CORPORATE FINANCE

(Financial Analysis and Planning)

RP_CF1_Financial Analysis and Planning

1
Trading Account
 Profit and
Loss Account
Balance
Sheet
Organization Chart for Financial Ratios
 Balance Sheet of Tata Steel Limited, 2012 and 2013
Particulars March-2013 March-2012 Particulars March-2013 March-2012
(in ₹ Crores) (in ₹ Crores) (in ₹ Crores) (in ₹ Crores)
Liabilities and Shareholders’ Equity Assets:
Current Liabilities: Current assets:
Debt due within a year 70.94 65.62 Cash and bank 2,218.11 3,946.99
Payables and Provisions 7,914.17 8,056.30 Accounts receivable 796.92 904.08
Other current liabilities 8,503.54 8,716.57 Inventories 5,257.94 4,858.99
Total Current Liabilities 16,488.65 16,838.49 Other current assets 2,823.63 1905.34
Long-term Debt 23,565.57 21,353.20 Total current assets 11,096.60 11,615.40
Other long-term liabilities 4,338.03 3,119.84 Net Fixed Assets 33,597.34 27,413.01
Total Liabilities 44,392.25 41,311.53 Investments 50,418.80 50,282.52
Share Capital 971.41 971.41 Other Assets 6,764.19 6,492.06
Reserves and Surplus 54,238.27 51,245.05
Others 2,275.00 2,275.00
Total shareholders’ equity 57,484.68 54,491.46
Total Liabilities &
Shareholders’ equity 101,876.93 95,802.99 Total Assets 101,876.93 95,802.99
 Profit and Loss Account of Tata Steel Limited, 2013

Particulars 2013 (₹ Crores) 2012 (₹ Crores)

