improvement in the liquidity position of a firm while a decrease in the current ratio indicates that there has been deterioration in the liquidity position of the firm. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities are considered to be satisfactory. The company didnt achieve that position from 2004 to 200 . In the year 200 -2008 also the company didn t reach 2.00 . so the company s liquidity position is not good up to last year..
.Quick ratio Quick ratio = quick asset Current liability (in lakhs) Year 2004-2005 2005-2006 2006-200 200 -2008 Quick asset 5305.29 88441.84 81 30.91 90884.92 Current liability 5305.29 88441.84 81 30.91 90884.92 Ratio(times) .46 .52 .5 .46
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0.6 0.5
0.4 0.3
0.2
0.
2004-2005
2005-2006
2006-2007
2007-2008
Interpretation A high acid test ratio is an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low quick ratio represents that the firm s liquidity position is not good. As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory. but in this case the ratio is below one. so it is not satisfactory from 2004 to 2009.
5.absolute liquid ratio Absolute liquidity ratio is represented by cash and near cash items. It is a ratio of absolute liquid assets to current liabilities. In the computation of this ratio only the absolute liquid assets are compared with the liquid liabilities. The absolute liquid assets are cash bank and marketable securities. It is to be observed that rece ivables (debtors/accounts receivables and bills receivables) are eliminated from the list of liquid assets in order to obtain absolute4 liquid assets since there may be some doubt in their liquidity . This ratio gains much significance only when it is used in conjunction with the current and liquid ratios. A standard of 0.5 : 1 absolute liquidity ratio is considered an acceptable norm. Absolute liquid ratio = absolute liquid asset Current liability (in lakhs)
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Year
Current liability
Ratio(times)
.96 .9 .9 .98
Interpretation A standard of 0.5 : 1 absolute liquidity ratio is considered an acceptable norm.in 2004-05 absolute liquid ratio was .96. but in 2005-06 there is slight increase in ratio from .96 to .9 . in 200 there is no change for the ratio. It remains the same in that year. in 200 -08 there is again a slight change occurred the ratio changes from .9 to .98. the ratio didn t have too much changes for the last 4 years. And it satisfied the acceptable norm 0.5:1. Market ratios 6.Price earning ratio Price earnings ratio (P/E ratio) is the ratio between market price per equity share and earning per share. Generally higher the price earning ratio the better it is. If the P/E ratio falls the management should look into the causes that have resulted into the fall of this ratio. Price earning ratio = current market price
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Earnings per share Year 2004-2005 2005-2006 2006-200 200 -2008 Current price 100 100 100 100 market Earnings per share 194.6 238.6 131.34 54.39 Ratio(times) .51 .42 . 6 1.82
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2004-2005 2005-2006 2006-2007 2007-2008
Interpretation Price earnings ratio helps the investor in deciding whether to buy or not to buy the shares of a particular company at a particular market price Generally higher the price earning . ratio the better it is. If the P/E ratio falls the management should look into the causes that have resulted into the fall of this ratio. In 2004-2005 the P/E ratio of KSFE ltd is .51 and it is slightly declines to .42 in the year 2005-2006.but in 2006-0 p/e ratio increases from .42 to . 6 and again increased to 1.82 in 2008. so company is in high better position on the basis of price earning ratio. Long term solvency ratios 7.Dividend coverage ratio
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The dividend cover ratio tells us how easily a business can pay its dividend from profits. A high dividend cover means that the company can easily afford to pay the dividend and a low value means that the business might have difficulty paying a dividend.A coverage ratio that measures a company's ability to pay off its required preferred dividend payments. A healthy company will have a high coverage ratio indicating that it has little difficulty in paying off its preferred dividend requirements. Dividend coverage ratio = profit after tax Proposed dividend (in lakhs) Year 2004-2005 2005-2006 2006-200 200 -2008 Profit after tax 1946.66 2386.6 1313.41 543.85 Proposed dividend 200 200 200 200 Ratio(times) 9. 3 11.93 6.5 2. 2
14
12 10 8
6 4 2
Interpretation
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In the year 2004-2005 the dividend coverage ratio of KSFE ltd was 9. 3. it has increased to 11.93 in the year 2005-06.but in 2006-0 the ratio is decreased to 6.5 from 11.93. in 200 -2008 the ratio again decreased to 2. 2. This continuous decrease of dividend coverage ratio shows that that the business might have difficulty paying a dividend So . they should try to increase the ratio by increasing the profit. 8.Shareholders equity Shareholders' equity represents the amount by which a company is financed thro gh u common and preferred shares. It is also also known as "share capital", "net worth" Shareholders' equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time through its operations.
