MANAGEMENT

ACCOUNTING - I

- Dr. Sandeep Goel

 FOCUS

FINANCIAL ANALYSIS

- Dr. Sandeep Goel

 WHY FINANCIAL ANALYSIS?

Two sets of Users…

 Internal users

 External users
TOOLS/TECHNIQUES OF FINANCIAL
ANALYSIS 

Horizontal Analysis
Vertical Analysis
Trend Analysis
Ratio Analysis
Du Pont Analysis
 
 Comparative Analysis / Horizontal Analysis

• To determine the comparative performance of the current year

with respect to previous year.
 Vertical Analysis / Common-size Analysis

• To determine ‘Item-wise Performance’.

(i) To determine the contribution of an individual item in the

total.

(ii) Also, to find out the performance of an item in regard to a

common base.

 It is also known as Common-size Analysis as all items are

converted into one common size ,that is 100.
 Trend Analysis
 

• To find out the trend – Pattern of Change over longer time

periods such as 5 or 10 years.

 
 WHAT IS
PROFIT/EARNING?
Profit
= Income – Expenses

Profit Variants
- Gross Profit ( Sales – COGS)
- EBITDA (Cash Operating Profit)
- EBIT(PBIT) / (Operating profit)
- EBT(PBT)
- EAT(PAT) / Net Profit
 Multi-Step Profit and Loss Account
RIL
(Rs. in crore)
2008-09

Sales 146,328.07
Less: Cost of production of goods sold (COGS) / Direct Expenses 118,306.32
Gross Profit - GP 28,021.75 19.15%
Less: Indirect expenses before depreciation, interest & tax 8,062.05

Earning before Interest,Tax, Dep. &Amort. - EBITDA 19,959.70 13.64%

Less: Depreciation 5,195.29
Earning before Interest and Tax - EBIT 14,764.41 10.09%
Less /Add: Non-Operating Expense(Income) 3,668.82
Earning before Tax - EBT 18433.23 12.60%
Less: Tax 3123.91
Profit after Tax - PAT 15309.32 10.46%

Efficiency at every level with respect to ‘Sales’

 Ratio Analysis
Objective
• To find out the profitability of the concern.

• To determine the operating efficiency.

• To determine the liquidity.

• To find out the solvency.

• To determine the ‘value creation’ to shareholders.

Profitability Ratios         

 To find out whether the Company is earning desired profits or

not?

Profit
= Income – Expenses

Profit Variants
- Gross Profit ( Sales – COGS)
- EBITDA (Cash Operating Profit)
- EBIT(PBIT) / (Operating profit)
- EBT(PBT)
- EAT(PAT) / Net Profit
Profitability Ratios
 To find out whether the Company is earning desired profits
or not?

1. Gross Profit Ratio = Gross Profit

Sales
 
Gross Profit = Sales - Cost of Production of Goods Sold*

*Cost of Production of Goods Sold (COGS) =

Opening Stock + Purchases + Direct expenses - Closing Stock

  
2. Cash Operating Profit Ratio = Cash Operating Profit / EBITDA
Sales
 

3. Operating Profit Ratio = Operating Profit / EBIT

Sales

4. Net Profit Ratio = PAT

Sales
 

5. Operating Ratio = Total Operating Expenses

Sales
 
Note: All the above Ratios are expressed in Percentage and therefore multiplied
by100.
 1. Consider the financial statements of Zed Ltd. for 31 December, 2005.
Profit and Loss Account
  for the year ended 31st December, 2005
(Rs. in lakhs)
Particulars 2005 2004
Income
Sales 2600 2200
Other Income 165 120
Profit on sale of fixed assets 95 -
Profit on sale of investment - 35
Stock adjustment* 85 120
Total Income 2945 2475
Expenditure
Raw materials consumed 1490 1260
Excise Duty 215 195
Manufacturing expenses 160 120
Administration expenses 65 40
Selling &distribution expenses 80 60
Depreciation 125 100
Interest costs 165 180
Loss on sale of fixed assets - 25
Loss on sale of investments 20 -
Total Expenditure 2320 1980
Profit Before Tax(PBT) 625 495
Provision for Tax 188 149
Profit After Tax (PAT) 437 346

* Stock adjustment refers to adjustment for finished stock.

