Ratio Analysis

Business Finance

Lecturer: Najaf Shah

Project Team Muhammad Zahid

Mubashir Hamid

Syed Tariq

CONTENTS

Introduction ................................................................................................................................ 3

Competitors ............................................................................................................................... 4

Liquidity Ratios: .......................................................................................................................... 5

Current ratio ........................................................................................................................... 5

Quick Ratio ............................................................................................................................. 7

Asset Management Ratios ......................................................................................................... 8

Inventory Turnover Ratio ........................................................................................................ 9

The Days Sales Outstanding .................................................................................................. 9

Asset Turnover Ratio .............................................................................................................10

Debt Management Ratios .........................................................................................................11

Total Debt to Total Assets Ratio ............................................................................................11

Profitability Ratios: ....................................................................................................................12

Profit margin on sales ............................................................................................................13

Basic Earning Power .............................................................................................................13

Return on Assets ...................................................................................................................14

Return on Equity ....................................................................................................................14

Market Value Ratio ...................................................................................................................15

Price/Earnings Ratio (P/E Ratio) ............................................................................................16

Cash Flow Per Share ............................................................................................................17

Market/ Book Ratio ................................................................................................................17

Conclusion ................................................................................................................................18

Reference: .............................................................................................................................19

INTRODUCTION

All businesses require effective planning and financial management. Ratio analysis is a useful

management tool that will help understanding financial results and trends over time. It provides

key indicators of organizational performance. Most managers are using ratio analysis to pinpoint

strengths and weaknesses from which strategies and initiatives can be formed. Creditors and

Investors may use ratio analysis to measure company’s financial results against other

organizations or make judgments concerning management effectiveness or investment

opportunities.

The assignment is based on study project on ratio analysis of any company to find out its

financial standing as a part of EMBA. It was assigned by Najaf Shah.

The company we choose to study is Indus Motor Company.

Indus Motor company (IMC) was incorporated in 1989 as a joint

venture company between the House of Habib of Pakistan,

Toyota Motor Corporation and Toyota Tsusho Corporation of

Japan. The Company manufactures and markets Toyota and

Daihatsu brand vehicles in Pakistan.

The main product offerings include several variants of the

flagship ‘Corolla’ in the passenger cars category, ‘Hilux’ in the

light commercial vehicles segment and ‘Fortuner’ in Sport Utility

Vehicle Segment. The manufacturing facility and offices are located at a 105 acre site in Port

Qasim, Karachi, while the product is delivered to end customers nationwide through a strong

network of 37 independent 3S Dealerships spread across the country. During 24 years IMC has

sold more than 500,000 vehicles and has demonstrated an impressive growth, in terms of

volumetric increase from a modest beginning of 20 vehicles per day production in 1993 to 210

units daily at present through the development of human talent embracing the ‘Toyota Way’ of

quality and lean manufacturing. Over the years, IMC has made large scale investments in

enhancing its own capacity and in meeting customer requirements for new products. Today,

Corolla is the largest selling automotive brand model in Pakistan and it also has the distinction

of being #1 in Toyota’s Asian market.

COMPETITORS

Indus Motor Company is competing with Honda, Suzuki, Nissan, Hyundai, etc. Honda and

Suzuki are major competitors however other products are not with a tough competition.

Passenger Cars:

In passenger cars segment IMC market share declined by 2% to 52,761 units in which the Company’s

market share was 55% or 29,087 units compared to 60% share achieved for FY 2013. Decline in market

share was due to the run out model of Corolla 10th Generation.

FINANCIAL RATIO ANALYSIS

LIQUIDITY RATIOS:

Measures ability of a firm to meet short term obligations with short term assets, a useful

indicator of cash flow in the near future.

Rs. In ,000

Ratio Type Amount 2012 Amount 2013 Amount 2014

Current ratio

Current Assets 24,088,975

2.32

22,188,485

2.99

20,038,312

3.35 Current

Liabilities 10,395,919 7,412,684 5,976,034

Quick (Acid Test)

Ratio

Current Assets 24,088,975

1.6

22,188,485

1.9

20,038,312

2.6 Inventories 7,529,571 7,883,309 4,469,460

Current

Liabilities 10,395,919 7,412,684 5,976,034

CURRENT RATIO

A social enterprise needs to ensure that it can pay its salaries, bills and expenses on time.

