a project report on working capital analysis of tata steel

SUMMER PROJECT REPORT

ONWORKING CAPITAL MANAGEMENT AND

RATIO ANALYSIS

At

TATA STEELSubmitted in Partial fulfillment of the Post Graduate Diploma in Management

(Finance) at Xavier Institute of Social Service, Ranchi

BY

Harpreet Kaur

Roll No – 57, Session- 2011-2013

Under the guidance of:

Prof. Shubhojit Bhattacharya

XAVIER INSTITUTE OF SOCIAL SERVICE

PURULIA ROAD, RANCHI

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APPROVAL SHEET

This is to certify that summer project entitled “Working capital management and

Ratio analysis” at Tata Steel has been prepared by Harpreet Kaur in partial

fulfilment of the requirement for the award of Post Graduate Diploma in

Management (Finance) at Xavier Institute of Social Service(XISS), Ranchi.

The study embodies data collected, analyzed & compiled by the researcher under

the guidance of the undersigned guide of the institute & there by approved as

indicating the proficiency of the researcher.

Prof. Shubhojit Bhattacharya Prof. Bhaskar BhowaniResearch Guide Summer Internship Coordinator (Finance)

Dr. Ratnesh Chaturvedi Dr. Fr. AlexiusEkka, s.j HOD, Finance Director, XISS

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DECLARATION

I hereby declare that the project report entitled “Working capital analysis and

Ratio analysis” has been prepared by me during the period from 16th April 2013

to 15th June 2013 under the guidance of Mr. Manoj Gupta, Head Finance

&Accounts, Tata Steel Ltd., Jamshedpur and Prof. Shubhojit Bhattacharya of

Xavier Institute of Social Service, Ranchi.

I also declare that the project has not been submitted nor shall it be submitted in

future to any other University or Institution for the award of any other degree or

diploma.

Harpreet Kaur

Date: 16.04.2012

Place: Ranchi

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ACKNOWLEDGEMENT

The fundamental characteristic of summer internship program lies not just in the successful

completion of a given project but also in the positive expansion of the professional business person inside a

student.

I would like to extend my gratitude to Mr. Manoj Kumar Gupta (Head, finance and accounts) for

giving me opportunity to work in such an important sphere and sharing his vision and experience.

I am thankful to Mr. ImtiazAhmed for his continuous support and guidance.

Mr.Gautam Ghosh (Tata Management Development Centre (TMDC) for providing me the opportunity to

learn and complete my summer internship in this esteemed organization.

I also take the opportunity to thanks Mr. Shubhojit Bhattacharya for his guidance and valuable

inputs in the development of the project, and interns of managing the real time issues that we faced in the

corporate world.

Last but not the least I would like to extend my thanks to all the employees at finance department,

my family and friends for their cooperation, valuable information and feedback during my project.

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CONTENT

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S. No TOPIC PAGE NO

1. EXECUTIVE SUMMARY 06

2. OBJECTIVE OF STUDY 07

3. RESEARCH METHODOLOGY 07

4. COLLECTION OF DATA 08

5. COMPANY PROFILE 09

6. SWOT ANALYSIS 15

7. WORKING CAPITAL 16

8. NET WORKING CAPITAL 25

9. FINANCIAL RATIOS OF TATA STEEL 28

10. COMPARITIVE ANALYSIS OF TATA STEEL,

SAIL, JSW

38

11. FINANCIAL RATIOS OF TATA STEEL, SAIL, JSW 48

12. RECOMMENDATION 84

13. CONCLUSION 85

14. BIBLIOGRAPHY 86

EXECUTIVE SUMMARY

Different businesses will have different working capital characteristics. There are 3 main aspects to these differences:

a) Holding inventory b) Taking time to pay suppliers and other accounts payable c) Allowing customers (accounts payable) time to pay

a) Food supermarkets and other retailers receive most of their sales in the form of cash, credit card or debit card. However, they will buy on credit from suppliers. They will therefore have the benefit of significant cash holdings which they may chose to invest. b) A wholesaler supplies other companies and is likely to buy and sell mainly on credit. The flow of cash will have to be managed carefully. Such a company may have to rely on short-term borrowings and overdrafts. c) Small companies with a limited trading record may find it difficult to obtain trade credit. At the same time customers will expect to receive the normal credit period to settle accounts.

Working capital is the capital required for maintenance of day-to-day business operations. The present day competitive market environment calls for an efficient management of working capital. The reason for this is attributed to the fact that an ineffective working capital management may force the firm to stop its business operations, may even lead to bankruptcy. Hence the goal of working capital management is not just concerned with the management of current assets & current liabilities but also in maintaining a satisfactory level of working capital. Holding of current assets in substantial amount strengthens the liquidity position & reduces the riskiness but only at the expense of profitability. Therefore achieving risk-return trade off is significant in holding of current assets. While cash outflows are predictable it runs contrary in case of cash inflows. Sales program of any business concern does not bring back cash immediately. There is a time lag that exists between sale of goods & sales realization. The capital requirement during this time lag is maintained by working capital in the form of current assets. The whole process of this conversion is explained by the operating cycle concept.

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.

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OBJECTIVES OF THE STUDY

TATA STEEL has been managing the various aspect of working capital through continuous efforts over a long period of time.

The present study is trying to investigate the different aspects of working capital management at TATA STEEL. Working capital is generally the net difference between the total assets and the liabilities of the company. So an attempt to understand as to how the company manages the working capital has been done.

In my project work we are trying to identify the various systematic processes in managing the working capital.

The study is trying to identify the various liquidity, profitability, solvency and the turnover positions of the company as a tool of performance which will lead us to identify the financial soundness of the company.

RESEARCH METHODOLOGY

The study will be based on the QUANTATIVE and QUALITATIVE approach of the working capital management model at TATA STEEL needs a thorough study. With the help of RATIO ANALYSIS & TREND ANALYSIS the result of the control mechanism can be summarised which will help in identifying the effectiveness of the system under the preview. The data for the companies under analysis has been taken from their respective websites of the companies. `MICROSOFT EXCEL has been used as a tool for different calculation purposes and developing the charts.

COLLECTION OF DATA:

The data has been collected from the primary and secondary sources:i) Primary data

(1) Department visit- discussion with the concerned person and interviewing officers in accounts and finance sector.

(2) Observation method .

ii) Secondary data(1) Annual reports(2) Journals and magazines(3) Study of files and office documents (4) Websites of TATA STEEL and other steel companies.

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CHAPTER: - 2 COMPANY PROFILE

The Tata Group of Companies has always believed strongly in the concept of collaborative growth, and this

vision has seen it emerge as one of India's and the world's most respected and successful business

conglomerates. The Tata Group has traced a route of growth that spans through six continents and embraces

diverse cultures. The total revenue of Tata companies, taken together, was 67.4 billion USD (around

Rs319,534 crore) in 2009-10, with 57 per cent of this coming from business outside India. In the face of

trying economic challenges in recent times, the Tata Group has steered India’s ascent in the global map

through its unwavering focus on sustainable development. Over 395,000 people worldwide are currently

employed in the seven business sectors in which the Tata Group Companies operate. It is the largest

employer in India in the Private Sector and continues to lead with the same commitment towards social and

community responsibilities that it has shown in the past.

The Tata Group of Companies has business operations (114 companies and subsidiaries) in seven defined

sectors – Materials, Engineering, Information Technology and Communications, Energy, Services,

Consumer Products and Chemicals. Tata Steel with its acquisition of Corus has secured a place among the

top ten steel manufacturers in the world and it is the Tata Group’s flagship Company. Other Group

Companies in the different sectors are – Tata Motors, Tata Consultancy Services (TCS), Tata

Communications, Tata Power, Indian Hotels, Tata Global Beverages and Tata Chemicals.

Tata Motors is India’s largest automobile company by revenue and is among the top five commercial

vehicle manufacturers in the world. Jaguar and Landrover are now part of Tata Motor’s portfolio.

Tata Consultancy Services (TCS) is an integrated software solutions provider with delivery centres in more

than 18 countries. It ranked fifth overall, and topped the list for IT services, in Bloomberg Businessweek's

12th annual 'Tech 100', a ranking of the world's best performing tech companies.

Tata Power has pioneered hydro-power generation in India and is the largest power generator (production

capacity of 2300 MW) in India in the private sector.

Indian Hotels Company (Taj Hotels, resorts and palaces) happens to be the leading chain of hotels in India

and one of the largest hospitality groups in Asia. It has a presence in 12 countries in 5 continents.

Tata Global Beverages (formerly Tata Tea), with its major acquisitions like Tetley and Good Earth is at

present the second largest global branded tea operation.

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When Jamshedji Tata gave shape to his vision of nation building by forming what was to become the Tata

Group in 1868, he had envisaged India as an independent strength – politically, economically and socially.

In order to become a force that the world has to reckon with, the Tata Group has always ventured into path

breaking territory and pioneered developments in industries of national importance.

As a policy, the Tata Group Companies promote and encourage economic, social and educational

development in the community, returning wealth to the society they serve. Two-thirds of the equity of Tata

Sons is held in philanthropic trusts that take care of endowments towards improvement programmes in these

spheres.

Through the years, the Tata Group has been amongst the most prestigious corporate presences in the world

governed by its principles of business ethics. Its foray into international business has been recognised by

various bodies and institutions. Brand Finance, a UK based consultancy firm after a recent valuation of the

Tata brand at $11.22 billion has ranked it 65th among the world's top 100 brands. In Business

Week magazine's list of the 25 most innovative companies the Tata name appears 13th and The Reputation

Institute, USA has evaluated the Tata Group as the 11th in a global study of the most reputed companies.

In the road ahead, the Tata Group is focusing on integration of new technologies in its operations and

breaking new grounds in product development. The Eka supercomputer had been ranked the world’s fourth

fastest in 2008 and the launch of the Nano has been a benchmark for the auto industry specifically and the

economy in general.

With a holistic approach in all its business operations, a loyal and dedicated workforce and its rooted belief

in value creation and corporate citizenship, the Tata Group is always ready to realise its vision and

objectives. The challenges of the future will only help to enhance the Group’s performance and transform

newer dreams to reality.

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FOUNDERS OF TATA STEEL

JAMSEDJI NUSSERWANJI TATA (1839 – 1904)

He was a visionary behind Tata Steel .He realized that India’s real

freedom depended upon its self-sufficiency in scientific knowledge,

power and steel, thus devoted the major part of his life, and his fortune

to three great enterprises-The Indian institute of Science at Bangalore,

the Hydro-electric schemes and the Iron & Steel Works at

Jamshedpur .He envisaged and conceived a steel town to the very last

detail, later to be named as Jamshedpur.

