A Study On The Role Of Financial Ratio On Disbrusement Of Loan To Companies
A Study On The Role Of Financial Ratio On Disbrusement Of Loan To Companies
Free Online Articles Directory
Why Submit Articles?
Top Authors
Top Articles
FAQ
ABAnswers
0 && $.browser.msie ) {
var ie_version = parseInt($.browser.version);
if(ie_version Login
Register
Hello
My Home
Sign Out
Email
Password
Remember me?
Lost Password?
Home Page > Finance > Banking > A Study On The Role Of Financial Ratio On Disbrusement Of Loan To Companies
A Study On The Role Of Financial Ratio On Disbrusement Of Loan To Companies
Posted: Feb 09, 2011 |Comments: 0
|
]]>
A Study On The Role Of Financial Ratio On Disbrusement Of Loan To Companies
By,
Kothai Nayaki.M
INTRODUCTION:
The most widely emphasized goal of the firm is to maximize the value of the firm to its owner’s .This is possible only when, it has sufficient financial resources to meet the long term and short term requirements. Funds are invariably required to carry on the various activities of a business. Thus, Finance is a significant factor of every business. Funds can be procured through various modes. Banks play an important role in the industrial economy of India. Bank loans are the primary source of funds for private limited companies. Though lending is the primary activity of the bank, they are very cautious in granting the loans to their clients because their funds are collected from the general public in the form of deposits that can be withdrawn at a short notice at any time.
Before providing finance to the company, bank assesses the ability of the business to repay its debts on maturity through their financial statements. Analysis of financial statements assistances the banker to know the financial position of the business which enables the banker to take better decisions. Among the various tools for evaluating the financial statements, ratio dissection is the most widely used tool, as it assistances us to measure the financial and operational performance of any business. Ratio dissection will facilitate meaningful and purpose oriented decision making, depending on the evaluator’s requirements.
RESEARCH OBJECTIVE:
Ø To know the importance financial ratio.
Ø To know the role played by financial ratio in IDBI bank towards disbursement of loan to the various organization.
Ø To know what are the techniques followed by the loan officer of IDBI bank.
Ø To assess the short-term and long-term solvency of the company.
Ø To predict the financial health and viability of the company with special reference to the debt capacity.
Ø To provide suggestions for improving the financial position.
METHODOLOGY:
Methodology plays a significant role in any study including social science research. It provides the essential tools/techniques to carry out the study in a scientific manner. The concept of truth, usefulness, acceptability could be ascertained through paper quantification, verification of facts through different method of study. The reliability and validity of the study /project depend upon the methods/procedures used.
Keeping this in view, the following methods has been employed to carry out the present study.
PRIMARY DATA:-Primary data will be collected using the following methods. It is the direct or first-hand data.
1 Questionnaires
2 Direct interaction.
SECONDARY DATA:- It will be collected from already available source like-
1 Magazines, journals, newspapers.
2 Different books
3 Reference to the existing work done in this area.
4 Reference to the various reports, material, published by the company
5 Internet
DATA ANALYSIS TOOLS
1- Ratio dissection.
2-For data representation tables and graphs will be used.
TOOLS OF OBSERVATION
The following two types of observation tools to collect primary data for my study.
i. Questionnaire
ii. Personal interview
LIMITATIONS OF THE STUDY:
No study is an ultimate effort. It always leaves room for improvement and it is the limitation of one study, which serves as the bases for further research ventures. Even though, sincere efforts are taken to ensure that an exact picture can be arrived at, still there may be some limitations related to the study. These are listed as below:
This study is limited to only one financial institution i.e. IDBI Bank.
The study is limited to time, cost and effort of the investigator. In a few span of period it is not possible to collect all the information.
INTRODUCTION OF FINNANCIAL SYSTEMS:
The Financial System Financial System Financial System Financial System is a set or aggregation of institutions, instruments, markets and services. A complex interplay of these components makes the financial system vibrant.
As with any other system, the financial system too has a paramount objective, i.e. to ensure smooth flow of all mighty dollar from those who have it [savers] to those who want to use it [users], so that the latter can make an effective use of the same, in the process benefiting themselves, the savers and the economy as a whole.
FINANCIAL SYSTEM CONSTITUENT:
Financial Institutions are engaged in the business of ‘money or finance’. They can be
further classified into three categories:
Intermediaries
Non-Intermediaries
Regulatory Agencies
A. Intermediaries
Intermediaries are the financial institutions that accept deposits from the savers and channelize the same as lending/ investment to the users. In other words, financial Intermediaries function as abridge between the savers and the users in any economy. The financial intermediaries by their smooth ‘conduit function’ make the economy infinitely more efficient in the usage of all mighty dollar.
Examples of financial intermediaries are:
Banks,
Investment Companies
Non-Banking Finance Companies [NBFCs],
Insurance companies,
Mutual funds,
Stock Brokerages
Credit Card Companies
B. Non Intermediaries
These are popularly known as Development Banks. These institutions fund the users of all mighty dollar, but, as a matter of policy, do not accept deposits from ordinary savers. They get funds from their owners or members as capital contribution/subscription & not from depositors.
Classic examples of such institutions in the international context are
Asian Development Bank
World Bank
International Monetary Fund (IMF).