Failure to pay loans on time may limit your future access to credit and therefore your ability to

leverage operations and growth.

A ratio less that 1 may indicate liquidity issues. A very high current ratio may mean there is

excess cash that should possibly be invested elsewhere in the business or that there is too

much inventory. Most believe that a ratio between 1.2 and 2.0 is sufficient. A high current ratio

Liquidity Ratio Liquidity Ratio

Current Ratio Current Ratio

Quick Ratio Quick Ratio

may mean cash is not being utilized in an optimal way. For example, the excess cash might be

better invested in equipment.

The one problem with the current ratio is that it does not take into account the timing of cash

flows. For example, company may have to pay most of its short term obligations in the next

week though inventory on hand will not be sold for another three weeks or account receivable

collections are slow.

According to company financial statement IMC is in Strong Liquidity position and they are able

to pay their liabilities very well. Company’s liquidity position appears to have remained stable

and it increased in 2014. Suzuki is also in the same strong situation; however Honda seems in

trouble due to its increased liabilities. Indus motor will not face any problem in paying back its

short term liabilities however Honda may have problem to satisfy its short term obligations when

they come due. This is strong point for investors to invest in Indus motor and least likely with

Honda (a major competitor in sedan category).

A current ratio can be improved by increasing current assets or by decreasing current liabilities.

Steps to accomplish an improvement include:

• Paying down debt

• Acquiring a long-term loan (payable in more than 1 year’s time)

• Selling a fixed asset

• Putting profits back into the business

QUICK RATIO

A more stringent liquidity test that indicates if a firm has enough short-term assets (without

selling inventory) to cover its immediate liabilities. This is often referred to as the “acid test”

because it only looks at the company’s most liquid assets only (excludes inventory) that can be

quickly converted to cash).

A ratio of 1:1 means that the company can pay its bills without having to sell inventory. Assets

considered to be “quick” assets include cash, stocks and bonds, and accounts receivable. In

other words, all of the current assets on the balance sheet except inventory.

Quick ratio is similar to the current ratio but it excludes inventory from current assets. Indus

motor company looks in better condition here to pay its liabilities. However Honda seems in

trouble due to its liabilities.

ASSET MANAGEMENT RATIOS

Measures the speed with which various accounts are converted into sales or cash-inflows or

cash-outflows.

Ratio Type Amount 2012 Amount 2013 Amount 2014

The Inventory

Turnover Ratio

Sales 76,962,642

10.2

63,829,075

8.1

57,063,622

12.8

Inventory 7,529,571 7,883,309 4,469,460

The Days Sales

Outstanding (DSO)

Accounts

Receivables 1,459,976

6.92

1,382,761

7.91

1,737,358

11.11

Sales 76,962,642 63,829,075 57,063,622

The Fixed Assets

Turnover Ratio

Sales 76,962,642

22.16

63,829,075

23.28

57,063,622

9.46 Net Fixed Assets 3,472,906 2,742,140 6,033,264

Total Asset Turnover

Ratio

Sales 76,962,642

2.79

63,829,075

2.54 57,063,622

2.19

Total Assets 27,575,718 25,105,975

26,110,635

Asset Management Ratios

Asset Management Ratios

Inventory turnover ratio

Inventory turnover ratio

DSO DSO

Fixed Asset turn out Ratio

Fixed Asset turn out Ratio

Total Asset turnout ratio Total Asset turnout ratio

Rs in ,000

INVENTORY TURNOVER RATIO

The number of times the company turn its inventory over into sales during the year or how many

days it takes to sell inventory.

This is a good indication of production and purchasing efficiency. A high ratio indicates inventory

is selling quickly and that little unused inventory is being stored (or could also mean inventory

shortage). If the ratio is low, it suggests overstocking, obsolete inventory or selling issues. In

general, the higher the ratio, the more frequently the inventory turned over.

Indus motor ratio indicates strong sales in 2013 and 2014 against its competitors.

