29493210 financial ratio analysis tata steel

TATA STEEL

2009

I N T E R N A T I O N A L S C H O O L O F B U S I N E S S & M E D I A ; K O L K A T A

FINANCIAL RATIO

ANALYSIS ABHIJIT SAMANTA

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FINANCIAL RATIO ANALYSIS OF TATA STEEL

1. Liquidity Ratios:-

Liquidity Ratios measures the ability of the firm to meet its short term obligations.

They also reflect the firm’s ability to meet financial contingencies that might arise.

(A) Current Ratio: - This ratio indicates the firm’s 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.

It is measured by: - Current Ratio = Current Assets / Current Liabilities.

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Current Asset Current Liabilities Current Ratio

2008 3,613.70 3,855.26 0.94

2009 5,707.05 6,039.86 0.94

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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(B) Quick Ratio:- 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 Asset-

Inventory – Prepaid Expense / Current Liability)

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 company’s effectiveness on generating profit. In other words the

profitability ratio reflects a company’s operating performance.


Year (Current Assets –

Inventory- Prepaid

Expense)

Current Liabilities Current Ratio

2008 13,570.52 3,855.26 3.52

2009 3,442.72 6,039.86 0.57

Quick Ratio = (Current Assets – Inventory- Prepaid Expense) / Current

Liability.

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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.

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.


Year Gross Profit Sales Gross Profit Margin

2008 7515.05 19,933.83 37.70%

2009 8295.84 24,624.04 33.69%

Gross Profit Ratio = (Gross Profit / Sales)*100

Operating profit ratio= (operating profit (EBIT)/sales)*100

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Analysis: - There is a decrease in Operating Profit Ratio for Tata Steel.

According to the sales figure the EBIT value in 2009 in comparatively less than

that of 2008. As we know a lower operating profit ratio indicates higher efficiency

of the firm. So, on the basis of the calculated data we can say that the operating

efficiency of Tata Steel has actually increased for the current year with a

comparison between 2008 and 2009.

(C ) Net Profit Ratio: - It relates the firms Net Profit and the firm’s 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.


Year Operating Profit

(EBIT)

Sales Gross Profit Margin

2008 8,360.25 19,933.83 41.94%

2009 9,278.34 24,624.04 37.68%

Net Profit Margin = (Net Profit after Tax / Sales)*100

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Analysis: - We can see that there is a decrease in the Net Profit Margin.

Actually it indicates the firm’s 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.


Year Net Profit after Tax

(PAT)

Sales Net Profit Margin

2008 4670.49 19,933.83 23.43%

2009 5193.21 24,624.04 21.09%

Return of Total Asset = (Net Profit after Tax / Total Assets)*100

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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.

(A) Fixed assets turnover ratio: - It indicates the efficiency of utilization of

fixed assets. The fixed assets turnover ratio is the sales turnover divided by the

fixed assets.



Year Net Profit after

Tax (PAT)

Total Assets Return of Total

Asset

2008 4670.49 47,075.52 9.92%

2009 5193.21 58,741.77 8.84%

Fixed Assets Turnover Ratio= Sales / Fixed Assets.

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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 company’s 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.

(B)Total assets turnover ratio:- It measures the overall efficiency and

performance of the assets employed in business. Total assets turnover ratio is

defined as sales turnover divided by the total assets. It is measure of firm’s total

assets management.

This ratio is calculated by the following formula.


Year Sales Fixed Assets. Fixed Asset

Turnover Ratio

2008 19,933.83 12,623.56 1.57

2009 24,624.04 14,482.22 1.70


Year Sales Fixed Assets. Fixed Asset

Turnover Ratio

2008 19,933.83 12,623.56 1.57

2009 24,624.04 14,482.22 1.70

Total Asset Turnover Ratio= Sales Turnover / Total Assets.

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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.


As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)

Year Debtors Turnover Ratio

2008 11.00

2009 9.00


Year Sales Turnover Total Assets. Total Asset

Turnover Ratio

2008 19,933.83 47,075.52 0.42

2009 24,624.04 58,741.77 0.42

Debtors Turnover Ratio= (Debtors / Credit Sells)*365

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Analysis: - As it shows the company’s ability to recover the amount that is

market due or in other words the company has sold on credit. It is very important

for any company to calculate this ratio as depending on that the company can

decide about its current position to recover the receivables.

For both the years the value is good.

(4) Leverages Ratios:- Leverage ratios indicate the extent

to which the firm has financed its assets by borrowing. The use

of debt financing increases the risk of the firm. The leverage

ratios reflect the financial risk posture of the firm. The more

extensive the use of debt, the higher would the firm’s leverage

ratios and more risk present in the firm. Some of the leverages

ratios are explained below.

(4) Debt Equity Ratio:- Though it doesn’t 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.

Debtors Equity Ratio= (Total Debt / Equity)

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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.


Year Interest coverage ratio

2008 8.35

2009 5.71

Analysis: -

It actually measures the firm’s ability to meet the interest obligations. Here in this

case we can see that the interest coverage ratio is decreasing, it means the firm’s

ability is reducing.


Year Debt Equity Ratio Long Term Debt Equity Ratio

2008 1.08 1.07

2009 1.34 1.31



2008 1.08 1.07

2009 1.34 1.31



2008 1.08 1.07

Interest coverage ratio = EBIT/Interest

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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.

Analysis: - It actually denotes the company’s future prospect. As here

we can see that there is decrease in the price earnings ratio it show’s a

decrease in company’s growth profile.

(B) Earnings per share:- 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.


Year Price Earnings Ratio: -

2008 10.38

2009 2.97

Price earnings ratio = Market Price per share / earnings per share.

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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 Holder’s

prospective also. Seeing more earning there is a chance for share holders to invest

on the company.


Year Earnings per share

2008 60.45

2009 66.80

Earnings per share: (Net profit after taxes – Preference

dividends) / Number of ordinary shares

29493210 financial ratio analysis tata steel

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