Financial Analysis of SAIL, NDIM Okhla

8/7/2019 Financial Analysis of SAIL, NDIM Okhla

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Group Members:

Amit Kr. Khetan G-06

Amrit Lal Sandil B-04

Arpit Tewari A-09

Ikjot Kaur A-22

Neha Yadav G-28

Santosini Nayak B-50


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About the company

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a

fully integrated iron and steel maker, producing both basic and special steels for domestic

construction, engineering, power, railway, automotive and defense industries and for salein export markets.

Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL

manufactures and sells a broad range of steel products, including hot and cold rolled sheets

and coils, galvanized sheets, electrical sheets, structural, railway products, plates, bars and

rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated

plants and three special steel plants, located principally in the eastern and central regions of

India and situated close to domestic sources of raw materials, including the Companys iron

ore, limestone and dolomite mines. The company has the distinction of being Indias second

largest producer of iron ore and of having the countrys second largest mines network. Thisgives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and

dolomite which are inputs for steel making. SAILs wide range of long and flat steel products

are much in demand in the domestic as well as the international market. This vital

responsibility is carried out by SAILs own Central Marketing Organization (CMO) that

transacts business through its network of 37 Branch Sales Offices spread across the four

regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact

Offices. CMOs domestic marketing effort is supplemented by its ever widening network of

rural dealers who meet the demands of the smallest customers in the remotest corners of

the country. With the total number of dealers over 2000, SAILs wide marketing spreadensures availability of quality steel in virtually all the districts of the country. SAILs

International Trade Division ( ITD), in New Delhi- an ISO 9001:2000 accredited unit of CMO,

undertakes exports of Mild Steel products and Pig Iron from SAILs five integrated steel

plants.


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FINANCIAL RATIOS

OBJECTIVES The importance of ratio analysis lies in the fact that it presents data on acomparative basis and enables the drawing of inferences regarding the performance of the

firm. Ratio analysis helps in concluding the following aspects:

Liquidity Position:

Ratio analysis helps in determining the liquidity position of the firm. A firm can be said to

have the ability to meet its current obligations when they become due. It is measured with

the help of liquidity ratios.

Long- Term Solvency:

Ratio analysis helps in assessing the long term financial viability of a firm. Long- term

solvency measured by leverage/capital structure and profitability ratios.

Operating Efficiency:

Ratio analysis determines the degree of efficiency of management and utilization of assets.

It is measured by the activity ratios.

Over-All Profitability:

The management of the firm is concerned about the overall profitability of the firm which

ensures a reasonable return to its owners and optimum utilization of its assets. This is

possible if an integrated view is taken and all the ratios are considered together.

Inter- firm Comparison:

Ratio analysis helps in comparing the various aspects of one firm with the other.


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Different Financial Ratios

CATEGORY TYPES OF RATIO INTERPRETATION1. Liquidity ratios

Net Working Capital = Current assets-current liabilities

It measures the liquidity of a firm.

Current ratio =Current Assets

Current Liabilities

It measures the short term liquidity of a firm. A firm with a higher ratio has better liquidity.

A ratio of 2:1 is considered safe.

Acid test or Quick ratio = Quick assets

Current Liabilities

It measures the liquidity position of a firm.


2. Turnover ratios

Inventory Turnover ratio =Costs of goods sold

Average inventory

This ratio indicates how fast inventory is sold.

A firm with a higher ratio has better liquidity.

Debtor Turnover ratio =Net credit sales

Average debtors

This ratio measures how fast debts are collected.

A high ratio indicates shorter time lag between credit sales and cash collection.

Creditors Turnover ratio = Net credit purchases

Average Creditors

A high ratio shows that accounts are to be settled rapidly.

3. Capital Structure Ratios

Debt-Equity ratio = Long term debt/shareholders Equity

This ratio indicates the relative proportions of debt and equity in financing the assets of a

firm.



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Debt to Total capital ratio = Long term debt

Permanent Capital

Or

Total debt

Permanent capital + Current liabilities

Or

Total Shareholders Equity

Total Assets

It indicates what proportion of the permanent capital of a firm consists of long-term debt.

A ratio 1:2 is considered safe.

It measures the share of the total assets financed by outside funds.

