CHAPTER V ANALYSIS OF PROFITABILITY

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1 CHAPTER V ANALYSIS OF PROFITABILITY 5.1 INTRODUCTION: In this chapter, the data collected are systematically processed, tabulated and made suitable for analysis and interpretation. The study is based on the secondary data collected for a period of ten years from 2002 to 2011 from the records of Eight Spinning Mills and they have been used for analyzing the financial performance of the mills. Statistical tools like descriptive analysis, Regression analysis, Principal Component Analysis and Trend Analysis are used in analyzing the data. The results of the analysis are also presented in the form of charts for easy understanding. In the first step, H score has been used to measure the financial healthiness of the mills. Secondly, the effect of leverage on profitability has been checked by using multiple regression analysis. Similarly the significant relationship between EBIT and sales, contribution margin and cash return on assets has also been analyzed. In the next step the Principal Component Analysis (PCA) has been used to find the significant components of profitability measures. Lastly, the trend of the operating profit have been analyzed and forecasted for the next 5 years. MEASURING THE FINANCIAL HEALTHINESS: FULMER MODEL H SCORE: Fulmer (U.S.1984) has used step-wise Multiple Discriminate Analysis to Evaluate 40 financial ratios to a sample of 60 companies - 30 failed and 30 successful. He has reported a 98 percent accuracy rate in classifying the test companies one year prior to failure and an 81 percent accuracy rate more than one year prior to bankruptcy. This model is applied to find the financial healthiness of the companies under study. The following is the Fulmer Model: 119

2 H =5.528V V V V V V V V V H <0, then the firm is classified as Failed otherwise Succèsful Where, V 1,= Retained Earnings/Total Assets V 2,= Sales/Total Assets V 3,= EBIT/Equity V 4,= s//total Debt V 5,= Debt/Total Assets V 6,= Current Liabilities/Total Assets V 7,= Log Tangible Total Assets V 8,= Working Capital/Total Assets V 9,= Log EBIT/Interest The following table shows the ratios used in the H-score and its Coefficients. The H-Score intends to cover the profitability, Efficiency, Liquidity and Solvency status of a firm. Using these H-scores of the eight companies are calculated and presented to know the financial healthiness of the companies in table

3 Table H-SCORE RATIOS AND CO-EFFICIENTS Variables(v) RATIOS Indication Co-efficient 1 RE/T.A Profitability Sales/TA Efficiency EBIT/Equity Profitability /Total Debt Liquidity Total Debt/TA Solvency C.L/T.A Solvency Log. Tan. TA Solvency Working Capital/Total Debts Liquidity /Interest Solvency Source: Computed 121

4 H Score of VTX Industries is shown in table Table H SCORE OF VTX INDUSTRIES 1 VTX Industries V1 RE/T.A V2 Sales/TA V3 EBIT/Equity / Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working Capital / Total Debts / Interest H score Source: Annual Report The above table shows that, out of the ten year period the H-scores are less than Zero in seven years and is in failed Status. It showed recovery sign for years 2004 onwards and up to It again turned negative from 2008 onwards. The negative is the highest in the year

5 H Score of Bannari Amman Spinning mills is shown in table Table H SCORE OF BANNARI AMMAN SPINNING MILLS 2 Bannari Amman Spinning V1 RE/T.A V2 Sales/TA V3 EBIT /Equity / Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working Capital / Total Debts / Interest H score Source: Annual Report The table reveals that, out of the ten years period, the H-scores are less than Zero in four years and is in failed Status. It showed recovery sign for years 2003 onwards and up to It turned negative from 2008 onwards and showed recovery sign in 2011.The negative is the highest in the year

6 H Score of Precot Meridian is shown in table Table H SCORE OF PRECOT MERIDIAN 3 Precot Meridian V1 RE/T.A V2 Sales/TA V3 EBIT/Equity /Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working capital /Total Debts /Interest H score Source: Annual Report The above table discloses that, out of the ten years period, the H- scores are less than Zero in three years and is in failed Status in those period. It showed recovery sign from the year 2003 onwards and up to It turned negative from 2008 onwards and showed recovery sign in The negative is the highest in the year

7 H Score of Ambika Cotton Mills is shown in table Table H SCORE OF AMBIKA COTTON MILLS 4 Ambika Cotton V1 RE/T.A V2 Sales/TA V3 EBIT/Equity / Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working Capital / Total Debts / Interest H score Source: Annual report Table shows that, out of the ten years period, the H-scores are less than Zero in three years and is in failed Status in those period. It showed recovery sign from the year 2010 onwards. The negative is the highest in the year