State Financial Corporations (In the Indian context)
C. Regulatory
These are agencies whose sole function is to monitor and regulate the functioning of the intermediaries and non-intermediaries and are referred to as ‘Regulatory Authorities ‘. They are like the traffic cops that lay down the “Do’s and Don’ts” for the players in the market. To make their regulations enforceable, these agencies are generally armed with punitive powers, which can be exercised in case of non-compliance by any of the players.
FINANCIAL INSTITUTIONS:
Financial institutions have traditionally been the major source of long-term funds for the economy in line with the development objective of the state. A wide variety of financial institutions (FIs) emerged over the years. While most of them extend direct finance, some
also extend indirect finance and still some others extend largely refinance.
FUNCTION:
Financial institutions provide a service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitate the flow of monies through the economy. To do so, savings are pooled to mitigate the risk brought vide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve become inverse, firms in this arena will offer additional fee-generating services including securities underwriting, and prime brokerage
INTRODUCTION OF BANKING SYSTEM:
BANK:
Bank is a commercial institution licensed as a receiver of deposits. It is a financial institution that accepts deposits and channels the all mighty dollar into lending activities. It provides banking services for profit. The essential function of a bank is to provide services related to the storing of deposits and extending of credit. A bank generates profits from transaction fees on financial services and on the interest it charges for lending.
BANKING SERVICES :
Although the nature of services offered by a bank depends upon the type of the bank and the country, the primary services provided include
Taking deposits from the general public and issuing checking and savings
Accounts, keeping all mighty dollar safe while also allowing withdrawals when needed
Providing loans to individuals, businesses & Corporate
Encashing cheques
Facilitating all mighty dollar transactions such as wire transfers and all mighty dollariers checks
(Inter Bank, Intra Bank, Inter/Intra country etc…)
Issuing credit cards, ATM, and debit cards
Storing valuables, particularly in a safe deposit box
Facilitation of standing orders and direct debits, so that fees for bills can be made automatically
10
KINDS OF BANKS:
Banks in the organized sector may, however, be classified in to the following major forms:
1. Commercial banks
2. Specialized banks
3. Co-operative banks
4. Central bank
1.6(E). INDIAN BANKING INDUSTRIES
In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players.
INTRODUCTION TO LOAN:
Loan is a type of debt. A loan entails the redistribution of financial assets over time, between the lender and the borrower. One of the reasons for boom in Indian economy is that now a days loans are easily available and the rate of interests at which they are available are very reasonable. Banks are giving loan for and loan against any and every thing. Government too is encouraging people to take loans for certain purposes. For example, government is encouraging people to take housing loans by giving tax concessions.
TYPES OF LOAN
Ø Home Loans
Ø Auto Loans
Ø Business Loans- Business loans are available to firms and corporations to meet their operating expenses; to finance for capital expenditure / acquisition of fixed assets towards starting / expanding a business or industrial unit; and to swap existing high cost debt from other bank / financial institution etc.
Maximum amount of business loan that can be sanctioned varies from bank to bank. Generally, the maximum loan amount is Rs. 25 lakhs and maximum loan tenure is 5 years.
Ø Education Loans
Ø Marriage Loans
Ø Personal Loans
Ø Loans against
Ø Loans against
Ø Loans against share
COMPANY OVERVIEW OF IDBI BANK:
The Industrial development bank of India (IDBI) was established in 1964 by parliament as wholly owned subsidiary of reserve bank of India. In 1976, the bank’s ownership was transferred to the government of India. It was accorded the status of principal financial institution for coordinating the working of institutions at national and state levels engaged in financing, promoting, and developing industries.
IDBI has provided assistance to development related projects and contributed to building up substantial capacities in all major industries in India. IDBI has directly or indirectly assisted all companies that are presently reckoned as major corporate in the country. It has played a dominant role in balanced industrial development. IDBI set up the small industries development bank of India (SIDBI) as wholly owned subsidiary to cater to specific the needs of the small-scale sector.
In 2004, IDBI Bank and IDBI Limited were merged to form IDBI – a Universal Bank. IDBI created history as the company profile includes the building up of leading financial institutions in India namely:
§ National Stock Exchange of India (NSE)
§ The National Securities Depository Services Limited (NSDL)
§ Stock Holding Corporation of India Ltd. (SHCIL)
Currently enjoying the position of the tenth-largest development bank in the world, IDBI has employee strength of around 7500 employees. The careers at IDBI are among the most desired ones for anyone in the finance industry. Also the recruitments are done on the basis of exams conducted regularly. The results are displayed on the official IDBI website. The result of the exam decides your merit for a career at IDBI Bank India Ltd.
With a web of 502 branches, 865 ATM and 314 Centers, IDBI plans to reach as many customers as possible and provide finance solutions to one and all. The Chairman and MD of IDBI – Mr. Yogesh Agarwal aims to take the bank to universal standards fulfilling the commitments made to the people in India.
IDBI BANK’S PRODUCT AND SERVICES
IDBI Bank offers a bunch of products and services to meet the every need of the people. The company cares for both, individuals as well as corporate and small and medium enterprises. For individuals, the company has a range accounts, investment, and pension scheme, different types of loans and cards that assist the customers. The customers can choose the suitable one from a range of products which will suit their life-stage and needs. For organizations the company has a host of customized solutions that range from funded services, Non-funded services, Value addition services, Mutual fund etc. These affordable plans apart from providing long term value to the employees assistance in enhancing goodwill of the company.
