Reliance Infrastructure Limited
Ratio Analysis “Mini Report Of Financial Ratios” F.Y.2007 TO F.Y. 2009
Submitted By: Miss.Priyanka Khedekar. Roll NO.12, MMS (Finance), VSIM Khed, Ratnagiri
ABOUT THE COMPANY Reliance Infrastructure Limited (formerly Reliance Energy Limited) is a part of the Reliance Anil Dhirubhai Ambani Group, India’s second largest business house.
Incorporated in 1929, Reliance Infrastructure is one of India’s fastest growing companies in the infrastructure sector. It ranks among India’s top listed private companies on all major financial parameters, including assets, sales, profits and market capitalization.
Reliance Infrastructure companies distribute more than 25 billion units of electricity to over 25 million consumers across an area that spans over 1,24,300 sq kms and includes India’s two premier cities, Mumbai and Delhi. The Company generates over 940 MW of electricity through its power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka and Goa.
Reliance Infrastructure has emerged as the leading player in India in the Engineering, Procurement and Construction (EPC) segment of the power sector.
In the last few years, Reliance Infrastructure has expanded its foot-print much beyond the power sector. Currently, Reliance Infrastructure group is engaged in the implementation of projects not only in the field of generation, transmission, distribution and trading of power but also in other key infrastructural areas such as highways, roads, bridges, metro rail and other mass rapid transit systems, special economic zones, real estate, etc.
In order to appropriately reflect the diverse businesses being carried on by it, Reliance Infrastructure Limited changed its name, effective April 28, 2008, from Reliance Energy Limited to Reliance Infrastructure Limited.
2
RATIO ANALYSIS FINANCIAL ANALYSIS
Financial analysis is the process of identifying the financial strengths and weaknesses of the firm and establishing relationship between the items of the balance sheet and profit & loss account. Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information in a company’s financial statements. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment. The information in the statements is used by •
Trade creditors, to identify the firm’s ability to meet their claims i.e. liquidity position of the company.
•
Investors, to know about the present and future profitability of the company and its financial structure.
•
Management, in every aspect of the financial analysis. It is the responsibility of the management to maintain sound financial condition in the company.
RATIO ANALYSIS
The term “Ratio” refers to the numerical and quantitative relationship between two items or variables. This relationship can b e exposed as •
Percentages
•
Fractions
•
Proportion of numbers
3
Ratio analysis is defined as the systematic use of the ratio to interpret the financial statements. So that the strengths and weaknesses of a firm, as well as its historical performance and current financial condition can be determined. Ratio reflects a quantitative relationship helps to form a quantitative judgment.
STEPS IN RATIO ANALYSIS •
The first task of the financial analysis is to select the information relevant to the decisio decision n under under consid considera eratio tion n from from the statem statement entss and calcul calculate atess approp appropria riate te ratios.
•
To compare the calculated ratios with the ratios of the same firm relating to the pas6t or with the industry ratios. It facilitates in assessing success or failure of the firm.
•
Third step is to interpretation, drawing of inferences and report writing conclusions are drawn after comparison in the shape of report or recommended courses of action.
BASIS OR STANDARDS OF COMPARISON
Ratios Ratios are relative figures reflecting reflecting the relation relation between between variables. variables. They enable analyst to draw conclusions regarding financial operations. They use of ratios as a tool of financial analysis involves the comparison with related facts. This is the basis of ratio analysis. The basis of ratio analysis is of four types. •
Past ratios, calculated from past financial statements of the firm.
•
Competitor’s ratio, of the some most progressive and successful competitor firm at the same point of time.
•
Industry ratio, the industry ratios to which the firm belongs to
•
Projected ratios, ratios of the future developed from the projected or pro forma financial statement 4
NATURE OF RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. It is only a means of understanding of financial strengths and weaknesses of a firm. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only on ly a few appropriate ratios. The following are the four steps involved in the ratio analysis. •
Select Selection ion of releva relevant nt data data from from the financi financial al statem statement entss dependi depending ng upon upon the objective of the analysis.
•
Calculation of appropriate ratios from the above data.
•
Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other other firms firms or the compar compariso ison n with with ratios ratios of the industry industry to which which the firm belongs.
IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE
1. Liquidity ratio 2. Leverage ratio 3. Activity ratio 4. Profitability ratio
5
DATA ANALYSIS (1) Liquidity Ratio: 1) Measures ability of a company to meet its current obligations.
2) Indicates short-term short-term financial stability stability of a company 3) Indicates present cash solvency & ability ability to remain remain solvent times of adversities. a) CURRENT CURRENT RATIO:
Current Ratio measures firm’s Short –Term solvency. It indicates the availability of current assets in rupees for every one rupee of current liability.