Interest is on long-term loans.
 Balance Sheet as at 31st December, 2005
  (Rs. in lakhs)

Particulars 2005 2004

Sources of Funds
Shareholders Funds:
Share Capital(Equity shares of Rs. 10 each) 1900 1250
12% Preference Share Capital 500 400
Reserves and Surplus 1960 1330
Loan Funds:
Long-term Loans 1650 1800
Total Sources 6010 4780
Application of Funds
Fixed Assets (net block) 4030 3060
Capital- work-in-progress 750 600
Investments 1050 1200
Current assets, Loans and Advances:
Inventories 260 210
Debtors 325 260
Cash and Bank Balances 40 60
Loans and Advances 325 185
Total Current assets, Loans and Advances 950 715
Less: Current Liabilities and Provisions
Sundry Creditors (508) (675)
Provision for Tax (337) (170)
Net Current Assets 105 (130)
Miscellaneous Expenses 75 50
Total Applications 6010 4780

Calculate sales-based profitability ratios.

Calculate assets-based profitability ratios.
 Zed Ltd. (Sales –based profitability ratios)
Solution (Rs. in lakhs)

2005 2004
Gross Profit
Sales 2600 2200
Less:Cost of production of goods sold
Raw materials consumed (1490) (1260)
Excise duty (215) (195)
Manufacturing expenses (160) (120)
Stock adjustment 85 1780 120 1445
820 745
Gross profit margin (%) (820 x 100) 31.54 (745 x 100 ) 33.86
2600 2200
Gross profit margin 31.54 % 33.86 %

(Rs. in lakhs)

2005 2004
Cash Operating Profit (EBITDA)
Gross profit 820 745
Less:Operating expenses (except depreciation)
Administration expenses (65) (40)
Selling and distribution expenses (80) (145) (60) (100)
675 645

Cash operating profit margin (%) (675 x 100) 25.96 (645 x 100 )
29.32
2600 2200
Cash operating profit margin 25.96 % 29.32 %
(Rs. in lakhs)

2005 2004
Operating Profit (EBIT)
Cash operating profit 675 645
Less: Depreciation (125) (100)
550 545

Operating profit margin (%) (550 x 100) 21.15 (545 x 100 ) 24.77
2600 2200
 (Rs. in lakhs)
2005 2004
Net Profit (PAT)
Operating profit 550 545
Add: Non- operating income
Other income 165 120
Profit on sale of fixed assets 95 -
Profit on sale of investment - 260 35 155
Less:Non- operating expenses
Interest (165) (180)
Loss on sale of fixed assets - (25)
Loss on sale of investments (20) (185) - (205)
EBT 625 495
Operating profit margin 21.15 % 24.77 %
(Rs. in lakhs)
2005 2004
Net Profit (PAT)
EBT 625 495
Less: Provision for tax (188 ) (149)

437 346
Net profit margin (%) (437 x 100) 16.81 (346 x 100 ) 15.73
2600 2200
 2005 2004

Gross profit margin 31.54 % 33.86

%

Cash operating profit margin 25.96 % 29.32

%

Operating profit margin 21.15 % 24.77

%

Net profit margin 16.81 % 15.73

%

 Operational efficiency has gone down in this year.

 BEL - PROFITABILITY

35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
March,05 March,06 March,07 March,08 March,09
Cash Operating Profit Ratio (%) 23.87 27.20 28.81 30.82 26.24
Operating Profit Ratio (%) 21.64 24.94 26.67 28.56 23.95
Net Profit Ratio (%) 13.90 16.49 18.19 20.15 16.13
 BEL - COST EFFICIENCY

84.00

82.00

80.00

78.00

76.00

74.00

72.00
March,05 March,06 March,07 March,08 March,09
Operating Ratio (%) 82.88 76.00 79.88 78.00 79.34
 RIL - PROFITABILITY

100.00
80.00
60.00
40.00
20.00
0.00
March,08 March,09
Gross Profit Ratio(%) 93.96 96.44
Cash Operating Profit Ratio (%) 16.61 13.64
Operating Profit Ratio (%) 13.13 10.09
Net Profit Ratio (%) 13.97 10.46
 TCS - PROFITABILITY

150.00

100.00

50.00

0.00
March,08 March,09
Gross Profit Ratio(%) 95.76 119.32
Cash Operating Profit Ratio (%) 26.11 26.87
Operating Profit Ratio (%) 23.61 25.01
Net Profit Ratio (%) 24.65 20.96
6. Return on Investment/
Return on Capital Employed =
EBIT
Capital Employed*

*Capital Employed =
Net Worth + Preference Share Capital + Long-term loans
Less: Miscellaneous Expenses / Fictitious Assets
  or
  Net Block + Working Capital
7. Return on Equity/
Return on Net Worth =
PAT - Preference Dividend – Dividend distribution Tax
Net Worth*

Net Worth* = Equity Share Capital + Reserves

Less:
Miscellaneous Expenses / Fictitious Assets
8. Earning per Share =
PAT - Preference Dividend – Dividend distribution Tax
Number of Equity Shares

9. Dividend per Share =

Dividend paid to Equity Shareholders
Number of Equity Shares
 
Note: All the above Ratios except EPS and DPS are expressed in
Percentage and therefore multiplied by 100. EPS and DPS
are expressed in Number of Times.
 