J.N. Tata had exhorted to his sons to pursue and develop his life’s

work ; his elder son, Sir Dorabji Tata(1859-1933) carried out the bequest with scrupulous zeal and

distinction .Thus , even though it was Jamshedji Tata who had envisioned the mammoth projects, it was in

fact Dorabji Tata who actually brought the ventures to existence and fruition. He was the first chairman of

the gigantic Tata enterprises.

It was in 1907 that the village of Sakchi was discovered at the confluence of two rivers, Subarnarekha and

Kharkhai and the railways station of Kalimati .The Tata Iron and Steel Company was floated.

SIR DORABJI TATA (1859 – 1933)

Sir DorabjiTata(1859-1933) carried out the bequest with scrupulous zeal

and distinction.

Thus , even though it was Jamshedji Tata who had envisioned the

mammoth projects, it was in fact Dorabji Tata who actually brought the

ventures to existence and fruition. He was the first chairman of the gigantic

Tata enterprises.

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BHARAT RATNA JEHANGIR RATANJI DADABHAI TATA (1904 – 1993)

J.R.D.Tata has been one of the greatest builders and personalities of modern

India in the twentieth century.

He assumed Chairmanship of Tata Steel at the young age of 34, but his

charismatic, disciplined and forward looking leadership over the next 50 years

led the Tata Group to new height of achievement, expansion and

modernization.

His style of management was to pick the best person for the job at hand and let

him have the latitude to carry out the job. He was never interested for Micro-

Management. It was he who zeroed in on Sumant Moolgaokar, the engineering

genius who successfully steered our company for many years. He was a visionary whose thinking was far

ahead of his time, which helped Tata Group launching its own Airlines, now known as Air India. He was

awarded the country’s highest civilian honor, The Bharat Ratna in 1992.

RATAN NAVAL TATA

Ratan Navel Tata was born on December 28, 1937, in Surat. He is the

present Chairman of Tata Group, India’s largest conglomerate founded

by Jamshedji Tata and consolidated and expanded by later generation of

his family. He is one of the most well-known and respected industrialists

in India.

Tata was born into wealthy and famous family of Mumbai. His

childhood was troubled as his parents separated in the mid-1940s,

when he was about seven and his younger brother was five. His

mother moved out and both he and his brother were raised by his grandmother Lady Navarjbai.

Ratan Tata completed his degree in architecture with structural engineering from Cornell University in 1962,

and the Advance management Program from Harvard Business School in 1975. He joined the Tata Group in

December 1962 on the advice of JRD Tata. He was first sent to Jamshedpur to work at Tata steel. He

worked on the floor with the other blue collar employees, shoveling limestone and handling the blast

furnaces. He was appointed the Director In Charge of The National Radio & Electronics Company Limited

(Nelco) in 1971 and was successful in turning Nelco around.

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LIST OF BOARD OF DIRECTORS

Board of Directors

AWARDS AND RECOGNITIONS

CORPORATE AWARDS

The Businessworld Most Respected Company Award 2011 in the Metals category.

Recognised as India’s Most Admired Knowledge Enterprise (MAKE) Award Winner 2010 at the CII KM India Summit 2010.

Awarded Asia MAKE (Most Admired Knowledge Enterprise) Award 2010. This is the seventh time

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Ratan N Tata Chairman

H M Nerurkar Managing Director

Subodh Bhargava Independent, Non-Executive Director

Andrew Robb Independent, Non-Executive Director

Ishaat Hussain Non Executive, Non Independent Director

Cyrus Pallonji Mistry Additional Director

B Muthuraman Vice Chairman

Nusli N Wadia Independent, Non-Executive Director

Jacobus Schraven Independent, Non-Executive Director

S M palia Independent, Non-Executive Director

Karl-Ulrich Koehler Non Executive, Non Independent Director

Mallika Srinivasan Additional Director

that the Company was conferred with this honour.

Tata Steel Europe awarded the Lifecycle Analysis Leadership Award 2010.

Awarded Steel Industry Website of the Year 2010 by the World Steel Association.

Tata Steel won the following awards at Asia’s Best Employer Awards hosted by the Employer Branding Institute in Singapore in July 2010: the Award for Talent Management, the Award for Best HR Strategy in line with Business and the Award for Excellence in Training.

Tata Steel Processing and Distribution Limited won the JIPM Award for 2009, awarded by the Japan Institute of Plant Management, for excellence in TPM in plant operations.

FE-EVI Green Business Leadership Award 2009-2010.

AWARDS FOR EXCELLENCE IN CORPORATE SOCIAL RESPONSIBILITY

Conferred with the Safety and Health Excellence Recognition Award 2010 by the World Steel Association.

Awarded the Rashtriya Khel Protsahan Puruskar for the second consecutive year.

Recognised in six of the seven categories at the annual awards function organised by the Joint Committee on Safety, Health and Environment in Steel Industry (JCSSI).

Awarded the CSR Excellence Award 2010 by ASSOCHAM, National CSR Committee and CSR Organising Committee.

Awarded the Businessworld-FICCI-SEDF Corporate Social Responsibility Award 2009.

Awarded the Best Corporate Social Responsibility Practice at the 6th Social and Corporate Governance Awards 2010 by the Bombay Stock Exchange.

NatSteel awarded the Platinum HEALTH Award 2010 by the Singapore Health Promotion Board.

NatSteel conferred with the Work-Life Excellence Award 2010 by the Singapore Ministry of Manpower for the fourth consecutive time.

TOP COMPETITORS OF TATA STEEL

Jindal Steel

SAIL

Essar steel

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SOME OTHER MAJOR PLAYER IN THIS INDUSTRY

Saw pipes

Uttam steel Ltd

Ispat industry Ltd

Mukand Ltd

Mahindra Ugine steel co. Ltd

Ushaispat Ltd

Kalyani steel Ltd

Electro steel casting Ltd

Sesa Goa Ltd

SWOT ANALYSIS

STRENGTH:

Strong brand name like Tata Steel & Corus Indian operation capable of meeting its own requirement Strong supply chain for raw material leading sales & distribution

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Low cost, high skilled labor.

WEAKNESS:

Low R & D Investment Unscientific mining method Technologically backward Low productivity

OPPURTUNITY:

Unexplored rural markets Growing domestic market Growing global market Carbon trade High investment in infrastructure sector

THREATS:

Major player entering Indian market China set to become a net exporter High duties and taxes from the government Environmental concerns & laws Global slowdown

CHAPTER.3. WORKING CAPITAL MANAGEMENT

WHAT IS WORKING CAPITAL???

Working capital is the cash needed to pay for the day to day operation of the business. Working capital is a

financial metric which represents operating liquidity available to a business, organization or other entity,

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including governmental entity. Along with fixed assets such as plant and equipment, working capital is

considered a part of operating capital. Net working capital is calculated as current assets minus current

liabilities.. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs

(Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital

deficiency, also called a working capital deficit.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot

readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue

its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming

operational expenses. The management of working capital involves managing inventories, accounts

receivable and payable, and cash.

Working capital management is a very important component of corporate finance because it directly

affects the liquidity and profitability of the company. It involves the decision of the amount and composition

of current assets and the financing of these assets. Efficient working capital management involves planning

and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet

due short term obligations on the one hand and avoid excessive investment in these assets on the other hand.

“Working capital” means that part of the total assets of the business that change from one form to

another form in the ordinary course of business operations.” Also known as revolving or circulating capital

or short-term financial management it is nothing but the difference between current assets and current

liabilities. The word “working capital” is made of two words- Working & Capital. The word „working‟

means day to day operation of the business, whereas the word „capital‟ means monetary value of all assets

of the business. Working capital is of major importance to internal and external analysis because of its close

relationship with the current day-to- day operations of a business.

Every business needs funds for two purposes.

Long term funds are required to create production facilities through purchase of fixed assets such as

plants, machineries, lands, building, etc.

Short term funds are required for the purchase of raw materials, payment of wages, and other day-

to-day expenses.

Working capital management deals with the management of these short term funds.

The constituents of current assets & current liabilities is as follows-

CURRENT ASSETS CURRENT LIABILITIES

1. INVENTORY 1. SUNDRY CREDITORS

a) RAW MATERIAL 2. TRADE ADVANCES16

b)WORK-IN-PROGRESS 3. BORROWINGS (short term)

c) FINISHED GOODS a) COMMERCIAL BANKS

d) OTHERS b) OTHERS

2. TRADE CREDITORS 4. PROVISIONS

3. LOANS AND ADVANCES

4.CASH AND BANK BALANCE

WORKING CAPITAL COMPRISES OF THE FOLLOWING:-

1. Cash and cash equivalents: - This most liquid form of working capital requires constant

supervision. A good cash budgeting and forecasting system provides answers to key questions such

as:

Is the cash level adequate to meet current expenses as they come due?

What is the timing relationship between cash inflow and outflow?

When would cash need occur?

When and how much bank borrowing will be needed to meet any cash shortfalls?

When will repayment be expected and will the cash flow cover it?

2. Accounts receivables: - Many businesses extend credit to their customers.

If you do, is the amount of accounts receivable reasonable relative to sales?

How rapidly are receivables being collected?

Which customers are slow to pay and what should be done about them?

3. Inventory: - Inventory is often as much as 50 percent of a firm's current assets, so naturally it

requires continual scrutiny.

Is the inventory level reasonable compared with sales and the nature of your business?

What's the rate of inventory turnover compared with other companies in your type of business?

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4. Accounts payable: - Financing by suppliers is common in small business; it is one of the major

sources of funds for entrepreneurs.

Is the amount of money owed suppliers reasonable relative to what you purchase?

What is your firm's payment policy doing to enhance or detract from your credit rating?

5. Accrued expenses and taxes payable: - These are obligations of your company at any given time

and represent a future outflow of cash.

THERE ARE TWO DIFFERENT CONCEPTS OF WORKING CAPITAL:-

1. Balance sheet or Traditional concept - It shows the position of the firm at certain point of time. It is

calculated in the basis of balance sheet prepared at a specific date. In this method there are two types of

working capital:- 18

a) Gross working capital - It refers to the firm’s investment in current assets. The sum of the current assets

is the working capital of the business. The sum of the current assets is a quantitative aspect of working

capital. Which emphasizes more on quantity than its quality, but it fails to reveal the true financial position

of the firm because every increase in current liabilities will decrease the gross working capital.

b) Net working capital - It is the difference between current assets and current liabilities or the excess of

total current assets over total current liabilities. It is also can defined as that part of a firm’s current assets

which is financed with long term funds. It may be either positive or negative. When the current assets

exceed the current liability, the working capital is positive and vice versa.

2. Operating cycle concept - The duration or time required to complete the sequence of events right from

purchase of raw material for cash to the realization of sales in cash is called the operating cycle or working

capital cycle

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Operating cycle

The investment in working capital is influenced by four key events in the production & sales cycle of the

firm:

Purchase of raw materials.

