ACCOUNTING FUNDAMENTALS

(FIN 101)

Term Assignment
On

“RATIO ANALYSIS”

POST GRADUATE DIPLOMA IN MANAGEMENT

(Term-I; Batch 2019-21)

Under the Supervision of

Prof. MOIDUDDIN AHMAD

Submitted by
Study Group 10
Roll no: NAME
PGFC1935 SHREYA JAIN
PGFC1927 RESHMA CHAUHAN
PGFC1919 NISHI RANA
PGFC 1949 YASHASVI
PGFC 1952 DEEPAK TYAGI

JAIPURIA INSTITUTE OF MANAGEMENT

A-32 A, Sector 62, Institutional Area, Noida- 201309 (U.P.)
AUGUST 5, 2019
 RATIO ANALYSIS

JK TYRES

The relationship between two accounting or mathematical figures which helps the
company in financial planning and analysis. Ratio analysis is used to to evaluate
different entities based on the various set ratios:

1. LIQUIDITY RATIOS/SHORT TERM SOLVENCY RATIOS

2. LEVERAGE RATIOS/LONG TERM SOLVENCY RATIOS
3. ACTIVITY RATIOS/EFFICIENCY RATIOS/PERFORMANCE RATIOS
4. PROFITABILITY RATIOS

Financial ratios helps us in:

 Decision making regarding the firm

 It helps us to find the performance of the company from previous year
evaluations.
 It helps to find the strengths and the weakness of the firm and how can we
use these ratios for improvement financially
1. LIQUIDITY RATIOS

 CURRENT RATIO:

CR= Current Assets/Current Liabilities

For the year 2018-19 (rupees in crores)
Current assets=3240.63
Current liabilities=3106.11
Current ratio = current assets/current liabilities
= (3240.63/3106.11)
= 1.04
For the year 2017-18 (rupees in crores)
Current assets= 2801.82
Current liabilities= 3379.93
Current ratio= current assets/current liabilities
= (2801.82/3379.93)
= 0.83

INTERPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The current ratio of jk tyre for 2018-19> 2017-18 by 0.21 which states that it
is better now as in the previous year the current assets of the company were
not enough to bear the short-term obligations which now has improved as
the current assets will now be able to bear the short-term obligations on
time.

INTERPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

The ideal current ratio is 2:1 which means that the company’s assets are
twice as large as the current liabilities, here in the year 2018-19 it is 1.04
which states that the current assets are almost equal to meet the short term
obligations, whereas in 2017-18 it is 0.83 which states that that for every 1
Rs of current liabilities we have 0.83 Rs of current liabilities, thus short term
obligations cannot meet on time.

INTEPRETATION 3: (ON THE BASIS OF THE INDUSTRY AVERAGE)

The industry average of automobiles sector is 1.23 which is more than the
company current ratio 1.04 which states that though the current assets can
meet the short-term obligations but not as efficiently as the industry.
 QUICK RATIO OR ACID TEST RATIO:

QR = Quick assets/current liabilities

Quick Assets: Current Assets-inventories-prepaid expenses-advance tax

For the year ended 2018-19(rupees in crores)

Quick assets=2104.51 (3240.63-1136.12)
Current liabilities= 3106.11
Quick ratio= (quick assets/current liabilities)
= (2104.51/3106.11)
= 0.68
For the year ended 2017-18(rupees in crores)
Quick assets= 1775.81 (2801.82-1026.01)
Current liabilities= 3379.93
Quick ratio= (quick assets/current liabilities)
= (1775.81/3379.93)
= 0.53

INTERPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The quick ratio of 2018-19>2017-18 which is a state of better position as the
company has more liquid assets to meet its current liabilities now than the
previous year, but it is not enough as the quick ratio is less than 1, so the
company needs to increase its quick assets to become more liquid.

INTERPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

The ideal quick ratio is 1:1 which states that for every Re1 of current assets
there is Re1 of current liabilities to be paid off. For both the years the quick
ratio is less than 1, but the company though is improving its quick ratio, will
not be able to meets its current liabilities on time right now.