Solution Zed Ltd. (Assets –based profitability ratios)
(Rs. in lakhs)

2005 2004
Operating Profit (EBIT) 550 545
Capital Employed
Equity share capital 1900 1250

12% Preference share capital 500 400

Reserves and surplus 1960 1330

Long-term loans 1650 1800

6010 4780
Less: Miscellaneous expenses 75 50
5935 4730
Or

Fixed Assets (Net) 4030 3060

Capital work-in-progress 750 600
 (Rs. in lakhs)

2005 2004
Operating Profit (EBIT) 550 545
Capital Employed 5935 4730

ROCE(%) ( EBIT x 100) (550 x 100) 9.27 (545 x 100)

11.52
CE 5935 4730

 ROCE has gone down despite increase in PAT margin.

Reason : Poor operational efficiency (poor efficiency in assets
utilisation).
2. Calculate RONW of New Life Ltd. under the following scenarios for the year 2005
and comment.
(Rs. in lakhs)

Particulars Scenario 1 Scenario2

2005 2005
PBIT 3000 3300
Loan funds (Average pre-tax 2000
interest cost 15%)
Loan funds (Average pre-tax 2000
interest cost 18%)
Shareholders funds 4000 4000
Tax rate (%) 30 30
Solution New Life Ltd.
(Rs. in lakhs)
Scenario 1 Scenario
2
2005 2005
PBIT 3000 3300
Less:Interest @15% &18% (300) (360)
PBT 2700 2940
Less: Provision for tax @30% (810) (882)
PAT 1890 2058

RONW (%) (1890 x 100) 47.25 (2058 x 100) 51.45

4000 4000
 Here, Increase in Interest RONW
 BEL - RETURN EARNED

50.00

40.00

30.00

20.00

10.00

0.00
March,05 March,06 March,07 March,08 March,09
ROI (%) 48.67 46.71 44.00 36.22 29.08
ROE (%) 28.32 28.76 27.96 25.73 19.71
 RIL- RETURN EARNED

25.00

20.00

15.00

10.00

5.00

0.00
March,08 March,09
ROI (%) 14.53 7.03
ROE (%) 23.55 11.86
 TCS- RETURN EARNED

50.00

40.00

30.00

20.00

10.00

0.00
March,08 March,09
ROI (%) 41.00 41.23
ROE (%) 38.85 33.13
3. Following are the financials of Reality Ltd. For two years:
(Rs. in million)
Particulars 1999-2000 1998-1999
PAT (after preference dividend) 1250 620
14% Preference Shares (of Rs. 100 each) 200 200
Equity Shares (of Rs. 10 each) 600 500
Reserves ands Surplus 1200 1050
Pay-out Ratio 50% 40%
Market Price Per Share (Rs.) 40 30
Miscellaneous Expenditure (not written off) 125 150

During the year, fresh shares were issued at premium of Rs. 30 on October 1, 1999.
Calculate dividend yield and earning per share.
 Realty Ltd.
Solution (Rs. in million)

1999-2000 1998-1999
Proposed dividend* 625 310
Dividend yield (Rs. per share) [625 /(40x60)] 0.26 [ 310/(30x50)] 0.21

Weighted average number of shares

[(50x6/12 +(60x6/12)] 55 50
EPS (Rs.) (1250 -3.5**)/55 22.66 (775 -3.5**)/50 15.43

*Pay-out ratio = Proposed dividend x 100 [For finding out pay-out, PAT
PAT should be after pref.
Dividend ]
 Basic EPS

Earning per Share = PAT - Preference Dividend

Number of Equity Shares
 Diluted EPS
(Potential equity shares in the capital structure)

Diluted EPS = *Diluted earnings / Adjusted Net Profit

Adjusted Weighted average number of equity shares

* PAT – Pref. dividend ,as increased by post-tax savings in interest

 AS-20 & IAS has made it mandatory for listed companies to

show both basic and diluted EPS.
4. MN Ltd. has earned a PAT of Rs. 1,200 lakhs during the year 2000-01. Its capital
structure for 2000-01 includes the following:

Particulars
Outstanding Equity shares (number in lakhs) 150
14% Convertible Preference Shares of Rs. 100 each (number in 10
lakhs) [each preference share is convertible into two equity shares]
13% Convertible Debentures of Rs. 100 each (number in lakhs) [each 10
preference share is convertible into two equity shares]
Employee stock option [Exercise Price Rs. 70] (number in lakhs) 8
Average Fair Value Per Share (on the basis of weekly closing share 120
prices during January – March, 2001)
Tax Rate 35%
Tax on Preference Dividend 20%

Calculate Basic EPS and Diluted EPS for 2000-01.