Payment of raw materials.

Sale of finished goods.

Collection of cash for sales.

The firm begins with the purchase of raw materials which are paid after a delay which represents the

“accounts payable period”. The raw materials are then converted into finished goods which are then sold.

The time lag between the purchase of raw materials and the sale of finished goods is called the “inventory

period”. The time lag between the date of sales & the date of collection of receivables is the “accounts

receivable period”. The time lag between purchase of raw materials & the collection of cash for sales is

referred to as “operating cycle.” The time lag between payment for raw material purchases & the collection

of cash for sales is referred to as “cash cycle”.

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IMPORTANCE OF WORKING CAPITAL

The advantages of working capital or adequate working capital may be enumerated as below: -

1. Cash Discount:

If a proper cash balance is maintained, the business can avail the advantage of cash discount by

paying cash for the purchase of raw materials and merchandise. It will result in reducing the cost of

production.

2. It creates a Feeling of Security and Confidence:

The proprietor or officials or management of a concern are quite carefree, if they have proper

working capital arrangements because they need not worry for the payment of business expenditure

or creditors. Adequate working capital creates a sense of security, confidence and loyalty, not only

throughout the business itself, but also among its customers, creditors and business associates.

3. ‘Must’ for Maintaining Solvency and Continuing Production:

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In order to maintain the solvency of the business, it is but essential that the sufficient amount t of

fund is available to make all the payments in time as and when they are due. Without ample working

capital, production will suffer, particularly in the era of cut throat competition, and a business can

never flourish in the absence of adequate working capital.

4. Sound Goodwill and Debt Capacity:

It is common experience of all prudent businessmen that promptness of payment in business creates

goodwill and increases the debt of the capacity of the business. A firm can raise funds from the

market, purchase goods on credit and borrow short-term funds from bank, etc. If the investor and

borrowers are confident that they will get their due interest and payment of principal in time.

5. Easy Loans from the Banks:

An adequate working capital i.e. excess of current assets over current liabilities helps the company to

borrow unsecured loans from the bank because the excess provides a good security to the unsecured

loans, Banks favour in granting seasonal loans, if business has a good credit standing and trade

reputation.

6. Distribution of Dividend:

If company is short of working capital, it cannot distribute the good dividend to its shareholders in

spite of sufficient profits. Profits are to be retained in the business to make up the deficiency of

working capital. On the other contrary, if working capital is sufficient, ample dividend can be

declared and distributed. It increases the market value of shares.

7. Exploitation of Good Opportunity:

In case of adequacy of capital in a concern, good opportunities can be exploited e.g., company may

make off-season purchases resulting in substantial savings or it can fetch big supply orders resulting

in good profits.

8. Meeting Unseen Contingency:

Depression shoots the demand of working capital because sock piling of finished goods become

necessary. Certain other unseen contingencies e.g., financial crisis due to heavy losses, business

oscillations, etc. can easily be overcome, if company maintains adequate working capital.

9. High Morale:

The provision of adequate working capital improves the morale of the executive because they have

an environment of certainty, security and confidence, which is a great psychological, factor in

improving the overall efficiency of the business and of the person who is at the hell of fairs in the

company.

10. Increased Production Efficiency:

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A continuous supply of raw material, research programme, innovations and technical development

and expansion programmes can successfully be carried out if adequate working capital is maintained

in the business. It will increase the production efficiency, which will, in turn increases the efficiency

and morale of the employees and lower costs and create image among the community.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

E v e r y b u s i n e s s c o n c e r n s h o u l d h a v e a d e q u a t e w o r k i n g c a p i t a l t o r u n i t s business operations. It should have neither redundant or excessive working capital nor inadequate nor shortage of working capital. Both excessive as well as short working capital positions are bad for any business.

1. Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments.

2. When there is redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft waste and losses.

3. Excessive working capital implies excessive debtors and defective credit Policy which may cause higher incidence of bad debts.

4. It may result into overall inefficiency in the organization.

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5. When there is an excessive working capital relation with the banks and other financial institutions may not be maintained.

6. Due to low rate of return on investments the value of shares may also fall

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1) A concern, which has inadequate working capital, cannot pay its short-term liabilities in time. Thus it will loose its reputation and shall not be able to get good credit facilities.

2 ) T h e f i r m c a n n o t p a y d a y - t o - d a y e x p e n s e s o f i t s o p e r a t i o n s a n d i t c r e a t e s inefficiencies, increases costs and reduces the profits of the business.

3 ) I t b e c o m e s i m p o s s i b l e t o u t i l i z e e f f i c i e n t l y t h e f i x e d a s s e t s d u e t o n o n - availability of liquid funds.

4 ) T h e r a t e o f r e t u r n o n i n v e s t m e n t s a l s o f a l l s w i t h t h e s h o r t a g e o f w o r k i n g capital.

NET WORKING CAPITAL

CURRENT ASSETS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011STORES AND SPARE PARTS

505.44 557.67 612.19 623.76 716.18

STOCK-IN-TRADE 1827.54 2047.31 2868.28 2453.99 3237.58SUNDRY DEBTORS 631.63 543.48 635.98 434.83 428.03INTREST ACCRUED AND INVESTMENTS

0.20 0.20 0.00 0.29 0.00

CASH AND BANK 455.41 465.04 1590.60 3234.14 4141.54LOANS AND ADVANCES

3055.73 2452.78 4330.43 3628.28 9553.19

TOTAL(A) 6475.95 6066.28 10037.48 10375.29 18076.52

CURRENT LIABILITIES

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

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SUNDRY CREDITORS

3145.99 3243.42 3842.78 4086.65 4721.07

SUBSIDIARY COMPANIES

102.61 115.74 1358.12 1514.30 1711.07

INTEREST ACCRUED BUT NOT DUE

47.11 231.05 506.68 676.66 679.31

ADVANCE RECEIVED FROM THE CUSTOMER

198.28 226.03 297.37 334.99 293.84

UNCLAIMED MATURED DEPOSITS(DUE)

0.00 0.02 0.01 0.00 0.00

INTEREST ACCRUED ON UNPAID DIVIDENDS AND UNCLAIMED MATURED DIVIDENDS(DUE)

0.03 0.08 0.07 0.00 0.00

UNPAID DIVIDENDS 23.37 29.33 33.08 39.44 41.26APPLICATION MONEY PENDING REFUND

0.01 5.65 0.24 0.14 0.61

UNPAID MATURED DIVIDENDS

0.00 0.00 0.00 0.73 0.54

UNPAID MATURED DEPOSITS

2.59 1.73 1.03 0.00 0.00

UNPAID MATURED DEBENTURES

1.76 1.79 0.14 0.00 0.00

INTEREST ACCRUED ON UNPAID DIVIDENDS AND MATURED DIVIDENDS

1.45 0.42 0.34 0.18 0.13

PROVISION FOR RETIRING GRATUITIES

49.31 0.00 0.00 0.00 0.00

PROVISION FOR EMPLOYEE BENEFITS

470.19 848.54 1143.08 1127.50 1601.75

PROVISION FOR TAXATION

448.68 854.74 493.59 507.13 791.29

PROVISION FOR FRINGE BENEFITS

18.37 19.12 19.12 2.12 3.88

PROPOSED DIVIDEND

943.91 1278.40 1278.40 709.77 1151.06

TOTAL(B) 5453.66 6768.78 8974.05 8999.61 10995.81

NET WORKING CAPITAL

1022.29 (702.5) 1063.43 1375.68 7080.71

25

PERCENTAGE CHANGE IN NET WORKING CAPITAL

CURRENT ASSETS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011STORES AND SPARE PARTS

14.18 10.33 9.78 1.89 14.81

STOCK-IN-TRADE 5.51 12.03 40.10 -14.44 31.93SUNDRY DEBTORS 17.10 -13.96 17.02 -31.63 -1.56CASH AND BANK 57.91 2.11 242.04 103.33 28.06LOANS AND ADVANCES

147.46 -19.73 76.55 -16.21 163.30

TOTAL(A) 242.16 -9.22 385.49 42.98 236.54

CURRENT LIABILITIES

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

26

SUNDRY CREDITORS

24.15 3.10 18.48 6.35 15.52

SUBSIDIARY COMPANIES

64.52 12.80 1073.42 11.50 12.99

INTEREST ACCRUED BUT NOT DUE

93.95 390.45 119.29 33.55 0.39

ADVANCE RECEIVED FROM THE CUSTOMER

7.14 14.00 31.56 12.65 -12.28

PROVISION FOR RETIRING GRATUITIES

5987.65 0.00 0.00 0.00 0.00

PROVISION FOR EMPLOYEE BENEFITS

0.00 63.34 34.71 0.014 42.06

PROVISION FOR TAXATION

79.44 90.50 -42.25 2.74 56.03

PROVISION FOR FRINGE BENEFITS

675.11 4.08 0.00 -88.91 83.01

PROPOSED DIVIDEND

31.19 26.19 7.33 -44.48 62.17

TOTAL(B) 6959.78 638.04 1232.01 -50.61 264.96

PERCENTAGE CHANGE OF NET WORKING CAPITAL(A-B)

-6717.62 -647.26 -846.52 93.59 -28.42

FINANCIAL RATIOS

1. WORKING CAPITAL TURNOVER RATIO

It is a ratio that reflects the amount of working capital needed to maintain a given level of sales. A high ratio indicates the firm is in a good liquidity position and vice-versa.

FORMULA = NET SALES NET WORKING CAPITAL

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

27

NET SALES 17551.09 19693.28 24315.77 25021.98 29396.35NET WORKING CAPITAL

1022.29 (702.5) 1063.43 1375.68 7080.71

WORKING CAPITAL TUNRNOVER RATIO

17.17 -28.03 22.87 18.19 4.15

2006-1007 2007-2008 2008-2009 2009-2010 2010-2011

-40

-30

-20

-10

0

10

20

30

17.17

-28.03

22.8718.19

4.15

working capital turnover ratio

INTERPRETATION:

The net working capital of TATA STEEL Ltd. has been fluctuating over the years. A sharp decrease in the working capital in the year 2007-2008, where the working capital was negative was mainly because of a decrease in current assets.

As compared to the year 2009-2010 where the working capital ratio was 18.19, the ratio this year has fallen down to 4.15. The reason for decrease can be accredited to the increase in the current assets such as inventory, cash & bank balances and loans and advances that has increased tremendously this year. There has been an increase in the sales and the production capacity this year. The raw materials consumption has also increased by 13.64%.

2. CURRENT RATIO

The current ratio is used to evaluate a company’s overall short – term liquidity position. It tells us whether a company is in a position to meet its obligations.

