Assignment on Financial statements analysis with the help of ratios

Submitted to Prof. Dharmendra Jain (Financial Management)

Submitted by Division B Mr. Atul Rane Roll no. 46

Anjuman-I-Islams Allana Institute Of Management Studies & Research Mumbai University Academic Year 2011-12

Introduction to Financial Statements and their differing objectives:

What are financial statements in a business enterprise?

The financial statements are: Profit and Loss statement Balance Sheet Cash flow statement and Funds flow statement Objectives are: Profit and Loss statement to know whether the enterprise is in profit or loss at the end of a given period or not. The period would usually be one year. It could be as short a period as one month even. However preparing the Profit and Loss Account every year is a must. Balance Sheet it is also referred to as statement of assets and liabilities. This is as on a particular date. The objective is to know the financial position of the enterprise, how much it owes to outsiders in the form of liabilities and how much it owns in the form of various assets. Although it could be prepared on a monthly basis as at the end of every month, it is prepared as at the end of every year again a statutory requirement besides being a business necessity. Cash flow statement Cash flow statement is primarily to know the cash from operations, investments and finance obtained and manage the liquidity in the short-run. In the shortrun, the objective could be financial planning. It lists all the cash inflows and cash outflows to verify as to whether the system has the required liquidity or not. The business should not have too little or too much cash. The frequency of preparing it depends upon the business needs it could even be on a weekly basis. The minimum frequency is one month. Funds flow statement this is the fundamental statement used for financial planning. The minimum period is one year. It talks of all resources, be it short-term or medium-term/longterm and the uses to which these are put to. The objective is to ensure that proper funding takes place in the business enterprise and that there is no diversion of working capital to acquiring fixed assets.

Example no. 1 - A sample of Profit and Loss Account (Rupees in Lacs) Income from operations Operating expenses: Salaries Repairs and maintenance Depreciation Office and general expenses Marketing expenses including Commission, if any Interest and other Charges Total expenses Profit before tax Tax at 35% Profit after tax Dividend Profit retained in Business [Retained Earnings] Learning points: Interest is charged to income before determining the profit of the organisation. Once the profit of the organisation is determined, tax is paid at the stipulated rate and the dividend is paid only after this. Thus, dividend is profit allocation. This difference between interest and dividend gives opportunity to business enterprises, to have a mix of capital of the owners and loans taken from outside, so that they can save on tax, through the interest charged as expense on the income. The amount of tax so saved is called tax shield on the interest. In the case of profit distributed among the partners as well in the case of dividend distributed among the shareholders, these are not taxed again in the hands of the owners. Linkage between balance sheet and profit and loss accounts The above statement is known as the Profit and Loss Account. This records the income and expenditure for a given period and is closed as soon as the period is over. The residual profit, as it 12 10 70 30 10.5 19.5 7.5 7 10 30 3 10 100

belongs to the owners, gets transferred to the capital account in another statement, called Balance Sheet.

The balance sheet tells us about the following:

How much money has the business enterprise raised? Which are the sources for the money? What is the use for this money? Example no. 2 The balance sheet is also known as Assets and Liability statement. A sample balance sheet is shown below: (Rupees in lacs) Liabilities Share capital: Reserves: (Retained profits Over a period of Time) Net worth Bank overdraft Creditors for expenses Other current liabilities Total current liabilities Total Liabilities 250 30 10 15 55 305 Total Assets 305 100 150 Assets Fixed Assets Less: Depreciation Net Fixed Assets: Investments: Current Assets: Bills Receivable Cash and Bank other current assets Total current assets 35 60 195 100 60 30 30 80

Suppose profit for the year is Rs.30 lacs after paying tax and dividend. This would be transferred to the balance sheet and the reserves at the end of the current year would be Rs.150 lacs + Rs.30 lacs = Rs.180 lacs. Similarly the depreciation claimed on the fixed assets and shown as an operating expense would also get transferred to the balance sheet to reduce the value of the fixed assets. Let us assume that there is no increase in the fixed assets during the year that there are no other changes and the depreciation for the year is Rs.10 lacs. We can construct the balance sheet for the next year without much change, excepting to accommodate these figures of depreciation and increase in reserves.