 MN Ltd.
Solution

Basic EPS = PAT – Preference dividend – Tax on preference dividend /

Average outstanding equity shares

= [1,200 – (140 – 28)] / 150

= Rs. 6.88
Effect of dilution Increase in Increase in Ranking as per
on earnings PAT (Profit available no. of shares dilutive impact

to equity shareholders)
(Rs. lakhs) (Rs. lakhs)
14% Convertible 168(140+28) 20 3
preference shares
13% Convertible 84.50* 20 2
Debentures
ESOPs - 8 1

* Saving in interest net of tax

Interest = Rs. 130
Less: Tax = Rs. 45.5(35%)
Net Cost = Rs. 84.5
Diluted EPS Profit available for equity No. of ordinary shares EPS
shareholders (Rs. lakhs) (Rs. lakhs) (Rs.)

Profit available for equity 1284.5 198

Shareholders after dilution (1,032+168+84.50) (150+20+20+*)

6.48
 BEL - RETURN DISTRIBUTED

120.00
100.00

80.00
60.00

40.00

20.00
0.00
March,05 March,06 March,07 March,08 March,09
EPS 55.80 72.88 89.86 103.34 93.23
DPS 11.20 14.60 18.00 20.70 18.70
D/P Ratio (%) 20.07 20.03 20.03 20.03 20.06
 RIL - RETURN DISTRIBUTED

150.00

100.00

50.00

0.00
March,08 March,09
EPS 131.98 95.25
DPS 11.22 12.06
D/P Ratio (%) 8.50 12.66
 TCS - RETURN DISTRIBUTED

50.00

40.00

30.00

20.00

10.00

0.00
March,08 March,09
EPS 43.69 45.53
DPS 14.00 14.00
D/P Ratio (%) 32.04 30.75
 CORPORATE CASES
Profitability Ratios (2002 - 2003)
Company NPM% Payout% EPS Rs. ROCE % ROE%

HLL 18.74 66.31 8.29 63.26 49.7

P&G 19.35 63.61 31.44 42.91 30.39

Infosys 29.79 18.67 144.61 47.65 39.04

Satyam 23.29 30.69 9.77 26.5 21.53

 HLL’s figures are for calendar yr. 2002; P&G’s for yr. July 2002-June 2003.
All other companies follow April- March.
 Analysis
1. FMCG (HLL &P&G) High payout ratio

 Company does not have enough investment requirement

2. Software (Infosys) Low payout ratio

 Retention of cash to meet future contingencies

Would Shareholders mind with a low payout ?

No, ROE is 40% and EPS is Rs. 145

(Shareholders would want their money to be re-invested in

such a profitable business).
 Turnover/ Operating Efficiency Ratios
 To find out whether the Company is efficiently managing its
resources?
  Debtors Turnover Ratio = Sales
Average Debtors
 
Note:
While calculating Debtors Turnover Ratio, Doubtful Debts are not
deducted from Debtors, since here the purpose is to calculate the
number of days for which sales are tied up in debtors and not the
realizable value of debtors.
Average Collection Period = Days in an Year/ Month in an Year
Debtors Turnover Ratio
 
Creditors Turnover Ratio = Purchases
Average Creditors

Average Payment Period = Days in an Year/ Month in an Year

Creditors Turnover Ratio
 
Stock Turnover Ratio = Cost of Goods Sold
Average Stock
Working Capital Turnover Ratio = Sales
Working Capital
 
Fixed Assets Turnover Ratio = Sales
Total Fixed Assets
 
Total Assets Turnover Ratio = Sales
Total Assets
 
 BEL - DEBTORS MANAGEMENT

200.00

150.00

100.00

50.00

0.00
March,05 March,06 March,07 March,08 March,09
Debtors Turnover Ratio 4.59 3.47 2.33 2.00 2.03
Average Collection Period (Days) 79 105 156 183 180
 RIL - DEBTORS MANAGEMENT

35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
March,08 March,09
Debtors Turnover Ratio 22.36 32.01
Average Collection Period (Days) 16 11
 TCS - DEBTORS MANAGEMENT