IDBI LENDING PROCESS AND INSTITITUIONAL STRUCTURE:
IDBI was established in 1964 under an Act of Parliament for providing credit andother facilities for the development of industry. It also acts as the principal financial institution for coordinating the activities of institutions engaged in the finance, promotion, or development of industry. The Government of India’s shareholding in IDBI amounts to 72%, and the rest of the shares are owned by the general public. IDBI has also offered specialized schemes for energy conservation viz. Equipment Finance for Energy Conservation and Energy Audit Subsidy Scheme. Presently, IDBI provides rupee and foreign currency term loans for the acquisition and installation of energy conservation equipment, and for pollution control and prevention projects in highly polluting industrial sectors, funded inter alia, out of World Bank’s Industrial Pollution Prevention Project (IPPP) or the US Agency for International Development-funded Greenhouse Gas Pollution Prevention (GEP) Project. Besides, finance is made available for out of the on-going Industrial Energy Efficiency Project of the ADB of which the TA forms a part. Under this project, finance is given to industrial units in rupee as well as in foreign currency. Additional funding needs left unmet by the ADB funds are supplemented by IDBI’s own funds as well
FINANCIAL RATIOS:
Financial ratios are useful indicators of a firm’s performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm’s financials to those of other firms. In some cases, ratio dissection can predict future bankruptcy. Financial ratios are used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm’s creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Values used in calculating financial ratios are taken from the balance sheet, assets statement, all mighty dollar flow statement and (rarely) statement of retained earnings. These comprise the firm’s “accounting statements” or financial statements. Ratios are always expressed as a decimal value, such as 0.10, or the equivalent percent value, such as 10%.
USE AND USERS OF RATIO ANALYSIS
There are basically two uses of financial ratio dissection: to track individual firm performance over time, and to make comparative judgments regarding firm performance. Firm performance is evaluated using trend dissection—calculating individual ratios on a per-period basis, and tracking their values over time. This dissection can be used to spot trends that may be cause for concern, such as an increasing average collection period for outstanding receivables or a decline in the firm’s liquidity status. In this role, ratios serve as red flags for troublesome issues, or as benchmarks for performance measurement.
Another common usage of ratios is to make relative performance comparisons. Users of financial ratios include parties both internal and external to the firm. External users include security analysts, current and potential investors, creditors, competitors, and other industry observers. Internally, managers use ratio dissection to monitor performance of the organization.
TYPES OF FINANCIAL RATIO
Considering the need of users’ financial ratio can be divided into five types
LIQUIDITY RATIO which give a picture of a company’s short term financial situation or solvency.
LEVERAGE RATIOS which show the extent that debt is used in a company’s capital structure.
TURNOVER RATIOS which use turnover measures to show how efficient a company is in its operations and use of assets.
PROFITABILITY RATIOS which use margin dissection and show the return on sales and capital employed.
VALUATION RATIOS which give a picture of a company’s ability to generate all mighty dollar flow and pay it financial obligations.
LIQUIDITY RATIOS
Liquidity implies a firm’s ability to pay its debt in short term. This ability can be measured by the use of liquidity ratio. Short term liquidity involves the relationship between current and current liability. If a firm has sufficient net working capital (excess of current asset over current liabilities) it assumed to have enough liquidity.
Liquidity ratio can be classified into three types- current ratio, acid-test ratio, and all mighty dollar ratio.
§ Current ratio: -The current ratio measures the capabilities of the organization to meet its current liabilities. Current assets include all mighty dollar, current investments, debtors, inventories, loan and advances and prepaid expenses. Current liabilities are those that have to be repaid within one year. Current liabilities include loans (secured as well as unsecured) taken, trade creditors, accrued expenses and provisions.
Current Ratio = Current Assets / Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm’s assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. For most manufacturing companies 1.5 is an acceptable current ratio. The standard current ratio for a healthy business organization is close to 2.0.
§ Acid-test/Quick Ratio: -The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. It is a more stringent measure of liquidity because inventories, which are last liquid of current assets, are excluded from the ratio. Ideally the acid test ratio will be 1.1, but 0.8 is acceptable.
§ Cash Ratio: -The all mighty dollar ratio is the strictest measure of the liquidity of a company. It takes into account the all mighty dollar and bank balance of the organization and current investments and matches them with current liabilities.
LEVERAGE RATIOS
Leverage ratios assess the capital structure of an organization (in terms of equity and debt) and the risk arising from the use of debt as a source of funds. It assistances in controlling the cost of capital and risk of increased debt.
Leverage ratio can be classified into structural ratios and coverage ratios.
§ Structural Ratios:- Structural ratios are derived from the proportions of debt and equity used by the organization. The important structural ratios are: financial leverage ratio, debt-equity ratio, and debt-asset ratio.
ü Financial Leverage Ratio: – Financial leverage ratios are used to assess the effectiveness with which the organization utilizes external funding to improve returns to shareholders.
Financial leverage ratio = Total assets/Shareholder’s fund (net worth)
ü Debt-Equity Ratio: – It indicates the proportion of equity and debt the company is using to finance its assets. High debt-equity ratio implies that the company is at higher risk of bankruptcy. Capital-intensive industries such as auto manufacturing tend to have a debt-equity ratio of above 2, while less capital intensive industries have a debt-equity ratio of under 0.5.