A low ratio is desirable for creditors.

It shows what portion of the total assets is financed by the owners capital.

A firm should neither have a high ratio nor a low ratio.

4. Coverage ratios

Interest Coverage = Earning before Interests and Tax interestA ratio used to determine how easily a company can pay on outstanding debt.

A ratio of more than 1.5 is satisfactory.

Dividend Coverage = Earnings after tax

Preference Dividend

It measures the ability of firm to pay dividend on preference shares.

A high ratio is better for creditors.

Total Coverage ratio = Earning before interests and tax

Total fixed charges

It shows the overall ability of the firm to fulfill the liabilities.

A high ratio indicates better ability.

5. Profitability ratios

Gross Profit margin = Gross profit 100/ SalesIt measures the profit in relation to sales.


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Net Profit margin =Net Profit after tax before interest

Sales

Or

Net Profit after Tax and Interest

Sales

It measures the net profit of a firm with respect to sale.


6. Expenses ratiosOperating ratio = Cost of Goods sold + other expenses

Sales

Operating ratio shows the operational efficiency of the business.

Lower operating ratio shows higher operating profit and vice versa .

Cost of Goods sold ratio = Cost of Goods sold

Sales

It measures the cost of goods sold per sale.

Specific Expenses ratio = Specific Expenses

Sales

It measures the specific expenses per sale.

7. Return on Investments

Return on Assets (ROA) =

Net Profit after Taxes 100/ Total Assets Or (Net Profit after Taxes + Interest) 100 /totalAssets

It measures the profitability of the total funds per investment of a firm.

Return on Capital Employed (ROCE) = (Net Profit after Taxes) 100Total capital employed

Or

(Net Profit after Taxes + Interest) 100Total Capital Employed

Or


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(Net Profit after Taxes + Interest) 100Total Capital Employed Intangible assets

It measures profitability of the firm with respect to the total capital employed.

The higher the ratio, the more efficient use of capital employed.

Return on Total Shareholders Equity = Net Profit after Taxes 100Total shareholders equity

It reveals how profitably the owners fund has been utilized by the firm.

Return on Ordinary shareholders equity = Net profit after taxes and Pref. dividend 100Ordinary Shareholders Equity

It determines whether the firm has earned satisfactory return for its equity holders or not.

8. Shareholders ratios

Earnings per Share (EPS) = Net Profit of Equity holders

Number of Ordinary Shares

It measures the profit available to the equity holders on a per share basis.

Dividend per Share (DPS) =

Net profits after interest and preference Dividend paid to ordinary shareholders

Number of ordinary shares outstanding

It is the net distributed profit belonging to the shareholders divided by the number ofordinary shares.

Dividend Payout ratio (D/P) = Total Dividend to Equity holders

Total net profit of equity holders

Or

Dividend per Ordinary Share

Earnings per Share

It shows what percentage share of the net profit after taxes and preference dividend is paid

to the equity holders. A high D/P ratio is preferred from investors point of view.

Earnings per Yield = Earnings per Share

Market Value per Share

It shows the percentage of each rupee invested in the stock that was earned by the

company.

Dividend Yield = Dividend per share

Market Value per share


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It shows how much a company pays out in dividends each year relative to its share price.

Price- Earnings ratio (P/E) = Market value per Share

Earnings per Share

It reflects the price currently paid by the market for each rupee of EPS. Higher the ratiobetter it is for owners.

Earning Power = Net profit after Taxes

Total Assets

It measures the overall profitability and operational efficiency of a firm.

9. Activity Ratios

Inventory turnover = Sales/ Closing Inventory

It measures how quickly inventory is sold.


Raw Material turnover = Cost of Raw Material used / Average Raw Material Inventory

Work in Progress turnover = Cost of Goods manufactured/ Average Work in process

inventory

Dividend Payout ratio (D/P) = Total Dividend to Equity holders

Total net profit of equity holdersOr

Dividend per Ordinary Share

Earnings per Share

It shows what percentage share of the net profit after taxes and preference dividend is paid

to the equity holders. A high D/P ratio is preferred from investors point of view.

Earnings per Yield = Earnings per Share

Market Value per Share

It shows the percentage of each rupee invested in the stock that was earned by thecompany.

