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Financial Ratio Analysis: Tata Steel
Financial Ratio Analysis: Tata Steel
Financial Ratio Analysis: Tata Steel
2009
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1. Liquidity Ratios:Liquidity Ratios measures the ability of the firm to meet its short term obligations. They also reflect the firms ability to meet financial contingencies that might arise.
(A) Current Ratio: - This ratio indicates the firms 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.
As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.) Year 2008 2009 Current Asset 3,613.70 5,707.05 Current Liabilities 3,855.26 6,039.86 Current Ratio 0.94 0.94
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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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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.
As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.)
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Year
Current Ratio
2008 2009
13,570.52 3,442.72
3,855.26 6,039.86
3.52 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 companys effectiveness on generating profit. In other words the profitability ratio reflects a companys 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.
As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
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.
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As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
Profit
(C ) Net Profit Ratio: - It relates the firms Net Profit and the firms 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.
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As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
Analysis: - We can see that there is a decrease in the Net Profit Margin. Actually it indicates the firms 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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As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.)
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Year
Total Assets
2008 2009
47,075.52 58,741.77
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.
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As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
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 companys 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.
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As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore.)
Year
2008 2009
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.
As per Balance Sheet &P&L 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
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(4) Debt Equity Ratio:- Though it doesnt 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.
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As per Balance Sheet &P&L 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
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.
As per Balance Sheet &P&L 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
Analysis: It actually measures the firms ability to meet the interest obligations. Here in this case we can see that the interest coverage ratio is decreasing, it means the firms 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.
As per Balance Sheet &P&L 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
Analysis: - It actually denotes the companys future prospect. As here we can see that there is decrease in the price earnings ratio it shows a decrease in companys growth profile.
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.
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Earnings per share: (Net profit after taxes Preference dividends) / Number of ordinary shares
As per Balance Sheet &P&L 31 March 2008 & 2009. (All figures are in crore.)
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Year
2008 2009
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 Holders prospective also. Seeing more earning there is a chance for share holders to invest on the company.