ASSIGNMENT ON

FINANCIAL STATEMENT ANALYSIS

TOPIC: RATIO ANALYSIS AND INTERPRETATION OF

STAR HEALTH AND ALLIED INSURANCE LTD.

Submitted to: Submitted by:

Rishabh Goswami Rajashree Muktiar (MCI15020)
Annu Kumari (COM18003)
Reginlu Tayang (COM18005)
ACKNOWLEDGEMENT
We owe our deepest gratitude to Professor Rishabh Goswami for helping us in completion of
the assignment throughout numerous consultations and valuable guidance. We also extend
our heartfelt thanks to all those who have directly or indirectly helped us in completing the
assignment.
COMPANY PROFILE:
Star Health and Allied Insurance Co Ltd is the first private standalone Indian insurance
company that commenced its operations in 2006. The company primarily focuses on Health
Insurance, Travel Insurance and Accident policies.
It has more than 400 offices across India and around 8500 + hospitals under its network.

With no other insurance category to focus and divide their attention, they use resources to
focus on service excellence, design products and use core competency of innovation to
deliver the best to their customers.

At Star Health Insurance, the company offers a wide range of health insurance products at
affordable prices to make health insurance every human being’s right, and as a company,
single-mindedly dedicated to health insurance.

Products and Services offered by Star Health Insurance:-

 Medi-classic Insurance Policy
 Family Health Optima Insurance Plan
 Star Micro Health Insurance
 Star Criticare Plus Insurance Policy
 Star Comprehensive Insurance Policy
 Star Family Delite Insurance Policy
 Star Cardiac Care Insurance Policy
 Diabetes Safe Insurance Policy
 Senior Citizens Red Carpet Health Insurance Policy
 Super Surplus Insurance Policy
 Star Health Gain Insurance Policy
 Star Care Insurance Policy
 Star Net plus
 Accident Care Individual Insurance Policy
 Star Cancer Care Gold (Pilot Product)
With focus on Service Excellence, offering Innovative Products at affordable prices and
reaching out to ensure “Inclusion” of masses, today, Star health is one of the Leaders in retail
Health space across the Industry.

It is the Brain child of Insurance Visionary Mr. V.Jagannathan backed by ICICI Venture,
TATA Capital Growth Fund, Apis Partners and Sequoia Capital.
Vision:

 Protecting Health and Promoting Health.

Mission:

 Ultimate Customer Satisfaction.

RATIO ANALYSIS AND INTERPRETATION:

1. PROFITABILITY RATIO:

Related to sales:- For profitability analysis related to sales, we have calculated four set of
ratios. They are-

 Return on sales: Return on sales, often called the operating profit margin, is a
financial ratio that calculates how efficiently a company is at generating profits from
its revenue. In other words, it measures a company’s performance by analyzing what
percentage of total company revenues are actually converted into company profits. It
is calculated by-
Return on sales = Operating profit ÷ Net Sales

 Operating Ratio: Operating ratio (also known as operating cost ratio or operating
expense ratio) is computed by dividing operating expenses of a particular period by
net sales made during that period. It is calculated by-
Operating ratio = Operating Expenses ÷ Net Sales

 Operating Profit Ratio: Operating profit ratio is calculated by dividing the operating
profit by net sales. This ratio helps in determining the ability of the management in
running the business.
Operating profit ratio = Operating profit ÷ Net sales
where, Operating profit = Net sales - Operating expenses

 Net profit Ratio: The net profit ratio, also called net margin, is a profitability metric
that measures what percentage of each rupee earned by a business ends up as profit at
the end of the year. In other words, it shows how much net income a business makes
from each rupee of sales.
Net Profit Ratio = Net profit ÷ Net sales
 RELATED TO SALES
1.4
1.2
1
0.8
0.6
0.4
0.2
0
ROS Operating Ratio Operating Profit Net Profit Ratio
2018 2017 2016

INTERPRETATIONS:
• All the Profitability ratios shows a declining trend, which shows that the company is
overall not in a good position in the current position.

• This is because the expenses related to the insurance business is increasing, whereas
the premium isn’t increasing simultaneously.

• Out of the profitability ratios, we can see that the ‘return on sales’ is the highest.
However, it shows a decreasing trend, which isn’t a good sign for the company; as the
higher the ratio the better it is for the company.