THE DAYS SALES OUTSTANDING

The number of times trade payables turn over during the year. The higher the turnover, the

shorter the period between purchases and payment. A high turnover may indicate unfavorable

supplier repayment terms. A low turnover may be a sign of cash flow problems.

DSO Shows the time needed to collect accounts receivables. Due to the high importance of

cash in running a business, it is in a company's best interest to collect outstanding receivables

as quickly as possible.

Looking at Indus motor company, Sales outstanding receivable are collected within 1 or 2

weeks. Suzuki seems higher days to receive sales receivable which can lead to the risk of cash

shortage. Indus motors have a very good credit and collection policies. Average collection

period of around 1 week for 2013 and 2 weeks in 2014 which is amazing. Suzuki has around 2

months’ time period in 2014 and Honda has 20 days’ time period. This shows that Indus motor

is quite efficient in collecting their credit within a short time.

ASSET TURNOVER RATIO

How efficiently business generates sales on each dollar of assets. An increasing ratio indicates that company is using its assets more productively.

Indus Motor company higher fixed-asset turnover ratio shows that the company has been more

effective in using the investment in fixed assets to generate revenues.

Looking at the fixed asset turnover ratio investors are more likely to invest in Indus Motor

Company because of large generation of revenue from these assets.

Higher Total Asset turnover of Indus Motor shows that company can operate with fewer assets

than other less efficient competitors, and so requires less debt and equity to operate. The result

is of this high ratio is comparatively greater return to its shareholders.

DEBT MANAGEMENT RATIOS

Indicates the amount the firm uses to generate profits from others’ money.

Ratio Type Amount 2012 Amount 2013 Amount 2014

Total Debt to

Total Assets

Ratio

Total Debts 10,561,860

0.38

7,412,684

0.29

5,976,034

0.22

Total Assets 27,575,718 25,105,975 26,110,635

TOTAL DEBT TO TOTAL ASSETS RATIO

The creditors have put Rs. 0.22 in the business for every Rs. 1.00 the owners have put in the business.

Debt Management Ratios Debt Management Ratios

Total Debt to Total Assets

Total Debt to Total Assets

Times Interest Earned Ratio Times Interest Earned Ratio

EBITDA Coverage Ratio

EBITDA Coverage Ratio

This ratio measures the proportion of total assets financed by the firm’s creditors. The higher

degree of debt ratio shows the greater the firm’s degree of indebtedness. Debt ratio for Indus

Motor is low which can be manageable by the company. In 2014 Total debt to Total Asset ratio

is decreased which shows company is managing its debt well. However, Honda possesses a

risk for creditors because of their greater liabilities.

PROFITABILITY RATIOS:

Indicates the amount the firm uses to generate profits from others’ money.

Ratio Type Amount 2012 Amount 2013 Amount 2014

Profit Margin on Sales

Net Income 4,302,715

0.06

3,357,545

0.05

3,873,452

0.07

Sales 76,962,642 63,829,075 57,063,622

Basic Earning Power

EBIT 6,312,267

0.23

4,969,775

0.20

5,016,497

0.19

Total Assets 27,575,718 25,105,975 26,110,635

0.15 Return on Assets

(ROA)

Net Income 4,302,715

0.16

3,357,545

0.13

3,873,452

Total Assets 27,575,718 25,105,975 26,110,635

Return on Common

Equity (ROE)

Net Income 4,302,715

0.25

3,357,545

0.19

3,873,452

0.19 Common

Equity 17,013,858 17,700,000 19,900,000

Profitability ratios Profitability ratios

Profit margin on sales

Profit margin on sales

Basic earning power

Basic earning power

Return on Assets

Return on Assets

Return on equity

Return on equity

PROFIT MARGIN ON SALES

Creditors and investors use this ratio to measure how effectively a company can convert sales

into net income. Investors want to make sure profits are high enough to distribute dividends

while creditors want to make sure the company has enough profits to pay back its loans

Indus motors Profit margin on Sales shows that it is in much better position as compare to other

competitors. Higher ratios as compare to Suzuki & Honda ensures higher dividend to investors

and payback creditors liabilities. Investors feel more secured in investing IMC.