The balance sheet as at the end of the next year would look as under: (Rupees in Lacs) Liabilities Share capital Reserves and surplus Net worth Bank overdraft Creditors for expenses Other current liabilities Total current liabilities Total liabilities 335 55 30 10 15 100 180 280 Fixed assets Less: depreciation Net fixed assets Investments Bill Receivable Cash and Bank Other current assets Total current assets Total Assets 335 35 60 195 100 120 Assets 60 40 20

We see that between the two balance sheets, there are two changes Investment has gone up by Rs.20 lacs and Bill receivable has gone up by Rs.20 lacs. The total is Rs.40 lacs. Where have these funds come from? This amount is the total of profit transferred to balance sheet from the profit and loss account and depreciation added back, as it does not involve any cash outlay. The figure is Rs.30 lacs + Rs.10 lacs = Rs.40 lacs. This figure is referred to as internal accruals. This need not be the case all the times. Where we use these funds entirely depends upon the business priority and what I have shown is only a sample. Learning points: The business enterprise generates funds from operations, known as internal accruals comprising depreciation (which is added back, being only a book-entry) and profit after tax and dividend; Where these funds are used is entirely dependent upon business exigencies; Depreciation claimed in the books as an expense goes to reduce the value of the fixed assets in the books, while profit after tax and dividend is shown as Reserves and increases the net worth of the company.

Key pointers to balance sheet and profit and loss statements:

A balance sheet represents the financial affairs of the company and is also referred to as Assets and Liabilities statement and is always as on a particular date and not for a period. A profit and loss account represents the summary of financial transactions during a particular period and depicts the profit or loss for the period along with income tax paid on the profit and how the profit has been allocated (appropriated).

Net worth means total of share capital and reserves and surplus. This includes preference share capital unlike in Accounts preference share capital is treated as a debt. For the purpose of debt to equity ratio, the necessary adjustment has to be done by reducing preference share capital from net worth and adding it to the debt in the numerator. Reserves and surplus represent the profit retained in business since inception of business. Surplus indicates the figure carried forward from the profit and loss appropriation account to the balance sheet, without allocating the same to any specific reserve. Hence, it is mostly called unallocated surplus. The company wants to keep a portion of profit in the free form so that it is available during the next year for appropriation without any problem. In the absence of this arrangement during the year of inadequate profits, the company may have to write back a part of the general reserves for which approval from the board and the general members would be required. Secured loans represent loans taken from banks, financial institutions, debentures (either from public or through private placement), bonds etc. for which the company has mortgaged immovable fixed assets (land and building) and/or hypothecated movable fixed assets (at times even working capital assets with the explicit permission of the working capital banks)

Usually, debentures, bonds and loans for fixed assets are secured by fixed assets, while loans from banks for working capital, i.e., current assets are secured by current assets. These loans enjoy priority over unsecured loans for settlement of claims against the company.

Unsecured loans represent fixed deposits taken from public (if any) as per the provisions of Section 58 (A) of The Companies Act, 1956 and in accordance with the provisions of Acceptance of Deposit Rules, 1975 and loans, if any, from promoters, friends, relatives etc. for which no security has been offered. Such unsecured loans rank second and subsequent to secured loans for settlement of claims against the company. There are other unsecured creditors also, forming part of current liabilities, like, creditors for purchase of materials, provisions etc. Gross block = gross fixed assets mean the cost price of the fixed assets. Cumulative depreciation in the books is as per the provisions of The Companies Act, 1956, Schedule XIV. It is last cumulative depreciation till last year + depreciation claimed during the current year. Net block = net fixed assets mean the depreciated value of fixed assets. Capital work-in-progress This represents advances, if any, given to building contractors, value of building yet to be completed, advances, if any, given to equipment suppliers etc. Once the equipment is received and the building is complete, the fixed assets are capitalised in the books, for claiming depreciation from that year onwards. Till then, it is reflected in the form of capital work in progress.