(in lakhs) Year Shareholders equity 2004-2005 2005-2006 2006-200 200 -2008 1202 8.20 129080.58 125623.68 199026.98 286 98.59 302996.58 31 6 9.36 396948.21 .42 .43 .39 .50 Total asset Ratio(%)
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0.6
0.5 0.4
0.3
0.2
Interpretation A ratio used to help determine how much shareholders would receive in the event of a company-wide liquidation. The ratio, expressed as a percentage, is calculated by dividing total shareholders' equity by total assets of the firm. In 2004-05 ksfe had 42% shareholders equity ,but it is slightly increased to 43% in the year 2005-06.in 2006-0 the ratio just changed to 39%. there is no big changes for shareholders equity till 2006 -08.but 200 -08 the ratio is increased to 50% from 39%.
9.Proprietory ratio This ratio establishes the relationship between partners fund and total assets financed by them. This ratio establishes the relationship between shareholder s fund and total assets financed by partners. As this ratio represents a relationship between the owner s fund to the total assets, higher the ratio or the shareholder in the total capital of the company, better is the long term solvency position of the company. Proprietory Ratio = Equity share holders fund Total Asset
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Proprietary ratio measures the extent to which a company s invested capital or net worth is tied-up in non-liquid, permanent and depreciable assets. Indirectly it measures the amount of capital remains for investment in other more fluid assets. High proprietary ratio indicates sound financial position and low ratio indicates the unsound financial positions. As the company s proprietary ratio is increasing over the years it s said to be sati factory s (in lakhs)
Year Equity shareholders fund 2004-2005 2005-2006 2006-200
Total asset
Ratio(times)
8 1.24
.02
200 -2008
0.04 0.035
0.03
0.02
0.02
0.01
0.01
0.00
Interpretation High proprietary ratio indicates sound financial position and low ratio indicates the unsound financial position. As the company s proprietary ratio is increasing over the years it is said to be satisfactory.
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In 2004-05 the proprietary ratio of KSFE ltd is .02 and it is increased to .033 in the year 2005-06. in 2006-0 it is again slightly increased to .035.but in 200 -08 proprietary ration start declining from .035 to .029. this is not a good sign 10.Return on capital employed Return on investment analysis provides a strong incentive for optimal utiliza tion of the assets of the company. In selecting amongst alternative long -term investment proposals, ROI provides a suitable measure for assessment of profitability of each proposal.
ROC =
X 100
(in lakhs) Year 2004-2005 2005-2006 2006-200 200 -2008 Operating profit 43 0.19 4411.90 3908.65 1503.18 Capital employed 8 1.24 10028.32 11113.69 11429.48 Ratio(times) .55 .44 .35 .13
0.3
0.25
0.2 0.15
0.1
0.05
0
200 -2005
2005-200
200 -200
200 -200
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Interpretation This ratio is an indicator of the earning capacity employed in the business. This ratio is considered to be the most important ratio because it reflects the overall efficiency with which capital is used. This ratio is a helpful tool for making capital budgeting decision. The KSFE ltd had a return of .55 times in the year 2004-05. In 2005-06 it declined to .44 times and in 2006-0 again declined to .35 times. Again it is declined to .13 times. The
return on the capital employed has been reducing drastically. This is not a good sign.
