Fm Final Ppt.

8/9/2019 Fm Final Ppt.

1/41

Ratio analysis


2/41

Group membersy Ashish Nakade

y Deepti Nayak 65

yAditi Rahalkar 77

y Girish Rathod 78

y Chetan Shirasi 95

y Leena Thakur 109


3/41

I

ntroductiony Financial ratio analysis is the calculation and

comparison of ratios which are derived from the

information in a company's financial statements, i.e.

balance sheet and P&L a/c.

y It is a powerful tool of financial analysis useful for

measuring the performance of an organization


4/41

I

ntroductiony It is the process of comparing one figure against

another(X/Y=Z)

y A ratio gains utility by comparison to other data andstandards(benchmarks).


5/41

W

ho uses ratiosy Investors present as well potential

y Mutual funds

y Stockbroker and stock exchange authorities

y Tax depts.

y Research analysts

y Company management

y Crs

y Banks and financial institutions

y Credit rating agencies


6/41

Modes of expression

Ratios

Pure ratio

e.g. 2:1

Percentage

20% of X

Numberofdays/week/month

Amount in Rs

EPS =Rs4pershare


7/41

Classification of ratios

y Balance sheet ratios comparison of items from

balance sheet

y P&L ratios Comparison of ratios of P& L account

y Composite Ratios Comparison between balancesheet and P&L account


8/41

Types of ratios

Leverage Ratios which show the extent that

debt is used in a company's capital structure.

Liquidity Ratios which give a picture of a

company's short term financial situation or

solvency.

Operational Ratios which use turnover

measures to show how efficient a company is

in its operations and use of assets.

Profitability Ratios which use margin analysis

and show the return on sales and capital

employed.

Solvency Ratios which give a picture of a

company's ability to generate cash flow and

pay it financial obligations.


9/41

Liquidity


10/41

Current Ratio

y Looks at the ratio between Current Assets and CurrentLiabilities

y Current Ratio = Current Assets : Current Liabilities

y Ideal level? 2 : 1 (varies as per industry)

It represents margin of safety for liabilities.

y Too high Might suggest that too much of its assets aretied up in unproductive activities too much stock, for

example?

y Too low - risk of not being able to pay your way


11/41

Acid test

y Also referred to as the Quick ratio

y (Current assets stock) : liabilities

y 1:1 seen as ideal

y

The omission of stock gives an indication of the cash thefirm has in relation to its liabilities (what it owes)

y A ratio of 3:1 therefore would suggest the firm has 3 times

as much cash as it owes very healthy!

y A ratio of 0.5:1 would suggest the firm has twice as many

liabilities as it has cash to pay for those liabilities. This

mightput the firm under pressure but is not in itself the

end of the world!


12/41

Investment/Shareholders


13/41

Investment/Shareholders

y Earnings per share profit aftertax / numberofshares

y Price earnings ratio market price / earnings pershare the higherthe bettergenerally. Comparisonwith otherfirms helps to identify value placed on themarket of the business.

y Dividend yield ordinary share dividend / marketprice x 100 higherthe better. Relates the return onthe investment to the share price.


14/41

Gearing


15/41

Gearing

y Gearing Ratio = Long term loans / Capital

employed x 100

y The higher the ratio the more the business is

exposed to interest rate fluctuations and to having

to pay back interest and loans before being able

to re-invest earnings


16/41

Profitability

y Profitability measures look at how much profitthe firm generates from sales orfrom its

capital assets

y Different measures of profit gross and nety Gross profit effectively total revenue (turnover)

variable costs (cost of sales)y Net Profit effectively total revenue (turnover)

variable costs and fixed costs (overheads)


17/41

Profitabilityy Gross Profit Margin = Gross profit /

turnover x 100

y The higher the better

y

Enables the firm to assess the impact of itssales and how much it cost to generate(produce) those sales

yA gross profit margin of 45% means that forevery 1 of sales, the firm makes 45p in gross

profit


18/41

Profitability

y Net Profit Margin = Net Profit / Turnover x 100

y Net profit takes into account the fixed costs involvedin production the overheads

y Keeping control over fixed costs is important couldbe easy to overlook forexample the amount of waste- paper, stationery, lighting, heating, water, etc.y e.g. leaving a photocopieron overnight uses enough electricity to

make 5,300 A4 copies. (1,934,500 peryear)

y 1ream = 500 copies. 1ream = 5.00 (on average)

y Total cost therefore = 19,345 peryear or1 persons salary


19/41

Profitability

y Return on Capital Employed (ROCE) = Profit /

capital employed x 100


20/41

Profitabilityy The higher the better

y Shows how effective the firm is in using its capitalto generate profit

yA ROCE of 25% means that it uses every 1 ofcapital to generate 25p in profit

y Partly a measure of efficiency in organisation anduse of capital


21/41

Financial


22/41

Asset Turnover

y Asset Turnover = Sales turnover / assets

employed

y Using assets to generate profit

y Asset turnoverx net profit margin = ROCE


23/41

Stock Turnover

y Stock turnover = Cost of goods sold / stock expressed as

times per year

y

The rate at which a companys stock is turned overy A high stock turnovermight mean increased efficiency?

y But: dependent on the type of business supermarkets might

have high stock turnoverratios whereas a shop selling high

value musical instruments might have low stock turnoverratio

y Low stock turnovercould mean poorcustomersatisfaction if

people are not buying the goods (Marks and Spencer?)


