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
H =5.528V 1 +0.212V 2 + 0.073V 3 + 1.270V 4 + 0.120V 5 + 2.335V 6 + 0.575V 7 + 1.083V 8 +0.894V 9-6.075 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 5.1.1. 120
Table 5.1.1 H-SCORE RATIOS AND CO-EFFICIENTS Variables(v) RATIOS Indication Co-efficient 1 RE/T.A Profitability 5.528 2 Sales/TA Efficiency 0.212 3 EBIT/Equity Profitability 0.073 4 /Total Debt Liquidity 1.27 5 Total Debt/TA Solvency 0.12 6 C.L/T.A Solvency 2.335 7 Log. Tan. TA Solvency 0.575 8 Working Capital/Total Debts Liquidity 1.083 9 /Interest Solvency 0.894 Source: Computed 121
H Score of VTX Industries is shown in table 5.1.2 Table 5.1.2 H SCORE OF VTX INDUSTRIES 1 VTX Industries 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A 0.02 0.02 0.03 0.00 0.12 0.05 0.02-0.03 0.01 0.01 V2 Sales/TA 1.51 1.44 1.34 1.27 0.91 0.62 0.53 0.36 0.33 0.43 V3 EBIT/Equity 0.47 0.46 0.40 0.37 0.41 0.18 0.21 0.03 0.18 0.29 / Total Debt 0.14 0.09 0.13 0.08 0.15 0.16 0.09-0.02 0.03 0.06 V5 Total Debt/TA 0.62 0.72 0.57 0.61 0.62 0.44 0.52 0.64 0.67 0.67 V6 C.L/T.A 0.21 0.36 0.43 0.52 0.22 0.14 0.12 0.07 0.07 0.05 V7 Log. Tan. TA 3.84 4.22 4.29 4.35 4.77 5.58 5.69 5.86 5.98 6.01 Working Capital / Total Debts / Interest 1.14 1.00 1.25 1.25 1.19 1.54 1.04 0.76 0.68 0.70 0.68 0.75 0.82 0.54 0.96 1.20 0.70-1.55 0.56 0.66 H score -0.79-0.41 0.22-0.03 0.48 0.86-0.34-3.17-0.99-0.79 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 2007. It again turned negative from 2008 onwards. The negative is the highest in the year 2009. 122
H Score of Bannari Amman Spinning mills is shown in table 5.1.3 Table 5.1.3 H SCORE OF BANNARI AMMAN SPINNING MILLS 2 Bannari Amman Spinning 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A 0.06 0.14 0.11 0.16 0.05 0.03 0.01 0.01 0.02 0.05 V2 Sales/TA 1.10 1.22 1.20 0.96 0.39 0.27 0.36 0.50 0.55 0.84 V3 EBIT /Equity 0.40 0.46 0.36 0.71 0.15 0.17 0.24 0.29 0.40 0.71 / Total Debt 0.19 0.48 0.40 0.40 0.25 0.10 0.06 0.07 0.09 0.20 V5 Total Debt/TA 0.56 0.41 0.41 0.51 0.35 0.61 0.72 0.72 0.73 0.71 V6 C.L/T.A 0.21 0.29 0.27 0.09 0.05 0.03 0.04 0.07 0.04 0.08 V7 Log. Tan. TA 4.01 3.91 4.10 4.52 5.45 6.04 6.35 6.36 6.47 6.58 Working Capital / Total Debts / Interest 0.53 0.53 0.86 0.73 1.38 0.47 0.42 0.33 0.42 0.54 1.42 2.06 2.78 3.27 2.46 2.40 1.54 1.14 1.21 1.74 H score -0.54 0.99 1.75 2.14 1.62 0.57-0.17-0.50-0.27 0.86 Source: Annual Report The table 5.1.3 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 2007. It turned negative from 2008 onwards and showed recovery sign in 2011.The negative is the highest in the year 2002. 123
H Score of Precot Meridian is shown in table 5.1.4 Table 5.1.4 H SCORE OF PRECOT MERIDIAN 3 Precot Meridian 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A 0.00 0.03 0.03 0.03 0.06 0.05 0.01-0.03 0.03 0.05 V2 Sales/TA 1.08 1.01 1.06 1.19 1.15 1.03 1.05 1.11 1.19 1.13 V3 EBIT/Equity 0.29 0.36 0.36 0.33 0.39 0.41 0.32 0.30 0.47 0.52 /Total Debt 0.21 0.20 0.19 0.24 0.35 0.22 0.15 0.10 0.19 0.15 V5 Total Debt/TA 0.49 0.57 0.57 0.51 0.46 0.58 0.60 0.64 0.61 0.70 V6 C.L/T.A 0.15 0.12 0.24 0.10 0.22 0.13 0.11 0.08 0.14 0.12 V7 Log. Tan. TA 5.17 5.37 5.43 5.36 5.35 5.82 5.87 5.84 5.92 6.32 Working capital /Total Debts /Interest 0.59 0.60 0.68 0.61 0.64 0.56 0.53 0.45 0.63 0.82 1.18 1.51 1.46 1.47 2.17 1.82 1.38 0.99 1.69 1.75 H score -0.47 0.00 0.34 0.01 1.22 0.65-0.06-0.84 0.64 1.11 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 2007. It turned negative from 2008 onwards and showed recovery sign in 2010. The negative is the highest in the year 2009. 124