Dividend Yield = Dividend per share

Market Value per share

It shows how much a company pays out in dividends each year relative to its share price.

Price- Earnings ratio (P/E) = Market value per Share

Earnings per Share


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It reflects the price currently paid by the market for each rupee of EPS. Higher the ratio

better it is for owners.

Earning Power = Net profit after Taxes

Total AssetsIt measures the overall profitability and operational efficiency of a firm.

10. Assets Turnover Ratios

Total Assets turnover = Cost of Goods Sold

Total Assets

It measures the efficiency of a firm in managing and utilizing its assets.

Higher the ratio, more efficient is the firm in utilizing its assets.

Fixed Assets turnover = Cost of Goods Sold/ Fixed Assets

Capital turnover =Cost of Goods Sold/ Capital Employed

Current Assets turnover =Cost of Goods Sold/ Current Assets


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Balance Sheet

Sources Of

Funds

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Total Share

Capital

4,130.40 4,130.40 4,130.40 4,130.40 4,130.40

Equity

Share

Capital

4,130.40 4,130.40 4,130.40 4,130.40 4,130.40

Share

Application

Money

0 0 0 0 0

Preference

Share

Capital

0 0 0 0 0

Reserves 8,471.01 13,182.75 18,933.17 23,853.70 29,186.30

Revaluation Reserves

0 0 0 0 0

Net worth 12,601.41 17,313.15 23,063.57 27,984.10 33,316.70

Secured

Loans

1,122.16 1,556.39 925.31 1,473.60 7,755.90

Unsecured

Loans

3,175.46 2,624.13 2,119.93 6,065.19 8,755.35

Total Debt 4,297.62 4,180.52 3,045.24 7,538.79 16,511.25

Total

Liabilities

16,899.03 21,493.67 26,108.81 35,522.89 49,827.95

Applicatio

n Of Funds

Gross

Block

29,360.46 29,912.71 30,922.73 32,728.69 35,382.49

Less:

Accum.

Depreciati

on

17,198.32 18,315.00 19,351.42 20,459.86 21,780.91


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Interpretation: Long Term Financial Position:

The comparative Balance Sheet of the company reveals that during the financial

year 2008 2009 there has been a large increase in fixed assets (34.76%)

compared to 2007-2008(9.09%) while the long term liabilities which contains

shareholders funds and long term loans also show growth. Loans show an

increase which means that most of the fixed assets are financed by long term

loans.

Increase in Fixed assets can be attributed to increase in plant and machinery

which means that SAIL has increased its production capacity over the years.

The company has sufficient control over its depreciation which shows an increaseof only 0.04% in 2009 over 2008.

Current Financial position and liquidity position:

The company has increased its current assets over the years by increasing the

level of inventories at Rs.10121 crores in 2009 compared to Rs.6857 crores in

2008, though a fall in inventory was seen in 2010. The current liabilities highly

fluctuate and show continuous increase in 2007-08 (20.5%) and 2008-09 (29.3%).

The Net Working Capital was in peak by the continuous increase after the year

2006. The company got good liquidity position due increase in Current assets but

it may affect the profitability of the company.

The overall financial position of the company is very good.