24/41

DebtorDays

y DebtorDays = Debtors / sales turnover x 365

y Shorterthe better

y Gives a measure of how long it takes the business to

recoverdebts

y Can be skewed by the degree of credit facility a firm

offers


25/41

INCOME STATEMENT OF TATA

MOTORS


26/41

y (currency in million Rs.)

y (2007) (2008)y Revenues 323,612.0 356,514.8

y OtherRevenues 19.6 65.0

y TOTAL REVENUES 325,143.8 358,086.0

y

Cost ofGoods Sold 234,753.6 254,571.5y GROSS PROFIT 90,390.2 103,514.5

y Selling General & Admin Expenses, Total 30,811.035,136.3

y R&D Expenses 850.2 659.5

y Depreciation & Amortization, Total 6,880.9 7,820.7y OtherOperating Expenses 17,508.5 24,046.6

y OTHER OPERATING EXPENSES, TOTAL 56,050.667,663.1

y OPERATING INCOME 34,339.6 35,851.4


27/41

y Interest Expense -4,650.6 -9,127.2

y Interest and Investment Income 592.5 1,696.6

y NET INTEREST EXPENSE -4,058.1 -7,430.6

y Income (Loss) on Equity Investments 394.2 652.0

y Currency Exchange Gains (Loss) 652.11,376.1

y OtherNon-Operating Income (Expenses) -1.4 -0.6y EBT, EXCLUDING UNUSUAL ITEMS 31,326.4 30,448.3

y Gain (Loss) on Sale of Assets -- 1,103.6

y OtherUnusual Items, Total -52.2 -37.0

y EBT, INCLUDING UNUSUAL ITEMS 31,274.2 31,514.9

y Income Tax Expense 8,832.18,515.4

y Minority Interest in Earnings -742.2 -1,322.5

y Earnings from Continuing Operations 21,699.9 21,677.0

y NET INCOME 21,699.9 21,677.0


28/41

BALANCE SHEET OF TATA MOTORS


29/41

y PAT on its share capital is decreased

y (2007) (2008)

y Assets (currency in millions Rs.)

y Cash and Equivalents 11,542.7 38,331.7

y TOTAL CASH AND SHORT TERM INVESTMENTS 11,542.7 38,331.7

y Accounts Receivable 17,022.2 20,605.1

y Notes Receivable 84,553. 76,938.9

y OtherReceivables 62.711.9

y

TOTAL RECEIVABLES 101,638.5 97,555.9y Inventory 31,669.0 32,946.4

y Prepaid Expenses 1,247.3 3,334.8

y OtherCurrent Assets 16,681.7 20,504.7

y TOTAL CURRENT ASSETS 162,779.2 192,673.5

y Gross Property Plant and Equipment 129,408.3 182,484.4

y Accumulated Depreciation - -54,266.5 -57,652.4

y NET PROPERTY PLANT AND EQUIPMENT 75,141.8 124,832.0

y Goodwill 4,430.1 5,661.6

y Long-Term Investments 11,745.9 26,658.3

y Deferred Charges, Long Term 119.3 2,442.1

y OtherIntangibles -- 1,429.6

y OtherLong-Term Assets - --

y

TOTAL ASSETS 254,216.3 353,697.1


30/41

y LIABILITIES & EQUITY

y Accounts Payable 48,723.3 67,832.8

y Accrued Expenses 4,704.9 5,389.3y Short-Term Borrowings 34,325. 52,503.2

y Current Income Taxes Payable 1,084.2 901.4

y OtherCurrent Liabilities, Total 38,789.2 62,104.1

y Unearned Revenue, Current 6.7 218.0

y TOTAL CURRENT LIABILITIES 127,633.7 188,948.8

y Long-Term Debt 38,693.6 63,345.5y Capital Leases -- --

y Minority Interest 2,499.6 4,683.1

y Deferred Tax Liability Non-Current 8,172.7 9,744.5

y TOTAL LIABILITIES 176,999.6 266,721.9

y Common Stock 3,853.6 3,854.9

y Additional Paid in Capital 19,364.015,372.2y Retained Earnings 44,087.8 58,523.7

y Comprehensive Income and Other9,911.3 9,224.4

y TOTAL COMMON EQUITY 77,216.7 86,975.2

y TOTAL LIABILITIES AND EQUITY 254,216.3 353,697.1


31/41

y Liquidity ratioy Current ratio = Current assets / Current liability

y 2008 2007

y Current Assets 192,673.5 162,779.2

y Current Liability 188,948.8 127,633.7

y Current Ratio (2008) 192,673.5/ 188,948.8 = 1.01

y Current Ratio (2007) 162,779.2/ 127,633.7 = 1.27

y Quick Ratio (2008) C.A. - Invent. / C.L.