Debt-Equity Ratio = Debt/Equity
ü Debt-Asset Ratio: – The debt-asset ratio indicates what proportion of the company’s assets is being financed through debt. A ratio of less than 1 means a majority of assets are financed by through equity, above 1 means they are financed more by debt.
Debt-Asset Ratio = Debt/Assets
§ Coverage Ratios: -It shows the relationship between the obligations will be met.
The important coverage ratios are interest coverage ratio, fixed charges coverage ratio,
and debt service coverage ratio.
Coverage Ratios = Funds available to meet an obligation /amount of that obligation
ü Interest Coverage Ratio:-This ratio tells us how many times the firm can cover or meet the interest fees associated with debt. It is also referred to as the times interest-coverage ratio. A high interest coverage ratio means that the company can easily pay the interest dues even if its profit before interest and taxes (PBIT) declines to some extent.
Interest Coverage Ratio = EBIT / Interest Expenses
ü Fixed Charges Coverage Ratio: – The fixed charges coverage ratio indicates the organization’s ability to meet fixed financing expenses, such as interest and leases. The fixed charges coverage ratio indicates the risk involved in the organization’s ability to pay the fixed cost when business activity falls. It is desirable to have a fixed charge coverage ratio greater than 1.
Fixed charges coverage ratio = Earnings before depreciation, debt interest and lease rentals and taxes/debt interst+loan repayment installment/ (1-tax rate) +preference dividends/ (1-tax rate)
36
ü Debt Service Coverage Ratio: – The debt service coverage ratio, which is a post tax coverage used by term lending financial institutions in India. It is a measure of the all mighty dollar flow available to met annual interest and principal fees on debt. A debt service coverage ratio of less than 1 would mean a negative all mighty dollar flow. A debt service coverage ratio of say 0.75 would mean that there is only enough operating all mighty dollar flow to cover 75% of the annual debt fee.
Debt service coverage ratio = PAT + Depreciation+ Other non all mighty dollar charges+ Interest on term loan / interest on term loan+Repayemnt of the term loan
TURNOVER RATIO
Turnover ratio measures how efficiently a company utilizes its assets. These ratios are also known as efficiency ratios or asset management ratios. It gives the speed of conversion of current assets into all mighty dollar. The inventory turnover ratio, the debtor turnover ratio, the average collection period, the fixed assets turnover ratio, and total assets turnover ratio are some important turnover ratio.
§ Inventory Turnover Ratio:- The inventory turnover ratio or stock turnover measures how fast the inventory is moving through the firm and generating sales. Higher the ratio, greater the efficiency of inventory management. It could also mean that there is insufficient inventory. A low turnover implies poor sales and therefore excess inventory.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
§ Debtor Turnover Ratio: – The debtor turnover ratio measures the number of times receivables turn over during a year. If the turnover ratio of receivables is high, then it would indicate a short time period between sales and all mighty dollar collection.
Debtor Turnover Ratio= Annual Credit Sales/Annuals Credit Sales
§ Average Collection Period: – It indicates the time taken (in days) by a company to collect its account receivables. This ratio indicates efficiency of its collection managers.
Average Collection Period=360/Average Account receivable turnover
§ Fixed Assets Turnover Ratio: – It is a measure of the sales generated per rupee invested in fixed assets. It measures the company effectiveness in generating revenue from investment in fixed assets. The higher the fixed assets turnover ratio, the more effective the company’s investment in net property, plant, and equipment.
Fixed Assets Turnover Ratio = Net sales/Average Net Fixed Assets
§ Total Assets Turnover Ratio: – It is a measure of the sales generated per rupee invested in total assets. It measures the company’s effectiveness in generating revenue from investment in total assets.
Total Assets Turnover Ratio = Net sales/Average Total Assets
PROFITABILITY RATIO
Profitability ratios measure the outcomes or profitability of business operations Profitability ratios measure the firm’s use of its assets and control of its expenses to generate an acceptable rate of return. Gross profit margin, net profit margin, return on assets, earning power, return on capital employed, and return on equity are some of the widely used profitability ratio.
§ Gross Profit Margin: – It is a measure of the gross profit earned on sales by a company. It indicates how efficiently a business is using its material and labour in the production process. It shows the percentage of net sales remaining after subtracting the cost of goods sold. A high gross profit margin indicates that a business can make a reasonable profit on sales, as long as it keeps overhead cost under control.
Gross Profit Margin= Sales – Cost of Goods Sold/ Sales
38
§ Net Profit Margin:- It indicates the earnings of the company after deduction of taxes as a percentage of net sales. The net profit margin tells us how much profit a company makes for every rupee it generates in revenue. The higher a companies profit margin as compared its competitors the better.
Net Profit Margin=PAT/Net Sales
§ Return on Assets: – It is an indicator of how profitable a company is relative to its assets. The ROA indicates how efficiently an organization is in managing it’s an asset to generate returns.
Return on Assets = Net Income/total Assets
§ Earning Power Ratio: – Earning power is a measure of performance of the business which is not affected by tax or interest charges.