H Score of Ambika Cotton Mills is shown in table 5.1.5 Table 5.1.5 H SCORE OF AMBIKA COTTON MILLS 4 Ambika Cotton 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A 0.04 0.10 0.09 0.07 0.07 0.05 0.03 0.02 0.05 0.09 V2 Sales/TA 1.04 1.13 0.73 0.51 0.46 0.49 0.42 0.50 0.61 0.75 V3 EBIT/Equity 0.21 0.37 0.25 0.17 0.19 0.14 0.10 0.11 0.17 0.26 / Total Debt 0.21 0.37 0.25 0.17 0.19 0.14 0.10 0.11 0.17 0.26 V5 Total Debt/TA 0.47 0.43 0.57 0.62 0.59 0.67 0.72 0.68 0.63 0.60 V6 C.L/T.A 0.21 0.41 0.19 0.16 0.16 0.17 0.10 0.09 0.17 0.13 V7 Log. Tan. TA 4.17 4.29 4.80 5.13 5.47 5.71 5.97 5.92 5.91 6.08 Working Capital / Total Debts / Interest 0.49 0.66 0.53 0.48 0.48 0.55 0.45 0.45 0.56 0.58 0.91 1.26 1.50 1.73 1.72 1.55 1.26 1.03 1.30 1.86 H score -1.06 0.54 0.12 0.11 0.34 0.24-0.32-0.60 0.16 1.11 Source: Annual report Table 5.1.5 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 2002. 125
H Score of Super Spinning Mills is shown in table 5.1.6 Table 5.1.6 H SCORE OF SUPER SPINNING MILLS 5 Super Spinning 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A 0.04 0.06 0.03 0.03 0.05 0.03 0.00-0.08 0.00 0.04 V2 Sales/TA 1.69 1.45 1.33 1.41 1.13 1.06 1.07 1.09 1.28 1.60 V3 EBIT/Equity 0.50 0.53 0.48 0.45 0.58 0.49 0.40 0.21 0.52 0.56 / Total Debt 0.22 0.25 0.16 0.18 0.19 0.14 0.10-0.01 0.12 0.17 V5 Total Debt/TA 0.60 0.59 0.66 0.62 0.66 0.67 0.68 0.73 0.68 0.66 V6 C.L/T.A 0.12 0.15 0.27 0.29 0.21 0.23 0.27 0.31 0.33 0.42 V7 Log. Tan. TA 5.16 5.29 5.56 5.56 5.82 5.96 5.94 5.80 5.67 5.74 Working Capital / Total Debts / Interest 0.75 0.84 0.82 0.74 0.80 0.62 0.65 0.51 0.54 0.74 1.11 1.48 1.31 1.21 1.62 1.29 0.86-0.44 0.61 0.92 H score -0.05 0.61 0.58 0.50 0.97 0.39-0.09-1.97-0.36 0.76 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 2007. It turned negative from 2008 to 2010. Again it shows recovery sign from 2011 onwards. The negative is the highest in the year 2009. 126
H Score of Lambodhara textile is shown in table 5.1.7 Table 5.1.7 H SCORE OF LAMBODHARA TEXTILES 6 Lambodhara Textiles 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A 0.05 0.18 0.02 0.04 0.05 0.01 0.04 0.03 0.01 0.03 V2 Sales/TA 1.61 1.14 1.30 1.09 0.85 0.97 0.95 1.08 0.91 1.17 V3 EBIT/Equity 0.37 0.42 0.57 0.56 0.79 0.85 0.63 0.67 0.73 0.94 / Total Debt 0.21 0.19 0.13 0.13 0.15 0.19 0.13 0.13 0.14 0.18 V5 Total Debt/TA 0.51 0.65 0.69 0.73 0.78 0.75 0.76 0.74 0.78 0.77 V6 C.L/T.A 0.16 0.18 0.10 0.08 0.07 0.07 0.06 0.03 0.07 0.09 V7 Log. Tan. TA 2.62 3.07 3.18 3.34 3.66 3.78 3.90 3.83 4.12 4.34 Working Capital / Total Debts / Interest 0.84 0.55 0.79 0.55 0.48 0.58 0.48 0.61 0.58 0.72 1.09 1.71 1.67 1.37 1.42 1.78 1.08 1.14 1.25 1.28 H score -1.35-0.18-1.02-1.40-1.23-0.86-1.49-1.43-1.23-0.62 Source: Annual report Table 5.1.7 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 2008. The performance of the company is very poor. 127