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Profit & Loss statement

Income Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Sales

Turnover

32,805.96 39,722.59 46,175.85 49,331.47 44,059.72

Excise Duty 4,605.48 5,393.82 6,217.18 5,532.89 3,463.82

Net Sales 28,200.48 34,328.77 39,958.67 43,798.58 40,595.90

Other Income 937.94 1,408.71 1,701.59 2,002.77 2,557.00

StockAdjustments 1,131.31 289.15 436.28 1,872.87 -1,157.45

Total Income 30,269.73 36,026.63 42,096.54 47,674.22 41,995.45

Expenditure

Raw Materials 15,034.54 16,252.28 17,257.67 23,915.45 18,611.12

Power & Fuel

Cost

2,489.74 2,578.84 2,825.56 3,119.42 3,364.30

Employee

Cost

4,156.97 5,087.76 7,919.28 8,401.73 5,417.00

Other

Manufacturin

g Expenses

303.71 346.59 492.18 643.35 870.35

Selling and

Admin

Expenses

1,619.20 1,602.31 1,727.55 1,701.52 1,754.02

Miscellaneous

Expenses

524.91 528.71 737.79 878.94 206.62

Preoperative

Exp

Capitalised

-1,352.05 -1,423.08 -1,832.22 -1,930.40 0

Total

Expenses

22,777.02 24,973.41 29,127.81 36,730.01 30,223.41

Operating

Profit

6,554.77 9,644.51 11,267.14 8,941.44 9,215.04

PBDIT 7,492.71 11,053.22 12,968.73 10,944.21 11,772.04


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Interest 467.76 332.13 250.94 253.24 402.01PBDT 7,024.95 10,721.09 12,717.79 10,690.97 11,370.03

Depreciation 1,207.30 1,211.48 1,235.48 1,285.12 1,337.24

Other Written

Off

181.44 128.59 75.49 128.02 10.33

Profit Before

Tax

5,636.21 9,381.02 11,406.82 9,277.83 10,022.46

Extra-ordinary

items

71.12 60.57 64.61 181.26 184.8

PBT (Post

Extra-ord

Items)

5,707.33 9,441.59 11,471.43 9,459.09 10,207.26

Tax 1,694.36 3,253.80 3,934.65 3,284.28 3,452.89

Reported Net

Profit

4,012.97 6,202.29 7,536.78 6,174.81 6,754.37

Total Value

Addition

7,742.48 8,721.13 11,870.14 12,814.56 11,612.29

Preference

Dividend

0 0 0 0 0

Equity

Dividend

826.08 1,280.42 1,528.25 1,073.90 1,363.03

Corporate

Dividend Tax

115.86 197.98 258.91 181.26 227.52

Per share

data

(annualised)

Shares in

issue (lakhs)

41,304.01 41,304.01 41,304.01 41,304.01 41,304.01

Earning Per

Share (Rs)

9.72 15.02 18.25 14.95 16.35

Equity

Dividend (%)

20 31 37 26 33


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Book Value(Rs) 30.51 41.92 55.84 67.75 80.66

Interpretation

The Net Sales figure shows an increasing trend. After the year 2006 it shows anincreasing trend which will help to increase in Net Profit.

The company has considerable change in Interest Charges and rather the latter

has decreased in recent years.

The company has been able to increase its net Profit over the years but a

decrease can be seen after 2008 which can be attributed to global economic

downturn.

It may conclude that there is a sufficient progress in the company and the overallprofitability of the concern is very good.


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FINANCIAL RATIO ANALYSIS

I. ACTIVITY RATIOS

These ratios are employed to evaluate the efficiency with which the firm manages

and utilizes its assets. These are also called as turnover ratios because they

indicate the speed with which assets are being turned over into sales. Hence this

ratio helps in finding out how the funds of creditors and owners are invested in

various assets to generate sales and profits. The better the management of

assets, the larger is the amount of sales.

Mar 06 Mar 07 Mar 08 Mar09 Mar10

Inventory

T.O. Ratio

5.19 5.9 6.64 4.8 4.86

No. of days,

Inventory

70 62 55 75 74

Debtor T.O.

Ratio

17.1 16.9 14.9 16.09 12.5

Average

collection

period

21 22 24 23 29

Asset T.O.

Ratio

1.75 1.71 1.64 1.32 0.84

Working

Capital T.O.

Ratio

3.48 2.82 2.7 2.18 1.57

Fixed Asset

T.O. Ratio

1.09 1.31 1.47 1.48 1.24

Current

Asset T.O.

Ratio

1.85 1.92 1.73 1.41 1.12


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INVENTORY TURNOVER RATIO

Interpretation: The Inventory Turnover ratio tells us how many times a company

has gone through or turned over, its inventory during a specified time period,

usually a year. It gives us an indication of how fast a company can sell its

products. After Financial year 08 SAILs efficiency in turning its inventories is

continuously deteriorating. Since Inventory T.O. is a test of effective inventory

management, so the companys utilisation of inventories in generating sales is

getting poorer.