FORMULA = CURRENT ASSETS CURRENT LIABILITIES

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-1011CURRENT 6475.95 6066.28 10037.48 10375.29 18076.52

28

ASSESTSCURRENT LIABILITIES

5453.66 6768.78 8974.05 8999.61 10995.81

CURRENT RATIO

1.19 0.90 1.12 1.15 1.64

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1.19000000000001

0.9

1.12 1.14999999999998

1.64

current ratio

current ratio

INTERPRETATION:

The ideal current ratio is considered to be 2:1. The current ratio has been increasing steadily over the years. As compared to the previous year in 2009-2010 the ratio has increased to 1.64 in the year 2010-2011. The reason for increase might be continuous investments in the current assets over the years.

3. QUICK RATIO

Quick ratio / Liquid ratio is an indicator of a company’s short – term solvency or liquidity position. It is the relationship between liquid assets and liabilities. An asset is said to be liquid if it can be converted into cash within a short period without loss of value.

FORMULA = CURRENT ASSETS – INVENTORY CURRENT LIABILITIES

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011CURRENT ASSETS

6475.95 6066.28 10037.48 10375.29 18076.52

INVENTORY 1827.54 2047.31 2868.28 2453.99 3237.58

29

CURRENT ASSETS- INVENTORY

4648.41 4018.97 7169.2 7921.3 14838.94

CURRENT LIABILTY

5453.66 6768.78 8957.05 8999.61 10995.81

QUICK RATIO 0.85 0.59 0.80 0.88 1.34

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

0.850000000000001

0.59

0.80.88

1.34

QUICK RATIO

QUICK RATIO

INTERPRETATION:

The ideal standard in case of quick ratio is 1:1. And if it is more it is considered to be better. The idea behind this is that for every rupee of current liabilities, there should be at least one rupee of liquid asset.

Quick ratio is thus a rigorous test of liquidity and gives a better picture of short term financial position of the firm. As shown in the graph above, we can see that after a steep fall in the quick ratio from the year 2006-2007 to 2007-2008 there has been a steady increase in the quick ratio and for the year 2010-2011 the ratio is 1.34 which signifies that the liquidity position of the firm has improved and this is because of increase in the cash that is lying with the firm.

4. DEBTORS TURNOVER RATIO

Debtors Turnover Ratio or Receivables Turnover Ratio indicates the relationship between net sales and average debtors. It shows the rate at which cash is generated by the turnover of debtors.

FORMULA = AVERAGE DEBTORS NET SALES

AVERAGE DEBTORS= (OPENING DEBTORS + CLOSING DEBTORS) / 2

30

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011AVERAGE DEBTORS

585.515 587.55 589.73 535.40 431.43

NET SALES 17551.09 19693.28 24315.77 25021.98 29396.35DEBTORS TURNOVER RATIO

29.98 33.52 41.23 46.73 68.13

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

10

20

30

40

50

60

70

80

29.9833.52

41.2346.73

68.13

DEBTORS TURNOVER RATIO

DEBTORS TURNOVER RATIO

INTERPRETATION:

Debtors’ turnover ratio indicates the speed with which the amount is being collected from the debtors. The higher the ratio the better it is, since it indicates the amount from the debtors is being collected more quickly. The more quickly the debtors pay, the less risk from bad debts, and so lower is the expenses of collection and increase in the liquidity of the firm. By comparing the debtors’ turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not.

As shown in the graph above, there has been an increase in the ratio from 2006-2007 to 2010-2011from 29.98 to 68.13 which shows that the sales management of the firm is quite efficient.

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5. DEBT COLLECTION PERIOD

Days Sales Outstanding is a short – term (operating) Activity ratio which tells us about the debtors holding time. The more the holding period the more risky it becomes for the company. A high debt collection period indicates that the company is taking time to collect cash from its debtors. The cash is not being collected on time which is not a good sign for the company, it is a red flag.

FORMULA = 365/ DEBTORS TURNOVER RATIO

32

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011DEBTORS TURNOVER RATIO

29.98 33.52 41.23 46.73 68.13

NO. OF DAYS 365 365 365 365 365DEBT COLLECTION PERIOD

12 11 9 8 5

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

2

4

6

8

10

12

1211

98

5

DEBT COLLECTION PERIOD

DEBT COLLECTION PERIOD

INTERPRETATION:

Debt collection period means the average number of days that the debtors take to get converted to cash. In other words, credit sales are locked up in debtors for the number of days.

As we can see here, the debt collection period has come down from 12 days to 5 days which means that the debtors get converted to cash in 5 days. An increase in the ratio indicates excessive blockage of funds with the debtors which increases the chances of bad debts. In this case as we can see that there is a decrease in the average collection period which indicates prompt payment by debtors which reduces the chances of bad debts.

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Therefore, from the above data it can be concluded that the company is in a better position and is improving as compared to its previous years.

6. STOCK TURNOVER RATIO

The Inventory Turnover Ratio measures the efficiency of the firm’s inventory management. A higher ratio indicates that inventory does not remain in warehouses or on the shelves but rather turns over rapidly from the time of acquisition to sales. A lower inventory turnover ratio means accumulation of inventories, over investment in inventory or unsalable goods.

FORMULA = COST OF GOODS SOLD

34

AVERAGE STOCK

AVERAGE STOCK= (OPENING STOCK+CLOSING STOCK)/2

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011COST OF GOODS SOLD

10174.97 11155.5 14928.65 15730.67 17471.83

AVERAGE STOCK

1779.82 1937.43 2457.8 2661.14 2845.78

STOCK TURNOVER RATIO

5.72 5.76 6.07 5.91 6.13

.

2006-2007 2007-2008 2008-2009 2009-2010 2010-20115.5

5.6

5.7

5.8

5.9

6

6.1

6.2

5.725.76

6.07

5.91

6.13



INTERPRETATION:

This ratio indicates the relationship between the cost of goods sold during the year and average stock kept during that year. The ratio indicates whether the stock has been efficiently used or not. It shows the speed with which the stock is turned into sales during the year.

The graph above shows that after an increase in the ratio from the year 2007-2008 to 2008-2009 (5.76-6.07) there in the year 2009-2010(5.91) after which again a rise in the ratio in the year 2010-2011(6.13). A high ratio is indicative that the stock is selling quickly.

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7. PAYABLES TURNOVER RATIO

Although accounts payable are liabilities rather than assets, their trend is significant as they represent an important source of financing for operating activities. The creditors turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on supplier’s credit. This shows the relationship between credit purchases and average accounts payable. Higher ratio shows that accounts are to be settled rapidly whereas, low ratio reflects liberal credit terms granted by suppliers.

FORMULA- NET CREDIT PURCHASE

36

AVERAGE CREDITORS

AVERAGE CREDITORS= (OPENING CREDITORS+CLOSING CREDITORS)/2

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 NET CREDIT PURCHASE

2263.01 2353.80 6241.61 5215.42 6853.95

AVERAGE CREDITORS

2840.01 3194.70 3543.10 3964.72 4383.86

PAYABLES TURNOVER RATIO

0.79 0.73 1.76 1.31 1.56

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

0.79 0.730000000000001

1.76

1.31

1.56



INTERPRETATION:

The ratio indicates the speed with which the amount is being paid to the creditors. A higher ratio is better since it would indicate that the creditors are being paid more quickly and this increases the credit worthiness of the firm.

Here, the graph above shows a steep fall in the ratio from the year 2008-2009(1.76) to 2009-2010(1.31) and then again a rise to the year 2010-2011(1.56). The reason for the fall can be attributed to a decrease in the net credit purchases in the year 2009-2010.

COMPARITIVE ANALYSIS OF

37

“TATA STEEL”,

“SAIL”

&

“JSW”

SAIL

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction,

38

engineering, power, railway, automotive and defence industries and for sale in export markets. SAIL is also among the five Maharatnas of the country's Central Public Sector Enterprises.

SAIL manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanised sheets, electrical sheets, structural, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company's iron ore, limestone and dolomite mines. The company has the distinction of being India’s second largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making.

SAIL's wide range of long and flat steel products are much in demand in the domestic as well as the international market. This vital responsibility is carried out by SAIL's own Central Marketing Organisation (CMO) that transacts business through its network of 37 Branch Sales Offices spread across the four regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Offices. CMO’s domestic marketing effort is supplemented by its ever widening network of rural dealers who meet the demands of the smallest customers in the remotest corners of the country. With the total number of dealers over 2000 , SAIL's wide marketing spread ensures availability of quality steel in virtually all the districts of the country.

SAIL's International Trade Division ( ITD), in New Delhi- an ISO 9001:2000 accredited unit of CMO, undertakes exports of Mild Steel products and Pig Iron from SAIL’s five integrated steel plants.

With technical and managerial expertise and know-how in steel making gained over four decades, SAIL's Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide.

SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS) at Ranchi which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Centre for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organisation at Ranchi. Our captive mines are under the control of the Raw Materials Division in Kolkata. The Environment Management Division and Growth Division of SAIL operate from their headquarters in Kolkata. Almost all our plants and major units are ISO Certified.

BACKGROUND & HISTORY

The Precursor

39

SAIL traces its origin to the formative years of an emerging nation - India. After independence the builders of modern India worked with a vision - to lay the infrastructure for rapid industrialisaton of the country. The steel sector was to propel the economic growth. Hindustan Steel Private Limited was set up on January 19, 1954.

Expanding Horizon (1959-1973)

Hindustan Steel (HSL) was initially designed to manage only one plant that was coming up at Rourkela. For Bhilai and Durgapur Steel Plants, the preliminary work was done by the Iron and Steel Ministry. From April 1957, the supervision and control of these two steel plants were also transferred to Hindustan Steel. The registered office was originally in New Delhi. It moved to Calcutta in July 1956, and ultimately to Ranchi in December 1959.

The 1 MT phases of Bhilai and Rourkela Steel Plants were completed by the end of December 1961. The 1 MT phase of Durgapur Steel Plant was completed in January 1962 after commissioning of the Wheel and Axle plant. The crude steel production of HSL went up from .158 MT (1959-60) to 1.6 MT. A new steel company, Bokaro Steel Limited, was incorporated in January 1964 to construct and operate the steel plant at Bokaro.The second phase of Bhilai Steel Plant was completed in September 1967 after commissioning of the Wire Rod Mill. The last unit of the 1.8 MT phase of Rourkela - the Tandem Mill - was commissioned in February 1968, and the 1.6 MT stage of Durgapur Steel Plant was completed in August 1969 after commissioning of the Furnace in SMS. Thus, with the completion of the 2.5 MT stage at Bhilai, 1.8 MT at Rourkela and 1.6 MT at Durgapur, the total crude steel production capacity of HSL was raised to 3.7 MT in 1968-69 and subsequently to 4MT in 1972-73.