80.00

60.00

40.00

20.00

0.00
March,08 March,09
Debtors Turnover Ratio 4.88 6.03
Average Collection Period (Days) 75 61
 BEL - INVENTORY MANAGEMENT

200.00

150.00

100.00

50.00

0.00
March,05 March,06 March,07 March,08 March,09
Inventory Turnover Ratio 3.02 3.41 3.17 3.04 1.91
Inventory Holding Period (Days) 121 107 115 120 191
 RIL - INVENTORY MANAGEMENT

50.00

40.00

30.00

20.00

10.00

0.00
March,08 March,09
Inventory Turnover Ratio 7.62 7.97
Inventory Holding Period (Days) 48 46

Improvement in utilisation of working capital in RIL

- Inventory holding period has reduced by 2 days
(Due to fall in production cycle)
 TCS - INVENTORY MANAGEMENT

1,000.00

800.00

600.00

400.00

200.00

0.00
March,08 March,09
Inventory Turnover Ratio 505.98 842.07
Inventory Holding Period (Days) 1 0
 BEL - ASSETS MANAGEMENT

10.00

8.00

6.00

4.00

2.00

0.00
March,05 March,06 March,07 March,08 March,09
Working Capital Turnover Ratio 2.90 2.33 1.97 1.56 1.47
Fixed Assets Turnover Ratio 8.76 9.03 9.42 9.13 8.99
 RIL - ASSETS MANAGEMENT

8.00

6.00

4.00

2.00

0.00
March,08 March,09
Working Capital Turnover Ratio 7.39 7.70
Fixed Assets Turnover Ratio 1.64 0.86

Fixed assets’s efficiency has gone down in the current year

- Each rupee of fixed assets is generating less than 1 Re of sales in RIL in
2008-09.
 TCS - ASSETS MANAGEMENT

8.00

6.00

4.00

2.00

0.00
March,08 March,09
Working Capital Turnover Ratio 4.89 5.22
Fixed Assets Turnover Ratio 6.46 6.68
 CORPORATE CASES
Assets Efficiency Ratios (2002 - 2003)
Company Fixed Assets Inventory Production Collection Suppliers
Turnover Holding Period Cycle Period Credit
(Days) (Days) (Days) (Days)

HINDALCO 1.640 77 22 27 35
NALCO 0.792 333 21 22 27

HLL 8.306 86 2 13 114

P&G 4.928 57 1 23 137

SAIL 1.233 120 1 28 33

TISCO 1.295 105 1 37 79

 HLL’s figures are for calendar yr. 2002; P&G’s for yr. July 2002-June 2003.
All other companies follow April- March.
 Analysis
1. FMCG (HLL &P&G) Fixed assets’ efficiency is very
high as compared to others

Also, wide differences in fixed assets turnover ratio

 HLL has outsourced most of its production requirements.

 The same is not true for hardcore manufacturing companies.

Industries like Aluminum and Iron&Steel are highly capital

intensive and hence the asset efficiency ratios would be lower.

2. Aluminum HINDALCO seems to be more efficient

than NALCO.

3. Iron&Steel TISCO is more efficient than SAIL.

NALCO is very inefficient in inventory management. It almost

maintains a year’s inventory.
 BHARAT ELECTRONICS LTD.
ASSETS STRUCTURE
( 2004-05 to 2008-09 )
(Rs. in million)
2004-05 2005-06 2006-07 2007-08 2008-09

Fixed Assets* 3667 3915 4194 4492 5142

Investments 123 123 123 120 120

Current Assets 38219 46405 52577 63431 78357

Total Assets 42009 50443 56894 68043 83619

CA/ TA Ratio(%) 90.98 91.99 92.41 93.22 93.71

*Fixed Assets comprise of Net Block and Capital Work- in- Progress
Issue:
 

Are we managing our huge current assets

efficiently?
First, we talk about Inventories
Are we losing Inventory due to obsolescence ?
Provision for Obsolescence as a Percent of
Total Inventory in BEL

6.00%

5.00%

4.00%
3.00%

2.00%

1.00%

0.00%
March,05 March,06 March,07 March,08 March,09
Provision for obsolescence (%) 4.66% 5.94% 5.67% 5.05% 3.51%
 What about Debtors ?
Doubtful Debts as a Percent of Total Debts in BEL

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
March,05 March,06 March,07 March,08 March,09
Doubtful Debts (%) 20.37% 17.14% 14.55% 13.57% 13.26%
 Debtors Composition

30000
25000 3484
3234
20000 2884
14237
15000 12829
2105 9887
10000
7479
5000 7047 7728 8545
2698
0
March,06 March,07 March,08 March,09
Doubtful 2105 2884 3234 3484
Good - Less than 6 months 7479 9887 12829 14237
Good - Over 6 Months 2698 7047 7728 8545
 Liquidity Ratios
 To find out whether the Company can meet its current
obligations as and when they arise?
  