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010

Series 1


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DEBTOR TURNOVER RATIO

Interpretation: The liquidity position of the firm depends on the quality of the

debtors to a great extent. Debtors T.O. indicates the number of times debtors

turnover each year. Debtors T.O. of SAIL is showing an alternating trend since

FY07. This is determining the collectibles of debtors. Thus the credits are not

easily realized from the debtors. Although the provision for bad debts has

decreased, but the similar trends of debtor T.O. can result into more bad debts in

the future.

0

2

4

6

8

10

12

14

16

18

2006 2007 2008 2009 2010


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ASSET TURNOVER RATIO

Interpretation: This ratio shows the firms ability in generating sales from all

financial resources committed to total assets. Asset T.O. curve is declining with

each financial year. This implies that the firm is not able to generate sales from its

total assets. Hence it can be analysed that SAIL holds unutilised assets.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2006 2007 2008 2009 2010

Series 1


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CURRENT ASSET TURNOVER

Interpretation: This ratio gives the firms ability in generating sales from its

current assets. So the decline in SAILs asset T.O. can be attributed to the decline

in its current asset T.O. A firms ability to produce a large volume of sales for a

given amount of net assets is the most important aspect of its operating

performance. Under-utilised current assets can increase the firms need for costly

financing as well as expenses for maintenance and upkeep.

0

0.5

1

1.5

2

2.5

2006 2007 2008 2009 2010

Series 1

Series 1


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II. LIQUIDITY RATIOS

Liquidity Ratios measure the firms ability to meet current obligations. The failure

of a company to meet its obligations due to lack of sufficient liquidity will result in

poor credit worthiness, loss of creditors confidence.

Ratios Mar 06 Mar 07 Mar 08 Mar 09 Mar 10

Current 2.14 3.14 2.79 2.8 3.52Quick 0.90 1.26 1.47 1.42 1.75

Cash 0.79 1.55 1.51 1.54 2.08

CURRENT RATIO

Interpretation: Current ratio represents a margin of safety for creditors. So from

creditors, viewpoint current ratio of the company is all time high. A large value

can also be analyzed as idling of assets. The major portion of the ratio is being

contributed by inventories. Since Inventory T.O. is declining, so firm have slow-

moving inventories. In FY08 it declined from 3.14 to 2.79 due to an increase in

current liabilities. It again increased in FY10 to 3.52.

0

0.5

1

1.5

2

2.5

3

3.5

4

2006 2007 2008 2009 2010

Series 1

Series 1


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QUICK RATIO

Interpretation: Quick ratio indicates whether the firm is in a position to pay its

current liabilities within a month or immediately. Liquid asset means those assets,which will yield cash very shortly. All current assets except stock and prepaid

expenses are included in liquid assets. Quick Ratio is continuously increasing. Also

the provision for bad debts has reduced. This implies that debtors of the firm are

not doubtful. Acid test ratio of 1.53 shows that even if SAILs inventories do not

sell it can easily meet its current obligations as it has liquid assets 1.53 times than

its current liabilities.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2006 2007 2008 2009 2010

Series 1

Series 1


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CASH RATIOS

Interpretation: Cash ratio gives the measure of the most liquid asset of a firm.

Initially the cash ratio was low but gradually it gained momentum and raised to2.08 in FY10. Although the cash ratio is increasing but cash in hand of the

company is not increasing at the same rate. Here the increase in cash ratio is due

to increase in term deposits by the company.

III. PROFITABILITY RATIOS

The profitability ratio measures the profitability or the operational efficiency of

the firm. There are two groups of person who are specifically interested in the

analysis of profitability of the firm which are:-

The management which is interested in the overall profitability and operational

efficiency of the firm.

0

0.5

1

1.5

2

2.5

2006 2007 2008 2009 2010

Series 1

Series 1


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Equity shareholders which are interested in ultimate returns available to them

Ratios Mar '06 Mar '07 Mar '07 Mar '09 Mar '10

Net Profit

Ratio

0.124 0.158 0.165 0.126 0.153

Gross Profit

Ratio

0.176 0.24 0.193 0.23

Return on

Asset

0.218 0.27 0.27 0.27 0.131

Return onaverage

equity %

35.84 41.95 37.51 24.13 21.98

Return on

average

capital

employed

%

27.27 39.88 42.54 29.77 26.56

Earnings

per share

9.72 15.02 18.25 18.25 16.35

Dividend

per share

2 3.1 3.7 2.6 3.3

Price

earnings

ratio(P/E)

8.56 7.59 10.12 6.45 15.44

Earning

power

0.31 0.31 0.255 0.2


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NET PROFIT RATIO

Interpretation: This ratio shows the earning left for shareholders as a percentage

of net sales. It measures the overall efficiency of production, administration,

selling, financing, pricing and tax management. Net profit ratio for SAIL is not

varying much. In FY10 net profit is 15.3% of the sales.

