Financial Evaluation of Arasu Rubber Corporation Limited in Kanyakumari District of Tamilnadu-An Empirical study

Transcription

1 Financial Evaluation of Arasu Rubber Corpon Limited in Kanyakumari District of Tamilnadu-An Empirical study D.H.Thavamalar & M.Julius prasad Assistant Professor, Department of Commerce, Directorate of Distance Education, Annamalai University, Annamalainagar-682 ABSTRACT Ratio analysis has been a primary tool for conducting financial analysis of any company. Different s highlight overall financial position of a company. This research paper aims at analyzing the financial performance of Arasu Rubber Corpon using the framework of analysis. The basic objective of this paper is to evaluate and judge the performance of Arasu Rubber Corpon during the research period. The reference period for the study is 1 years beginning from year 2-1 to 29-1.Data for the study has been taken from the annual report of Arasu Rubber Corpon for the corresponding years. The study reveals the inability of the corpon to maintain the liquidity. The gross profit is very high in all the years of study. Whereas, the net profit was less which is an indication of the poor performance and openal efficiency of the firm. A high debt equity is observed in general. The high proprietary indicated the better long term solvency. There is a fluctuating trend in interest coverage as there is wide variation in EBIT. The high inventory turnover indicated the efficiency of the inventory management of the firm.the total asset turnover was inefficient during the initial period of study and improves as the year progresses. Keywords: Activity, EBIT, Leverage, Liquidity, Profitability, INTRODUCTION Financial performance exhibits the results of a firm s policies and opens in monetary terms. It is an important aspect which influences the long-term stability, profitability and liquidity of an organization. The financial strength or weaknesses of a firm may be identified through Financial Analysis. Financial planning involves determining the company s financial goals, forecasting certain key variables, analyzing the choices open to the company in terms of investment opportunities and finances available, deciding the action to be taken and evaluating the actual performance [Samuels et al., (1995)]. Financial performance analysis is done by computing financial s. The relationship between two accounting figures expressed mathematically is known as the financial (Sybir kumar Banerjee, 1999 ). Financial analysis can be broadly classified into different categories viz, liquidity, profitability, leverage and activity s. It is primarily conducted using figures drawn from profit and loss account and balance sheet. In this context an attempt has been made to analyze the financial performance of Arasu Rubber Corpon in Kanyakumari District with the help of financial s. PROBLEM STATEMENT The basic problem which is to be investigated in this study is the financial soundness of Arasu Rubber Corpon over a period of years. It thus aims at measuring financial performance of the Corpon using analysis. Different s viz, liquidity, profitability, leverage and turnover s are calculated to evaluate overall financial performance of Arasu Rubber Corpon. OBJECTIVES The basic objective of this research paper is to analyze the financial position of Arasu Rubber Corpon from 2-1 to 29-1 using different s viz., leverage, liquidity, profitability and activity s. LITERATURE REVIEW The need for reliable financial statement data and the importance of financial s for analysis and prediction is well established in the literature. Beginning with Beaver's (1966) contention that standard financial s can predict the financial performance of firms, many subsequent studies have attempted to demonstrate the predictive value of various techniques for estimating actual business performance. However, the conclusions of this study were questioned by the findings of Casey and Bartzca (1984). Using a sample of 3 bankrupt firms, with another thirty firms held out for validation, Casey and Bartzca found that standard accounting s were better for predicting firm failure. METHODOLOGY AND TOOLS Research was done based on secondary data drawn from Arasu rubber corpon s annual report from the year 21-2 to Financial s for the above 1 years were taken from their annual report. Research is thus historical in nature as it relies on historical data. > RJCBS: Volume: 1, Number: 9, July-212 Page 45