Current Ratio = Current Assets
Current Liabilities
 Liquid Ratio = Liquid assets
Current Liabilities
 Super Quick Ratio = Cash and Bank
Current Liabilities
 
1. Compute the short-term solvency ratios from the following details:
Balance Sheet as at 31 st March, 2001
(Rs. in lakhs)

Particulars 2001 2000

Sources of Funds
Shareholders Funds:
Share Capital 200 200
Reserves and Surplus 225 200
Loan Funds:
Long-term Loans 125 100
Cash Credit 75 100
Total Sources 625 600
Application of Funds
Fixed Assets:
Gross Block 435 300
Less: Accumulated Depreciation 165 120
Net Block 270 180
Investments 30 20
Current assets, Loans and Advances:
Inventories 175 210
Debtors 125 175
Prepaid expenses 45 25
Cash and Bank Balance 30 10
Advance Income Tax 40 30
Staff Advance 65 90
A. Total of Current Assets, Loans and advances 480 540
Less: Current Liabilities and Provisions
Sundry Creditors (80) (90)
Provision for Tax (25) (20)
Proposed Dividend (50) (30)
B. Total of Current Liabilities and Provisions (155) (140)
Net Current Assets (A- B) 325 400
Total Applications 625 600

Notes
1. Debtors are net of provisions for doubtful debts of Rs. 25 lakhs as on 31
March, 2001(Rs. 20 lakhs in the previous year).
2. Investments include Rs. 5 lakhs of short -term investments (Rs. 2 lakhs in
previous year).
3. Staff Advance are for a period of 2 years.
Solution
(Rs. in lakhs)
2001 2000
A. Current assets
Inventories 175 210
Debtors (net of provisions) 125 175
Prepaid expenses 45 25
Cash and bank balance 30 10
Advance income tax 40 30
Short-term investments 5 2
420 452
 (Rs. in lakhs)

2001 2000
B. Current liabilities
Cash credit 75 100
Sundry creditors 80 90
Provision for tax 25 20
Proposed dividend 50 30
230 240
 2001 2000
Current ratio 420/230 452/240
= 1.83 = 1.88

Liquid ratio *200/230 *217/240

= 0.87 = 0.90

* Liquid assets = Current assets – Inventories – Prepaid expenses

420 – [(175-45)] 452 – [(210-25)]

= 200 = 217
 Both Current ratio and liquid ratio have declined during the current year.
Does it imply worsening of liquidity position of the firm?
Analysis
 The firm has reduced its inventory and debtors.
- This is a sign of better liquidity.
 Therefore, the firm was able to reduce its reliance on cash
credit ( from 41.67% in the previous year to 32.61% in the
current year).

 There has been a significant improvement in cash and bank

balance position too.
 HLL CASE
HLL is known for its liquidity management
The Company avails more days of credit facility from its suppliers
than it offers to its customers.

2002
Current credit terms of suppliers 75 days
Revised term (with cash discount of 14 % p.a.) 14 days

Credit terms to customers 14 days

 CORPORATE CASES
Liquidity Position (31st March , 2003)
Company Industry Current Ratio Quick Ratio

HINDALCO Aluminum 2.10 0.84

NALCO Aluminum 0.69 0.08
HLL FMCG 1.11 0.60
P&G FMCG 1.39 0.85
SAIL Iron &Steel 0.69 0.19
TISCO Iron &Steel 1.29 0.47
Infosys Software 3.29 2.50
Satyam Software 4.22 3.97
 Analysis
1. Software Very high liquidity ratios

 Both the companies in software industry maintain huge cash

balance and hence their liquidity ratios are very high. This is an
industry- specific phenomenon.
2. Aluminum Wide variation in liquidity position

NALCO’s Quick ratio is almost zero

 The company does not possess readily realizable assets

3. Iron and Steel Similar trend as of Aluminum

SAIL’s Quick ratio is almost zero

 Company’s short-term liquidity is very weak.

