INDEX

S.NO TOPIC PAGE NUMBER

1. Introduction 1-4

2. Uses of financial ratio analysis 4

3. Ratio 5-9

4. Analysis and interpretation 10-11

5. Conclusion 12
Introduction

Financial analysis (also referred to as financial statement

analysis or accounting analysis or Analysis of finance) refers to an
assessment of the viability, stability, and profitability of a business,
sub-business or project.
It is performed by professionals who prepare reports using ratios that make
use of information taken from financial statements and other reports.
These reports are usually presented to top management as one of their
bases in making business decisions. Financial analysis may determine if a
business will:

Continue or discontinue its main operation or part of its business;

 Make or purchase certain materials in the manufacture of its

product;
 Acquire or rent/lease certain machineries and equipment in the
production of its goods;
 Issue stocks or negotiate for a bank loan to increase its working
capital;
 Make decisions regarding investing or lending capital;
 Make other decisions that allow management to make an informed
selection on various alternatives in the conduct of its business

Ratios can be invaluable tools for making decisions about companies you
might want to invest in. Across the industry, they are used by
individual investors and professional analysts, and there are a variety of
ratios to use. Financial ratios are typically cast into four categories:

 Profitability ratios
 Liquidity ratios
 Solvency ratios
 Valuation ratios

Profitability Ratios
Profitability is a key aspect to analyze when considering to invest in a
company. This is because high revenues alone don't necessarily translate
into high earnings or high dividends. In general, profitability analysis
seeks to analyze business productivity from multiple angles using a few

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different scenarios. Profitability ratios help provide insight into how
much profit a company generates and how that profit relates to other
important information about the company.

Some key profitability ratios include:

 Gross margin
 Operating margin
 Net margin
 EBITDA margin
 Cash flow margin
 Return on assets
 Return on equity
 Return on invested capital

One of the leading ratios used by investors for a quick check of

profitability is the net profit margin.

Net profit margin is calculated as follows:

Profit Margin=Net Income/Revenue

This ratio compares a company’s net income to its revenue. In general,

the higher a company's profit margin, the better. A net profit margin of 1
means a company is converting all of its revenue to net income. Profit
margin levels vary across industries and time periods as this ratio can be
affected by several factors. Thus, it is also helpful to look at a company's
net profit margin versus the industry and the company’s historical
average.

With net profit margin, there can be a few red flags you should watch out
for, especially if the company sees decreasing profit
margins year-over-year. Oftentimes, this suggests changing market
conditions, increasing competition, or rising costs.

If a company has a really low-profit margin, it may need to focus on

decreasing expenses through wide-scale strategic initiatives. A really
high-profit margin relative to the industry may indicate a significant
advantage in economies of scale or potentially some accounting schemes
that may not be sustainable for the long term.

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Methods
Financial analysts often compare financial
ratios (of solvency, profitability, growth, etc.):

 Past Performance - Across historical time periods for the same

firm (the last 5 years for example),
 Future Performance - Using historical figures and certain
mathematical and statistical techniques, including present and future
values, This extrapolation method is the main source of errors in
financial analysis as past statistics can be poor predictors of future
prospects.
 Comparative Performance - Comparison between similar firms.
These ratios are calculated by dividing a (group of) account balance(s),
taken from the balance sheet and/or the income statement, by another, for
example :
Net income / equity = return on equity (ROE)
Net income / total assets = return on assets (ROA)
Stock price / earnings per share = P/E ratio
Comparing financial ratios is merely one way of conducting financial
analysis. Financial ratios face several theoretical challenges:

 They say little about the firm's prospects in an absolute sense.

Their insights about relative performance require a reference point
from other time periods or similar firms.
 One ratio holds little meaning. As indicators, ratios can be logically
interpreted in at least two ways.[why?] One can partially overcome
this problem by combining several related ratios to paint a more
comprehensive picture of the firm's performance.
 Seasonal factors may prevent year-end values from being
representative. A ratio's values may be distorted as account balances
change from the beginning to the end of an accounting period. Use
average values for such accounts whenever possible.
 Financial ratios are no more objective than the accounting methods
employed. Changes in accounting policies or choices can yield
drastically different ratio values.

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Financial analysts can also use percentage analysis which involves
reducing a series of figures as a percentage of some base amount. For
example, a group of items can be expressed as a percentage of net income.
When proportionate changes in the same figure over a given time period
expressed as a percentage is known as horizontal analysis. Vertical or
common-size analysis reduces all items on a statement to a "common
size" as a percentage of some base value which assists in comparability
with other companies of different sizes. As a result, all Income Statement
items are divided by Sales, and all Balance Sheet items are divided by
Total Assets.
Another method is comparative analysis. This provides a better way to
determine trends. Comparative analysis presents the same information for
two or more time periods and is presented side-by-side to allow for easy
analysis.

Uses and Users of Financial Ratio Analysis

Analysis of financial ratios serves two main purposes:

1. Track company performance:

Determining individual financial ratios per period and tracking the

change in their values over time is done to spot trends that may be
developing in a company. For example, an increasing debt-to-asset ratio
may indicate that a company is overburdened with debt and may
eventually be facing default risk.

2. Make comparative judgments regarding company performance

Comparing financial ratios with that of major competitors is done to

identify whether the company is performing better or worse than the
industry average. For example, comparing the return on assets between
companies helps an analyst or investor to determine which of the
company’s assets are being used most efficiently.