2 EMPIRICAL ANALYSIS AND RESULTS A) TEST OF LIQUIDITY The liquidity refers to the availability of company resources to meet short term cash requirement. The liquidity of an enterprise is measured by the degree to which it can meet its short-term obligations. In order to test the liquidity of the corpon three most popular s viz, current, quick, cash position were calculated and presented in Table 1 and Exhibit 1 Formulation Current = Current assets / Current liabilities Quick = Quick assets / Current liabilities Cash position = Cash + marketable securities / Current liabilities TABLE 1 : LIQUIDITY RATIOS Sl no Current Quick Cash position Source-Annual Report of ARC-Results computed.8 EXHIBIT 1 Liquidity s Ratios.4 Current Quick Cash position The of 2:1 of current assets and current liabilities is regarded as a satisfactory state of affair. This 2:1 is considered as a very safe margin of solvency due to the fact that even if the current assets is reduced to half (i.e. instead of 2) then also the current creditors will be able to get their full payment. From the table it is ascertained that the norm of 2:1 has been found in none of the years under study. However, there is an increasing trend from 22-3 to 27-8 with a slight decline in 28-9 which again found increasing during The worst has been found in 21-1 ie.,.69:1. This denotes Arasu Rubber Corpon s inability to maintain the at its standard by keeping current assets less as compared to its current liabilities. From the table it is also clear that in none of the years the quick is 1:1 which is found to be standard. However > RJCBS: Volume: 1, Number: 9, July-212 Page 46

3 there is an increase of quick from 22-3 to 27-8 and a slight decline in 28-9 which in turn increases in The quick is poor in the year This shows that the Arasu Rubber Corpon s liquidity position is not satisfactory in the initial years but it gets improved during Cash position measures a company s ability to satisfy short-term financial obligations immediately and is therefore a good quality measure. A of.5 is preferable. If it is below.5, it means they will be having cash flow problems. It may be because of significant backlog in accounts receivable. In the years of 2-1 to 25-6 the s of cash to current liability is very less which denotes the weakness of the firm. This is because of increase in current liabilities and deficit in cashflow. However, there is an uptrend, in the years 26-7,27-8 and 29-1 which represents decrease in current liabilities due to accounts receivables from debtors. B) Test of Profitability Profitability means the earning power or profit making ability of the enterprise. The profitability reflects the final results of business open. This analysis reveals that how the business concern is successful in its goals and objectives. For this purpose s like gross profit and net profit were selected and are presented in Table 2 and Exhibit 2. Formulation Gross profit = Gross Profit / Sales Net profit = Net Profit / Sales TABLE 2: PROFITABILITY RATIOS Sl. no year Gross profit Net profit Source-Annual Report of ARC-Results computed The gross profit is very high in all the years of study. The high is due to more sales of rubber which reaches the peak during The net profit was highest in the year 26-7followed by 23-4 and 25-6, which denotes that in these years the openal efficiency is high. In the years, 2-1 and 21-2 the net profit was negative which is an indication of the poor performance and openal efficiency of the firm. EXHIBIT2 profitability s Ratios.4.2 Gross profit Net profit > RJCBS: Volume: 1, Number: 9, July-212 Page 47

4 C. TEST OF LEVERAGE OR LEVERAGE MEASURES A leverage measure is one of the means of longterm solvency analysis. This shows how heavily the corpon is in debt. Leverage magnifies both managerial success (profits) and failure (losses). The management s initiative and flexibility for pursuing profitable opportunities is limited by Excessive debt [(Ross Stephen et al., (21)].In order to measure the leverage of the corpon three s viz, debt-equity, Proprietory and interest coverage s were calculated and presented in Table 3 and Exhibit 3 Formulation: Debt -equity = Debt / Equity Proprietary = Share holders funds / Total Assets TABLE 3: LEVERAGE RATIOS Sl. no Debtequity Proprietary Interest coverage Source-Annual Report of ARC-Results computed Interest Coverage Ratio = EBIT/Interest EXHIBIT 3 Leverage s Ratios Debt-equity Proprietary Interest coverage The Table 3 and Exhibit 3 reveals that the total debt to equity stood at 2.2 times in 2-21 had decreased to.8 at the end of the study period with wide fluctuations. A high debt equity is observed in general which means the company has been aggressive in financing its growth with debt. The proprietary of Arasu Rubber Corpon is 7.93 per cent in 2-1 which progressively increased from 22-3 up to the end of the study period ie during 29-1(55.83 per cent). This indicates that the creditors are safe as the year progresses. This may be considered as an indication of the better long-term solvency of Arasu Rubber Corpon. It also indicated the extent to which the assets can be lost without affecting the interest of the creditors. It is evident from the Table that the interest coverage is negative during 2-1, 21-2 and This is because due to decline in EBIT, due to a deep fall in rubber price during these years. The interest cover is highest during 29-1 which denotes that the Arasu Rubber Corpon can cover the interest cost and raises interest rates. D. TEST OF ACTIVITY Activity s are concerned with measuring the efficiency of the respective concern in the asset management. The > RJCBS: Volume: 1, Number: 9, July-212 Page 48