Holding Company

The Ministry of Steel and Mines drafted a policy statement to evolve a new model for managing industry. The policy statement was presented to the Parliament on December 2, 1972. On this basis the concept of creating a holding company to manage inputs and outputs under one umbrella was mooted. This led to the formation of Steel Authority of India Ltd. The company, incorporated on January 24, 1973 with an authorized capital of Rs. 2000 crore, was made responsible for managing five integrated steel plants at Bhilai, Bokaro, Durgapur, Rourkela and Burnpur, the Alloy Steel Plant and the Salem Steel Plant. In 1978 SAIL was restructured as an operating company.

Since its inception, SAIL has been instrumental in laying a sound infrastructure for the industrial development of the country. Besides, it has immensely contributed to the development of technical and managerial expertise. It has triggered the secondary and tertiary waves of economic growth by continuously providing the inputs for the consuming industry.

JSW

JSW Group is one of the fastest growing business conglomerates with a strong presence in the core economic sector. This Sajjan Jindal led enterprise has grown from a steel rolling mill in 1982 to a multi

40

business conglomerate worth US $ 9 billion within a short span of time.As part of the US $ 15 billion O. P. Jindal Group, JSW Group has diversified interests in Steel, Energy, Minerals and Mining, Aluminium, Infrastructure and Logistics, Cement and Information Technology. On its road to growth and expansion, the Group is also conscious about its responsibility towards environment and social development. Eco-efficiency is a matter of principle. Preventive measures for damage to the environment are taken into account at the planning stage of production and growth.

JSW Foundation, an integral part of the Group, is the CSR wing, with a vision to create socio economic difference in the fields of Education, Health and Sports, Community Relationship/Propagation as well as Art, Culture and Heritage.

JSW Foundation plans and implements social development activities of the JSW group of companies. It is an independent institution and is governed by a Board of Trustees who is drawn from the senior management of the JSW group of companies. The Foundation is headed by Mrs Sangita Jindal while the executive is headed by Shri Jugal Tandon in his capacity as CEO, Corporate Sustainability. A team of social development professionals is based in Mumbai and at every location where JSW has its operations and undertake community based activity in consultation with their respective managements. An Advisory Board comprising of eminent NGO leaders has been constituted recently to render advice on social processes and participatory planning and execution of projects.

A social development policy has been accepted by the group. JSW cherishes people and believes in inclusive growth to facilitate creation of a value based and empowered society through continuous and purposeful engagement of all stakeholders. In partnership with external development agencies, JSW would strive toachieve sustainable development in all spheres of life including integrated community development, promotion of arts and culture, environment protection and sports .

As a responsible corporate, JSW would integrate its environment, HR and ethical business policies with appropriate community engagement and gender equity. JSW is committed to allocation of 1.5% of its PAT to pursue its CSR policy. In tune with this, JSW Foundation works closely with village communities and creates synergies with other verticals of the JSW group to assimilate their intervention in a social development framework.

1. WORKING CAPITAL RATIO

It is a ratio that reflects the amount of working capital needed to maintain a given level of sales. A high ratio indicates the firm is in a good liquidity position and vice-versa.

41

FORMULA = NET SALES NET WORKING CAPITAL

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011TATA STEEL 17.17 -28.03 22.87 18.19 4.15SAIL 3.63 3.01 2.48 1.85 2.06JINDAL 42.79 -10.49 -4.78 -8.82 187.34

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

-50

0

50

100

150

200

TATA STEELSAILJINDAL

INTERPRETATION:

The working capital ratio of TATA STEEL has been fluctuating over the years. The reason for negative working capital for the year 2007-2008 can be attributed to the decrease in current assets whereas a sharp decrease in working capital for the year 2010-2011 is because of the increase in current assets such as cash and bank balances, loans and advances and also because of an increase in the raw material consumption.

The working capital ratio of SAIL Ltd. has been falling constantly from the year 2006-2007 to the year 2009-2010 after which there was an increase in the ratio.

The working capital of JSW has shown a sharp decrease from the year 2006-2007 to 2007-2008 where the working capital ratio remained constantly negative for three consecutive years and after that there was an increase in the ratio. The reason for the increase in the ratio is an increase in the current assets, loans and advances.

2. CURRENT RATIO

The current ratio is used to evaluate a company’s overall short – term liquidity position. It tells us whether a company is in a position to meet its obligations.

42

FORMULA = CURRENT ASSETS CURRENT LIABILITIES

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011TATA STEEL 1.19 0.90 1.12 1.15 1.64SAIL 1.86 1.99 2.02 1.78 1.84JINDAL 1.08 0.74 0.61 0.73 1.01

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.5

1

1.5

2

2.5

1.19000000000001

0.9

1.12 1.14999999999999

1.641.64

1.990000000000012.02

1.78 1.84

1.08

0.740000000000004 0.61000000000000

1

0.730000000000001

1.01


INTERPRETATION:

The current ratio of TATA STEEL has been rising from the year 2007-2008and it has shown a positive graph. The reason for the constantly rising graph since 2007-2008 has been investment in the current assets, i.e. inventories, debtors, loans and advances and the liquid cash and bank balances.

SAIL has a fluctuating current ratio over the years with various rises and falls over the time. The reason for the fall in the ratio from the year 2008-2009 to the year 2009-2010 was the decrease in the current assets.

JSW had witnessed a steep downfall till the year 2008-2009 after which there was a rise in the ratio till 2010-2011. The reason for decrease in the ratio from the year 2007-2008 to the year 2008-2009 was because of the increase in current liabilities and again a rise in the year 2009-2010 was because of the increase in the current assets.

Current ratio should therefore be maintained around its ideal standard and for achieving this the company’s should therefore maintain its current assets and current liabilities in the right proportion.

3. QUICK RATIO

43

Quick ratio OR Liquid ratio is an indicator of a company’s short – term solvency or liquidity position. It is the relationship between liquid assets and liabilities. An asset is said to be liquid if it can be converted into cash within a short period without loss of value.

FORMULA = CURRENT ASSETS – INVENTORY CURRENT LIABILITIES

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011TATA STEEL 0.85 0.59 0.80 0.88 1.34SAIL 1.25 1.47 1.42 1.37 1.29JINDAL 0.64 0.36 0.34 0.39 0.60

2006-2007 2007-2008 2008-2009 2009-2010

0

0.5

1

1.5

2

2.5

3

0.850000000000001

0.590.8 0.88

1.34

2.4

1.47 1.42 1.37 1.29

0.640000000000007

0.36 0.340.39000000000000

4

0.600000000000001


INTERPRETATION:

The quick ratio of TATA STEEL has been rising since 2007-2008 and the investments should be made enough in the current assets so as to maintain the ratio of current assets and current liabilities as 1:1.

The quick ratio of SAIL had declined from 2006-2007(2.4) to 2007-2008(1.47) and thereafter the ratio has been declining throughout but the company has maintained the ratio above the ideal standard.

The ratio of JSW had fallen from the year 2007-2008(0.36) to 2008-2009(0.34) negligibly and thereafter it rose to 0.39 in 2008-2009 and finally to 0.60 in 2010-2011. The reason for the increase in the ratio in 2010-2011 was increase in the cash and bank balances maintained with the company.

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4. DEBTORS TURNOVER RATIO

Debtors Turnover Ratio or Receivables Turnover Ratio indicates the relationship between net sales and average debtors. It shows the rate at which cash is generated by the turnover of debtors

FORMULA = AVERAGE DEBTORS NET SALES

AVERAGE DEBTORS= (OPENING DEBTORS + CLOSING DEBTORS) / 2

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011TATA STEEL 29.98 33.52 41.23 46.73 68.13SAIL 16.31 14.73 14.21 12.44 11.16JINDAL - 33.83 38.07 37.87 33.05

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

10

20

30

40

50

60

70

80

29.9833.52

41.23

46.73

68.13

16.31 14.73 14.21 12.44 11.16

33.838.07

7.87

33.05

TATA STEELSAILJSW

INTERPRETATION:

The debtors turnover ratio has shown a positive rising graph throughout which is very good for the company since it shows the speed with which the money is being recovered from the debtors. And rising graph throughout shows that the sales management is quite efficient in recovering the money from the debtors.

SAIL has a declining graph throughout which is not a good sign and therefore it means that credit sales have been made to the debtors who do not deserve so much of credit and therefore the company must revise its sales policy.

JSW has a fluctuating graph and after a steep fall in the year 2009-2010 the ratio rose to 33.5 in the year 2010-2011. The debtors and the sales figures have risen for the year 2010-2011 and the reason for the rise in the ratio can be efficient sales management and a sound sales policy.

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5. DEBT COLLECTION PERIOD

Days Sales Outstanding is a short – term (operating) Activity ratio which tells us about the debtors holding time. The more the holding period the more risky it becomes for the company. A high debt collection period indicates that the company is taking time to collect cash from its debtors. The cash is not being collected on time which is not a good sign for the company, it is a red flag.

FORMULA = 365/ DEBTORS TURNOVER RATIO

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011TATA STEEL 12 11 9 8 5SAIL 22 24 26 29 33JINDAL 10 9 9 11

2005-2006 2006-2007 2007-2008 2008-2009 2009-20100

5

10

15

20

25

30

35

TATA STEELSAILJSW

INTERPRETATION:

The lower the debt collection period the lesser the chances of bad debts and thus is better for the firm. TATA STEEL has a sound sale policy and the average collection period has been decreasing over the years and finally the debtors are converted to cash in 5 days as in the year 2010-2011 and lesser is the collection period shorter is the operating cycle.

SAIL’s average collection period has been increasing in the number of days which means that they have a liberal sales policy and the credit period is thus extended for the debtors. A higher debt collection period generally increases the chances of bad debts and reduces the chances of recovery of money from the debtors.

JSW has maintained its collection period at more or less a constant platform. The debtors are converted to cash in 11 days (2010-2011). Here we can conclude that TATA STEEL is in a better position as compared to the other two firms. SAIL should make some serious efforts to reduce its debt collection period

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6. STOCK TURNOVER RATIO

The Inventory Turnover Ratio measures the efficiency of the firm’s inventory management. A higher ratio indicates that inventory does not remain in warehouses or on the shelves but rather turns over rapidly from the time of acquisition to sales. A lower inventory turnover ratio means accumulation of inventories, over investment in inventory or unsalable goods.

FORMULA = COST OF GOODS SOLD AVERAGE STOCK

AVERAGE STOCK= (OPENING STOCK+CLOSING STOCK)/2

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011TATA STEEL 5.72 5.76 6.07 5.91 6.13SAIL 4.22 4.68 4.68 3.62 4.09JINDAL 5.87 5.89 5.74 5.29

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

1

2

3

4

5

6

7

5.72 5.766.07 5.91

6.13

4.224.68 4.68

3.624.09

5.87 5.89 5.745.29

TATA STEELSAILJSW

INTERPRETATION:

The stock turnover ratio of TATA STEEL has been rising throughout and the cost of goods sold has also been rising with a rise in the average stock maintained with the company. A higher stock ratio turnover is indicative that the stock is selling quickly, that is reflected with the higher sales.