 Investments Investment made in shares/bonds/units of Unit Trust of India etc. This type of investment should be ideally from the profits of the organisation and not from any other funds, which are required either for working capital or capital expenditure. They are bifurcated in the schedule, into quoted and traded and unquoted and not traded depending upon the nature of the investment, as to whether they can be liquidated in the secondary market or not. Current assets Both gross and net current assets (net of current liabilities) are given in the balance sheet. Miscellaneous expenditure not written off can be one of the following Company incorporation expenses or public issue of share capital, debenture etc. together known as preliminary expenses written off over a period of 5 years as per provisions of Income Tax. Misc. expense could also be other deferred revenue expense like product launch expenses. Other income in the profit and loss account includes income from dividend on share investment made in other companies, interest on fixed deposits/debentures, sale proceeds of special import licenses, profit on sale of fixed assets and any other sundry receipts. Provision for tax could include short provision made for the earlier years. Provision for tax is made after making all adjustments for the following: Carried forward loss, if any; Book depreciation and depreciation as per income tax and Concessions available to a business entity, depending upon their activity (export business, S.S.I. etc.) and location in a backward area (like Goa etc.) As per the provisions of The Companies Act, 1956, in the event of a limited company declaring dividend, a fixed percentage of the profit after tax has to be transferred to the General Reserves of the Company and entire PAT cannot be given as dividend. With effect from 01/04/02, dividend tax on dividends paid by the company has been withdrawn. From that date, the shareholders are liable to pay tax on dividend income. Thus for a period of 5 years, the position was different in the sense that the company was bearing the additional tax on dividend.

Other parts of annual statements

The Directors Report on the year passed and the future plans; Annexure to the Directors Report containing particulars regarding etc; conservation of energy

Auditors Report as per the Manufacturing and Other Companies (Auditors Report) Order, 1998) along with Annexure; Schedules to Balance Sheet and Profit and Loss Account; Accounting policies adopted by the company and notes on accounts giving details about changes if any, in method of valuation of stocks, fixed assets, method of depreciation on fixed assets, contingent liabilities, like guarantees given by the banks on behalf of the company, guarantees given by the company, quantitative details regarding performance of the year passed, foreign exchange inflow and outflow etc. and Statement of cash flows for the same period for which final accounts have been presented. There is a significant difference between the way in which the statements of accounts are prepared as per Schedule VI of the Companies Act and the manner in which these statements, especially, balance sheet is analysed by a finance person or an analyst. For example, in the Schedule VI, the current liabilities are netted off against current assets and only net current assets are shown. This is not so in the case of financial statement analysis. Both are shown fully and separately without any netting off. At the end of any financial year, there are certain adjustments to be made in the books of accounts to get the proper picture of profit or loss, as the case may be, for that particular period. For example, if stocks of raw materials are outstanding at the end of the period, the value of the same has to be deducted from the total of the opening stock (closing stock of the previous year) and the current years purchases. This alone would show the correct picture of materials consumed during the current year.

The principal tool of analysis

Ratio analysis i.e. to determine the relationship between any set of two parameters and compare it with the past trend. In the statements of accounts, there are several such pairs of parameters and hence ratio analysis assumes great significance. The most important thing to remember in the case of ratio analysis is that you can compare two units in the same industry only and other factors like the relative ages of the units, the scales of operation etc. come into play. Let us see some of the important types of ratios and their significance: Liquidity ratios; Turnover ratios; Profitability ratios; Investment on capital/return ratios; Leverage ratios and Coverage ratios.

Liquidity ratios:
Current ratio: Formula = Current assets/Current liabilities. Min. Expected even for a new unit in India = 1.33:1. Significance = Net working capital should always be positive. In short, the higher the net working capital, the greater is the degree of overall short-term liquidity. Means current ratio does indicate liquidity of the enterprise. Too much liquidity is also not good, as opportunity cost is very high of holding such liquidity. This means that we are carrying either cash in large quantities or inventory in large quantities or receivables are getting delayed. All these indicate higher costs. Hence, if you are too liquid, you compromise with profits and if your liquidity is very thin, you run the risk of inadequacy of working capital. Range No fixed range is possible. Unless the activity is very profitable and there are no immediate means of reinvesting the excess profits in fixed assets, any current ratio above 2.5:1 calls for an examination of the profitability of the operations and the need for high level of current assets. Reason = net working capital could mean that external borrowing is involved in this and hence cost goes up in maintaining the net working capital. It is only a broad indication of the liquidity of the company, as all assets cannot be exchanged for cash easily and hence for a more accurate measure of liquidity, we see quick asset ratio or acid test ratio.