5 efficiency in which the assets are used would be reflected in the speed and rapidity with which assets are converted into sales. The greater rate of turnover or conversion indicate the more efficient of the utilization/management. The various types of activity s are as follows: Here only three s have been computed in this respect and shown in table 4 and exhibit 4. Formulation Inventory turnover = Net sales / average inventory at cost Total assets turnover = net sales / total assets Fixed assets turnover = net sales / fixed assets Sl. no TABLE 4 : ACTIVITY RATIO Inventory turnover Total asset turnover Fixed asset turnover Ratio Source-Annual Report of ARC- Results computed EXHIBIT4 Activity s Ratios 4 Inventory turnover Total asset turnover Fixed asset turnover Ratio Table 5 shows that during 29-1 the inventory turnover values are higher ( 24.1 respectively) than the other years of study. This indicates that the higher the inventory turnover, the more efficient the inventory management of the firm and more liquidity which also had higher sales than the other years of study. However, during 22-3, even though the inventory is 29.4 the sales are very less. This may be caused by a high level of inventory which may result in frequent stock accumulation and loss of sales. The fixed asset turnover shows a constant performance from the year 2-1 to During the year 29-1 there is an increase in net sales and a six fold increase in net fixed assets which is a positive sign for the achievement of the company. This increase in investment on fixed assets may improve the net sales of the company in forthcoming years. During the year 27-8 the of total asset turnover has recorded as.67 times which was the highest, when compared with other years. This trend of low indicates the inefficiency of management in the utilization of total assets. > RJCBS: Volume: 1, Number: 9, July-212 Page 49

6 CONCLUSION The reference period for the study is 1 years beginning from year 2-1 to 29-1.Data for the study has been taken from the annual report of Arasu Rubber Corpon for the corresponding years. The study reveals the inability of the corpon to maintain the liquidity high as it is understood by keeping current assets less compared to its current liabilities. The gross profit is very high in all the years of study. The high is due to more sales of rubber. Whereas, the net profit was less which is an indication of the poor performance and openal efficiency of the firm. A high debt equity is observed in general which means the company has been aggressive in financing its growth with debt. The high proprietary indicated the better long term solvency. There is a fluctuating trend in interest coverage as there is wide variation in EBIT. The high inventory turnover indicated the efficiency of the inventory management of the firm and more liquidity and increase in fixed asset turnover revealed the increase in net sales.the total asset turnover was inefficient during the initial period of study and improves as the year progresses. REFERENCE Beaver, W.H., (1966). Financial s and predictions of failure: Empirical research in according selected studies, Journal of accounting research, Casey, C. J., & Bartczak, N. J. (1984), "Cash Flow: It's not the bottom line," Harvard Business Review, July/August, pp Khan and Jain.(26), Financial Management Tata McGraw- Hill Publishing Company Limited, 4th edition Ross Stephen A., Westerfield, Randolph W. and Jorden, Bradford D. (21), Essentials of Corporate Finance, McGraw Hill Higher Education, A division of the McGraw -Hill Companies, New York, pp. : Samuels,J.M., Wikes, F.M., and R.E. Brayshew,(1995), Management of company finance, 6 th Ed, International Thomson Business Press, London, pp Sybir kumar Banerjee,1999 Financial management.s.chand &Co.,Ltd,NewDelhi.Pp248. *** > RJCBS: Volume: 1, Number: 9, July-212 Page 5