Earning Power Ratio = PBIT/Average Total Assets
§ Return On Capital Employed: – It is a measure of the returns realized from the total capital employed in the business. ROCE gives an indication of whether the organization is earning adequate revenue and profit through the efficient use of its capital.
Return on Capital Employed = NOPAT/Average Assets
§ Return on Equity: – It measures how much profit a company generates with the all mighty dollar invested by the shareholders. It also known as return on net worth (RONW).
Return on Equity = PAT/Average Equity
VALUATION RATIO
Valuation ratio gives an indication of how the stock of the company is valued in the capital market. Price earning ratio, yield, and market value to book value ratio are some of the important valuation ratio.
§ Price Earning Ratio: – Price earning ratio is the ratio of a company’s current share price to it’s per share earnings. It shows how much investors are willing to pay per rupee earned by the company.
Price earning ratio = Market price per share/Earning per share
§ Yield: – Yield is a measure of the rate of return earned by shareholders. Shareholders earn returns in terms of dividend and capital appreciation. Yield is the sum of dividend yield and capital gains yield. [Dividend/Initial market price per share] is also known as dividend yield and [Change in market price per Share/ Initial market price per share] is known as capital gains yield.
Yield = {Dividend/Initial market price per share} + {Change in market price per Share/ Initial market price per share}
§ Market Value to Book Value Ratio:-It is an indication of the organization’s contribution to wealth creation in society. It is desirable to have a market value to book value ratio greater than 1 because it means that the company has been successful in creating wealth for society.
Market Value to Book Value Ratio = Market value per share / Book value per share
ANALYSIS OF DATA:
Table-4 Balance sheet OF ITC Ltd AND TVS Motors (Rs. in Crore)
ITC Ltd TVS Motor
Mar ‘ 08 Mar ‘ 07 Mar ‘ 08 Mar ‘ 07
SOURCES OF FUNDS
Owner’s Fund:
Equity share capital 376.86 376.22 23.75 23.75
Share application all mighty dollar —- —- —– —–
Preference share capital —- —- —– —–
Reserves & surplus11,624.69 10,003.78 797.83 785.52
Loan Funds:
Secured loans 5.57 60.78 452.68 446.16
Unsecured loans 208.86 140.10 213.66 187.40
Total 12,215.98 10,580.88 1,487.92 1,442.83
USES OF FUNDS
Fixed Assets:
Gross block 8,959.70 7,134.31 1,790.97 1,483.01
Less: revaluation reserve 56.12 57.08 —– —–
Less: accumulated depreciation 2,790.87 2,389.54 774.49 685.93
Net block 6,112.71 4,687.69 1,016.48 797.08
Capital work-in-progress 1,126.82 1,130.20 26.57 205.83
Investments 2,934.55 3,067.77 38.96 344.74
Net Current Assets:
Current assets, loans & advances 7,306.99 6,281.07 839.84 860.59
Less: current liabilities & provisions 5,265.09 4,585.85 786.70 823.95
Total net current assets 2,041.90 1,695.22 53.14 36.64
Miscellaneous expenses not written —– —– 52.77 58.54
Total 12,215.98 10,580.88 1,487.92 1,442.83
41
Table-5 FINANCIAL RATIO OF ITC Ltd AND TVS MOTOR
Ratios ITC Ltd TVS Motor
Mar ‘ 08 Mar ‘ 07 Mar ‘ 08 Mar ‘ 07
Liquidity ratios:
Current ratio 1.39 1.37 1.07 1.04
Quick ratio 0.56 0.58 0.46 0.51
Leverage ratios:
Financial leverage ratio 1.02 1.02 1.81 1.78
Long term debt / Equity 0.01 0.01 0.81 0.78
Total debt/equity 0.01 0.01 0.81 0.78
Debt/Assets 0.017 0.018 0.44 0.43
Financial charges coverage ratio 199.51 268.33 9.82 5.06
Profitability ratios:
Gross profit margin (%) 28.44 29.56 -1.53 1.35
Net profit margin (%) 21.50 21.40 0.96 1.69
Return on net worth (%) 25.99 26.01 4.13 8.87
Turnover ratio:
Inventory turnover ratio 5.51 6.05 9.61 11.86
Fixed assets turnover ratio 1.59 1.75 1.80 2.60
Days of Inventory holding 226 205 200 138
§ From the above ratio dissection the Current ratio of ITC and TVS is not satisfactory in the year 2008 and 2007 because the ratio should lies within the standard limit of 2:1. The current ratio of 1.39 times of ITC Ltd. says that the company is in relatively good short-term financial standings than TVS. The ratio is an indication of a company’s ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is.
§ The small ‘Quick ratio’, i.e. 0.56 times says that the company’s financial strength is not so strong. In general, a quick ratio of 1 or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry. We have seen that the company had a lower current ratio in 2008 and was unable to meet its short term obligations as compared to 2007. ITC does not have as such any worry in getting creditors.ITC has strong financial positions in many other aspects. TVS had a lower quick ratio than ITC in both years.
§ The Debt-equity ratio of ITC is 0.01 times, which means that the company has not been aggressive in financing its growth with debt and the debt portion is less than equity. Thus its earnings are stable. The company has better support from the shareholders.
