TATA STEEL
2009
FINANCIAL RATIO ANALYSIS ABHIJIT SAMANTA
INTERNATIONAL SCHOOL OF BUSINESS
& MEDIA; KOLKATA
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FINANCIAL RATIO ANALYSIS OF TATA STEEL
1. Liquidity Ratios:Liquidity Ratios measures the ability of the firm to meet its short term obligations. They also reflect the firm’s ability to meet financial contingencies that might arise.
(A) Current Ratio: - This ratio indicates the firm’s ability to meet its current liabilities. This ratio is of very high importance to the suppliers of short term funds like the bankers and trade creditors.
It is measured by: - Current Ratio = Current Assets / Current Liabilities.
st
As per Balance Sheet 31 March 2008 & 2009.
(All figures are in crore.)
Year
Current Asset
Current Liabilities
Current Ratio
2008
3,613.70
3,855.26
0.94
2009
5,707.05
6,039.86
0.94
Analysis: - The industry norm value of current ratio is 2:1. However it does not mean so that higher current ratio means good company profile. It may signify higher unused cash, inventory which again may result in inventory carrying cost. In both the years the Current ratio for Tata Steel is same. However it does not mean any increase or decrease in current ratio of any company gives the growth profile of the company.
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(B) Quick Ratio:-
This ratio is calculated on pre assumption that all the current assets are of same level of liquidity. But this is not the reality. Cash in Hand is more liquid that the same cash equivalent of inventory. So to get a real picture of liquidity we calculate Liquid Ratio. It is calculated by (Current AssetInventory – Prepaid Expense / Current Liability) Quick Ratio = (Current Assets – Inventory- Prepaid Expense) / Current Liability.
st
As per Balance Sheet 31 March 2008 & 2009.
Year
(Current Inventory-
Assets
(All figures are in crore.)
– Current Liabilities
Current Ratio
Prepaid
Expense)
2008
13,570.52
3,855.26
3.52
2009
3,442.72
6,039.86
0.57
Analysis:- As per the industry norms the Quick Ratio should be 1:1. There is a huge difference between the Quick Ratios of the company. It also shows the decreasing trend. In the year 2008 there was high unutilized cash. But for the current year the situation is more balanced.
2. Profitability Ratio:This ratio shows a company’s effectiveness on generating profit. In other words the profitability ratio reflects a company’s operating performance.
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(A) Gross Profit Ratio:- Gross Profit is defined as Sales – Cost of Goods Sold. Now the Gross Profit Ratio is a ratio of Gross Profit to the Sales. We express it in terms of Gross Profit Margin. It is the amount of each rupee of sale that left over after repaying the Cost of Goods Sold. We calculate this ratio by the following formula.
Gross Profit Ratio = (Gross Profit / Sales)*100
st
As per Balance Sheet 31 March 2008 & 2009.
(All figures are in crore.)
Year
Gross Profit
Sales
Gross Profit Margin
2008
7515.05
19,933.83
37.70%
2009
8295.84
24,624.04
33.69%
Analysis: - It indicates the Gross Profit over sales of any company. This ratio can be changed by 1. Change in Sales Volume. 2. Changes in sales price 3. Change in cost of production. According to the data of 2007 and 2008 there is a decrease of Tata Steel in earning the Gross profit which we can find out form the above table.
(B) Operating Profit Margin: This ratio signifies the operational efficiency of any business entity. In this case a lower ratio indicates the higher efficiency. This ratio is calculated with the help of the following formula.
Operating profit ratio= (operating profit (EBIT)/sales)*100
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st
As per Balance Sheet 31 March 2008 & 2009.
(All figures are in crore.)
Year
Operating (EBIT)
Profit Sales
Gross Profit Margin
2008
8,360.25
19,933.83
41.94%
2009
9,278.34
24,624.04
37.68%
Analysis: - There is a decrease in Operating Profit Ratio for Tata Steel. According to the sales figure the EBIT value in 2009 in comparatively less than that of 2008. As we know a lower operating profit profit ratio indicates higher higher efficiency of the firm. So, on the basis of the calculated data we can say that the operating efficiency of Tata Steel has actually increased for the current year with a comparison between 2008 and 2009.
(C ) Net Profit Ratio: - It relates the firms Net Profit and the firm’s Sales level. It indicates what percentage of every rupee of sales the firm was able to transform into the Net Profit. The net profit margin measures the profit that is available from each rupee of sales after all expenses have been paid, including cost of goods sold, selling, general and administrative expenses, depreciation, interest and taxes This ratio is calculated by the following formula.
Net Profit Margin = (Net Profit after Tax / Sales)*100
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st
As per Balance Sheet 31 March 2008 & 2009.
(All figures are in crore.)
Year
Net Profit after Tax Sales (PAT)
Net Profit Margin
2008
4670.49
19,933.83
23.43%
2009
5193.21
24,624.04
21.09%
Analysis: - We can see that there is a decrease in the Net Profit Margin. Actually it indicates the firm’s ability to transfer its sales into the net profit. So, here analyzing the consecutive two years data we can see that the profitability of Tata Steel has actually decreased in 2009 than of the year 2008.
(D) Return on total assets: - It relates the profit of the firm to its tangible assets. In other words it indicates the how much profit the firm has gained by utilizing its resources.
It is calculated by the following formula. Return of Total Asset = (Net Profit after Tax / Total Assets)*100
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st
As per Balance Sheet 31 March 2008 & 2009.
(All figures are in crore.)