8 H Score of Super Spinning Mills is shown in table Table H SCORE OF SUPER SPINNING MILLS 5 Super Spinning V1 RE/T.A V2 Sales/TA V3 EBIT/Equity / Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working Capital / Total Debts / Interest H score Source: Annual report The above table reveals that, out of the ten years period, the H-scores are less than Zero in four years and is in failed Status in those periods. It showed recovery sign from the year 2003 to It turned negative from 2008 to Again it shows recovery sign from 2011 onwards. The negative is the highest in the year

9 H Score of Lambodhara textile is shown in table Table H SCORE OF LAMBODHARA TEXTILES 6 Lambodhara Textiles V1 RE/T.A V2 Sales/TA V3 EBIT/Equity / Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working Capital / Total Debts / Interest H score Source: Annual report Table reveals that, H scores are negative in all the ten years periods. Hence, we may say they are in failed Status. It showed recovery sign from the year 2011 onwards. The negative is the highest in the year The performance of the company is very poor. 127

10 H Score of Super Sales Industries is shown in table Table H SCORE OF SUPER SALES INDIA 7 Super Sales India V1 RE/T.A V2 Sales/TA V3 EBIT/Equity / Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working Capital / Total Debts / Interest H score Source: Annual report From the above table it discloses that, out of the ten year periods, H scores are negative in eight years periods. Hence, we may say they are in failed Status in those periods. It showed recovery sign in 2003 and It turned negative from 2005 to Among these years the negative is the highest in the year It reveals unsatisfactory performance of the company. 128

11 H Score of Salona Cotspin is shown in table Table H SCORE OF SALONA COTSPIN 8 Salona Cotspin V1 RE/T.A V2 Sales/TA V3 EBIT/Equity / Total Debt V5 Total Debt/TA V6 C.L/T.A V7 Log. Tan. TA Working Capital / Total Debts / Interest H score Source: Annual report Table discloses that, out of the ten year periods, H scores are negative in six year periods. Hence, we may say they are in failed Status in those periods. It showed recovery sign from the year 2010 onwards. The negative is the highest in the year

12 Table H SCORE OF ALL THE MILLS COMPANY VTX Industries Healthiness-Status Failed Failed Successful Failed Successful Successful Failed Failed Failed Failed Bannari Amm Spg Healthiness-Status Failed Failed Failed Successful Successful Successful Failed Failed Failed Successful Precot Meridian Healthiness-Status Failed Successful Successful Successful Successful Successful Failed Failed Successful Successful Ambika Cotton Healthiness-Status Failed Successful Successful Successful Successful Successful Failed Failed Successful Successful Super Spinning Healthiness-Status Failed Successful Successful Successful Successful Successful Failed Failed Failed Successful Lambodhara Text Healthiness-Status Failed Failed Failed Failed Failed Failed Failed Failed Failed Failed Super Sales India Healthiness-Status Failed Successful Successful Failed Failed Failed Failed Failed Failed Failed Salona Cotspin Healthiness-Status Failed Failed Failed Failed Successful Successful Failed Failed Successful Successful Source: Computed The overall financial healthiness statuses of the companies for the ten year period have been consolidated in the above table. In the year 2002, 2008, 2009 all companies have attained failed Status. In 2003 & 2005, only four companies have shown Successful Status. In 2006, 2007 six companies have attained the Successful status. In 2010 three companies attained the Successful Status. In 2004 & 2011 five companies have attained the Successful Status. 130

13 No Company Table H SCORE COMPONENTS OF THE COMPANIES Average H SCORE Status Profitability Efficiency Liquidity Solvency Total 1 VTX Industries Failed 4% 10% 13% 73% 100% 6 2 Bannari Amm Spinning 0.65 Successful 4% 7% 8% 80% 100% 1 3 Precot Meridian 0.26 Successful 4% 11% 8% 77% 100% 2 4 Ambika Cotton 0.06 Successful 3% 7% 8% 82% 100% 4 5 Super Spinning 0.13 Successful 5% 13% 8% 74% 100% 3 6 Lambodhara Textiles Failed 8% 13% 9% 69% 100% 8 7 Super Sales India Failed 5% 21% 18% 57% 100% 7 8 Salona Cotspin Failed 7% 13% 9% 72% 100% 5 Source: Computed Inference: Rank Based on H score The above table shows the average H scores of the companies, Status and the percentage coverage towards Profitability, Efficiency, Liquidity and Solvency position of the companies during the 10 year period. The score less than ZERO reveal failed otherwise Successful. Four companies attained failed Status and the balance four companies have attained Successful status. On an average coverage towards Profitability, Efficiency, Liquidity and Solvency position of the companies are 5 percent, 12 percent, 10 percent and 73 percent respectively. 131

CHAPTER VI SUMMARY OF FINDINGS, SUGGESTIONS AND CONCLUSION

CHAPTER VI SUMMARY OF FINDINGS, SUGGESTIONS AND CONCLUSION INTRODUCTION In the present era of globalisation, liberalisation, cut-throat competition and removal of social inequalities, spinning industries