 BEL - LIQUIDITY

2.00

1.50

1.00

0.50

0.00
March,0 March,0 March,0 March,0 March,0
5 6 7 8 9
Current Ratio 1.41 1.49 1.62 1.71 1.71
Liquid Ratio 1.02 1.15 1.24 1.35 1.35
Super Quick Ratio 0.49 0.59 0.64 0.66 0.66
 RIL - LIQUIDITY

2.00

1.50

1.00

0.50

0.00
March,08 March,09
Current Ratio 1.78 1.53
Liquid Ratio 1.19 1.12
Super Quick Ratio 0.18 0.62
 TCS - LIQUIDITY

2.50

2.00

1.50

1.00

0.50

0.00
March,08 March,09
Current Ratio 2.04 1.87
Liquid Ratio 2.04 1.86
Super Quick Ratio 0.15 0.32
Solvency Ratios
 To find out whether the Company is financially sound, i.e.
whether the Company can meet its long-term obligations on the

due time?
  
Debt- Equity Ratio = Long-term Debt
Shareholders’ Funds*
 
*Shareholders’ Funds = Net Worth + Preference Share Capital
Less: Fictitious Assets / Miscellaneous Expenses
 
Interest Coverage Ratio = EBIT
Interest on Long- term Loans
Debt – service Coverage Ratio
PAT +Depreciation + Other Non-cash charges + Interest
Interest on Long- term Loans +Installments paid during the
year on long-term loans

*Cash flows from operating activities after tax

Interest on Long- term Loans +Installments paid during the
year on long-term loans

 It shows the debt-servicing capacity of the firm.

 Higher the ratio, better it is for lender.
1. Consider the following two companies:

Particulars A Ltd. B Ltd.

PAT (Rs. lakhs) 85 (5)
Interest on Long-term Loans (Rs. lakhs) 40 25
Cash flows from operating activities after tax 65 45
[before deducting interest] (Rs. lakhs)
Long-term loans at the end of the year (Rs. lakhs) 200 125
Installments paid during the year 40 20
Equity (Rs. lakhs) 225 100

Calculate long-term solvency ratios.

Solution

Ratios A Ltd. B Ltd.

Debt – equity ratio 200 / 225 = 0.89 125 / 100 = 1.25
Interest coverage ratio (85+40)/40 = 3.13 [(5) +25]/25 = 0.80
Debt service coverage ratio 65/ (40+40) =0.81 45/(25+20) = 1.00
 A Ltd. B Ltd.
Debt – equity ratio 200 / 225 = 0.89 125 100 = 1.25
Interest coverage ratio (85 +40) / 40 = 3.13 [(5) +25] / 25 = 0.80
Debt service coverage ratio 65 /(40 +40) = 0.81 45 / (25 +20) = 1.00

 Why is DSCR of A Ltd. Poorer despite higher interest coverage ratio?

(As A Ltd. Could not manage its working capital well.
Against PBIAT of Rs. 125 lakhs, operating cash flows are only Rs. 65 lakhs.)

 On the other hand, with PBIAT of only Rs. 20 lakhs,

B Ltd. could show an operating cash flows of Rs. 45 lakhs.
It implies a reduction in working capital investment by Rs. 25 lakhs.

 So, which company is better in long-term solvency?

 BEL - SOLVENCY

6000.00

5000.00

4000.00

3000.00

2000.00

1000.00

0.00
March,05 March,06 March,07 March,08 March,09
Debt-Equity Ratio 0.01 0.00 0.00 0.00 0.00
Interest Coverage Ratio 76.38 34.45 1317.50 5858.00 102.56
 RIL - SOLVENCY

20.00

15.00

10.00

5.00

0.00
March,08 March,09
Debt-Equity Ratio 0.45 0.58
Interest Coverage Ratio 16.97 8.46
 TCS - SOLVENCY

1400.00
1200.00
1000.00
800.00
600.00
400.00
200.00
0.00
March,08 March,09
Debt-Equity Ratio 0.00 0.00
Interest Coverage Ratio 1,262.42 753.14
 Market Based / Valuation Ratios
  To find out how the market responses to company’s performance?
 
Price – Earning Ratio (P/E) = Market price per share / EPS

Dividend Yield = Dividend per share / Market price per share

Book value per share = Net worth / Number of shares

Price-to-Book Ratio = Market price per share / Book value per share
 BEL - VALUATION

2000.00

1500.00

1000.00

500.00

0.00
March,05 March,06 March,07 March,08 March,09
Book Value per share 197.05 253.39 321.43 401.63 472.96
Market Value per share 665.00 1321.70 1501.00 1057.00 882.90
Market Value to Book Value per share 3.37 5.22 4.67 2.63 1.87
 RIL - VALUATION

2500.00

2000.00

1500.00

1000.00

500.00

0.00
March,08 March,09
Book Value per share 560.44 803.13
Market Value per share 2264.50 1523.20
Market Value to Book Value per share 4.04 1.90
 TCS - VALUATION