y 192,673.5 - 32,946.4 / 188,948.8 = .85

y Quick Ratio (2007) 162,779.2- 31,669.0/127,633.7 =

1.02


32/41

y Interval measure - Current assets-inven. / avg. daily cash oper.Exp

y For2008-

y Avg. daily cash oper. Exp - Total cash exp./ 365

y 67,663.1/ 365 = 185.3

y Interval measure - 192,673.5 - 32,946.4 / 185.3 = 862 days

y For2007

y

Avg. daily cash oper. Exp - 56,050.6/ 365 = 153.5y Interval measure - 162,779.2- 31,669.0 / 153.5 = 854 days

y In liquidity ratio, we observe that current ratio in 2008 is less incomparison of

y 2007. it means companies efficiency decreases in paying currentliability. And in

y

quick ratio, it also decreases. In 2008, regularcash meet was 862days in

y comparison of854 of 2007. It means firms ability to pay its daily exp.Increases.

y Leverage Ratio


33/41

y Total debt ratio Total debt / capital employed

y For2008y Total debt - 63,345.5

y Capital employed - Net worth + borrowing

y OrShare capital + debt.

y 86,975.2+ 63,345.5= 150320.7

y

63,345.5 / 150320.7 = .42y For2007

y Total debt - 38,693.6

y Capital employed - 77,216.7 + 38,693.6= 115910.3

y (shr. cap) (debt)

y

38,693.6 / 115910.3 = .33y Debt equity ratio - Net worth / total debt

y Net worth = share cap.

y For200886,975.2/63,345.5 = 1.37

y For200777,216.7 /38,693.6 = 1.99


34/41

y Capital equity ratio - Capital employed / net worth

y For2008150320.7 / 86,975.2= 1.73

y For2007115910.3 / 77,216.7 = 1.50


35/41

y Interest coverage ratio EBIT + depreciation / Interest

y 2008 2007

y Earning before tax 30,448.3 31,326.4

y Add- Interest 9,127.2 4,650.6

y 39575.5 35977

y For2008 - 39575.5 + 7,820.7/9,127.2 = 5.19

y For2007 - 35977 + 6,880.9 / 4,650.6= 9.21

y In 2008, the long term financial position getting strong than 2008.Capability of

y paying long term debt. is increases. As we seen, debt ratioincreases. And the

y contribution of debt is increases in 2008 than 2007. and the part ofshare capital is

y also increases in total capital employed than 2007. it means,company is increasing

y its capital through shares.

y Activity Ratio


36/41

y Inventory Turnover Ratio:- Cost of goods sold /Inventory

y (2008) (2007)

y Cost of goods sold 254,571.5 234,753.6

y

Inventory 32,946.4 31,669.0y For2008:- 254,571.5 / 32,946.4 = 7.72

y For2007 :- 234,753.6 / 31,669.0 = 7.41


37/41

y Debtor Turnover Ratio :- Sales / debtor

y For2008 :- 358,086.0 (sales) / 97,555.9 (debtor)

= 3.67

y

For2007 :- 325,143.8 (sales) / 101,638.5 (debtor)= 3.20

yAverage collection period (2008) = 360 / 3.67 =

98 days

y

Average collection period (2007) = 360 / 3.20 =112 days


38/41


39/41

y Working Capital Turnover Ratio:- Sales /Net working capital

y Net Working Capital = Current assets Current liability

y For 2008 = 192,673.5 - 188,948.8 = 3724.7

y For 2007 = 162,779.2 - 127,633.7 = 35145.5

y For2008 :- 358,086.0 (sales) / 3724.7 (N.W.C.) = 96.13

y For2007 :- 325,143.8 (sales) / 35145.5 (N.

W.C) = 9.25

y As we seen, companys efficiency of using its assets is increasing in2008 than

y 2007. The inventory turnoverratio which shows its efficiency of sellingproduct is

y increasing. Average collection period is decreasing means company isselling its

y product more on cash basis in 2008 than 2007. but companys assetsturnover

y ratio is decreasing means sales is not growing according to its capitalemployed

y and working capital.

y Profitability Ratio


40/41


41/41

y Return on equity = PAT / Net worth

y For2008 = 21,677.0 / 86,975.2 = .25

y For2007 = 21,699.9 / 77,216.7 = .28

y In profitability ratio, the gross profit ratio is increasing in2008 than 2007. it

y means its profit is growing in sales. But companys EBITratio is decreasing means

y interest on capital and tax rate is increased in 2008 than2007 which is responsible

y in decreasing its PAT. And companys return on investmentis decreased that

y indicates that its earning on capital employed is decreasedin 2008 than 2007. and

y its ROE is also decreases means its

Fm Final Ppt.

Documents

Transcript of Fm Final Ppt.