Related to Investment: For profitability analysis related to investment, we have calculated

four set of ratios. They are-

 Return on equity: The return on equity ratio or ROE is a profitability ratio that
measures the ability of a firm to generate profits from its equity shareholders
investments in the company. In other words, the return on equity ratio shows how
much profit each rupee of common stockholders’ equity generates.
ROE = Net Income÷ Shareholders Equity
 Return on Assets: The return on assets ratio, often called the return on total assets, is
a profitability ratio that measures the net income produced by total assets during a
period by comparing net income to the average total assets. In other words, the return
on assets ratio or ROA measures how efficiently a company can manage its assets to
produce profits during a period.
ROA = Net income÷ Average Total Assets
 Return on Shareholder’ fund : Return on Shareholders’ Funds is one of the ratios of
overall profitability group, which indicates the profitability of a firm in relation to the
funds supplied by the shareholders or owners. This ratio is very important from the
 owner’s point of view as it helps the firm to know whether the firm has earned enough
returns to repay its shareholders or not.
ROSHF = Net Profit after tax÷ Total Shareholder’s Fund
0.3
0.25 YIELD FROM INVESTMENT
0.2
0.15
0.1
0.05
0
Return on Equity Return on Asset Return on
shareholders
fund

2018 2017 2016

INTERPRETATIONS:

 Return on Equity Capital (ROE)

From the graph, we can see that ROE shows a decreasing trend, which indicates that
the equity shareholders are not getting proper return on their investment.

 Return on Assets (ROA)

The ROA also shows a declining trend, which indicates that the company has failed in
effectively utilizing its assets, to generate profit which has led to the downfall in the
profitability ratios.
Also, a declining ROA indicates that the company has put emphasis mainly on
investments rather than acquiring assets.

 Return on shareholder’s fund (ROSHF)

The return on shareholder’s fund however, shows a rising trend which is because, the
company has provided proper returns to its preference shareholders but has failed in
providing returns equally to its equity shareholders.

2. LIQUIDITY RATIO: For liquidity analysis of the company, we have calculated

the following set of ratios:

 Current Ratio : The current ratio is a liquidity and efficiency ratio that measures a
firm’s ability to pay off its short-term liabilities with its current assets. It is calculated
by-
 Current ratio = Current assets ÷ Current Liabilities
 Quick Ratio: The quick ratio is a measure of a company's ability to meet its short-
term obligations using its most liquid assets (near cash or quick assets). Quick assets
include those current assets that presumably can be quickly converted to cash at close
to their book values.
Quick ratio = Quick assets ÷ Current liabilities
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Current Ratio Quick Ratio
2018 2017 2016

INTERPRETATIONS:
• The current ratio shows a rising trend, which indicates that the company has acquired
more current assets to meet its liquidity requirements.

• However, the quick ratio is declining, which indicates that the company isn’t much
efficient in meeting its quick liquidity requirements.

3. LEVERAGE RATIO: For calculating the leverage of the company, we have

calculated the Debt-Equity Ratio; which is a measure of a company's financial
leverage calculated by dividing its total liabilities by stockholders' equity. It indicates
what proportion of equity and debt the company is using to finance its assets.
Debt-Equity Ratio= Total liabilities ÷ Total Equity
 LEVERAGE RATIO
2.5
2
1.5
1
0.5
0
Debt-equity ratio
2018 2017 Series 3

INTERPRETATION-:
The graph shows that there is a significant rise in the debt-equity ratio in the current period,
which means that the company has been aggressive in financing its growth with debt.

4. Market Test ratios: For calculating the market measure, we have calculated the
‘Earnings per share’ and ‘Price Earnings ratio’.
 Earnings per share: Earnings per share (EPS), also called net income per share, is a
market prospect ratio that measures the amount of net income earned per share of
stock outstanding. It shows how profitable a company is on a shareholder basis.
EPS = (Net Income- Preferred Dividend) ÷ weighted average number of outstanding
shares
 Price Earnings ratio: The price earnings ratio, is a market prospect ratio that
calculates the market value of a stock relative to its earnings by comparing the market
price per share by the earnings per share. In other words, the price earnings ratio
shows what the market is willing to pay for a stock based on its current earnings.
PE ratio = Market price per share÷ Earnings per share
 MARKET TEST RATIO
4

0
EPS Price earning ratio
2018 2017 2016

INTERPRETATIONS:
• The EPS shows a rising trend, which means that the company has enough capacity to
pay dividend to its equity shareholders in the current year.

• The Price Earnings ratio shows a falling trend, which indicates that the share is
undervalued in the current period.