Year
Net Profit after Total Assets Tax (PAT)
Return of Total Asset
2008
4670.49
47,075.52
9.92%
2009
5193.21
58,741.77
8.84%
Analysis:- Again we can see that there is reduction in the return to total asset ratio. The return Tata Steel earned over their Total Asset in 2008 the value reduced in the year 2009. It also means to achieve a certain amount of revenue Tata Steel has used more amount of its capital.
3. Turnover Ratios:-
These ratios determine how quickly certain assets
are converted into cash. It measures the ability of the firm to manage assets and convert into cash. High turnover ratios are usually associated with good asset management and low turnover ratios with poor asset management.
(A) Fixed assets turnover ratio: - It indicates the efficiency of utilization of fixed assets. The fixed assets turnover ratio is the sales turnover divided by the fixed assets. It is calculated by the following formula.
Fixed Assets Turnover Ratio= Sales / Fixed Assets.
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st
As per Balance Sheet 31 March 2008 & 2009.
(All figures are in crore.)
Year
Sales
Fixed Assets.
Fixed Asset Turnover Ratio
2008
19,933.83
12,623.56
1.57
2009
24,624.04
14,482.22
1.70
Analysis: - For both of the years 2008 and 2009 the fixed asset turnover ratio of Tata Steel is more than 1. As we know this ratio shows the company’s ability to turn its fixed assets into the turnover. The turnover has actually increased here. But the turnover is also very good in the year 2008.
(B)Total assets turnover ratio:- It measures the overall efficiency and performance of the assets employed in business. Total assets turnover ratio is defined as sales turnover divided by the total assets. It is measure of firm’s total assets management. This ratio is calculated by the following formula.
Total Asset Turnover Ratio= Sales Turnover / Total Assets.
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As per Balance Sheet 31 March 2008 & 2009.
(All figures are in crore.)
Year
Sales Turnover
Total Assets.
Total Asset Turnover Ratio
2008
19,933.83
47,075.52
0.42
2009
24,624.04
58,741.77
0.42
Analysis: - Here for both the years the value of Total Asset Turnover Ratio is same it is showing that overall turnover of assets to sales remained same for both the years.
(C ) Debtors Turnover ratio/Average collection period:This ratio indicates the efficiency of the firm in collecting its receivables from its customers to whom the firm has sold on credit. It indicates the effectiveness of the collection policy adopted by the firm. It is calculated by the following formula.
Debtors Turnover Ratio= (Debtors / Credit Sells)*365
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As per Balance Sheet &P&L 31 March 2008 & 2009.
Year
Debtors Turnover Ratio
2008 2009
11.00 9.00
(All figures are in crore.)
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Analysis: - As it shows the company’s ability to recover the amount that is market due or in other words the company has sold on credit. It is very important for any company to calculate this ratio as depending on that the company can decide about its current position to recover the receivables. For both the years the value is good.
(4) Leverages Ratios:- Leverage ratios indicate the extent to which the firm has financed its assets by borrowing. The use of debt financing increases the risk of the firm. The leverage ratios reflect the financial risk posture of the firm. The more extensive the use of debt, the higher would the firm’s leverage ratios and more risk present in the firm. Some of the leverages ratios are explained below.
(4) Debt Equity Ratio:- Though it doesn’t signify anything related to meeting short term liability it is often discussed under this topic. A firm has two options when going for expansion one is raising debt and other going for public issue. Generally very high debt is not preferred by the investors because it signifies the risk and high form of equity has threat of hostile bid and acquisition. The above ratio is calculated by the following formula.
Debtors Equity Ratio= (Total Debt / Equity)
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st
As per Balance Sheet &P&L 31 March 2008 & 2009.
(All figures are in crore.)
Year
Debt Equity Ratio
Long Term Debt Equity Ratio
2008 2009
1.08 1.34
1.07 1.31
Analysis: - Here we can see that in both Debt Equity Ratio and in Long Term Debt Equity Ratio has increase for both of the years. Logically speaking that when this ratio for any company increase it does not show good performance of the company.
(B) Interest coverage ratio:- This ratio is the sum of the net earnings before taxes and interest charge divided by the interest expenditure. The above ratio is calculated by the following formula.
Interest coverage ratio = EBIT/Interest
st
As per Balance Sheet &P&L 31 March 2008 & 2009.
Year
Interest coverage ratio
2008 2009
8.35 5.71
(All figures are in crore.)
Analysis: -
It actually measures the firm’s ability to meet the interest obligations. Here in this case we can see that the interest coverage ratio is decreasing, it means the firm’s ability is reducing.
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( 5) Market value ratios:(A) Price Earnings Ratio: - This ratio highlights the relationship between the market price of a share and the current earnings per share. The market value, on the other hand is the value of equity as perceived by investors.
Price earnings ratio = Market Price per share / earnings per share.
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As per Balance Sheet &P&L 31 March 2008 & 2009.
Year
Price Earnings Ratio: -
2008 2009
10.38 2.97
(All figures are in crore.)
Analysis: - It actually denotes the company’s future prospect. As here we can see that there is decrease in the price earnings ratio it show’s a decrease in company’s growth profile.
(B) Earnings per share:-
The shareholders invest their money with the
expectation of getting dividends and capital appreciation on the shares. . Since the earnings form the basis for dividend payments as well as a basis for any future increase in the market price of the shares, investors are always extremely interested in knowing the earnings per share. s hare.
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Earnings per share: (Net profit after taxes – Preference dividends) / Number of ordinary shares
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As per Balance Sheet &P&L 31 March 2008 & 2009.
Year
Earnings per share
2008 2009
60.45 66.80
(All figures are in crore.)
Analysis: -Here it shows that for Tata Steel the earning per share increasing. It is good symbol form the company prospective as well as from the Share Holder’s prospective also. Seeing more earning there is a chance for share holders to invest on the company.