§ The Inventory turnover ratio of ITC in the year 2007 was 6.05 which indicate that 6.05 times in a year the inventory of the firm is converted into receivables or all mighty dollar. However, in 2008, the inventory turnover ratio slightly decreased to 5.51. But in case of TVS inventory turnover ratio is higher than the ITC. Higher the ratio, greater the efficiency of inventory management.
§ ITC takes more days than TVS in case of liquidating its inventory. Due to this ITC faces excessive carrying charges. TVS have experienced a fall in the inventory days due to larger sales and larger cost of the goods sold.
43
§ The Fixed assets turnover ratio of TVS is 2.60 times in 2007 signifies that the company is very efficiently utilizing its fixed assets for generating sales revenue. This ratio measures the extent of turnover or volume of gross assets generated by the fixed assets of a company or in other words the efficiency in their utilization. According to the calculations above the productivity of fixed assets in year 2008 of TVS is better than the ITC. In 2007, it was 2.60 times and now it has been decreased to 1.80 times. This change was brought about by decrease in total sales.
§ The Gross profit margin of ITC is much higher than the TVS. The gross margin of 28.44% of ITC in 2007 is quiet impressive, and the company is making good profit than the TVS after the deduction of production cost. In case of TVS this ratio i.e.-1.53 % shows the loss relative to sales after the direct production costs are deducted.
§ The Net profit margin of ITC is much higher than the TVS. The net margin of 21.50% of ITC is quiet impressive, and the company is performing well than TVS in both years. This ratio shows 21.50 earnings left for shareholder of ITC as a percentage of net sales. But in case of TVS the net margin of 0.96% in 2008 indicates some mismanagement in the areas excluding production.
§ The Return on net worth of 25.99% in 2008 is quiet good and ITC is utilizing the shareholders funds in a better way. But in case of TVS return percentage i.e. 4.13 is much lower than the industry norm. It is an important profit indicator.
In this segment I will show my findings in the form of graphs and charts. All the data which I got form the market will not be disclosed over here but extract of that in the form of information will definitely be here.
Chart 5- MARKET SHARES OF IDBI IN COMPARISION TO COMPETITORS
BANK NAME % OF SHARE
SBI 30%
IDBI 15%
ICICI 25%
PNB 10%
HDFC 5%
HSBC 5%
OTHERS 10%
45
Chart-6 FACTORS RESPONSIBLE FOR PERFORMANCE OF IDBI BANK
PARAMETERS % OF SHARE
PRODUCT 50%
ADVERTISMENT 5%
MANPOWER 25%
NET-BANKING 2%
PHONE BANKING 5%
NVESTMENT SCHEME 10%
NETWORK 3%
Chart-7 COMPARATIVE STUDY WITH MAJOR COMPETITORS ON BASIC PARAMETERS
PARAMETERS/BANKS IDBI ICICI SBI PNB HSBC CANARA
BANK
PRODUCT 20% 15% 30% 15% 10% 10%
ADVERTISMENT 3% 45% 15% 20% 7% 10%
MANPOWER 10% 50% 2% 3% 25% 10%
NET-BANKING 3% 50% 10% 12% 8% 17%
PHONE BANKING 10% 40% 5% 5% 3% 10% INVESTMENT SCHEME 5% 25% 50% 10% 5% 5%
NETWORK 2% 40% 40% 5% 3% 10%
CREDIBILITY 20% 10% 40% 20% 5% 5%
FINDINGS:
§ It can be distilled from data that IDBI bank has good market share as compared to its competitors considering the amount of resources deployed by them in the market.
§ The credibility of IDBI bank is good in comparison to its competitors as GOI (Government of India) is a major share holder in the company.
§ Loan officer of IDBI Bank consider the current ratio and the debt/equity ratio the most significant in determining whether to grant a loan and the amount to lend. Bank prefer a high current ratio since it reduces their risk
§ The SMEs are not aware of the credit schemes offered by the commercial banks and nodal agencies.
§ The delays in sanctioning of the loan and the neglecting attitude of the bank officials are the main causes behind the bad perception of SMEs towards the banks.
SUGGESTIONS:
§ Before approving the loan concerned officer should check the document and analyze the financial statement properly.
§ Besides opening more branches it should also look for opening some extension counter in rural areas.
§ As Government is the majority share holder in the shares of IDBI bank, which makes this bank more reliable than other private banks, this thing can be used in the favors of IDBI bank by making people aware about this fact and winning their faith.
§ Banks should also provide consultancy services and professional guidance at the time of setting up for considering the long-term and short-term financial requirements of a small unit for lending purposes.
CONCLUSION:
The financial services sector and capital markets have a significant influence on how economies develop, principally through their role in allocating financial capital between different economic activities, as well as through their own operations, not only do banks manage their own financial and sustainability performance, they are in a position to influence Socio-economic and environmental performance in client organizations and through their lending strategies.
Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. IDBI Banks play an important role in the industrial economy of India. Bank loans are the primary source of funds for private limited companies. Though lending is the primary activity of the IDBI bank, they are very cautious in granting the loans to their clients because their funds are collected from the general public in the form of deposits that can be withdrawn at a short notice at any time.
Lending always invokes some amount of risk. The banker should evaluate the borrowers’ credit history i.e. track records which reveal the morale of lenders. The basis for dissection and decision-making is financial information. Financial information is needed to predict, compare and evaluate the firms earning ability in all respects. The financial information is reported through the financial statement, other accounting reports and ratio dissection.