1000.00

800.00

600.00

400.00

200.00

0.00
March,08 March,09
Book Value per share 112.45 137.40
Market Value per share 810.90 540.00
Market Value to Book Value per share 7.21 3.93
 BEL - PRICE EARNING RATIO

20.00

15.00

10.00

5.00

0.00
March,05 March,06 March,07 March,08 March,09
Price - Earning ratio 11.92 18.14 16.70 10.23 9.47

March,05 March,06 March,07 March,08 March,09

EPS 55.80 72.88 89.86 103.34 93.23

MPS 665.00 1321.70 1501.00 1057.00 882.90

 RIL - PRICE EARNING RATIO

17.50

17.00

16.50

16.00

15.50

15.00
March,08 March,09
Price - Earning ratio 17.16 15.99

March,08 March,09
EPS 131.98 95.25

MPS 2264.50 1523.20

 TCS - PRICE EARNING RATIO

20.00

15.00

10.00

5.00

0.00
March,08 March,09
Price - Earning ratio 18.56 11.86

March,08 March,09
EPS 43.69 45.53

MPS 810.90 540.00

 BEL - DIVIDEND YIELD RATIO

2.50

2.00

1.50

1.00

0.50

0.00
March,05 March,06 March,07 March,08 March,09
Dividend Yield (%) 1.68 1.10 1.20 1.96 2.12

March,05 March,06 March,07 March,08 March,09

DPS 11.20 14.60 18.00 20.70 18.70

MPS 665.00 1321.70 1501.00 1057.00 882.90

 BEL - MARKET CAPITALISATION

14000.00
12000.00
10000.00
8000.00
6000.00
4000.00
2000.00
0.00
March,05 March,06 March,07 March,08 March,09
Market capitalisation (Rs. in cr.) 5320.00 10573.60 12008.00 8456.00 7064.00
 RIL - MARKET CAPITALISATION

350000.00
300000.00
250000.00
200000.00
150000.00
100000.00
50000.00
0.00
March,08 March,09
Market capitalisation (Rs. in cr.) 329099.79 239675.52
 TCS - MARKET CAPITALISATION

80000.00

60000.00

40000.00

20000.00

0.00
March,08 March,09
Market capitalisation (Rs. in cr.) 79354.67 52844.40
 DU PONT ANALYSIS
• It enables to understand the performance of RONW in a
better way.

• It divides RONW into three determinants:

 
1. Net Profit Margin
2. Assets Turnover Ratio
3. Assets to Equity /Financial Leverage Ratio
 Du Pont Analysis

Return on Equity/ = Net Profit Ratio X Total Assets Turnover Ratio X Assets to Equity Ratio /
Return on Net Worth Financial Leverage Ratio

ROE/RONW = PAT
X 100
Equity Shareholders'Funds

ROE/RONW = PAT X Sales X Total Assets

Sales Total Assets Equity Shareholders'Funds
 BEL - DU PONT ANALYSIS

30.00
25.00
20.00
15.00
10.00
5.00
0.00
Net Profit Assets Assets to
ROE (%)
Ratio (%) Turnover Ratio Equity Ratio
March,05 28.32 13.90 0.77 2.66
March,06 28.76 16.49 0.70 2.48
March,07 27.96 18.19 0.70 2.21
March,08 25.73 20.15 0.60 2.11
March,09 19.71 16.13 0.55 2.21
BEL VS. BHEL - ROE COMPARISON
(2008-09 )

25

20

15

10

0
ROE (%) PAT/Sales (%) Sales/Assets Assets/Equity
BEL 19.71 16.13 0.55 2.21
BHEL 24.25 11.19 0.71 3.06
 RIL - DU PONT ANALYSIS

25.00

20.00

15.00

10.00

5.00

0.00
Net Profit Assets Assets to
ROE (%)
Ratio (%) Turnover Ratio Equity Ratio
March,08 23.55 13.97 1.09 1.57
March,09 11.86 10.46 0.65 1.77
 TCS - DU PONT ANALYSIS

40.00

30.00

20.00

10.00

0.00
Net Profit Assets Assets to
ROE (%)
Ratio (%) Turnover Ratio Equity Ratio
March,08 38.85 24.65 1.80 0.92
March,09 33.13 20.96 1.78 0.94
 DISCLOSURES IN ANNUAL REPORT
• Financial Statements

• Chairman’s/MD’s Address

• Management Discussion and Analysis

• Directors’ Report

• Auditors’ Report

• Report on Corporate Governance