11.Earnings per share The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Earnings per share = profit available to equity shareholders Number of equity shares
shareholders 2004-2005 2005-2006 2006-200 200 -2008 1946.66 2386.68 1313.41 543.85 10 10 10 10 194.6 238.6 131.34 54.38
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300 250
200 150 100
50 0
2004-2005 2005-2006 2006-2007 2007-2008
Interpretation The Earning per share of KSFE is 194.6 in 2004-2005. In 2005-2006 it is increased from 194.6 to 238.6 . But from 2006 onwards it starting declines, from 238.6 it decreased to 131.34 and again in 200 -08 it is again dramatically declines to 54.38. there is a decreasing trend showing in this ratio. so the shareholders are gettin less returns for their g investment. 12.Return on assets This ratio shows the relationship between net profit after taxes and total assets. It reveals the rate of return on total assets. This is also known as Net Profit to Total assets. The formula for this ratio is as follows: Return on Total Asset = net profit after tax x 100
Average total asset The higher the ratio represents the better performance of the firm and lower the ratio lower the performance of the company. (in lakhs) YEAR 2006-200 200 -2008 Net profit after tax 1946.66 2386.6 Total asset 286 98.59 302996.58 Ratio(times) .68 . 9
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2008-2009 2009-2010
1313.41 543.85
31 6 9.36 396948.21
.41 .14
0.9
0.8
0.7
0.
0.5
0.4
0.3
0.2
2007-2008
2008-2009
Interpretation
The higher the ratio represents the better performance of the firm and lower the ratio lowers the performance of the firm. From the above table, .68 in the year 2004-05. But in the year 2005-06 it increased to . 9 .but in 2006-0 it is decreased to .41 . in 2008-2009 it is again decreased to .14.so the firm does not perform well because the ratio shows a decreasing trend in the last 4 years.
13. Return on equity share holders funds This ratio expresses the net profit in terms of the equity shareholders funds. This ratio is an important yardstick of performance for equity shareholders since it indicates the return on the funds employed by them. This ratio is a measure of the percentage if net profit to nds include, equity share capital, equity shareholders funds. Equity shareholders fu capital reserve, revenue reserves, balance of profit and loss account. Return on equity share holders funds = Net Profit after Interest and Tax X 100
(in lakhs) Year NP after interest and tax 2004-2005 2005-2006 2006-200 200 -2008 1946.66 2386.6 1313.41 543.85 Equity shareholders fund 8 1.24 10028.32 11113.69 11429.48 .25 .24 .12 .048 Ratio(times)
0.3
0.25
0.2
0.15
0.1
0.05 0
2006-2007
2007-2008
2008-2009
2009-2010
Interpretation The KSFE Ltd has attained .25% of return on the equity shareholders in the year 2004 -05. In 2005-06 it slightly decreased to .24% and it again declined to .12 in the year 2006% 0 . In 200 -2008 it again decreased to .048%. The return had decreased to which means there is a need to increase the profits. Turnover ratios: 14.Capital turnover ratio: Capital turnover ratio =
New horizon college of engineering
sales
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Capital employed These ratios are very important for the company to judge how well facilities at the disposal of the concern are being used or to measure the effectiveness with which a company used its resources at its disposal. Higher the ratio , higher the profits. (in lakhs) Year 2004-2005 2005-2006 2006-200 200 -2008 sales 26488.65 26832.69 29461.95 34840.30 Capital employed 8 1.24 10028.32 11113.69 11429.48 Ratio(times) 3.36 2.68 2.65 3.05
0.6 0.5
0. 0.3
0.2 0.1 0
200 -2005
2005-2006
2006-2007
2007-2008
Interpretation From the above table it can be seen that KSFE Ltd s capital turn over ratio has decreased from 3.36 times in the year 2004-05 to 2.68 times in the year 2005-06 and has slightly again decreased to 2.61 times in the year 2006-0 . In 200 -08 it started increasing ,it increases to 3.05 from 2.65. if it is higher the ratio, higher will be the profits.so the last year it showing profits for the KSFE ltd.
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15.Total Assets Turnover Ratio The ratio is calculated by dividing the net sales by the value of the total assets. The ratio shows the firm s ability in generating sales from all financial resources committed to total assets. A high ratio is an indicator of over trading of total assets while a low ratio reveals idle capacity Total assets turnover ratio = sales Total Asset (in lakhs) YEAR Sales Total asset Ratio(times)
Interpretation
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The KSFE Ltd had assets turnover ratio on the year 2004-05 of .092 then the ratio gradually decreased to .089 in the year 2005 -06.and it is slightly increased to .093 in 2006-0 and it is decreased to .088 in 200 -08 due to the increase in sales.