Acid test ratio or quick asset ratio:

Quick assets = Current assets (-) Inventories which cannot be easily converted into cash. This assumes that all other current assets like receivables can be converted into cash easily. This ratio examines whether the quick assets are sufficient to cover all the current liabilities. Some of the authors indicate that the entire current liabilities should not be considered for this purpose and only quick liabilities should be considered by deducting from the current liabilities the short-term bank borrowing, as usually for an ongoing company, there is no need to pay back this amount, unlike the other current liabilities. Significance = coverage of current liabilities by quick assets. As quick assets are a part of current assets, this ratio would obviously be less than current ratio. This directly indicates the degree of excess liquidity or absence of liquidity in the system and hence for proper measure of liquidity, this ratio is preferred. The minimum should be 1:1. This should not be too high as the opportunity cost associated with high level of liquidity could also be high. What is working capital gap? The difference between all the current assets known as Gross working capital and all the current liabilities other than bank borrowing. This gap is met from one of the two sources, namely, net working capital and bank borrowing. Net working capital is hence defined as medium and longterm funds invested in current assets.

Turn over ratios:

Generally, turn over ratios indicate the operating efficiency. The higher the ratio, the higher the degree of efficiency and hence these assume significance. Further, depending upon the type of turnover ratio, indication would either be about liquidity or profitability also. For example, inventory or stocks turn over would give us a measure of the profitability of the operations, while receivables turnover ratio would indicate the liquidity in the system. Debtors turnover ratio this indicates the efficiency of collection of receivables and contributes to the liquidity of the system. Formula = Total credit sales/Average debtors outstanding during the year. Hence the minimum would be 3 to 4 times, but this depends upon so many factors such as, type of industry like capital goods, consumer goods capital goods, this would be less and consumer goods, this would be significantly higher; Conditions of the market monopolistic or competitive monopolistic, this would be higher and competitive it would be less as you are forced to give credit; Whether new enterprise or established new enterprise would be required to give higher credit in the initial stages while an existing business would have a more fixed credit policy evolved over the years of business; Hence any deterioration over a period of time assumes significance for an existing business this indicates change in the market conditions to the business and this could happen due to general recession in the economy or the industry specifically due to very high capacity or could be this unit employs outmoded technology, which is forcing them to dump stocks on its distributors and hence realisation is coming in late etc. Average collection period = inversely related to debtors turnover ratio. For example debtors turnover ratio is 4. Then considering 360 days in a year, the average collection period would be 90 days. In case the debtors turnover ratio increases, the average collection period would reduce, indicating improvement in liquidity. Formula for average collection period = 360/receivables turnover ratio. The above points for debtors turnover ratio hold good for this also. Any significant deviation from the past trend is of greater significance here than the absolute numbers. No minimum and no maximum. Inventory turnover ratio as said earlier, this directly contributes to the profitability of the organisation. Formula = Cost of goods sold/Average inventory held during the year. The inventory should turn over at least 4 times in a year, even for a capital goods industry. But there are capital goods industries with a very long production cycle and in such cases, the ratio would be low. While receivables turn over contributes to liquidity, this contributes to profitability

due to higher turnover. The production cycle and the corporate policy of keeping high stocks affect this ratio. The less the production cycle, the better the ratio and vice-versa. The higher the level of stocks, the lower would be the ratio and vice-versa. Cost of goods sold = Sales profit Interest charges. Current assets turnover ratio not much of significance as the entire current assets are involved. However, this could indicate deterioration or improvement over a period of time. Indicates operating efficiency. Formula = Cost of goods sold/Average current assets held in business during the year. There is no min or maximum. Again this depends upon the type of industry, market conditions, managements policy towards working capital etc. Fixed assets turnover ratio Not much of significance as fixed assets cannot contribute directly either to liquidity or profitability. This is used as a very broad parameter to compare two units in the same industry and especially when the scales of operations are quite significant. Formula = Cost of goods sold/Average value of fixed assets in the period (book value).

Profitability ratios
Profit in relation to sales and profit in relation to assets: Profit in relation to sales this indicates the margin available on sales; Profit in relation to assets this indicates the degree of return on the capital employed in business that means the earning efficiency. Example no. 3 Units A and B are in the same type of business and operate at the same levels of capacities. Unit A employs capital of 250 lacs and unit B employs capital of 200lacs. The sales and profits are as under: Parameter Sales Profits Profit margin on sales Return on capital employed Unit A 1000lacs 100lacs90lacs 10% 40% 9% 45% Unit B 1000lacs

While Unit A has higher profit margins, Unit B has better returns on capital employed.