Current Assets Current Ratio =
Current Liabilities (Rupees In Crores)
Year 2007-08
Current Assets 12967.91
Current Liabilities 3130.66
Ratio 4.14
2008-09
9021.46
3377.81
2.67
2009-10
8803.63
5421.75
1.62
6
ANALYSIS AND INTERPRETATION:
From the above chart, it shows the decline trend during F.Y. 2007 to F.Y.2009. It was high in F.Y.2007 at 4.14 times which further reduced to 1.62 times in F.Y. 2009 which is lower than standard i.e. 2:1. In F.Y. 2007 the ratio was high due to the high Cash & Bank balance which further reduced to 2.67 times in F.Y. 2008. In F.Y.2009 the ratio was very low because of increase in Current Liability. The continuous decrease in Current Ratio is not good for company’s financial health. So company has to take necessary action to improve current ratio.
b) QUICK RATIO:
Quick ratio is a test of liquidity liquidity than the current ratio. The term liquidity refers refers to the ability of a firm to pay its short-term obligations as & when they b ecome due. Quick Assets Quick Ratio=
7
Quick Liabilities (Rupees In Crores)
Year 2007
Quick Asset 12675.22
Current Liabilities 3130.66
Ratio 4.05
2008
8721.17
3377.81
2.59
2009
8362.95
5421.75
1.54
ANALYSIS AND INTERPRETATION:
The chart shows continuous decline trend from F.Y.2007 to F.Y. 2008. The ratio is above the standard i.e. 1:1. In F.Y. 2007 the ratio was high at 4.5 times due to tremendous increase in Cash & Bank Balance which was25 times greater than F.Y.2008, also in F.Y. 2007. Further Further it reduced to 1.54 times times but we cannot say that the the liquid position of the company is good because in F.Y. 2009 company’s Cash & bank balance and Debtors has increased. Thus, the company can suffer the shortage of fund due to slow paying, doubtful & long duration outstanding debtors.
8
c) PROPRIETOR RATIO:
It measures the relationship between funds invested in business by the owners with the total fund invested in business.
Proprietor Ratio:
Proprietor’s Fund
Total Asset (Rupees In Crores)
Year 2007
Propr oprietor tor’s Fund 9339.24
Total tal Asset set 18584.15
Propr oprietor tor Ratio tio 0.50
2008
11686.96
20,322.32
0.58
2009
11907.44
24,855.32
0.48
ANALYSIS AND INTERPRETATION:
9
The chart shows fluctuation trend during the year. It was high in F.Y. 2008 which indicates that company is less dependent on outside funds for working & company is quite solvent. In F.Y. 2009 it dipped by 21 % as compared to F.Y. 2008.
(2) Financial Leverage Ratio:
1) Indicates the the financial structure of the organisation, organisation, i.e. the proportion proportion of Debt as compared to owner’s funds. 2) Source Source of Funds: Funds: i.
Exte Extern rnal al Fund Fund
ii. ii.
Inte Intern rnal al Fund Fund
Debt-Equity Ratio:
Higher the ratio less secured is the creditors, lower the ratio creditors enjoy higher degree of safety Debt Debt Equity Ratio :
Equity (Rupees In Crores)
Year 2007
Debt 9339.24
Equity 5858.32
Debt-Equity Ratio 1.59
2008
11686.96
4988.88
2.34
2009
11907.44
7332.18
1.62
10
ANALYSIS AND INTERPRETATION:
At early stage i.e. in F.Y. 2007 it was low at 1.59 times which further increased to 2.34 times in F.Y. 2008 and later on it further decreased to 1.62 times. The low ratio indicates that lenders contribution is lower than owner’s contribution. But in FY 2008 the lenders contribution is higher than owner’s contribution which indicates that Creditors are less secured than shareholders of the company.
(3.i) Profitability Ratio:
1) Measures overall efficiency of the business. 2)
Indica Indicates tes whethe whetherr utiliza utilizatio tion n of busines businesss assets assets and funds are done effectively.
a) Gross Profit Ratio:
It shows the operating efficiency of the business. It measures the efficiency of production as well as pricing. Gross Profit Gross Profit Ratio =
X 100 Sales
11
(Rupees In Crores)
Gross Profit Ratio Year
G/P
Net Sales
2007
872.37
3610.95
% 24.16
2008
1151.70
4419.87
26.06
2009
1193.43
7183.10
16.61
b) Net Profit Ratio:
It shows the overall efficiency of the business. Higher the ratio indicates higher efficiency of business and better utilization of total resources.
Net profit after tax Net Profit Ratio:
X 100 Sales (Rupees In Crores)
Net Profit Ratio Year
N/P
Net Sales
2007
801.45
3610.95
% 22.19
2008
1084.63
4419.87
15.01
2009
1138.88
7183.10
15.85
12
ANALYSIS AND INTERPRETATION:
In FY 2007 2007 & FY 2009 the the G/P G/P Rati Ratio o & Net Net Prof Profit it Rati Ratio o were were increa increase sed d simultaneously. There was slightly difference between them. But in FY 2008 the G/P increases at a faster rate as compared to Net profit. This indicates that operating expenses relative to sales have been increasing. The increasing expenses should be identified & controlled.