16.Fixed asset turnover ratio Fixed asset turnover ratio = sales Fixed Assets (in lakhs) YEAR Sales Fixed asset Ratio(times)
60 50
0
!
30
20 10
0
200 -2005
!
2005-2006
2006-2007
2007-2008
Interpretation The ratio is calculated by dividing the net sales by the value of the Fixed assets. A high ratio is an indicator of over trading of taotal assets while a low ratio reveals idle capacity.
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The KSFE Ltd had fixed assets turnover ratio on the year 2004-05 of 49.25 then the ratio again increased to 50. 8 in the year 2005-06. But in 2006-200 it decreased to 31.18 in 2006-0 39.24 17.Current Assets Turnover Ratio Current Assets Turnover Ratio = sales Current Assets (in lakhs) YEAR sales Current asset Ratio(times) due to the decrease in sales and fixed asset. In 200 -2008 it again increased to
0.094 0.093 0.092 0.091 0.09 0.089 0.088 0.087 0.086 0.085 0.084 0.083
2004-2005 2005-2006 2006-2007 2007-2008
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Interpretation Current assets turnover ratio of KSFE in the year 2004-05 was .092 times and it has been decreased to .089 in the year 2005-06. It is an indication of under utilization of current assets and in the year 2005-06. It has been increased again from .089 to .093 times in 2006-0 due to percentage increase in current assets is more than the percentage increase in net sales.im 200 -2008 it is decreased from .093 to .08 .
18.Working Capital Turnover Ratio Working capital Turnover ratio = Sales Working capital YEAR Sales Working capital Ratio(times)
0.3
0.25 0.2
0.15 0.1
0.05 0
2004-2005
2005-2006
2006-2007
2007-2008
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Interpretation A higher working capital ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. In 2004-05 the working capital turn over ratio of company KSFE was .22. In 2005-06 it slightly decreases to .21. In 2006-07 its again increased to .24. but in 2007-2008 it decreases to .18.
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As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory,but in this case the ratio is below one. so it is not satisfactory from 2004 to 2008.
y y
The net profit ratio of the company has been declining . The last two year proprietary ratio showing increasing trend this means the company reserve allocating is increasing.
The company utilization of assets were unsatisfactory but last year showed up trend.
The net profit margin of KSFE Ltd that was .073 in the year 2004-05, but slightly increased to .089 in the year 2005-06 and it declined to .045% in 2006-07.again the net profit declined from .045 to .0156 in the year 2007-2008.
y y
KSFE is only successful Chitty fund business in Kerala. The policies of the State Government towards KSFE are liberal.
SUGGESTIONS
y
The current ratio of the company is poorer than what they required ,this must be increased.
The previous years performance indicating the company needs more attention to strengthening their performance except the last year.
y y
The bank has to increase the earning per share by generating more income. The company has to find out more profitable investment avenue for generating more income.
To elaborate the professional support base to the successful operation of the company.
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The present social activities of Bank like charitable trust, micro finance, financial aid to the poor people is appreciateble but this need further elaboration to increase the goodwill of the firm.
Conclusion:The analysis of financial statements of the company KSFE from the financial year 2005 to 2009 reveals that this organization is achieving sustainable performance. This shows KSFE is the only successful Non banking Institution in Kerala. When we compare this to other Banks; its performance is delightful. KSFE ensures equitable distribution of wealth and reduces the impact of interest in the economy like inflation and instability in the economy. KSFE is also a boon to the State Government as it helps to raise lot of fund to the Government Treasury.It is the only financial institution which provides huge sum of money to any individual when he enters into a Chitty. There is now stability in the capital of organization which is due to liberalized government policies
BIBLIOGRAPHY
For the purpose of the study, the following books have been referred:
S.L NO Authors Title of Books Publishers
Edition
Financial Management
Delhi
Financial Management
B.S Raman
Management Accountancy
Reddy Appannaih
2001
Management Accounting
S.
Chandra
& 2002
company ltd
P.K
Sharma
Kalyani Publishers
2000
Shashi K.Gupta
y y y y y y
KSFE official website www.ksfe.com The annual reports of ksfe from 2004-2005 The annual reports of ksfe 2005-2006 The annual reports of ksfe 2006-2007 The annual report of ksfe 2007-2008 Article from wikipedia about NBFC
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