Profit margin on sales: Gross profit margin on sales and net profit margin ratio Gross profit margin = Formula = Gross profit/net sales. Gross profit = Net sales (-) Cost of production before selling, general, administrative expenses and interest charges. Net sales = Gross sales (-) Excise duty. This indicates the efficiency of production and serves well to compare with another unit in the same industry or in the same unit for comparing it with past trend. For example in Unit A and Unit B let us assume that the sales are same at Rs.100lacs. Example no. 4 Parameter Sales Cost of production Gross profit Deduct: Selling general, Administrative expenses and interest Net profit 35lacs 5lacs 30lacs 5lacs Unit A 100lacs 60lacs 40lacs Unit B 100lacs 65lacs 35lacs

While both the units have the same net profit to sales ratio, the significant difference lies in the fact that while Unit A has less cost of production and more office and selling expenses, Unit B has more cost of production and less of office and selling expenses. This ratio helps in controlling either production costs if cost of production is high or selling and administration costs, in case these are high.

Net profit/sales ratio net profit means profit after tax but before distribution in any form. Formula = Net profit/net sales. Tax rate being the same, this ratio indicates operating efficiency directly in the sense that a unit having higher net profitability percentage means that it has a higher operating efficiency. In case there are tax concessions due to location in a backward area, export activity etc. available to one unit and not available to another unit, then this comparison would not hold well.

Investment on capital ratios/Earnings ratios:

Return on net worth Profit After Tax (PAT) / Net worth. This is the return on the shareholders funds including Preference Share capital. Hence Preference Share capital is not deducted. There is no standard range for this ratio. If it reduces it indicates less return on the net worth. Return on equity Profit After Tax (PAT) Dividend on Preference Share Capital / Net worth Preference share capital. Although reference is equity here, all equity shareholders funds are taken in the denominator. Hence Preference dividend and Preference share capital are excluded. There is no standard range for this ratio. If it comes down over a period it means that the profitability of the organisation is suffering a setback. Return on capital employed (pre-tax) Earnings Before Interest and Tax (EBIT) / Net worth + Medium and long-term liabilities. This gives return on long-term funds employed in business in pre-tax terms. Again there is no standard range for this ratio. If it reduces, it is a cause for concern. Earning per share (EPS) Dividend per share (DPS) + Retained earnings per share (REPS). Here the share refers to equity share and not preference share. The formula is = Profit after tax (-) Preference dividend (-) Dividend tax both on preference and equity dividend / number of equity shares. This is an important indicator about the return to equity shareholder. In fact P/E ratio is related to this, as P/E ratio is the relationship between Market value of the share and the EPS. The higher the PE the stronger is the recommendation to sell the share and the lower the PE, the stronger is the recommendation to buy the share. This is only indicative and by and large followed. There is something known as industry average EPS. If the P/E ratio of the unit whose shares we contemplate to purchase is less than industry average and growth prospects are quite good, it is the time for buying the shares, unless we know for certain that the price is going to come down further. If on the other hand, the P/E ratio of the unit is more than industry average P/E, it is time for us to sell unless we expect further increase in the near future.

Leverage ratios
Leverages are of two kinds, operating leverage and financial leverage. However, we are concerned more with financial leverage. Financial leverage is the advantage of debt over equity in a capital structure. Capital structure indicates the relationship between medium and long-term debt on the one hand and equity on the other hand. Equity in the beginning is the equity share capital. Over a period of time it is net worth (-) redeemable preference share capital. It is well known that EPS increases with increased dose of debt capital within the same capital structure. Given the advantage of debt also, as even risk of default, i.e., non-payment of interest and non-repayment of principal amount increases with increase in debt capital component, the market accepts a maximum of 2:1 at present. It can be less. Formula for debt/equity ratio = Medium and long-term loans + redeemable preference share capital / Net worth (-) Redeemable preference share capital. From the working capital lending banks point of view, all liabilities are to be included in debt. Hence all external liabilities including current liabilities are taken into account for this ratio. We have to add redeemable preference share capital and reduce from the net worth the same as in the previous formula.

