Magazine 2012
A Study of Financial Soundness of
Mahanand Dairy, Mumbai
Dr. Kanchan Dutt, Shailendra Education Societyb s Art,
Commerce & Science College, Mumbai.
Ms. Varsha Mallah, Bhavanb s Somani College, Mumbai
Abstract
Mahand Dairy is a unit run by the MRSDMM. It has made significant growth and progress in the field of
productivity improvement, quality improvement, energy conservation, cost control etc. due to sincere and
dedicated efforts put at all the levels. The financial statements of a business enterprise provide a summary of its
accounts. Analysis and interpretation of these account statements helps in full diagnosis of the profitability and
financial soundness of the business. The research attempts to evaluate and analyses the financial performance
of Mahanand Dairy, Mumbai. The study covers data of last five years by using ratio analysis techniques.
1
. Introduction
Maharashtra Rajya Sahakari Dudh Mahasangh Maryadit (MRSDMM) is an Apex Federation of District / Taluka
milk unions established to implement the Operation Flood programme in the state of Maharashtra. The main
objective of MRSDMM is to procure milk from the member milk unions at remunerative rates and distribute the
same to the consumers at reasonable rates. MRSDMM is working as a vital link between the milk producers
and consumers and working for the economic development and upliftment of the farmers in the rural areas.
MRSDMM was established on 09th June, 1967.
Mahand Dairy is a unit run by the MRSDMM. It was established on 18th Aug.1983 with a milk handling capacity
of 4 LLPD and the capacity was expanded up to 6 LLPD during the year 1997-98. From December, 2005 it is
governed by the elected Board of Directors. At present MRSDMM have 86 member unions with more than
2
0000 primary milk societies & 23 lacs members which include appx. 27000 women members. At present
Mahanand Dairy is distributing 8.5 Lac Litres milk per day through 722 milk distributors (Ex Dairy Distributors -
74 and shop Distributors, Commission Agents etc. - 548). It has also extended its wings in Goa, Andhra
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Pradesh and Gujarat. Mahanand Dairy has good range of milk products i.e Shrikhand ( in four flavours),
Amrakhand, Cow Ghee, Lassi, Butter milk, Dahi, Paneer and flavoured milk in eight flavours which is well
accepted by the consumers of Mumbai.
Mahanand is HACCP and ISO-9000 certified company. It has made significant growth and progress in the field
of productivity improvement, quality improvement, energy conservation, cost control etc. due to sincere and
dedicated efforts put at all the levels. The total sale of milk under Mahanand Brand name in the state is 8.5
LLPD including the sale of milk in Konkan, Pune & Nagpur region. For the last 45 years it has been successfully
working and for the year 2010-11 had made a turnover of Rs. 483.92 crores. Mahanand Dairy has been
awarded 8 (EIGHT) National Productivity Council Awards.
The financial statements of a business enterprise provide a summary of its accounts. It is difficult for a layman
to understand which figures are important in the statement and what is the significance of these figures. Analysis
and interpretation of these account statements helps in full diagnosis of the profitability and financial soundness
of the business. Financial statement analysis is a process that examines past and present financial data for the
purpose of evaluating performance and estimating future risk and potentials. It determines financial strength
and weaknesses of the firm According to John N Myers, b Financial statement analysis is largely a study of the
relationships among the various financial factors in a business as disclosed by a single set of statements and a
study of the trends of these factors as shown in a series of statements.b
The analysis of financial statements requires methodical classification of the data given in the financial statements
and comparison of various interconnected figures with each other. Various types of tools can be used for the
analysis of financial statements. The major tools available are- Comparative financial Statements, Common-size
Financial Statements, Trend Percentages and Ratio Analysis. Financial statement analysis helps various interested
stake holders like management, shareholders, investors, creditors, Government, researchers etc to make an
evaluation of the various aspects of the companyb s performance.
The present study analyses the financial performance of Mahanand Dairy, Mumbai.
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2. Statement of problem
Mahanand is considered to be one of the ideal cooperative organization which has helped in the development
and growth of dairy farming in Maharashtra. One of the important objectives of Mahanand is to protect the
interest of the milk producing farmers who are its suppliers as well as its members. A study of final accounts of
Mahanand for last five years shows an inconsistent performance. The present paper is an attempt to study the
financial performance of Mahanand dairy to understand the financial position of the concern.
3
. Objectives of the study
The objective of this study is to analyze and interpret the financial performance of Mahanand Dairy. The paper
is an attempt to examine the profitability, managerial efficiency and financial soundness of Mahanand Dairy.
4. Research methodology
The study is purely based on secondary data. The secondary data were collected from different sources such
as Official website of Mahanand Dairy, Professional Magazines, Reference Books, Newspapers, Journals and
published reports of Mahanand Dairy.