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

2006 2007 2008 2009 2010

Series 1

Series 1


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RETURN ON ASSET

Interpretation It measures the profitability of the total funds per investment of a

firm. Return on asset increased a bit in earlier years from 2007 to 2008 and then

decreased gradually in years 2009 to 2010. This is primarily on account of the fact

that total assets have increased by a very large extent in the last two years

0

0.05

0.1

0.15

0.2

0.25

0.3

2006 2007 2008 2009 2010

Series 1

Series 1


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RETURN ON AVERAGE EQUITY

Interpretation: A return on shareholders equity is calculated to see the

profitability of owners investment. ROE indicates how well the firm has used theresources of the owners. This reveals the relative performance and strength of

the company in attracting future investments. Returns on equity are reducing

gradually in following years (41.95 in FY07 to 21.98 in FY10) which is a bad

prospect for future investments by shareholders.

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010

Series 1

Series 1


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RETURN ON AVERAGE CAPITAL EMPLOYED

Interpretation: It measures profitability of the firm with respect to the total

capital employed. The higher the ratio, the more efficient use of capital

employed. ROCE increases initially showing more efficient use of capital and then

decreases for years 2009 and 2010 which is a bad sign. The company needs to

increase the efficiency of how and where to employ its capital.

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010

Series 1

Series 1


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EARNINGS PER SHARE

Interpretation: This number represents the profit of the company equally split

among each share of the stock. It shows the profitability of the firm on per share

basis. EPS has the highest value of 18.25 in FY08. This is due to 18% increase in

PAT in FY08.

0

2

4

6

8

10

12

14

16

18

20

2006 2007 2008 2009 2010

Series 1

Series 1


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DIVIDEND PER SHARE

Interpretation: Profit remaining after payment of tax and preference dividends is

available to equity shareholders. Out of these profits a portion is retained in the

business and the remaining is distributed among equity shareholders as dividend.

The difference between EPS and DPS is retained in the business. The DPS of SAIL

was on growth trajectory from 200-06 to 2007-08. But the Dividend per share of

the company decreased by 30 percent from Rs 3.7 in 2007-08 to Rs 2.6 in 2008-09

due to decrease in total profit distributed to equity shareholders.

0

0.5

1

1.5

2

2.5

3

3.5

4

2006 2007 2008 2009 2010

Series 1

Series 1


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PRICE EARNING RATIO

Interpretation: PE ratio establishes the relation between market price of the

share and EPS. It indicates the expectation of equity investor about the earningsof the firm. The PE ratio increased tremendously in 2009-10 from 6.45 percent in

2008-98 to 15.44 in 2009-10 which is good for the company as it indicates high

growth prospects of the company. It indicates that the share of SAIL has low risk

and therefore the investor are content with low prospective return or the

investor expect high dividend growth and are ready to pay a higher price for the

share at present.

0

2

4

6

8

10

12

14

16

18

2006 2007 2008 2009 2010

Series 1

Series 1


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DEBT EQUITY RATIO

Interpretation The relationship between borrowed funds and owners capital is

shown by the debt -equity ratio. A high debt equity ratio is the danger signal for

the long-term lenders. The ratio of SAIL is on safe side till FY09 as it is 0.27 in

FY09. In FY10 the shareholders funds is just double the amount of long term

loans. So the firm must take careful measures so as to bring down the amount of

long-term loans.