Sales 38,199.43 33933.46
Other Income 902.04 886.43
Total Revenue: 39,101.47 34819.89
Raw material expenses 9,926.14 8,014.37
Wages and Salaries 3,608.52 3047.26
Selling, general and administrative
Expenses 13,538.53 11346.26
Depreciation 1,640.38 1151.44
EBIT 10,387.90 11260.56
Interest 1,876.77 1,925.42
Tax 2,773.63 3160.93
Exceptional Items -674.53 -511.01
Net Income (PAT) 5,062.97 5663.2
 Measuring Tata Steels’ Financial Performance
Net Working Capital:
Net working capital = current assets – current liabilities
= 11,096.60 – 16,488.65 = ₹ 5,392.05 crores.
• It roughly measures the company’s potential reservoir of cash.
• The bottom portion of the balance sheet shows the sources of the cash that was
used to acquire the net working capital, investments and fixed assets.
• After the long-term liabilities have been paid off, the remaining assets belong to
the common stakeholders.
• The company’s equity is simply the net working capital, investments, and the
fixed assets less the long-term liabilities.
• Part of this equity has come from the sale of shares to investors and the remainder
has come from earnings that the company has retained and invested on behalf of
the shareholders.
 Measuring Tata Steels’ Financial Performance
EBIT:
EBIT = Total revenue – operating expenses – depreciation
= 39,101.47-27,073.19-1,640.38= ₹ 10,387.90 crores.
• Out of total EBIT of 10,387.90 crores, sum of 1,876.77 went to pay the interest on
the short and long-term debt. Debt interest is paid out of pre-tax income.
• ₹ 2,773.63 crores to the government in the form of taxes. The net income(profit
after tax) of Tata Steel is ₹5,062.97 crores.
 Measuring Tata Steels’ Financial Performance
Market-to-Book Ratio:
• At the close of fiscal 2013 Tata Steel’s common stock was priced at ₹315 per
share and there were 9712.15 lakh shares (approximately 97.12 crores)
outstanding.
• Market Capitalization = No. of outstanding shares x Share price per share.
= 97.12 crores x ₹ 315 = ₹ 30,593 crores.
• The book value measures shareholders’ cumulative investment in the company.
The book value Tata Steel’s equity was ₹ 55,210 crores.
• Market Value Added (MVA) = Market value of the firm’s shares - Shareholders’
investments.
• Market Value Added = ₹ 30,593-₹55,210 = ₹ -24,616 crores.
 Measuring Tata Steels’ Financial Performance
Market-to-Book Ratio: (Contd.)
• Market-to-book ratio = Market value of equity/book value of equity
= 30593/55210 = 0.55
• Tata Steel has destroyed about 45% of the value of its shareholders’ investment
over the years.
• Stock market measures of company performance in 2013 (rupee value in million)
Stock Market Value Market-to- Stock Market Market-to-
Added Book ratio Value Added Book ratio
TCS 3,493,195.47 9.78 Jai Prakash -32,065.76 0.76
Associates
ITC 2,218,585.61 9.42 Reliance -50,795.70 0.85
Communications
Infosys 1,525,578.96 4.86 HPCL -57,424.40 0.54
Coal India 1,447,584.40 36.34 Hindalco Industries -117,557.36 0.68
Hindustan 1,207,604.94 36.34 Steel Authority of -162,205.73 0.62
Unilever India
 Measuring Tata Steels’ Financial Performance
Economic Value Added (EVA):
• Cost of capital is the cost, that the company raised from the investors. It is the
minimum acceptable rate of return on capital investment. It is also called as the
opportunity cost of capital.
• The profit after deducting all costs, including the cost of capital, is called as the
company’s economic valued added.
• Total long-term capital, sometimes called total capitalization, is the sum of long-
term debt and shareholders’ equity.
• EVA = (after-tax interest + net income)- (Cost of capital * Capital).
𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
= − Cost of capital ∗ 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
=(return on capital-cost of capital)* total capital.
 Measuring Tata Steels’ Financial Performance
Economic Value Added (EVA):
• At the end of March 2012, Tata Steel’s total capitalization amounted to ₹73,570
cores (₹21,353.20 crores of debt + ₹ 52,216.46 crores of equity).
• Investors who provided the ₹73,570 crores required the company in 2013 to earn
at least 0.18*73,569.77 = ₹13,242.54 crores for its debt and equity holders.
• Tata Steel’s weighted average cost of Capital was about 18%, tax rate 34%.
• EVA = (after-tax interest + net income)- (Cost of capital * Capital).
= (1−0.34)∗1876.77+5062.97 -13,242.54
= ₹-6,940.90 crores.
 Measuring Tata Steels’ Financial Performance
Return on Capital (ROC):
𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
• Return on capital =
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
1−0.34 𝑋 1,876.77+5,602.97
=
73,569.77
= 0.092= 8.57%
• The company’s cost of capital (WACC) was about 18%. So we can say that the
company earned 9.43% less than investors demanded.
Return on Equity (ROE):
• Return on equity is the measure, as the income to shareholders per rupee
invested.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 5,062.97
• Return on Equity = = = 0.097 = 9.7%.
𝐸𝑞𝑢𝑖𝑡𝑦 52,216.46
• Note: Tata Steel’s cost of equity in 2012 was about 22%.
 Measuring Tata Steels’ Financial Performance
Return on Assets (ROA):
• Return on assets measures the income available to debt and equity investors per
rupee of the firm’s total assets.

𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

• Return on Assets =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
1−0.34 𝑋 1,876.77+5,062.97
=
95,802.99
= 0.0657= 6.57%
 Measuring Efficiency
Assets Turnover Ratio:
• The assets turnover, or sales to assets, ratio shows how much sales are generated
by each rupee of total assets.
𝑆𝑎𝑙𝑒𝑠
Assets turnover =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑦𝑒𝑎𝑟
38,199.43
= = 0.40
95,802.99
𝑆𝑎𝑙𝑒𝑠
Assets turnover =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
38,199.43
= = 0.39
(95,802.99+101,876.93)/2
 Measuring Efficiency (Contd.)
Inventory Turnover Ratio:
𝑆𝑎𝑙𝑒𝑠 38,199.43
Inventory turnover = = = 5.1007
𝐴𝑣𝑔. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 (4,858.99+5257.94)/2
𝐴𝑣𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Average days in inventory =
𝐷𝑎𝑖𝑙𝑦 𝑆𝑎𝑙𝑒𝑠
7488.96
= = 71.56 days.
38,199.43/365
• This measure explains the how many days of output are represented by
inventories.
Receivables Turnover Ratio:
𝑆𝑎𝑙𝑒𝑠 38,199.43
Receivables turnover = = = 44.90
𝐴𝑣𝑔.𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (904.48+796.92)/2
𝐴𝑣𝑔 𝑅𝑒𝑐𝑖𝑒𝑣𝑎𝑏𝑙𝑒𝑠
Average collection period=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑆𝑎𝑙𝑒𝑠
850.70
= = 8.13 days.
38,199.43/365
• The faster the firm turn over its receivables, the shorter the collection period.
 Measuring Leverage
Debt Ratio:
𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 23,565.57
Long-term debt ratio = = = 0.30=30%
𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡+𝑒𝑞𝑢𝑖𝑡𝑦 23,565.57+55,209.68

𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 23,565.57

Debt to equity ratio= = = 0.43.
𝐸𝑞𝑢𝑖𝑡𝑦 55,209.68

𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 44,392.25

Total debt ratio= = = 0.4368.
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 101,876.93
Interest-Earned ratio:
• One measure of financial leverage is the extent to which interest obligations are
covered by earnings.
𝐸𝐵𝐼𝑇 10,387.9
Interest coverage ratio = = = 5.53
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
1,876.77
 Measuring Leverage (Contd.)
Cash Coverage ratio:
𝐸𝐵𝐼𝑇+𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 10,387.90+1,640.38
Cash coverage ratio = = = 6.41
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑛𝑒𝑡𝑠 1,876.77
 Measuring Liquidity
Current ratio:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 11,096.30
Current ratio = = = 0.67
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 16,488.65
• Changes in the current ratio can be misleading. It is preferable to consider short-
term investments against short-term debt while calculating the current ratio.

Quick (Acid-test) ratio:

𝐶𝑎𝑠ℎ+𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠+𝑟𝑒𝑐𝑖𝑒𝑣𝑎𝑏𝑙𝑒𝑠 2,218.11+796.92
Quick ratio = = = 0.18
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 16,488.65

Cash ratio:
• A company’s most liquid assets are its holding of cash and marketable securities.
𝐶𝑎𝑠ℎ+𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 2,218.11
Cash ratio = = = 0.13
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 16,488.65
 Ratio Analysis: Practice Problems
1. With the help of the following information, complete the Balance Sheet of JP
Ltd.
Equity Rs. 100,000
The relevant ratios of the firm are as follows:
Current debt to total debt .40
Total debt to owners’ equity .60
Fixed assets to owners’ equity .60
Total assets turnover 2 times
Inventory turnover 8 times
 Ratio Analysis: Practice Problems
2. Debtors’ velocity 3 months
Creditors’ velocity 3 months
Stock velocity 2 months
Fixed Assets-Turnover Ratio 2.5 times
Capital-Turnover Ratio 1.5 times
Gross Profit Margin 25%

Gross Profit for the year amounts to Rs. 1,15,000. Reserve and Surplus amounts to Rs. 40,000.
Liquid Assets are Rs. 1,10,000. Closing Stock of the year is Rs. 15,000 more than the Opening
Stock. Bills Receivable and Bills Payable at the end of the year amount to Rs. 10,000 and Rs.
8,000 respectively. There is no long-term loan or bank overdraft.

From the above information you are required to find out: (a) Sales, (b) Purchases, (c) Sundry
Creditors, (d) Sundry Debtors, (e) Closing Stock, (f) Fixed Assets, (g) Share Capital.
Note:It is assumed that all purchases are on credit basis and average payables are equal to
closing payables