Coverage ratios
Interest coverage ratio This indicates the number of times interest is covered by EBIT. Formula = EBIT / Interest payment on all loans including short-term liabilities. Minimum acceptable is 2 to 2.5:1. Less than that is not desirable, as after paying interest, tax has to be paid and afterwards dividend and dividend tax. Asset coverage ratio This indicates the number of times the medium and long-term liabilities are covered by the book value of fixed assets. Formula = Book value of Fixed assets / Outstanding medium and long-term liabilities. Accepted ratio is minimum 1.5:1. Less than that indicates inadequate coverage of the liabilities. Debt Service coverage ratio This indicates the ability of the business enterprise to service its borrowing, especially medium and long-term. Servicing consists of two aspects namely, payment of interest and repayment of principal amount. As interest is paid out of income and booked as an expense, in the formula it gets added back to profit after tax. The assumption here is that dividend is ignored. In case dividend is paid out, the formula gets amended to deduct from PAT dividend paid and dividend tax. Formula is: PAT (+) Depreciation (+) Amortisation (DRE write-off) (+) Int. on med. & long-term liabilities Interest on medium and long-term borrowing (+) Instalment on medium and long-term borrowing. This is assuming that dividend is not paid. In the case of an existing company dividend will have to be paid and hence in the numerator, instead of PAT, retained earnings would appear. The above ratio is calculated for the entire period of the loan with the bank/financial institution. The minimum acceptable average for the entire period is 1.75:1. This means that in one year this could be less but it has to be made up in the other years to get an average of 1.75:1.

Let us now analyse some ratios of Tata Motors financial statements for the year 2009 & 2008. BALANCE SHEET OF TATA MOTORS

PARTICULARS SOURCES OF FUNDS

Mar '09

Mar '08

Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

514.05 514.05 0.00 0.00 11,855.15 25.07 12,394.27 5,251.65 7,913.91 13,165.56 25,559.83

385.54 385.54 0.00 0.00 7,428.45 25.51 7,839.50 2,461.99 3,818.53 6,280.52 14,120.02

APPLICATION OF FUNDS

Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

13,905.17 6,259.90 7,645.27 6,954.04 12,968.13 2,229.81 1,555.20 638.17 4,423.18 5,909.75 503.65 10,836.58 0.00 10,968.95 1,877.26 12,846.21 -2,009.63 2.02 25,559.83 5,433.07 240.64

10,830.83 5,443.52 5,387.31 5,064.96 4,910.27 2,421.83 1,130.73 750.14 4,302.70 4,831.36 1,647.17 10,781.23 0.00 10,040.37 1,989.43 12,029.80 -1,248.57 6.05 14,120.02 5,590.83 202.70

PROFIT AND LOSS ACCOUNT OF TATA MOTORS

PARTICULARS INCOME

Mar '09

Mar '08

Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income EXPENDITURE Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax

28,538.20 2,877.53 25,660.67 921.29 -238.04 26,343.92

33,123.54 4,355.63 28,767.91 734.17 -40.48 29,461.60

18,801.37 304.94 1,551.39 866.65 1,652.31 1,438.89 -916.02 23,699.53 1,723.10 2,644.39 704.92 1,939.47 874.54 51.17 1,013.76

20,891.33 325.19 1,544.57 904.95 2,197.49 964.78 -1,131.40 25,696.91 3,030.52 3,764.69 471.56 3,293.13 652.31 64.35 2,576.47

Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax

15.29 1,029.05 12.50 1,001.26 4,898.16 0.00 311.61 34.09

0.00 2,576.47 547.55 2,028.92 4,805.58 0.00 578.43 81.25

Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

5,140.08 19.48 60.00 240.64

3,855.04 52.63 150.00 202.70

RATIO ANALYSIS Sr. No. Ratios Formula Year Mar08 Year Mar09 Explanation Higher the current ratio better is the situation and the ideal value is 2:1. Tata Motors current ratio is less than 1 which indicates more liabilities than assets. A higher liquid ratio indicates that there are sufficient assets available with the organisation which can be converted in the form of cash almost immediately to pay off those liabilities which are to be paid off almost immediately. It indicates the capability of organisation to achieve maximum sales with the minimum investment in fixed assets. Higher the ratio, the better. It indicates the capability of organisation to achieve maximum sales with the minimum investment in current assets. Higher the ratio, the better. It indicates the capability of organisation to achieve maximum sales with the minimum investment in working capital. Higher the ratio, the better. It indicates the capability of organisation to achieve maximum sales with the

1.