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Users of financial ratios include parties external and internal to the
company:

 External users: Financial analysts, retail investors, creditors,

competitors, tax authorities, regulatory authorities, and industry
observers
 Internal users: Management team, employees, and owners

Liquidity Ratios

Liquidity ratios are financial ratios that measure a company’s ability to

repay both short- and long-term obligations. Common liquidity ratios
include the following:

The current ratio measures a company’s ability to pay off short-term

liabilities with current assets:

Current ratio = Current assets / Current liabilities

The acid-test ratio measures a company’s ability to pay off short-term

liabilities with quick assets:

Acid-test ratio = Current assets – Inventories / Current liabilities

The cash ratio measures a company’s ability to pay off short-term

liabilities with cash and cash equivalents:

Cash ratio = Cash and Cash equivalents / Current Liabilities

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The operating cash flow ratio is a measure of the number of times a
company can pay off current liabilities with the cash generated in a given
period:

Operating cash flow ratio = Operating cash flow / Current liabilities

Leverage Financial Ratios

Leverage ratios measure the amount of capital that comes from debt. In
other words, leverage financial ratios are used to evaluate a company’s
debt levels. Common leverage ratios include the following:

The debt ratio measures the relative amount of a company’s assets that
are provided from debt:

Debt ratio = Total liabilities / Total assets

The debt to equity ratio calculates the weight of total debt and financial
liabilities against shareholders equity:

Debt to equity ratio = Total liabilities / Shareholder’s equity

The interest coverage ratio determines how easily a company can pay its
interest expenses:

Interest coverage ratio = Operating income / Interest expenses

The debt service coverage ratio determines how easily a company can
pay its debt obligations:

Debt service coverage ratio = Operating income / Total debt service

Efficiency Ratios

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Efficiency ratios, also known as activity financial ratios, are used to
measure how well a company is utilizing its assets and resources.
Common efficiency ratios include:

The asset turnover ratio measures a company’s ability to generate sales

from assets:

Asset turnover ratio = Net sales / Total assets

The inventory turnover ratio measures how many times a company’s

inventory is sold and replaced over a given period:

Inventory turnover ratio = Cost of goods sold / Average inventory

The accounts receivable turnover ratio measures how many times a

company can turn receivables into cash over a given period:

Receivables turnover ratio = Net credit sales / Average accounts

receivable

The days sales in inventory ratio measures the average number of days
that a company holds onto its inventory before selling it to customers:

Days sales in inventory ratio = 365 days / Inventory turnover ratio

Profitability Ratios

Profitability ratios measure a company’s ability to generate income

relative to revenue, balance sheet assets, operating costs, and equity.
Common profitability financial ratios include the following:

The gross margin ratio compares the gross profit of a company to its net
sales to show how much profit a company makes after paying off its cost
of goods sold:

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 Gross margin ratio = Gross profit / Net sales

The operating margin ratio compares the operating income of a company

to its net sales to determine operating efficiency:

Operating margin ratio = Operating income / Net sales

The return on assets ratio measures how efficiently a company is using its
assets to generate profit:

Return on assets ratio = Net income / Total assets

The return on equity ratio measures how efficiently a company is using

its equity to generate profit:

Return on equity ratio = Net income / Shareholder’s equity

Market Value Ratios

Market value ratios are used to evaluate the share price of a company’s
stock. Common market value ratios include the following:

The book value per share ratio calculates the per-share value of a
company based on equity available to shareholders:

Book value per share ratio = Shareholder’s equity / Total shares

outstanding

The dividend yield ratio measures the amount of dividends attributed to

shareholders relative to the market value per share:

Dividend yield ratio = Dividend per share / Share price

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The earnings per share ratio measures the amount of net income earned
for each share outstanding:

Earnings per share ratio = Net earnings / Total shares outstanding

The price-earnings ratio compares a company’s share price to the

earnings per share:

Price-earnings ratio = Share price / Earnings per share

TATA MOTORS 2017-18 Annual Report Analysis

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 ANALYSIS AND INTERPRETATION

1. Current ratio = Current assets / Current liabilities

2018 2017
C. R = 14971.66/24218.95 C.R = 12757.08/21538.35

= 0.61 = 0.59

2. Acid-test ratio = Current assets – Inventories / Current liabilities

2018 2017

Q. R = 14971.66-5670.13/24218.95 R. R = 12757.08-5553.01/21538.35

= 038 = 0.33

3. Cash ratio = Cash and Cash equivalents / Current Liabilities

2018 2017

D. R = 546.92/24218.95 C. R = 228.94/21538.35

= 0.0225 = 0.011

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4. Debt ratio = Total liabilities / Total assets

2018 2017
D. R = 39041.32/59212.30 D.R = 37715.67/58878.28

= 0.65 =0.64

5. Debt to equity ratio = Total liabilities / Shareholder’s equity

2018 2017
D.E.R = 39041.32/20170.99 D.E.R = 37715.67/21162.61

= 1.935 = 1.782

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Conclusion

As we can see from the above ratio calculations the firm is not
liquid enough to meet its current liabilities. The ideal current
ratio is 2:1 but the firm lags way behind that mark.

As far as debt ratio is concerned the company is not looking

good either. The company has accured a lot of its assets on debt
which is not good as far as it is looked at from the investment
point of view.

The debt to equity ratio also shows that the companies liabilities
are very high. The company should use more of equity money
because they do not require interest to be paid on them rather
than debt which does.

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