H Score of Super Sales Industries is shown in table 5.1.8 Table 5.1.8 H SCORE OF SUPER SALES INDIA 7 Super Sales India 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A -0.03 0.06 0.08 0.07 0.09 0.08 0.06 0.01 0.11 0.10 V2 Sales/TA 1.95 2.26 2.16 1.89 1.94 1.59 1.35 1.23 1.09 1.28 V3 EBIT/Equity 0.29 0.41 0.19 0.25 0.36 0.40 0.46 0.29 0.30 0.45 / Total Debt 0.32 0.99 0.28 0.24 0.17 0.09 0.11 0.13 0.09 0.12 V5 Total Debt/TA 0.36 0.25 0.28 0.40 0.49 0.60 0.69 0.54 0.63 0.67 V6 C.L/T.A 0.21 0.21 0.30 0.19 0.16 0.22 0.06 0.04 0.06 0.06 V7 Log. Tan. TA 1.96 2.06 2.13 2.39 2.64 2.91 3.32 3.62 3.85 4.07 Working Capital / Total Debts / Interest 1.26 2.17 2.06 1.63 1.28 0.83 0.78 0.77 0.64 0.54 1.00 1.86 1.07 0.97 1.09 0.92 0.80 0.77 0.89 1.14 H score -1.47 1.76 0.35-0.44-0.61-1.17-1.60-1.85-1.18-0.90 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 2004. It turned negative from 2005 to 2011. Among these years the negative is the highest in the year 2009. It reveals unsatisfactory performance of the company. 128
H Score of Salona Cotspin is shown in table 5.1.9 Table 5.1.9 H SCORE OF SALONA COTSPIN 8 Salona Cotspin 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 V1 RE/T.A 0.02 0.05-0.01 0.01 0.03 0.05 0.02 0.00 0.03 0.05 V2 Sales/TA 1.22 1.39 1.90 1.48 1.15 0.90 0.75 0.83 0.97 1.03 V3 EBIT/Equity 0.40 0.59 0.53 0.47 0.71 0.81 0.66 0.42 0.67 0.67 / Total Debt 0.10 0.28 0.40 0.33 0.28 0.26 0.22 0.19 0.39 0.27 V5 Total Debt/TA 0.62 0.55 0.47 0.50 0.61 0.67 0.66 0.61 0.55 0.57 V6 C.L/T.A 0.23 0.28 0.41 0.34 0.31 0.13 0.13 0.05 0.15 0.23 V7 Log. Tan. TA 3.83 3.76 3.73 3.83 4.33 4.77 4.92 4.79 4.91 5.21 Working Capital / Total Debts / Interest 0.27 0.38 0.69 0.68 0.50 0.45 0.50 0.50 0.60 0.58 0.31 1.01 1.18 1.50 1.96 1.89 1.66 1.19 2.20 1.34 H score -2.13-0.93-0.22-0.14 0.33 0.08-0.23-1.07 0.69 0.22 Source: Annual report Table 5.1.9 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 2002. 129
Table 5.1.10 H SCORE OF ALL THE MILLS COMPANY 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VTX Industries -0.79-0.41 0.22-0.03 0.48 0.86-0.34-3.17-0.99-0.79 Healthiness-Status Failed Failed Successful Failed Successful Successful Failed Failed Failed Failed Bannari Amm Spg. -0.54 0.99 1.75 2.14 1.62 0.57-0.17-0.50-0.27 0.86 Healthiness-Status Failed Failed Failed Successful Successful Successful Failed Failed Failed Successful Precot Meridian -0.47 0.00 0.34 0.01 1.22 0.65-0.06-0.84 0.64 1.11 Healthiness-Status Failed Successful Successful Successful Successful Successful Failed Failed Successful Successful Ambika Cotton -1.06 0.54 0.12 0.11 0.34 0.24-0.32-0.60 0.16 1.11 Healthiness-Status Failed Successful Successful Successful Successful Successful Failed Failed Successful Successful Super Spinning -0.05 0.61 0.58 0.50 0.97 0.39-0.09-1.97-0.36 0.76 Healthiness-Status Failed Successful Successful Successful Successful Successful Failed Failed Failed Successful Lambodhara Text. -1.35-0.18-1.02-1.40-1.23-0.86-1.49-1.43-1.23-0.62 Healthiness-Status Failed Failed Failed Failed Failed Failed Failed Failed Failed Failed Super Sales India -1.47 1.76 0.35-0.44-0.61-1.17-1.60-1.85-1.18-0.90 Healthiness-Status Failed Successful Successful Failed Failed Failed Failed Failed Failed Failed Salona Cotspin -2.13-0.93-0.22-0.14 0.33 0.08-0.23-1.07 0.69 0.22 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
No Company Table 5.1.11 H SCORE COMPONENTS OF THE COMPANIES Average H SCORE Status Profitability Efficiency Liquidity Solvency Total 1 VTX Industries -0.50 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 -1.08 Failed 8% 13% 9% 69% 100% 8 7 Super Sales India -0.71 Failed 5% 21% 18% 57% 100% 7 8 Salona Cotspin -0.34 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