Current ratio

Current Assets/ Current Liabilities

0.64

0.44

2.

Liquid ratio

Liquid assets/liquid liabilities

0.66

0.58

3.

Fixed Assets turnover ratio

Net sales/ fixed assets

2.69

1.88

4.

Current assets turnover ratio

Net sales/ current assets

6.68

5.8

5.

Working capital turnover ratio Inventory/

Net sales/ working capital

5.68

3.68

6.

Stock turnover

Net sales/Closing inventory

3.52

4.60

ratio

minimum investment in inventory. Higher the ratio, the better. It indicates the efficiency of the organisation with which the capital employed is being utilized. Higher the ratio, the better. Both these figures indicate that the owners funds are exceeding the fixed assets which indicate that a part of owners funds is invested in the current assets also. A low value of this ratio in both cases indicates that a major portion of the long term funds are invested in current assets as compared to fixed assets. A high ratio as indicted by the 2 figures is favorable as it indicates the protection available to the lenders of long term capital in the form of funds available to pay the interest charges. It gives indication about the capability of Tata Motors to meet the obligations of long term borrowing. A very low value of ratio means insufficient earning capacity of organisation to meet the obligations of long term borrowing. A low value shown by the 2 figures indicates that this organisation is not able to produce or purchase at a low

7.

Capital turnover ratio

Sales/capital employed

0.76

0.60

8.

Proprietary ratio

Fixed assets/ owners fund

0.54

0.60

9.

Fixed Assets/Capit al employed ratio

Fixed assets*100/capital employed

32%

26%

10.

Interest Coverage ratio

Profits before interest and taxes/ Interest charges

10.70

7.84

11.

Debt service Coverage ratio

(Net profit after taxes + Depreciation + Interest on term loans)/(Interest on term loans + Installments of term loans

0.47

0.35

12.

Gross profit ratio

Gross profit * 100/net sales

15.28%

16.10%

cost. It can be increased by either adjusting the sales price or production cost or by increasing volume of products having high gross profit margin. It indicates that portion of sales available to the owner after considering all types of expenses and costs. The lower figures alongside indicate lower profitability of the business. A high ratio as seen alongside indicates that only a small margin of sales is available to meet the expenses in the form of interest, dividend and other non-operating expenses. A lower value is generally desirable. It measures profitability of investments in the firm. Higher value is preferred which is not the case as per figures shown. It measures profitability of capital employed in the firm. Higher value is preferred and the situation of Mar08 was much better than Mar09. It measures if the firm has earned sufficient returns for its shareholders or not. Higher the ratio, the better the situation which is not the case for Tata Motors in both the years. It measures available to the the profits equity

13.

Net profit ratio

(Net profit after taxes) * 100/net sales

15.14%

12.40%

14.

Operating ratio

(Manufacturing cost of goods sold+ operating expenses)*100/Net sales

83.52%

81.16%

15.

Return on Asset

Net profit * 100 /assets

36.13%

26.87%

16.

Return on capital employed

(Net profit + Interest on long term sources)/capital employed

0.73

0.57

17.

Return on Shareholders funds

Net profit after taxes * 100/ Total shareholders funds

0.14

0.08

18.

Earnings per share

(Net profit after taxes- preference

52.63

19.48

dividend)/ Number of equity shares outstanding Capital to non-current assets ratio

shareholders on a per share basis. A higher capital to noncurrent assets ratio indicates that it is easier to meet the business' debt and creditor commitments. An increase in the fixed costs to total assets ratio may indicate higher fixed charges, possibly resulting in greater instability in operations and earnings.

19.

Owners equity/ Non-current assets

3.51

4.22

20.

Fixed costs to total assets

Fixed costs/ Total assets

1.09

1.06

Bibliography
1. 2. 3.

http://www.moneycontrol.com/financials/tatamotors/balance-sheet/TM03#TM03 http://www.moneycontrol.com/financials/tatamotors/profit-loss/TM03#TM03 http://en.wikipedia.org/wiki/Financial_ratio