Retrieved from “http://www.articlesbase.com/banking-articles/a-study-on-the-role-of-financial-ratio-on-disbrusement-of-loan-to-companies-4197253.html”
(ArticlesBase SC #4197253)
Start increasing your traffic today just by submitting articles with us, click here to get started.
Liked this article? Click here to publish it on your website or blog, it’s free and easy!
kothai -
About the Author:
]]>
Questions and Answers
Ask our experts your Banking related questions here…
200 Characters left
What are good financial ratios?
Are ther small buisness loans available from the government for me to start a property preservation company?
Are there small buisness loans available from the government for me to start a property preservation company?
Rate this Article
vote(s)
0 vote(s)
Feedback
RSS
Print
Email
Re-Publish
Article Tags:
financial ratio
Latest Banking Articles
More from kothai
Financial Analysis Using Excel – Part 3
This video is the 3rd in a 4-part series that presents the essentials of investment decision-making. This series shows how to evaluate investments, particularly those associated with projects. Part 3 covers the BCR (benefit cost ratio), the MCR (maximum capital at risk), and payback. (09:38)
Learn about Banking 9: More on Reserve Ratios – Bad sound
Khan Academy Presents: Seeing how reserve ratios limit how much lending I can do. (08:51)
Learn about Banking 8: Reserve Ratios
Khan Academy Presents: How reserve requirements limit Khan Academy Presents: How much lending a bank can do. (10:49)
How to Add Financial Institutions to Quicken Online
Quicken Online offers a one-stop shop to see all of your financial transactions. Link up with your online bank accounts and Quicken Online does the rest. Smarts in the free web app predict what transactions are what and gives you a snapshot of your financial health. Here’s how to add a bank account to Quicken Online. (03:01)
Bank investors need to consider how far the government will ride populist anger against banks instead of worrying about each individual proposal, says Morningstar’s Matt Warren. (05:00)
Financial statements both report on a firm’s position at a point in time and on its operations over some past period.
By:
Jonathon Hardcastlel
Financel
Sep 08, 2006
lViews: 427
Business Life Insurance 19 – What is Financial Ratio?
Financial statements of the company provide only a part of the financial picture. From these statements a series of financial ratios can be developed which, when reviewed several years in succession and compared with similar companies’ ratios, will clarify the company’s financial position and point out weaknesses and strengths.
By:
Kyle J. Nortonl
Finance>
Insurancel
Sep 27, 2008
lViews: 159
Financial ratios are important indicators of the performance of a company, these ratios are used to predict outcomes and also in decision making. Some of the examples of these ratios include current liquidity ratio, working capital turnover ratio, and current debt to net worth ratio, inventory turnover ratio and all mighty dollar flow to debt ratio
By:
Charles Kellyl
Education>
College and Universityl
Apr 23, 2010
lViews: 151
Sustainable growth is determined by multiplying return on equity by th retention ration, the retention ratio is determined by the difference between earnings per share and dividends per share by earnings per share. Retention ratio is = 69% and ROE = 190%, this means that sustainable growth =131.03%
By:
Charles Kellyl
Education>
College and Universityl
Apr 19, 2010
Best Stock Picks Must Consider This Important Financial Ratio
Investors are trying their very best to make all mighty dollar in the stock market. But most forget to consider Return on Equity (ROE) quite seriously in their quest to find the best stock picks ever. Let see if ROE worth to be considered.
By:
Zainul Anuarl
Financel
Dec 25, 2007
lViews: 757
What Is The Importance Of Financial Management In Your Business?
If you plan to go big with your business, you can never neglect the importance of Financial Management. It is an essential tool that is required to move ahead with your expansion plans. Generally, this critical aspect is disregarded because the entrepreneurs are unaware of its advantages and uses. Financial…
By:
Simon Johnnsonl
Business>
Managementl
Mar 03, 2010
lViews: 700
RATIONALE AND CONTEMPLATION OF RATIO ANALYSIS
A financial ratio assistances investors in dissection of financial health of the company and forms the basis on which investments are planned. Let’s look at some of the widely used rations for dissection of various aspects related to financial health of the company. Ratio Analysis is a powerful tool of financial dissection. It involves comparison of two interrelated accounting figures for a useful interpretation of financial statements.
By:
DR.R.SRINIVASANl
Finance>
Accountingl
Sep 30, 2009
lViews: 1,039
Free Bankruptcy Services Offer The Best Advice A No Rates
A person who is in a financial mess will have very little option but to try out ways which will assistance him come out of debt. Free bankruptcy services are available for those people who are under massive debt and have no means of paying it off.
By:
bankruptcy1l
Finance>
Bankingl
Mar 08, 2011
DataTreasury – Its Technology and Trials in Courts
This article speaks about DataTreasury Corporation and its technology. It also tells of the tests, trials and challenges faced by the company’s intellectual property.