The collected data was complied and analyzed for the purpose of the study. To facilitate interpretation ratio
analysis technique was used. Tables and graph diagrams has been used for presentation of findings.
5
1
2
3
4
5
. Limitations of the study
. This study will focus on the financial performance of Mahanand Dairy
. The study covers data of last five years i.e. from 2006-2007 to 2010-2011
. The technique used for the study is ratio analysis
. The Ratios selected for the study is Liquidity Ratio, Efficiency Ratio and Profitability Ratio
. Analysis and Findings of the study
Ratio analysis is the most common and effective tool of analysis and interpretation of financial statements. It
helps in finding out the inter-relationships between different figures in the financial statements. It is a diagnostic
tool that helps to identify problem areas and opportunities within a company. It guides various interested
parties like management, shareholders, potential investors, creditors, government and other analysts to make
an evaluation of companyb s performance. Ratios can be classified into different categories depending upon
the basis of classification. For the present paper, classification is done on the basis of their functional aspects.
According to the functions ratios can be broadly categorized into-
b "
Liquidity ratios
b "
Efficiency ratios
b "
Profitability ratios
5
.1 Liquidity Ratios
A company is considered to be financially strong if it is able to fulfill its long term and short term obligations.
Liquidity ratios are used to access a firmb s ability to meet its short-term obligations. An asset is deemed liquid
if it can be readily converted into cash. Common liquidity ratios include current ratio, quick ratio and debt-to-
equity ratio.
5
.1.1 Current ratio
This is the most commonly used indicator to find out the short term paying capacity of the firm. The current
ratio is also known as b working capital ratiob . This ratio measures the extent to which the claims of short-term
creditors are covered by assets that can be quickly converted into cash. It is the ratio of current assets to
current liabilities. The ratio is expressed as follows:
Formula:-
Current Assets
Current Ratio
=
Current Liabilities
Table-1 shows the position of current ratio in Mahanand Dairy. For current assets particulars like cash & bank,
short term investments, stock and other miscellaneous current assets were considered. Similarly current liability
as given in the balance sheet and short term loans and advances were considered for current liabilities.
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Table-1
Current Ratio (Rs. In Lakhs)
Year
007
008
009
010
011
Current Assets (1)
Current Liabilities (2)
5841.47
Ratio (1/2)
1.38
2
8063.62
7823.04
8544.23
9476.93
7700.52
2
12702.17
0.62
2
21728.48
0.39
2
7430.39
1.28
2
6293.88
1.22
Source: Calculated from Annual reports of Mahanand Dairy (2006-2007 to 2010-2011)
Generally, current assets should be twice the current liability (2:1). The study of trend shows that in last five
years the organization was not able to get this ratio even once. The worst performance was in the year 2009.
Shortage of short term funds can have an adverse effect on the operational efficiency of the firm. It can only be
manageable if the firm has its arrangements with bank for emergency requirements. All the years where the ratio
is above 1:1 is still satisfactory as it shows that Mahanand is able to fulfill its short term liabilities.
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.1.2 Liquid Ratio
It is a variation of current assets. The liquid ratio measures a companyb s ability to pay off the claims of short-
term creditors without relying on the sale of its inventories. This is a valuable measure since in practice the sale
of inventories is often difficult. It is expressed as follows:
Formula:-
Liquid Assets
=
Liquid Liabilities
Liquid Ratio
Table-2 shows the position of liquid ratio in Mahanand Dairy. For liquid assets all the current assets except for
stock is taken into consideration. Similarly for liquid liability all the current liability as given in the balance sheet
excluding bank overdraft, if any is considered.
Table-2
Liquid Ratio (Rs. In Lakhs)
Year
007
008
009
010
011
Liquid Assets (1)
677.18
Liquid Liabilities (2)
5841.47
Ratio (1/2)
1.16
2
2
7157
12702.17
0.56
2
7722.32
8320.13
6159.2
21728.48
0.36
2
7430.39
1.12
2
6293.88
0.98
Source: Calculated from Annual reports of Mahanand Dairy (2006-2007 to 2010-2011)
Generally, a ratio of 1:1 is considered as good indicator of firmb s capacity. Practically, if organization can
manage up to a ratio of 0.75:1 is also considered as satisfactory. The overall liquidity position of Mahanand
looks satisfactory except for the two years 2008 and 2009, where organization invested in short term projects.
The firmb s cash position looks well, where it can manage with its very short term liabilities. A ratio above one in
last two years is a good indicator.