(3.ii) In relation to Capital Employed:
13
a) Return On Investment:
It measures the overall performance of the company that is utilization of total resources and funds available with the company.
EBT But AT Return On Investment :
X 100 Total Assets/ Liability
(Rupees In Crores)
Return On Year
EBIT
Total Assets
Investment Ratio
2007
872.37
18584.63
(%) 4.69
2008
1151.70
20322.32
5.67
2009
1193.43
1193.43
4.80
14
ANALYSIS AND INTERPRETATION:
In this ratio higher the ratio is better which indicates the better utilization of funds also indicates earning capacity of the business. From the above chart it shows the fluctuating trend during the year. It was high in FY 2008 at 5.67%. Further it was decreased to 4.80%.
b) Return On Net Worth
It measures the productivity of shareholders funds. Higher the ratio indicates better utilization of shareholders funds or higher productivity of owner’s funds. Net Profit After Tax Return On Net Worth :
X 100 Equity Shareholder Fund
15
(Rupees In Crores)
Return On Net Year
PAT
Net Worth
Worth
2007
801.45
9339.24
Ratio (%) 8.58
2008
1084.63
11686.96
9.28
2009
1138.88
11907.44
9.56
ANALYSIS AND INTERPRETATION:
From the above chart it shows the increasing trend which is good indicator for firm & their prospective indicators. In FY 2007 it was 8.58% which further increased to 9.56% in FY 2009. It is good sign for prospective share holders of R-INFRA.
4) Other Ratio: a) Interest Coverage Ratio:
This ratio is used to test the firms Debt- Servicing Capacity. 16
Interest Coverage Ratio:
EBIT Interest
(Rupees In Crores)
Interest Coverage Year
EBIT
Interest
2007
872.37
250.32
Ratio ( Rs.) 3.49
2008
1151.70
308.76
3.73
2009
1193.43
330.50
3.61
ANALYSIS AND INTERPRETATION:
The Interest Coverage Ratio shows the number of times the interest charges are covered by funds that are ordinary available for their payment.
17
The above chart shows relative constant fluctuation because it was Rs.3.49 in FY 2007 which further increased to Rs.3.73 in FY 2008 & 3.61 in FY 2009. Too high ratio indicates the firm is very conservative in using debt & that is not using credit to best advantage of shareholder. In R-INFRA the ratio is high in FY 2008 i.e. Rs. 3.73 crores.
b) Earnings Per Share:
EPS calculation made over the years indicates whether or not the firm’s earnings power on per-share basis has changed over the period.
Earnings After Year
No. Of Shares Paid
EPS
Up
( Rs. Per Share)
Tax – Preference Dividend
2007
801.45
22.857
35.06
2008
1084.63
23.562
46.03
2009
1138.88
22.607
50.37
ANALYSIS AND INTERPRETATION:
The The rati ratio o shows shows incr increa easi sing ng trend trend.. It incr increa ease sed d from from Rs. Rs. 35.06 35.06 per per shar sharee to Rs.50.37 per share from FY 2007 to FY 2009. EPS simply implies the profitability of the firm on per share of basis. From this we can say that the overall profitability of the firm is showing good position in near future.
c) Dividend Per Share Ratio:
DPS is the earnings distributed to ordinary shareholders divided by the number of ordinary share outstanding.
18
Equity Dividend Dividend Per Share :
No. Of Equity Shares
Year
No. Of Equity
DPS
Shares
( Rs. Per Share)
Equity Dividend
2007
121.12
22.857
5.30
2008
147.73
23.562
6.27
2009
157.69
22.607
7.00
ANALYSIS AND INTERPRETATION:
From the above chart the ratio was Rs. 5.3 per share in FY 2007 which further increased to Rs. 6.27 per share to Rs.7 per share in FY 2008 200 8 & FY 2009 respectively.
19
This means that, in case of FY 2009, company distributed Rs. 7 as dividend out of Rs. 50.37 per share (EPS). The difference pe r share is retained in the business.
FINDIGS 1) There There is continuo continuous us decrea decrease se in Curren Currentt Ratio. Ratio. Thus, it is necessary necessary to take take corrective actions. 2) The company can suffer the shortage of fund due to slow paying, paying, doubtful & long duration outstanding debtors. 3) The lenders contributi contribution on is higher than owner’s owner’s contribution contribution which indicates indicates that Creditors are less secured than shareholders of the company. 4) The operating expenses relative to sales have been increasing.
5) Proprietar Proprietary y ratio of the company fluctuat fluctuates es during the period of study. It shows the change in the value of reserves and surplus in the form of shareholders’ fund. 20
6) R-INRA is far far better in in covering its fixed fixed cost with with the interest coverage ratio. 7) The overall financial condition condition of R-INFRA is good.
CONCLUSION The R-INFRA’s overall position is at a good position. Particularly the current year’s position is well due to raise in the profit level from the last year position. It is better for the organization to diversify the funds to different sectors in the present market scenario.
21