INTEPRETATION 3: (ON THE BASIS OF INDUSTRY AVERAGE)

The industry average of quick ratio for automobiles is 0.19 which is quite
less and in comparison, to that jk tyre is having a good quick ratio the
company just have to work more on how to increase its liquid assets in order
to meet its current liabilities.
2. LEVERAGE RATIOS / LONG-TERM SOLVENCY RATIOS

 DEBT-EQUITY RATIO = (Long term debt/Shareholder’s fund)

OR
(Total Outside liabilities/Shareholder’s equity)

For the year ended 2018-19(rupees in crores)

Total debt= 1558.22
Shareholder’s fund= 1995.12
Debt equity ratio= (total debt/shareholder’s fund)
= (1558.22/1995.12)
= 0.78
For the year ended 2017-18(rupees in crores)
Total debt= 1457.75
Shareholder’s fund= 1644.29
Debt equity ratio= (total debt/shareholder’s fund)
= (1457.75/1644.29)
= 0.89

INTEPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The debt equity ratio refers to proportion of debt fund in relation to equity,
the debt equity of the year 2018-19<2017-18 which states that the business
is more financially balanced, as the interest of the lenders is more than the
creditors, the company’s major assets are financed through equity.

INTEPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

The ideal debt equity ratio is 2:1, the company’s ratio is lower as compared
to the ideal ratio which states that less money has been raised through debt
rather than equity and thus business is more financially balanced, and
investors and creditors prefer low balances as they are better protected.

INTEPRETATION 3: (ON THE BASIS OF INDUSTRY AVERAGE)

The industry average of the industry is 2.61 which is quite high, as compared
to the company, which is a good sign for the tyre company as the company
is more financially stable and lenders see this ratio while investing in the
business, as it provides a safety cushion, and is an indicator of company’s
financial leverage.
 DEBT RATIO OR DEBT TO CAPITAL EMPLOYED RATIO

DR= (Long term debt/capital employed)

OR
(Total debt/capital employed)

For the year ended 2018-19(rupees in crores)

Long term debt=1558.22
Capital employed= 3553.34 (1558.22+1995.12)
Debt ratio= (total debt/capital employed)
= (1558.22/3553.34)
= 0.44
For the year ended 2017-18(rupees in crores)
Long term debt=1457.75
Capital employed= 3102.04(1457.75+1644.29)
Debt ratio= (total debt/capital employed)
= (1457.75/3102.04)
= 0.47

INTEPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The debt to capital employed ratio of the year 2018-19<2017-18 which
states that the total obligations of the company to the total capital is
decreasing which is a good state, as it makes the investments in the company
a less riskier.
The company tries to keep the debt to capital employed ratio less because of
less risk and high debt interest and more investment opportunities. Thus,
here the company ratio is decreasing which is a good sign.
  INTEREST COVERAGE RATIO OR TIMER INTEREST EARNED:

ICR= (PBIT/Interest on long term debt)

For the year ended 2018-19(rupees in crores)

Pbit = 620.96 (304.68+316.28)
Interest on Ltb = 316.28
ICR= (pbit/interest on Ltb)
= (620.96/316.28)
=1.96

For the year ended 2017-18(rupees in crores)

Pbit = 337.97 (63.85+274.12)
Interest on Ltb = 274.12
ICR = (pbit/interest on Ltb)
= (337.97/274.12)
= 1.23

INTEPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The interest coverage ratio of the year 2018-19>2017-18 which is a good sign as
the higher the ratio, the better is the ability of the company to pay interest on its
outstanding debt amount. The company should try to increase its interest coverage
ratio to more than 2 and nearing 3 as it is considered as a good ratio.

INTERPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

The ideal interest coverage ratio is considered 2:1 for the companies that has solid
revenues, otherwise a ratio of 3 or more is considered good by the analyst. Here
though jk tyre had improved its interest ratio, it should further try to improve it
more.

INTERPRETATION 3: (ON THE BASIS OF INDUSTRY AVERAGE)

The industry average of interest coverage ratio is 1.69 which is less than 2, thus not
a good ratio, in that respect jk tyre is doing better, as the industry average indicates
a low ability of the company to pay interest on the debt amount, thus the
companies under this industry is having a ratio nearing 2 approximately.
 3. PROFITABILITY RATIOS

 GROSS PROFIT RATIO:

GPR= (Gross Profit/Net Revenue from operations)

For the year ended 2018-19 (rupees in crores)

GP = Revenue from operations- Cost of Revenue (COGS)
Where,
COGS= Cost of materials consumed+ Purchases of stock-in-trade+ Changes in
inventory
=7613.35 – [4071.30+1273.24+(180.24)]
=7613.35-5164.3
=2449.05
GPR = (2449.05/7613.35)
= 0.32
Gross Profit Margin= 0.32*100 = 32%

For the year ended 2017-18(rupees in crores)

GP = 6578.50 – [3748.74+667.96+(69.80)]
=6578.50 – 4346.9
= 2231.6
GPR= (2231.6/6578.50)
= 0.34
Gross Profit Margin= 0.34*100= 34%

INTERPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The Gross Profit ratio of JK tyres for 2018-19< 2017-18 which states that it was
better earlier as compared to the current year as in the current year cost of goods
sold (changes in inventory) was high, and thus company should aim to increase gp
ratio for better operational performance of the business.

INTERPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

GPR OR GPM is good in both the years as a good gross profit ratio is 20% or
above which is there in both the years whereas the profit margin of 10% or more is
considered to be average though there has been no standard set for gp ratio. A
higher gross profit margin indicates that a company can make a reasonable profit
on sales and thus a good sign of management.

 OPERATING RATIO/OPERATING EXPENSE RATIO

Operating Ratio= (Cost of Revenue+ Operating expenses/Net revenue)

For the year ended 2018-19 (rupees in crores)

Cost of revenue = 5164.3
Operating expenses = 560.36+316.28+188.36+1157.49
= 2222.49
Net revenue = 7689.67
Operating ratio = 7386.79(5164.3+2222.49)/ 7689.67
= 0.960
Operating Margin = 0.960*100 = 96%

For the year ended 2017-18 (rupees in crores)

Cost of revenue= 4346.9
Operating expenses= 523.60+274.12+175.14+125.15+1095.50
= 2193.51
Net revenue = 6610.95
Operating Ratio = 6540.41(4346.9+2193.51)/ 6610.95
= 0.99
Operating Margin= 0.99*100 = 99%

INTERPRETATION 1 (ON THE BASIS OF PREVIOUS YEAR)

The operating ratio of JK Tyres is less in the current year as compared to the
previous year. The smaller the operating ratio the greater is the organization ability
to generate the profit. Hence, the ability to generate profit increased in the current
year and was not in the previous year.

INTERPRETATION 2 (ON THE BASIS OF IDEAL RATIO)

The company’s operating ratio decreased in the current year because the company
has lowered its expenses and there is no excise duty paid on sales and thus
generating a better revenue. The average operating ratio is 60-80% but the
company is having quite high operating expense ratio thus the company should
work to decrease its operating expenses.
  NET PROFIT RATIO

NET PROFIT RATIO= Net Profit/ Net revenue or Total Revenue

For the year ended 2018-19 (rupees in crores)

Net profit = 204.40
Net revenue = 7689.67
Net profit ratio= 204.40/ 7689.67
= 0.026
Net Profit Margin = 0.026*100 = 2.65%

For the year ended 2017-18 (rupees in crores)

Net profit = 43.09
Net revenue = 6610.95
Net Profit Ratio = 43.09/ 6610.95
=0.006
Net Profit Margin= 0.006*100 = 0.6%

INTERPRETATION 1 (ON THE BASIS OF PREVIOUS YEAR)

The Net Profit Ratio of current year is more than the previous year which means
that the company in the current year has more ability to convert the sales into
profits so, a more net profit ratio is good from the company’s point of view as it
ensures good returns in the business.

INTERPRETATION 2 (ON THE BASIS OF IDEAL RATIO)

A 10% net profit margin is considered to be average, 20% margin is considered
good and 5% margin is considered to be poor in nature. The company’s net profit
margin is low which is not a good sign as company’s earning from sales is reduced
thus company should try to increase its net profit margin.

INTEPRETATION 3: (ON THE BASIS OF INDUSTRY AVERAGE)

The industry average of net profit margin for automotive industry is 0.84 which is
less, but the company’s performance in comparison to it is good. The company is
acquiring a better amount of profit from the sales of the products.
 RETURN ON CAPITAL EMPLOYED/RETURN ON INVESTMENT

ROCE = ROI = PBIT/Capital employed

For the year ended 2018-19 (rupees in crores)

Pbit= 620.96(304.68+316.28)
Capital employed= 3553.34(1995.12+1558.22)
ROCE= Pbit/capital employed
= 620.96/3553.34
= 0.174
= 0.174*100 =17.4%

For the year ended 2017-18(rupees in crores)

Pbit = 337.97 (63.85+274.12)
Capital employed= 3102.04(1644.29+1457.75)
ROCE= Pbit/capital employed
= 337.97/3102.04
= 0.108
= 0.108*100 = 10.8%

INTEPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The higher is the capital employed ratio the better it is. In this scenario the
ROCE for the year 2018-19>2017-18. It shows how much return of profit
that can be reinvested in the business for betterment of shareholders. The
pbit has increased a lot in the current year as compared to the previous year
thus such a difference in the ratio.

INTEPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

There is no such ideal return on capital employed but the higher the ratio the
better it is considered. It is a measure of company’s profitability and how
efficiently is the capital being employed. The company is towards a positive
note, increasing its ROCE ratio.