SAIL has fluctuating ratio throughout.

JSW has a declining ratio, though the cost of goods sold and the average debtors has been rising but certain items which have to be excluded from the cost of goods sold have been rising over the time.

47

7. PAYABLES TURNOVER RATIO

Although accounts payable are liabilities rather than assets, their trend is significant as they represent an important source of financing for operating activities. The creditors turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on supplier’s credit. This shows the relationship between credit purchases and average accounts payable. Higher ratio shows that accounts are to be settled rapidly whereas, low ratio reflects liberal credit terms granted by suppliers.

FORMULA- NET CREDIT PURCHASE AVERAGE CREDITORS

AVERAGE CREDITORS= (OPENING CREDITORS+CLOSING CREDITORS)/2

PARTICULARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011TATA STEEL 0.79 0.73 1.76 1.31 1.56SAIL 5.46 5.21 6.14 3.13 3.82JINDAL 7.17 6.28 6.51 8.57

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

1

2

3

4

5

6

7

8

9

0.79 0.730000000000001

1.761.31

1.56

5.465.21

6.14

3.13

3.82

7.17

6.28 6.51

8.57

TATA STEELSAILJSW

48

INTERPRETATION:

The payables turnover ratio means the speed with which the creditors are being paid. TATA STEEL has a rising graph which indicates that the creditors of the firm are being paid on time and quite frequently and this helps in increasing the credit worthiness of the firm.

SAIL has had a fall in the ratio drastically from the year 2008-2009 to the year 2009-2010.

JSW is quite efficient in paying off its creditors. A ratio of 8.57 times mans that the speed with which the company pays to its creditors is quite high.

49

RATIO ANALYSIS

WHAT IS RATIO ANALYSIS???

A tool used by individuals to conduct a quantitative analysis of information in a company's financial

statements. Ratios are calculated from current year numbers and are then compared to previous years, other

companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is

predominately used by proponents of fundamental analysis.

Single most important technique of financial analysis in which quantities are converted into ratios for

meaningful comparisons, with past ratios and ratios of other firms in the same or different industries. Ratio

analysis determines trends and exposes strengths or weaknesses of a firm.

Ratios can be found out by dividing one number by another number. Ratios show how one number is related to another. It may be expressed in the form of co-efficient, percentage, proportion, or rate. For example the current assets and current liabilities of a business on a particular date are $200,000 and $100,000 respectively. The ratio of current assets and current liabilities could be expressed as 2 (i.e. 200,000 / 100,000) or 200 percent or it can be expressed as 2:1 i.e., the current assets are two times the current liabilities. Ratio sometimes is expressed in the form of rate. For instance, the ratio between two numerical facts, usually over a period of time, e.g. stock turnover is three times a year.

Classification of Accounting Ratios:

Ratios may be classified in a number of ways to suit any particular purpose. Different kinds of ratios are selected for different types of situations. Mostly, the purpose for which the ratios are used and the kind of data available determine the nature of analysis. The various accounting ratios can be classified as follows:

Classification of Accounting Ratios / Financial Ratios

(A)Traditional Classification or Statement Ratios

(B)Functional Classification or Classification According to Tests

(C)Significance Ratios or Ratios According to Importance

Profit and loss account ratios or revenue/income statement ratios

Balance sheet ratios or position statement ratios

Composite/mixed ratios or inter statement ratios

Profitability ratios Liquidity ratios Activity ratios Leverage ratios or long

term solvency ratios

Primary ratios Secondary ratios

50

Advantages of Ratios Analysis:

Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages / Benefits of ratio analysis:

1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business

2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms.

3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications.

4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.

5. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.

Limitations of Ratios Analysis:

The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations.

1. Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements.

2. Comparative study required: Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations.

3. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen.

4. Problems of price level changes: A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios.

5. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult.

6. Limited use of single ratios: A single ratio, usually, does not convey much of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision.

7. Personal bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpreted and different people may interpret the same ratio in different way.

8. Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

51

FINANCIAL RATIOS

1. NET DEBT TO EQUITYDebt is the borrowed funds and Equity is the owned funds of an organization. This ratio is calculated to measure the extent to which debt financing has been used in a business. A ratio of 1:1 is considered to be satisfactory. This ratio is also known as External-Internal ratio as it indicates the relationship between the external equities or the outsider’s funds and the internal equities or the shareholders funds.

FORMULA = NET DEBT SHAREHOLDER’S FUND

NET DEBT= SECURED LOANS+ UNSECURED LOANS- CASH AND BANK BALANCE- CURRENT INVESTMENTS

EQUITY= SHAREHOLDER’S FUND- MISCELLANOUS EXPENSES

FINANCIAL YEAR 2006-2007

COMPANY NET DEBT SHAREHOLDER’S FUND

DEBT- EQUITY RATIO

TATA STEEL (1728.55) 15108.68 (0.12)

SAIL (5454.57) 17184 (0.32)JSW 3642.29 5788.92 0.63



DEBT- EQUITY RATIO

TATA STEEL 16519.85 27455.84 0.61SAIL (10737.77) 23004.09 (0.47)JSW 6283.78 7677.25 0.82



DEBT-EQUITY RATIO




DEBT- EQUITY RATIO


52



DEBT-EQUITY RATIO

TATA STEEL 21159.81 46944.63 0.45SAIL 2638.56 37069.47 0.07JSW 5965.65 17225.27 0.35

2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

-0.12

0.610000000000001

0.730000000000001

0.550.45

-0.32000000000000

3 -0.47-

0.380000000000003

-0.18

0.07

0.630000000000006

0.820000000000001

1.21

0.98

0.35TATA STEEL SAIL

JSW

INTERPRETATION:

The debt-equity ratio is calculated to assess the firm’s ability to meet its long term liabilities. Generally, a ratio of 2:1 is considered to be safe for the long term lenders and a ratio below 2:1 provides sufficient protection to the long term lenders and thus they are more secure and a higher ratio thus would indicate a more risky financial position of the firm.

The debt- equity ratio for all the year and of all the three companies has been less than 2:1 and this is indicative of a sound financial position of the firm.

53

2. SHAREHOLDER’S EQUITY RATIO

This ratio helps to determine how much shareholders would receive in the event of a company-wide liquidation. It represents the amount of assets on which shareholders have a residual claim. The higher the ratio the more shareholders may receive and vice-versa.

FORMULA= SHAREHOLDRE’S EQUITY

TOTAL ASSETS


COMPANY SHAREHOLDER’S EQUITY

TOTAL ASSETS(TANGIBLE)

SHAREHOLDER’S EQUITY RATIO













COMAPNY SHAREHOLDER’S EQUITY





54





2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

0.023

0.132

0.11

0.014 0.012

0.18

0.15

0.11

0.080.07

0.0490000000000001

0.032 0.030.023

0.018

TATA STEELSAILJSW

INTERPRETATION:

A ratio used to help determine how much shareholders would receive in the event of a company-wide liquidation. The ratio is calculated by dividing total shareholders' equity by total assets of the firm, and it represents the amount of assets on which shareholders have a residual claim.

If we consider as in the case of TATA STEEL, the ratio for the year 2006-2007 is 0.023 so this means that the shareholders would have a claim of 2.3% on the assets in the event of the wind up of the company.

The lower the ratio, the better it is for the company since the company would be then able to pay off to its shareholders in case of liquidation without any burden.

TATA STEEL has made efforts to lower the ratio and finally succeeded to do so. If we consider the ratios for the year 2010-2011, we can see that TATA ATEEL is in a better position than the other two companies.

55

3. DEBT TO NET WORTH RATIO - The net debt to net worth ratio has significance to lenders, analysts and business managers. If affects the ability of a company to borrow money and to finance its growth. A business owner needs to know the optimal debt to net worth ratio for the benefit of its company. The net debt should never be higher than the net worth; it is a bad sign for the company.

FORMULA = LONG TERM DEBT NET WORTH

LONG TERM DEBT = SECURED LOANS + UNSECURED LOANS – CASH & BANK – CURRENT INVESTMENTS

NET WORTH= EQUITY SHARE CAPITAL + PREFERENCE SHARE CAPITAL+ RESERVES & SURPLUS – MISCELLANOUS EXPENSES TO THE EXTENT NOT WRITTEN OFF.


COMPANY LONG TERM DEBT

NET WORTH DEBT- NET WORTH RATIO

TATA STEEL (1728.55) 13893.62 (0.125)SAIL (5454.57) 17184 (0.32)JSW 3642.29 5399.18 0.67












TATA STEEL 20285.83 36961.80 0.55

56

SAIL (5925.12) 33316.70 (0.18)JSW 9529.64 9706.34 0.98





2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

-0.125

0.610000000000001

0.730000000000001

0.550.45

-0.320000000000003

-0.47-0.380000000000003

-0.18

0.07

0.670000000000008

0.820000000000001

1.21

0.98

0.36TATA STEELSAILJSW

INTERPRETATION:

This ratio is used in the analysis of financial statements to show the amount of protection available to creditors. A high ratio usually indicates that the business has a lot of risk because it must meet principal and interest on its obligations. TATA STEEL has a fluctuating ratio throughout the five years. But anyhow it has tried to maintain its position by reducing the debts and increasing the net worth of the company. SAIL has a negative ratio but in the year 2010-2011 it has finally achieved a positive ratio. JSW has a fluctuating graph throughout the five years but in the year 2010-2011, it has been able to lower the ratio and thus reduce the risk involved in the business.

57

4. FIXED ASSETS TO LONG TERM RATIO - This ratio indicates the proportion of long-term funds deployed in fixed assets. The higher the ratio, the safer will be the funds available in case of liquidation. It also indicates the proportion of funds that is invested in working capital.

It indicates the level of fixed assets owned by a company in relation to the long-term debts of the company. The higher the ratio the better it is for a company and the assets which are debt free and fully owned by the company.

FORMULA = FIXED ASSETS

LONG TERM LOANS

FIXED ASSETS = GROSS FIXED ASSETS – DEPRICIATION

LONG TERM LOANS = SHARE CAPITAL+ RESERVES+ LONG TERM LOANS


COMPANY FIXED ASSETS LONG TERM FUNDS

FIXED ASSTES TO LONG TERM RATIO









TATA STEEL 14482.22 57122.44 0.25

58

SAIL 12268.83 35522.89 0.35JSW 13086.44 19231.88 0.68




TATA STEEL 16006.03 62201 0.26SAIL 13615.28 49827.95 0.27JSW 16866.14 21291.44 0.79





2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.47

0.280.25 0.26 0.25

0.54

0.44

0.35

0.27 0.26

0.840000000000001

0.7200000000000010.68

0.79

0.740000000000004

TATA STEELSAILJSW

INTERPRETATION:

This is a difficult set of ratios to interpret as asset values are based on the historical cost. An increase in the fixed asset figure may result from the replacement of an asset at an increased price or the purchase of an additional asset intended to increase the production capacity. A latter transaction might be expected to result in increased sales.