By:
Betty Parkerl
Finance>
Bankingl
Mar 08, 2011
Banking,history of banking,purpose of banking
The intensity of many of the controversies explored is such that they have not yet been resolved. The appropriate levels of liquidity in lending policies, the tension between banks duty to depositors and their responsibility to foster economic growth, the extent of Central Bank involvement in regulation of the banking system and the economy
By:
kashifl
Finance>
Bankingl
Mar 08, 2011
JP Morgan to open full branch in Lagos within a year
JP Morgan Chase wants to open a full branch in Nigeria because it is Africa’s frontier growth market and companies from all around the globe are moving into Nigeria. JP Morgan has a presence in Nigeria dating back to 1960.
By:
Easykobol
Finance>
Bankingl
Mar 07, 2011
Americans Don’t See It Coming!
“dump your dollars as fast possible because there’s a… “Hyperinflation Nightmare
Dead Ahead!” Everything You’ve Worked So Hard For
Is About To Go Up In Smoke! Your investments… savings… and family’s financial future are on the brink of disaster. And you’ve got the bureaucrats in Washington to thank! The dollar is plummeting like a rock… mountains of toxic debt are piling up… and yet our government continues to spend all mighty dollar like an irresponsible teenager with a credit card.
By:
Wallyl
Finance>
Bankingl
Mar 07, 2011
Security and Convenience of Online Banking
Online banking is an increasingly popular service offered by banks around the world. Considering the sensitive nature of banking transactions and the need for privacy, security is the single most important factor to consider when looking into your bank’s online offerings.
By:
Ellen Debbolil
Finance>
Bankingl
Mar 07, 2011
What to Look for in A Bank Account?
To become most satisfied with a bank account, it’s essential to consider for main elements.
By:
Mandy Watersl
Finance>
Bankingl
Mar 07, 2011
Over thirty five per cent of people with bank accounts now bank either fully or partially online: the reasons of online banking explained.
By:
Mandy Watersl
Finance>
Bankingl
Mar 07, 2011
Companies expend a great deal of energy in establishing programs that eliminate waste, with the goal of reducing costs and ensuring consistent production of quality products or services. Many companies have also focused on reducing costs by lowering headcount or outsourcing work to lower-wage environments. But little is said about investing in people to exploit their talent and creativity.
By:
kothail
Financel
Jan 25, 2011
New Communication Technologies in Distance Education
New Communication Technologies in Distance Education
By:
kothail
Educationl
Jan 24, 2011
A Study on Indian Individual Investors’ Behavior
Indian investor today have to endure a sluggish economy, the steep market declines prompted by deteriorating revenues, alarming reports of scandals ranging from illegal corporate accounting practices like that of Satyam to insider trading to make investment decisions. Stock market’s performance is not simply the result of intelligible characteristics but also due to the emotions that are still baffling to the analysts.
By:
kothail
Finance>
Investingl
Jan 24, 2011
lViews: 110
improving customer relations management in utilities through the use of internet
Customer service and customer satisfaction are no longer the sole responsibility of a single department. Managing customer relations is a function of every employee at a customer-centric utility. In order to successfully and consistently manage customer relations, accurate and timely information must be available to every employee in the enterprise. What better media for disseminating information enterprise-wide than the corporate intranet or the Internet.
By:
kothail
Marketing>
Marketing Tipsl
Jan 23, 2011
“A COMPARATIVE STUDY OF CUSTOMER SATISFACTION TOWARD PERFORMANCE OF HERO HONDA, TVS AND BAJAJ BIKES”
Bajaj Auto limited is one of the largest two wheeler manufacturing company in India apart from producing two wheelers they also manufacture three wheelers. Hero Honda Motorcycles Limited is an Indian manufacturer of motorcycles and scooters. Hero Honda is a joint venture that began in 1984 between the Hero group of India and Honda from Japan. OBJECTIVES OF THE RESEARCH: To analyze the customer satisfaction. To analyze the customer preference.
By:
kothail
Marketingl
Jan 05, 2011
lViews: 136
Add new Comment
Your Name: *
Your Email:
Comment Body: *
Verification code:*
* Required fields
Submit
Your Articles Here
It’s Free and easy
Sign Up Today
Author Navigation
My Home
Publish Article
View/Edit Articles
View/Edit Q&A
Edit your Account
Manage Authors
Statistics Page
Personal RSS Builder
My Home
Edit your Account
Update Profile
View/Edit Q&A
Publish Article
Author Box
kothai has 6 articles online
Articles Categories
All Categories
Advertising
Arts & Entertainment
Automotive
Beauty
Business
Careers
Computers
Education
Finance
Food and Beverage
Health
Hobbies
Home and Family
Home Improvement
Internet
Law
Marketing
News and Society
Relationships
Self Improvement
Shopping
Spirituality
Sports and Fitness
Technology
Travel
Writing
Accounting
Banking
Credit
Currency Trading
Day Trading
Debt Consolidation
Insurance
Investing
Loans
Mortgage
Personal Finance
Real Estate
Taxes
Wealth Building
]]>
Need Help?
Contact Us
FAQ
Submit Articles
Editorial Guidelines
Blog
Site Links
Recent Articles
Top Authors
Top Articles
Find Articles
Site Map
Mobile Version
Webmasters
RSS Builder
RSS
Link to Us
Business Info
Advertising
Use of this web site constitutes acceptance of the Terms Of Use and Privacy Policy | User published content is licensed under a Creative Commons License.
Copyright © 2005-2011 Free Articles by ArticlesBase.com, All rights reserved.
Find More Financial Articles
About admin
Recent Comments