INTEPRETATION 3: (ON THE BASIS OF INDUSTRY AVERAGE)

 The average industry return on capital employed is 11.73% which is less
than the current year ROCE. Thus, the company on its own is doing better
than the industry averages.

 RETURN ON SHAREHOLDER’S FUND/RETURN ON NETWORTH

Return on shareholder’s fund= Net profit/Shareholder’s fund

For the year ended 2018-19 (rupees in crores)

Net profit after tax= 204.40
Shareholder’s fund= 1995.12
Return on shareholder’s fund= Net profit after tax/ Shareholder’s fund
= 204.40/1995.12
= 0.1024
=10.24%
For the year ended 2017-18 (rupees in crores)
Net profit after tax= 43.09
Shareholder’s fund= 1644.29
Return on shareholder’s fund = 43.09/ 1644.29
= 0.0262
= 2.62%

INTERPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The return on shareholder’s fund has increased in the current year as compared to
the previous year. This ratio is a measure of efficiency of the business rather than
the profitability, it tells us how much the company is efficient to generate profits
without depending on capital.

INTERPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

A good return on shareholder’s fund is considered to be around 15-20%.The
company though have return on equity less than the ideal ratio but is improving
and from the previous year it has shown a remarkable improvement. Thus, it is
able to generate more of cash now internally.

INTEPRETATION 3: (ON THE BASIS OF INDUSTRY AVERAGE)

The industry average of return on net-worth is 7.71 which is less but having a very
high return on net worth is also not a good sign on financial performance of the
company, as high leverage is dangerous for company’s solvency.
  BOOK VALUE PER SHARE

Book value per share= Equity shareholder’s fund/Number of equity shares

For the year ended 2018-19(rupees in crores)

Equity shareholder’s fund= 1995.12
Number of equity shares= 62,50,00,000
Book value per share = 1995.12/62.5
= Rs32

For the year ended 2017-18(rupees in crores)

Equity shareholder’s fund= 1644.29
Number of equity shares= 62,50,00,000
Book value per share= 1644.29/62.5
= Rs26

INTEPRETAION 1: (ON THE BASIS OF PREVIOUS YEAR)

The book value per share of the year 2018-19>2017-18 which states that the shares
of the current year are having higher value than the shares of the previous year.
4. ACTIVITY RATIOS / EFFICIENCY RATIOS

 INVENTORY TURNOVER RATIO

Inventory turnover ratio= Cost of revenue/Average inventory

For the year ended 2018-19(rupees in crores)

Cost of revenue= 5164.3
Average inventory= (1026.01+1136.12)/2
= 1081.065
ITO= 5164.3/1081.065
= 4.78

For the year ended 2017-18(rupees in crores)

Cost of revenue= 4346.9
Average inventory= (1026.01+930.78)/2
= 978.395
ITO= 4346.9/978.395
= 4.44

INTERPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The inventory turnover ratio is used to show in how much time the inventory
stored is converted into sales. The inventory turnover ratio of 2018-
19>2017-18 which is good sign as higher the inventory turnover the higher
is its convertibility into cash.

INTERPRETATION 2: (ON THE BASIS OF IDEAL RATIO)

The ideal inventory turnover ratio for most companies is from 4 to 6. Thus,
in comparison to it the current ratio is good as it shows in what time is the
stock level restocked with respect to sales.
  FIXED ASSETS TURNOVER RATIO

Fixed assets turnover ratio = Net revenue from operations/net fixed assets

For the year ended 2018-19 (rupees in crores)

Net revenue from operations= 7613.35
Net fixed assets= 4164.75
FATO= (7613.35/4164.75)
= 1.83

For the year ended 2017-18 (rupees in crores)

Net revenue from operations= 6578.50
Net fixed assets= 4376.59
FATO= (6578.50/4376.59)
= 1.50

INTERPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)

The fixed assets turnover ratio of 2018-19>2017-18 which is better as higher the
ratio the better is the company’s ability to generate sales from its net fixed assets.

 TOTAL ASSETS TURNOVER RATIO

Total assets turnover ratio= Sales or Cogs/Total assets

For the year ended 2018-19 (rupees in crores)

Cogs= 5164.3
Total assets = 7405.38
Total assets turnover ratio = (5164.3/7405.38)
= 0.70

For the year ended 2017-18 (rupees in crores)

Cogs = 4346.9
Total assets = 7178.41
Total assets turnover ratio = (4346.9/7178.41)
= 0.61
 INTERPRETATION 1: (ON THE BASIS OF PREVIOUS YEAR)
The assets turnover ratio is better in the current year as compared to the previous
year, it shows that firm uses its assets efficiently with respect to the total assets.