0

0.1

0.2

0.3

0.4

0.5

0.6

2006 2007 2008 2009 2010

Series 1

Series 1


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DEBT ASSET RATIO

Interpretation: The ratio shows the proportion of proprietors funds to the total

assets employed. Debt Asset Ratio of SAIL is continuously increasing since FY08.This implies that the firm is improving in its policies of acquiring assets with the

help of proprietors funds. In FY10 the ratio is just 33%. Therefore SAIL needs to

improve this ratio so that it is less dependent on outside funds and thus does not

create any outside liabilities.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2006 2007 2008 2009 2010

Series 1

Series 1


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INTEREST COVERAGE RATIO

Interpretation: This ratio is used to determine how easily a company can pay

interest on outstanding debt. The ratio for SAIL increased drastically in FY08 dueto 17.8% increase in EBIT and after that the ratio is continuously decreasing over

the years. The interest coverage ratio of SAIL in FY10 is 26.2 which indicates that

the firm will be able to pay the interest on long term loans regularly and for the

lenders the firm is less risky.

0

5

10

15

20

25

30

35

40

45

50

2006 2007 2008 2009 2010

Series 1

Series 1


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CAPITAL EQUITY RATIO

Interpretation: This shows how much funds are being contributed together by

lenders and owners for each rupee of the owners contribution. This ratio has anear constant value over the given years as shown by the graph.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2006 2007 2008 2009 2010

Series 1

Series 1


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DEPRECIATION POLICY

Depreciation refers to two very different but related concepts:

1. Decline in value of assets, and

2. Allocation of the cost of tangible assets to periods in which the assets are used.

The former affects values of businesses and entities. The latter affects net

income. Generally the cost is allocated, as depreciation expense, among the

periods in which the asset is expected to be used. Such expense is recognized by

businesses for financial reporting and tax purposes. Methods of computingdepreciation may vary by asset for the same business. Methods and lives may be

specified in accounting and/or tax rules in a country. Several standard methods of

computing depreciation expense may be used, including fixed percentage,

straight line, and declining balance methods. Depreciation expense generally

begins when the asset is placed in service. Example: a depreciation expense of

100 per year for 5 years may be recognized for an asset costing 500. In

economics, depreciation is the decrease in the economic value of the capital stock

of a firm, nation or other entity, either through physical depreciation,

obsolescence or changes in the demand for the services of the capital in question.

If capital stock is C0 at the beginning of a period, investment is I and depreciation

D, the capital stock at the end of the period, C1, is C0 + I - D. Depreciation is an

important item on the profit and loss account; its nature is often not properly

understood by non-finance managers. This article clarifies what deprecation is,

explains the manner in which the depreciation schedule is prepared, presents

information on the methods and rates of depreciation under the Companies Act

and the Income Tax Act, and dispels some of the myths surrounding depreciation.

Nature of Depreciation: A fixed asset is used over a number accounting periods.

So it is necessary to allocate its costs to various accounting periods that benefit

from its use. Such an allocation is called depreciation. Accountants normally

allocate the cost of an asset over its useful life using a well-defined procedure.


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Income Statement of SAIL and its competitors

Income Tata Steel SAIL JSW Steel

Sales Turnover 26,757.60 44,059.72 19,456.64

Excise Duty 1,816.95 3,463.82 1,289.18

Net Sales 24,940.65 40,595.90 18,167.46

Other Income 1,241.08 2,557.00 474.25

Stock

Adjustments

-134.97 -1,157.45 64.74

TotalIncome 26,046.76 41,995.45 18,706.45

Expenditure

Raw Materials 8,356.45 18,611.12 11,415.86

Power & Fuel

Cost

1,383.44 3,364.30 1,014.82

Employee Cost 2,361.48 5,417.00 365.2

OtherManufacturing

Expenses

2,419.89 870.35 249.6

Selling and

Admin Expenses

417.9 1,754.02 724.63

Miscellaneous

Expenses

1,287.04 206.62 188.53

Preoperative

Exp Capitalised

-326.11 0 0

Total Expenses 15,900.09 30,223.41 13,958.64

Operating Profit 8,905.59 9,215.04 4,273.56

PBDIT 10,146.67 11,772.04 4,747.81

Interest 1,848.19 402.01 900.26

PBDT 8,298.48 11,370.03 3,847.55

Depreciation 1,083.18 1,337.24 1,123.41

Other Written

Off

0 10.33 0


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Profit BeforeTax 7,215.30 10,022.46 2,724.14