59

5. PROPERITARY RATIO - This ratio indicates the proportion of long-term funds deployed in fixed assets. The higher the ratio, the safer will be the funds available in case of liquidation. It also indicates the proportion of funds that is invested in working capital.

It indicates the level of fixed assets owned by a company in relation to the long-term debts of the company. The higher the ratio the better it is for a company and the assets which are debt free and fully owned by the company.

FORMULA = NET WORTH TOTAL ASSETS

NET WORTH = EQUITY SHARE CAPITAL + PREFERENCE SHARE CAPITAL+ RESERVES & SURPLUS – MISCELLANOUS EXPENSES TO THE EXTENT NOT WRITTEN OFF.

TOTAL ASSETS = FIXED ASSETS + CURRENT ASSETS


COMPANY NET WORTH TOTAL ASSETS PROPERITARY RATIO

TATA STEEL 13893.62 25597.50 0.54SAIL 17184 22906.33 0.75JSW 5399.18 10779.74 0.50






TATA STEEL 30071.19 58741.77 0.52SAIL 27984.10 36855.04 0.76

60

JSW 7959.25 20653.04 0.39




FIANANCIAL YEAR 2010-2011



2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.540.57

0.52

0.580.600000000000001

0.750000000000006

0.830000000000001

0.760000000000006

0.6500000000000060.630000000000006

0.50.47

0.3900000000000030.42

0.55

TATA STEELSAILJSW

INTERPRETATION:

Proprietary ratio indicates the proportion of total assets funded by owners or shareholders. A higher proprietary ratio is an indicator of sound financial position from the long term point of view because it means a large proportion of total assets are provided by equity and hence the firm is thus less dependent on the external sources of finance. A lower proprietary ratio is a danger signal for l.ong term lenders as it indicates a lower margin of safety available to them.

61

TATA STEEL has maintained an overall consistent ratio throughout as in the five year time. The proprietary ratio of SAIL has been declining since the year 2007-2008. The proprietary ratio of JSW has been increasing since 2008-2009. TATA STEEL has been improving over the years and though SAIL has a declining ratio throughout but anyhow it is in a better position than the other companies.

6. INTEREST COVER - This ratio is also known as “time – interest - earned ratio”. It measures the firm’s ability to make contractual interest payments. This ratio measures the debt servicing capacity of a firm insofar as fixed interest on long term loan is concerned. It indicates the extent to which a fall in EBIT is tolerable in that the ability of the firm to service its interest payments would not be adversely affected. For instance, coverage of five times would indicate that a fall in operating earnings only to up to one-fifth level can be tolerated.

The higher the ratio the greater is the ability of the firm to handle fixed charge liabilities and the more assured is the payment of interest to them. However, too high a ratio would imply unused debt capacity. A low ratio is danger signal that the firm is using excessive debt and does not have the ability to offer assured payment of interest to the lenders.

FORMULA = PBIT INTEREST


COMPANY PBIT INTEREST INTEREST COVER







TATA STEEL 8468.30 1152.69 7.35SAIL 9656.69 253.24 38.13

62

JSW 1474.88 797.25 1.85FINANCIAL YEAR 2009-2010






2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

5

10

15

20

25

30

35

40

45

50

37.01

9.047.35

5.788.52

29.37

46.7

38.13

26.2

16.15

5.79 6.64

1.854.28

5

TATA STEELSAILJSW

INTERPRETATION:

The interest cover ratio is used to determine how easily a company can be relieved of its burden to pay interest expenses on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.

TATA STEEL has had a steep fall in the ratio from the year 2006-2007(37.01) to the year 2007-2008(9.04) and this was mainly because the interest expenses had risen by leaps and bounds. And thereafter the interest expenses continued to rise.

SAIL has a fluctuating ratio. The rise in the ratio was because of the reduction in the interest expenses and a sudden fall was when the interest expenses were high.

63

JSW has witnessed a ratio of 1.85 for the year 2008-2009 because this year the profit before interest and tax was 1474.88 which was quite less as compared to the previous year and the interest expenses were 797.25 which had risen by 1.8 times as compared to the previous year.

7. DIVIDEND COVER RATIO - It measures the ability of a firm to pay dividend on preference shares which carry a stated rate of return. This ratio is the ratio of net profits after taxes (EAT) and the amount of preference dividend. The higher the coverage the better it is and vice versa

FORMULA = NET PROFIT AFTER TAX DIVIDEND


COMPANY PROFIT AFTER TAX

DIVIDEND DIVIDEND COVER

TATA STEEL 4222.15 1104.33 3.82SAIL 6202.29 1478.40 4.20JSW 1292 199.39 6.48









64









2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

2

4

6

8

10

12

14

16

18

20

3.823.36 3.49

5.755.25

4.2 4.224.92

4.25 4.26

6.487.16

17.3

8.4

5.74

TATA STEELSAILJSW

INTERPRETATION:

The dividend cover ratio means that how easily the company can be relieved of its burden of paying the dividends to the company.

TATA STEEL has been paying off its dividends at a consistent rate. And it seems that it has been following a conservative approach.

JSW had paid a very high dividend for the year 2008-2009, which means that the company had declared ala large part of its profit as dividend and thus following a liberal approach for paying the dividends.

65

8. EBIDTA TO TURNOVER RATIO - This ratio is used to assess a company’s profitability by comparing its turnover and earnings. Since EBITDA is derived from revenue this would indicate the percentage of a company remaining after operating expenses.

Generally a higher ratio would indicate that the company is able to keep its earnings at a good level through efficient processes that have kept certain expenses low.

FORMULA = EARNING BEFORE INTEREST, TAX AND DEPRICIATION TURNOVER


COMPANY EBIDTA TURNOVER EBIDTA TO TURNOVER RATIO






66









2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.4

0.44

0.3800000000000030.3800000000000030.4

0.3100000000000020.310000000000002

0.24

0.27

0.2

0.3200000000000030.310000000000002

0.16

0.26

0.21

TATA STEELSAILJSW

INTERPRETATION:

EBIDTA to turnover ratio signifies that higher the ratio the better it is. Since it means that earnings before interest, depreciation and taxation.

67

TATA STEEL has maintained a positive rising graph throughout. And it has a ratio better than the other two companies.

9. EARNING PER SHARE - This ratio measures the profitability on a per share basis i.e. the amount that they can get on every share held. The higher the ratio the more amount the equity shareholders receive.

FORMULA = PROFIT ATTRIBUTABLE TO SHAREHOLDERS WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES FOR BASIC EPS


COMPANY PROFIT O ATTRIBUTABLE SHAREHOLDERS

WEIGHTED AVERAGE NO. OF ORDINARY SHARES

EARNING PER SHARE

TATA STEEL 4222.15 646823122 73.76SAIL 6202.29 4130400545 15.02JSW 1259.35 157208820 80.11


COMPANY PROFIT ATTRIBUTABLE TO SHAREHOLDERS

WEIGHTED AVEARGE NO. OF ORDINARY SHARES

EARNING PER SHARE



COMPANY PROFIT WEIGHTED EARNING PER 68

ATTRIBUTABLE TO SHAREHOLDERS

AVEARGE NO. OF ORDINARY SHARES

SHARE





EARNING PER SHARE





EARNING PER SHARE


2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

0 20 40 60 80 100 120

73.76

67.17

69.45

60.26

75.63

15.02

18.25

14.95

16.35

11.87

80.11

95.26

22.7

106.34

97.17

JSWSAILTATA STEEL

INTERPRETATION:

The ratio is helpful in the determination of the market price of the equity share of the company. The ratio is also helpful in estimating the capacity of company to declare dividends on equity shares.

69

Higher the EPS the better is the capital productivity. It is an important measure of the economic performance of a corporate entity.

JSW has the highest EPS as compared to the other two firms. And TATA STEEL has been quite consistent in maintaining its ratio throughout.

10. GROSS PROFIT MARGIN - The ratio measures the margin of profit available on sales. The higher the ratio the better it is for the company. It reflects the efficiency with which a firm produces its products.

FORMULA = GROSS PROFIT * 100 SALESFINANCIAL YEAR 2006-2007

COMPANY GROSS PROFIT SALES GROSS PROFIT MARGIN






COMPANY GROSS PROFIT SALES GROSS PROFIT

70

MARGINTATA STEEL 8160.03 24315.77 33.55SAIL 8040.59 43150.08 18.63JSW 2005.45 14001.25 14.32







2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

5

10

15

20

25

30

35

40

35.06

37.52

33.5531.44

34.99

25.29 25.46

18.6320.2

12.42

25.3623.35

14.32

17.3

13.79

TATA STEELSAILJSW

INTEPRETATION:

71

The ratio measures the margin of profit available on sales. The higher the ratio the better it is. The ratio of TATA STEEL has been fluctuating but it has been on a constant platform. The sales figures have been rising so the fluctuations in the ratio can be attributed to the difference in the prices of the raw materials, freights and wages.

The gross profit ratio of SAIL has been falling and which is again because of the rise in the prices of the raw materials, wages and freight which have ultimately reduced the margin of the gross profit.

The gross profit margin of JSW has also decreased since the selling prices have not risen in the same proportion to the increase in the cost of the raw materials and other expenses.

TATA STEEL has a much favourable ratio as compared to the other two companies. SAIL can take some measures such as procure raw materials at a cheaper price or to increase the selling price in order to improve its gross profit margin.

11. NET PROFIT MARGIN - This ratio measures the relationship between EBIT to sales. It indicates the efficiency of the management in manufacturing, selling, administration and other activities of the firm. It is the overall measure of a firm’s profitability. It is represented as a percentage.

A high net profit margin would ensure adequate returns to the owners as well as enable a firm to withstand adverse economic conditions when selling price is declining, cost of production is rising and demand for product id falling. A low net profit margin has the opposite implication.

FORMULA = NET PROFIT BEFORE INTEREST AND TAX * 100 SALES


COMPANY NPBIT SALES NET PROFIT MARGIN


72













2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

5

10

15

20

25

30

35

40

45

36.67

40.34

34.82 34.86

37.82

28.529.66

22.38

25.98

17.95

27.06 25.6

10.53

20.21

15.01

TATA STEELSAILJSW

73

INTERPRETATION:

Net profit ratio reflects the net profit margin on the total sales after deducting all the expenses but before deducting the interest and taxation. This ratio measures the efficiency of the operation of the company.