5.1.3 Debt-to-equity ratio
It is a solvency ratio and is calculated to find out long tern financial capacity of the firm. It is also known as
external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the
company. It helps in finding out margin of safety for long term creditors. It also helps in understanding the
capitalization of the company and so they are also known as capital gearing ratios. It is expressed as follows:
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Formula:-
Total Debt
=
Total Equity
Debt-to-Equity Ratio
Table-3
Debt-Equity Ratio (Rs. In Lakhs)
Year
Debt (1)
Equity (2)
8742.74
9323.7
Ratio (1/2)
0.72
2
007
008
009
010
011
6334.94
13325.43
21672.5
8235.36
8054.37
2
1.43
2
9870.37
10765.01
11074.22
2.20
2
0.76
2
0.73
Source: Calculated from Annual reports of Mahanand Dairy (2006-2007 to 2010-2011)
Table-3 shows the position of debt equity ratio in Mahanand. Debt includes Long term and short term loans,
advances, current liabilities etc, whereas equity includes all types of shares, reserves and surplus and net profit
of Mahanand. A ratio of 1:1 is usually considered to be satisfactory ratio. In the year 2008 and 2009 the debt-
equity ratio of Mahanand is much higher and shows an unsatisfactory safety margin for the long term creditors.
In the later years the condition of Mahanand looks better as the ratio becomes favourable, that is less than one.
It shows a very satisfactory safety margin for the long term creditors. It also suggests that the organization can
raise additional funds as there is less burden of fixed interest payment.
5.2 Efficiency Ratio
Efficiency ratios are used to find out how effectively a company is managing its assets and resources. These
ratios are also known as turnover ratios because they indicate the speed with which assets are turned into sales.
These ratios are important in measuring the efficiency of a company and also to find out the ability of a
company to meet both its short term and long term obligations.
5.2.1 Inventory turnover
This ratio measures the number of times inventory is converted into sales. It calculates stock velocity to indicate
the time period taken by the average stock to be sold out. It helps in evaluating the management of stock in the
organization. It is expressed as follows:
Formula:-
Cost of goods sold
Inventory Turnover Ratio
=
Average Inventory
Table-4 shows the position of Inventory turnover ratio in Mahanand Dairy. Cost of goods sold is calculated by
subtracting gross profit from sales; similarly average inventory is calculated as opening stock + closing stock/
2
.
Table-4
Inventory Turnover Ratio (Rs. In Lakhs)
Year
007
008
009
010
011
Cost of Goods Sold (1)
Average Stock (2)
1033.41
Ratio (1/2)
37.76
2
39026.07
42627.75
41510.38
40741.84
46215.43
2
979.24
43.53
2
743.98
55.80
2
989.36
41.18
2
1349.28
34.25
Source: Calculated from Annual reports of Mahanand Dairy (2006-2007 to 2010-2011)
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the performance of last five years it can be noted that the inventory turnover ratio was highest that is 55 times
in 2009 after which it is reducing reaching up to 34 times in 2011. In this context it can be said that the
performance of Mahanand is losing its edge.
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.2.2Fixed Assets Turnover Ratio
This ratio measures the efficiency and profit earning capacity of the firm. Higher the ratio, greater is the utilization
of fixed assets. Therefore a higher ratio is favourable. A lower ratio signifies that the firm has an excessive
investment in fixed assets. It can be expressed as-
Formula:
Net Sales
Fixed Asset Turnover Ratio =
Fixed Assets
Table-5
Fixed Assets Turnover Ratio (Rs. In Lakhs)
Year
007
008
009
010
011
Net Sales (1)
40673.25
44520.52
43943.35
43802.93
4839.83
Fixed Assets (2)
1562.37
Ratio (1/2)
26.03
2
2
1638.4
27.17
2
1774.07
24.77
2
2473.63
17.70
2
4378.2
11.05
Source: Calculated from Annual reports of Mahanand Dairy (2006-2007 to 2010-2011)
Table-5 shows the status of fixed asset turnover ratio in Mahanand. Net sales are as given in the trading account
and fixed assets here means depreciated value of fixed assets. There is no standard fixed asset turnover ratio in
absolute terms. Each organization has to determine its own standard ratio as per its past performances and
industryb s performance. The ratio is highest (27) in 2008 and is lowest (11) in 2011. The study shows a continuous
downfall in the ratio without much change in the figures of sales and fixed assets. Despite the fact that a ratio of
1
1 is a good indicator of very effective utilization of fixed assets the reducing trend of ratio shows that the
performance of Mahanand is slowing down.
.3 Profitability Ratios
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Efficiency of an organization is measured in terms of its profit earned. Profit ratios measure the efficiency with
which the company uses its resources. The more efficient the company, the greater is its profitability. Profitability
in relation to sales indicates the amount of profit per rupee of sales. For this study the profitability ratios taken
are Gross profit ratio and Net profit ratio.