Extra-ordinary

items

0 184.8 96.03

PBT (Post

Extra-ord Items)

7,215.30 10,207.26 2,820.17

Tax 2,168.50 3,452.89 797.43

Reported Net

Profit

5,046.80 6,754.37 2,022.74

Total Value

Addition

7,543.64 11,612.29 2,542.78

Preference

Dividend

45.88 0 28.92

Equity Dividend 709.77 1,363.03 177.7

Corporate

Dividend Tax

122.8 227.52 34.31

Per share data

(annualised)Shares in issue(lakhs)

8,872.14 41,304.01 1,870.49

Earning Per

Share (Rs)

56.37 16.35 106.59

Equity Dividend(%)

80 33 95

Book Value (Rs) 418.94 80.66 504


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Ratio Analysis of CompetitorsRATIOS SAIL TATA JSW

PROFITIBILITY

RATIO

GROSS PROFIT 0.23 0.27 0.17

NET PROFIT 0.153 0.19 0.11

RETURN ON

CAPITAL

EMPLOYED (%)

26.56 14.25 15.08

LIQUIDITY RATIOS

QUICK RATIO 2.7 1.08 0.31

CURRENT RATIO 3.52 1.12 0.58

ACTIVITY RATIOS

INVENTORY TURN

OVER RATIO

4.86 10.9 8.95

DEBTORS TURN

OVER RATIO

12.57 61.5 37.79

ASSETS TURNOVER RATIO

0.84 1.17 0.85

FIXED ASSETS

TURN OVER RATIO

1.24 1.67 0.83

LEVERAGE RATIOS

DEBT EQUITY

RATIO

0.5 0.61 1.26

INTEREST

COVERAGE RATIO

26.26 4.41 3.57

Interpretation

y Net Profit ratio of SAIL is better than other competitor except TATASteel. This can be attributed to lower earnings of SAIL in comparison

to their earnings.

y Return on Capital employed is greater for SAIL which shows thatoverall profitability and efficiency of the business is good.

yThe current ratio for SAIL is more than TATA Steel which shows that


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it has enough liquidity in comparison to other competitors.

y The debt equity ratio is 0.5 which is lower than TATA Steel. Thismeans that it is more traditionally financed in comparison to other

competitors. It has lower debt so it can easily raise debt in future.

y Interest coverage ratio is too high for SAIL which shows that debt isnot being used as a source of finance to increase earnings per share.

y Inventory turnover ratio is lesser in SAIL compared to othercompetitors which indicates inefficient management of inventories.

y The debtors turnover ratio is lower for SAIL compared to TATA Steelwhich shows that the debtors are less liquid implying inefficientmanagement of debtors/sales.


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Calculation and Interpretation Of Cash Flow Statement (in Rs. crores)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

Profit before

tax

5705.74 9422.62 11468.73 9403.45 10132.03

Net Cash

Flow

Operating

activity

3823.93 5632.91 8378.18 6124.26 4800.48

Net Cash

used in

investing

activity

337.18 587.53 (139.89 4406.47 8021.15

Net Cash

used in Fin.

Activity

3574.26 (608.19 3088.68 2751.30 7395.00

Net inc./dec.

in cash or

equivalent

87.51 3437.19 4149.61 4469.09 4174.33

Cash and

equivalent at

beginning of

the year

6260.15 6172.64 9609.83 13759.44 18264.67

Cash and

equivalent at

end of the

year

6172.64 9609.83 13759.44 18228.53 22439.00

INTERPRETATION

Cash flow statement shows that the profit before tax increases continuously in

2006, 2007, 2008 and decreases in 2009 due to unstable economic conditions.

Net cash flow from operating activities increases continuously in 2007 and 2008

due to increase in sales and earnings but it came down in 2009 and further

reduced in 2010.


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Net cash outflows in investing activities have been growing in SAIL as cash is being

used to purchase fixed assets like plants and machinery and higher development

costs.

Cash flows have been positive for financing activities in 2009 mainly due to

increase in borrowings.

Cash and cash equivalents have been increasing steadily from 2006 to 2010

showing good liquidity position of the firm

Financial Analysis of SAIL, NDIM Okhla

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