The trend of the graph of the net profit ratio is quite similar to that of the gross profit margin ratio. Higher the ratio the better it is. TATA STEEL has been quite efficient in managing the operating expenses of the firm.

12. CASH PROFIT RATIO - The Cash Ratio is the most conservative of all these measures of cash resources, as only actual cash and securities easily convertible to cash are used to measure cash resources. The short-term liquidity of a company may be measured through cash ratio.

FORMULA = CASH PROFIT SALES

CASH PROFIT= NET PROFIT+ DEPRICIATION


COMPANY CASH PROFIT SALES CASH PROFIT RATIO



74












2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

5

10

15

20

25

3028.72 28.38

25.424.5

27.25

21.85 22.2

17.29

19.95

14.95

20.93 21.15

9.38

17.28

14.63 TATA STEELSAILJSW

75

INTERPRETATION:

The ratio measures the cash generation in the business as a result of the operation expressed in terms of sales. The cash profit ratio is more reliable indicator of performance where there are sharp fluctuations in profit before tax and the net profit from year to year owing to the difference in depreciation. It facilitates the inter firm comparison of performance since different methods of depreciation may be adopted by different companies. TATA STEEL is ahead of the other two companies and has a better graph as compared to SAIL and JSW.

13. RETURN ON ASSETS - Here the profitability is measured in terms of the relationship between net profits and assets. The ROA may be also called as profit-to-asset ratio. It can be interpreted in two ways. First, it measures management’s ability and efficiency in using the firm’s assets to generate (operating) profits. Second, it reports the total return accruing to all providers of capital (debt and equity), independent of the source of capital.

FORMULA = EBIT AVERAGE TOTAL ASSETS


COMPANY EBIT AVERAGE TOTAL ASSETS

RETURN ON ASSETS

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TATA STEEL 6435.55 20107.33 0.32SAIL 9754.75 20644.91 0.47JSW 2314.72

FINANCILA YEAR 2007-2008


RETURN ON ASSETS




RETURN ON ASSETS




RETURN ON ASSETS




RETURN ON ASSETS


2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.320000000000002

0.21

0.160.14 0.15

0.47 0.46

0.3

0.24

0.14

0.21

0.08

0.17

0.13

TATA STEELSAILJSW

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INTERPRETATION:

The ratio indicates how profitable a company is relative to its total assets. The ratio illustrates how well management is employing company’s total assets to make a profit. The higher the return, the more efficient management is in utilizing the assets base.

Here we can conclude that SAIL has not been utilizing its asset base efficiently and so the graph has taken a downward trend.

TATA STEEL has also not been very efficient in utilizing the asset base of the company.

14. RETURN ON AVERAGE NET WORTH - This ratio measures the return on the total equity funds of ordinary shares. From this ratio it can be judged whether the firm has earned a satisfactory return for its shareholders or not. The higher the ratio, the better it is for the shareholders.

FORMULA= PROFIT AFTER TAX AVERAGE NET WORTH



AVERAGE NET WORTH

RETURN ON AVEARGE NET WORTH

TATA STEEL 4222.15 11697.83 0.36SAIL 6202.29 14784.80 0.42JSW 1292

78



AVERAGE NET WORTH





AVERAGE NET WORTH





AVERAGE NET WORTH



FIANANCIAL YEAR 2010-2011


AVERAGE NET WORTH



79

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.36

0.23

0.18

0.150.16

0.42

0.380000000000002

0.240.22

0.14

0.26

0.12

0.23

0.15

TATA STEELSAILJSW

INTERPRETATION:

It expresses the net profit in terms of equity shareholders fund. It is an important yardstick of performance for equity shareholders since it indicates the return on funds employed by them. However this measure is based on the historical net worth and will be high for old plants and low for new plants.

The factor which motivates the shareholders to invest in a company is the expectations of an adequate rate of return on their funds, they will want to assess the rate of return in order to decide whether to continue their investments or not.

15. RETURN ON AVERAGE CAPITAL EMPLOYED - Return on average capital employed is a profitability ratio. The term capital employed refers to long-term funds supplied by the lenders and

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owners of the firm. Capital employed basis provides a test of profitability related to the sources of long-term funds. It is an insight into how efficiently the long-term funds of owners and lenders are being used. The higher the ratio, the more efficient is the use of capital employed.

CAPITAL EMPLOYED = TOTAL FUNDS EMPLOYED – MISCELLANOUS EXPENSES TO THE EXTENT NOT WRITTEN OFF

COMPANY EBIT AVERAGE CAPITAL EMPLOYED

RETURN ON AVERAGE CAPITAL EMPLOYED

TATA STEEL 6435.55 19879.43 0.32SAIL 9754.75 20601.58 0.47JSW 2314.72













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2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.320000000000003

0.22

0.160.14

0.16

0.47 0.46

0.3

0.24

0.14

0.22

0.08

0.17

0.13

TATA STEELSAILJSW

INTERPRETATION:

Return on average capital employed ratio narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. By comparing net income to the sum of a company's debt and equity capital, investors can get a clear picture of how the use of leverage impacts a company's profitability. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management's ability to generate earnings from a company's total pool of capital.

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16. DIVIDEND PAYOUT RATIO - This ratio indicates the percentage PAT distributed as dividends to equity shareholders. It is also known as pay-out ratio. For instance PAT are Rs. 500000 and the dividend is Rs. 300000 then the dividend pay -out ratio would be 60%. This implies that 40% of the profits of the firm are retained (retention ratio) and 60% distributed as dividends. Therefore, the higher the ratio the more dividends can be received.

= DIVIDEND (EQUITY)/ PROFIT AFTER TAX


COMPANY DIVIDEND(EQUITY) PROFIT AFTER TAX

DIVIDEND PAYOUT RATIO

TATA STEEL 1104.33 4222.15 26.16SAIL 1478.40 6202.29 23.89JSW 199.39 1292 15.43

















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2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

5

10

15

20

25

30

35

26.16

29.7328.69

17.4119.05

23.89 23.71

20.3

23.55 23.5

15.4313.97

5.78

11.97

17.41 TATA STEELSAILJSW

INTERPRETATION:

This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend payment.

It indicates the extent to the net profit distributed to the shareholders as dividend. A high payout signifies a liberal distribution policy and a low payout reflects conservative distribution policy,

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RECOMMENDATION:

Tata steel should try to improve its solvency so that at the time of crisis they don’t have to sell of

their inventory to pay off debts.

They should maintain quick ratio above or equal to 1.0.

Fluctuations in operating cycle should be reduced.

TATA STEEL must keep eye on its WIP conversion period.

TATA STEEL should try to minimize its inventory conversion period and also try to minimize the

average age of stock to reduce the cost of inventories.

As sale price per unit is lesser than the competitors it must keep trend increasing mode of sales to

reduce the blockage of its price in its inventory.

Try to generate more revenue from other country.

TATA STEEL should try for acquisition of more mines in India to reduce the raw material

outsourcing or import cost.

There should be a proper balance between the current assets and the currents liabilities. The working capital became negative due to an improper balance.

It should not allow its net debt to become negative. A negative net debt indicates more cash and less debt which means that the company is not investing enough in its growth.

New and advanced concept must be introduced in inventory control management.

Adequate planning is required for procurement of store items.

Advance payments should be avoided. If at all advance payments are required, it should be against securities like bank guarantees etc.

The essence of effective working capital management is proper cash flow forecasting. This should take into account the unforeseen events, market cycles, sudden fall in demand, fall in selling price, loss in prime customers etc. This is a very important factor that has to be taken into account.

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CONCLUSION

Tata Steel has been analyzed in terms of financial aspects especially working capital and financial ratios. A comparison has been made with JSW and SAIL to see the position of Tata Steel Ltd. in the industry.

Working capital management is a very crucial part of any organization. It needs to maintain its working capital efficiently for its day to day operations to take place. An organization needs proper liquidity to meet its obligations on time.

Ratio analysis is also a very important part of a business. It is a platform to judge a company based on liquidity, profitability etc. It is very crucial for banks, investors, creditors etc. It also makes comparisons easier.

Tata Steel has been able to maintain a good liquidity position throughout. It has been able to pay back its liabilities on time and also has been able to give dividends on time to its shareholders. It has also maintained a good level of EPS. The inventory turnover has been maintained efficiently which we can see from the high inventory turnover ratio.

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BIBLIOGRAPHY

Gerald I. White, Ashwinpaul C. Sondhi & Dov Fried (2011). The Analysis And Use Of Financial Statements- Third edition.

M Y Khan & P K Jain (2010). Management Accounting- Fifth Edition.

http://www.tatasteel.com/about-us/company-profile.asp

http://www.ey.com/Publication/vwLUAssets/Global_Steel_Report_2010-2011/$FILE/Global%20Steel %20Report%202010-2011%20FULL%20REPORT.pdf

zenithresearch.org.in/images/stories/pdf/2012/Jan/ZIJMR/13 SURESH VADDE Steel_paper.pdf

http://www.zacks.com/stock/news/49743/steel-industry-outlook-%96-march-2011

Research and Markets: Analyzing the Indian Steel Industry – 2012 Edition is Completed with An Analysis of the Major Players in the Indian Steel Sector | Japan Metal Bulletin

Top Indian Steel Companies Performance | News From Business, Finance, Share Market Real Estate

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http://moneymatters.blog.com/top-indian-steel-companies/

http://www.japanmetalbulletin.com/?p=20926&utm_source=rss&utm_medium=rss&utm_campaign=research-and-markets-analyzing-the-indian-steel-industry-2012-edition-is-completed-with-an-analysis-of-the-major-players-in-the-indian-steel-sector

http://www.japanmetalbulletin.com/?p=20926&utm_source=rss&utm_medium=rss&utm_campaign=research-and-markets-analyzing-the-indian-steel-industry-2012-edition-is-completed-with-an-analysis-of-the-major-players-in-the-indian-steel-sector

http://www.zacks.com/stock/news/49743/steel-industry-outlook-%96-march-2011

http://zenithresearch.org.in/images/stories/pdf/2012/Jan/ZIJMR/13%20SURESH%20VADDE%20Steel_paper.pdf

http://www.ey.com/Publication/vwLUAssets/Global_Steel_Report_2010-2011/$FILE/Global%20Steel%20Report%202010-2011%20FULL%20REPORT.pdf

http://www.ey.com/Publication/vwLUAssets/Global_Steel_Report_2010-2011/$FILE/Global%20Steel%20Report%202010-2011%20FULL%20REPORT.pdf

http://www.tatasteel.com/about-us/company-profile.asp

a project report on working capital analysis of tata steel

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