5. Turnover ratio: For turnover analysis, we have calculated the following set of
ratios:

 Sales to Capital Employed: The Capital Employed Turnover Ratio or Sales to

Capital Employed ratio shows how efficiently the sales are generated from the capital
employed by the firm. This ratio helps the investors or the creditors to determine the
ability of a firm to generate revenues from the capital employed.
Sales to capital Employed = Net Sales ÷ Capital Employed

 Sales to Fixed assets: It is an efficiency ratio that measures a company’s return on

their investment in property, plant, and equipment by comparing net sales with fixed
assets. In other words, it calculates how efficiently a company is a producing sales
with its machines and equipment.
Sales to fixed Assets = Net Sales ÷ Fixed Assets

 Sales to working Capital: This ratio indicates the amount of money from sales,
generated by a rupee of working capital investment. In other words, it is a ratio
measuring the efficiency of company's working capital utilization in order to generate
the certain level of sales.
Sales to working Capital = Sales ÷ (Current Assets - Current Liabilities)
  Total asset Turnover: The total asset turnover ratio is an efficiency ratio that
measures a company’s ability to generate sales from its assets by comparing net sales
with average total assets. In other words, this ratio shows how efficiently a company
can use its assets to generate sales.
Total Asset Turnover = Net Sales ÷ Average total assets

TURNOVER RATIO
30

25

20

15

10

0
Sales to capital Sales to fixed asset Sales to working Total asset turnover
-5 employed capital ratio

2018 2017 2016

INTERPRETATIONS:
• The Sales to working capital ratio shows a negative figure, which is because the
current liabilities were more than the amount of current assets; this might happen
because the company has emphasized more on acquiring fixed assets rather than
current assets, as we can see a rising trend in the sales to fixed assets ratio.

• The total assets turnover is rising, which is because the company has acquired more
fixed assets during the period.

• The Sales to Fixed Asset is rising, depicting that the company is able to maintain a
good amount of sales in relation to the total amount of fixed assets the company has
acquired over the period.

6. Underwriting ratios: It includes the following set of ratios-

 Loss ratio: The loss ratio is calculated by dividing loss adjustments expenses by
premiums earned. The loss ratio shows what percentage of payouts is being settled
with recipients. The lower the loss ratio the better. Higher loss ratios may indicate that
an insurance company may need better risk management policies to guard against
future possible insurance payouts.
 Loss Ratio = Loss Adjustments ÷ Premiums Earned

 Expense ratio: It is calculated by dividing underwriting expenses by net premiums

earned. Underwriting expenses are the costs of obtaining new policies from insurance
carriers. The lower the expense ratio the better it is, because it means more profits to
the insurance company.
Expense Ratio = Underwriting Expenses ÷ Net Premiums Written
 Combined ratio: This ratio measures the claims losses and operating expenses
against premiums earned. The lower the figure the better. The combined ratio is the
total of estimated claims expenses for a period plus overhead expressed as a
percentage of earned premiums.
Combined Ratio = ( Loss Ratio + Expense Ratio )

0.6
0.4
0.2 2018
0 2017
Loss ratio
ExpenseCombined
ratio ratio
2016

INTERPRETATIONS:
• From the graph we can see that the loss ratio and the combined ratios are highest in
2018 which means that the company paid out more claims than expected, and the
premiums received weren’t enough to cover all the claims.

• However, the expense ratio is very minimum, which shows that the company is
maintaining its underwriting expenses quite meticulously.

7. Premium to Surplus ratio: This ratio measures the level of capital surplus
necessary to write premiums. It is used to measure the capacity of an insurance
company to underwrite new policies. The lower the ratio, the greater the company’s
financial strength.
Premium to Surplus ratio = Net written premium ÷ total equity
 3
2.5
2
1.5 2018
1
0.5 2017
0
Premium 2016
to surplus
ratio

INTERPRETATION:
The ‘premium to surplus ratio’ shows a rising trend, which isn’t a good indication for the
company; as the lower the ratio, the higher is the company’s financial strength, i.e, the
company might not be able to underwrite many new policies during this year.
CONCLUSION:
We used different ratios to analyze the overall financial health of Star Health and Allied
Insurance Ltd. Basically those ratios that focus on their liquidity position, profitability,
leverage etc. After the analysis of all the ratios we calculated, we can conclude that the
overall financial strength of the company is not in a very good position, as the Premium to
Surplus Ratio showed a rising trend. Also it has been seen that the Current Assets of the
company are much less as compared to its Current Liabilities, which is a growing cause of
concern for the company to meet its short term obligations. As a solution to this, the company
might put certain restrictions on Debt financing, as we have seen from its leverage ratio, that
the company has much aggressively used debt as their source of finance. Also it is seen from
the Underwriting Ratios that the company paid more claims than the premiums earned. The
profitability ratios too weren’t in a very good position.

Thus, it can be concluded that the company should take its financing, operating and investing
decisions quite meticulously if it wishes to survive in the Industry.
BIBLIOGRAPHY:

 https://www.academia.edu/Ratio_analysis_of_the_insurance_company
 https://www.myaccountingcourse.com/financial-ratios
 https://www.starhealth.in/about-us