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.3.1 Gross profit Ratio
This ratio compares gross profit with sales. It helps in ascertaining the productivity of concern as it takes in to
consideration the expenditures of production, sales and inventory. It is generally expressed in the form of
percentage. It can be calculated as follows-
Formula b
Gross Profit
Gross Profit Ratio =
x100
Sales
Table-6
Gross Profit Ratio (Rs. In Lakhs)
Year
007
008
009
010
Gross Profit(1)
1650.08
Net Sales (2)
40673.25
44520.52
43943.35
43802.93
Ratio (1/2*100)
2
4.06
4.26
5.54
6.99
2
1898.2
2
2434.42
2
3062.72
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Table-6 shows the trend of gross profit of Mahanand for last five years. There is no standard gross profit ratio in
absolute terms. Each concern has to determine its own standard ratio on basis of its past performances,
performance of other concerns and average of the entire industry. Mahanand has earned its highest gross profit
in the year 2010 which is 7 Percent. From 2007 to 2010 it shows a consistent improving trend in gross profit
earning. This shows improving productivity of the concern, efficient management of production, purchases and
inventory etc. However the gross profit margin of 2011 has come down to 4.5 percent. This indicates some
problem arising in production management and loses control over factory expenses.
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.3.2 Net Profit Ratio
Net profit ratio shows relationship between net profit and sales of the organization. The Ratio is used to
measure the overall profitability and hence it is very useful to proprietors. It helps in ascertaining the overall
efficiency of organization in managing its activities of operations, financing and investment. It is calculated as
follows: Formula:-
Net Profit
Net Profit Ratio
=
*
100
Sales
Table-7
Net Profit Ratio (Rs. In Lakhs)
Year
007
008
009
010
011
Net Profit(1)
Net Sales (2)
40673.25
44520.52
43943.35
43802.93
48391.83
Ratio (1/2*100)
2
200.8
392.53
510.37
595.65
347.74
0.49
0.88
1.16
1.36
0.72
2
2
2
2
Source: Calculated from Annual reports of Mahanand Dairy (2006-2007 to 2010-2011)
Table-7 shows the position of net profit ratio in Mahanand for last five years. There is no standard Net Profit ratio
in absolute terms. Each concern has to determine its own standard ratio on basis of its past performances,
performance of other concerns and average of the entire industry. Mahanand has earned its highest net profit in
the year 2010 which is 1.36 Percent. From 2007 to 2010 it shows a consistent improving trend in net profit
earning. This shows great efficiency of the concern in managing all its activities and good control over all types
of costs. However the net profit margin of 2011 has come down to 0.72 percent, against the trend. It can be
taken as an indicator of inefficiency in controlling its operating expenses, inefficient management or simply
increasing competition in the market.
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. Concluding Observations
Ratio analysis is the process of identifying financial strengths and weaknesses of the firm by properly establishing
relationship between the items of the balance sheet and the profit and loss account. It assists the Investors,
Shareholders and Creditors to take sound decisions regarding the company. This paper tried to analyze the
financial performance of Mahanand dairy, Mumbai. It was found that the concern has shown a inconsistent
performance from year 2007 to 2011. Concernb s long term as well as short term solvency position is satisfactory.
It is also able to convert its resources into sales effectively. However year 2011 shows declining of overall profit
of the concern. The reasons as given by the chairman in the annual report 2011 are- increasing competition,
increased rate for milk purchase by Maharashtra Government, reduced milk production, bonus payment to
employees and implementation of sixth pay for employees. Despite that the norms of all the ratios could not be
achieved it can be said that the overall performance of Mahanand was found to be satisfactory.
7. References
B
B
B
Ainapure, Ainapure (2009)b Management Accountingb , Manan Prakashan
Arora M N (2009)b Management Accountingb , Himalaya Publishing House
Annual reports of Mahanand Dairy
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B
B
B
Baruch Lev(1974)b Financial Statement Analysis, A New Approach, Prentice Hall
Gibaldi Joseph, (2004)b MLA handbook of writers of research paperb , New Delhi,
Surya Dharma, (2011)b Australian Dairy-Financial Performance of Dairy Producing Farmsb
Australian Bureau of Agricultural and Resource Economics and Sciences.
T Rajasekar, S Aravanan (sept 2011)b Financial performance Analysis of Major Ports in India- A study with
special reference to Tuticorin Port Trustb Indian journal of finance.
www.mahanand.co.in
B
B
B
B
B
www.fnbnews.com
www.thehindubusinessline.in
www.moneycontrol.com
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