BASIC EARNING POWER

A business's ability to generate profit from conducting its operations. Earnings power is

used to analyze stocks to assess whether the underlying company is worthy of investment.

Possessing greater long-term earnings power is one indication that a stock may be a good

investment.

The higher the Basic Earning Power ratio, the more effective a company is at generating income

from its assets. Hence Indus Motor Company is in strong position as compare to its competitors.

It is useful for comparing firms with different tax situations and different degrees of financial

leverage

RETURN ON ASSETS

Measures Company’s ability to turn assets into profit. This is a very useful measure of

comparison within an industry. It is a measure of how effectively company utilized its assets to

make a profit. A low ratio compared to industry may mean that competitors have found a way to

operate more efficiently. After tax interest expense can be added back to numerator since ROA

measures profitability on all assets whether or not they are financed by equity or debt.

The higher the firm’s return on total asset considers the better. Return on total asset of Indus

Motor appears to be improved from year 2013 and rose to 15% in 2014. Competitors are far

from IMC, showing IMC better management and asset utilization.

RETURN ON EQUITY

Rate of return on investment by shareholders. This is one of the most important ratios to

investors. It shows that company is making enough profit to compensate for the risk of being in

business. The return on equity ratio (ROE) measures how much the shareholders earned for

their investment in the company. Indus Motors has higher ratio percentage shows that

management is efficiently utilizing its equity base and the better return is to investors.

ROE is more than a measure of profit; it's a measure of efficiency. A rising ROE suggests that a

company is increasing its ability to generate profit without needing as much capital. It also

indicates how well a company's management is deploying the shareholders' capital. In other

words, the higher the ROE the better. Falling ROE is usually a problem.

IMC ROE shows that company is generating Rs. 0.20 profit for every Rs. 1 shareholder.

MARKET VALUE RATIO

Relates the firms’ market value as measured by its current share price, to certain accounting

values.

Ratio Type Amount 2012 Amount 2013 Amount 2014

Price/Earnings Ratio (P/E

Ratio)

Market Price Per Share 245.69

4.49

304

7.12

462

9.38

Earnings Per Share 54.74 42.72 49.28

Price/ Cash Flow Ratio

Market Price Per Share 245.69

17.55

304

2.18

462

2.96

Cash Flow Per Share 14 139.40 156.41

Cash Flow Per Share Net Income 4,302,715 139.13 3,357,545 139.40 3,873,452 156.41

Market value ratio Market value ratio

Price earning ratio

Price earning ratio

Cash flow per share

Cash flow per share

Market/ book ratio

Market/ book ratio

Price/Cash flow share Price/Cash flow share

Depreciation and Amortization 6,633,030 7,599,412 8,420,087

Common Share Outstanding 78,600 78,600 78,600

Market/ Book Ratio

Market Price Per Share 245.69

113.50

304

135.09

462

182.60 Book Value Per Share 2.16 2.25 2.53

Book Value Per Share Common Equity 17,013,858

2.16 17,700,000

2.25 19,900,000

2.53 Share Outstanding 7,860,000 7,860,000 7,860,000

PRICE/EARNINGS RATIO (P/E RATIO)

A high P/E suggests that investors are expecting higher earnings growth in the future compared

to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself.

It's usually more useful to compare the P/E ratios of one company to other companies in the

same industry, to the market in general or against the company's own historical P/E. It would not

be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of

a technology company (high P/E) to a utility company (low P/E) as each industry has much

different growth prospects.

Price/Earning ratio shows that Investor for Indus Motors has to pay Rs. 9.38 to earn Rs. 1.

Looking at Indus its ratio is increasing, which shows positive growth. Hence Indus is returning

good return to its investors.

CASH FLOW PER SHARE

Cash flow per share is a financial ratio that measures the operating cash flows attributable to

each share of common stock. It is a variation of the earnings per share which substitutes net

income with net cash flows from operations.

Cash flow per share is more reliable than price/earnings ratio. Most of the investors look at cash

flow per share and positive growth in this ratio shows the company growth in profitability. IMC

positive growth in cash flow per share is an indicator of company’s good market condition.

MARKET/ BOOK RATIO

A ratio used to compare a stock's market value to its book value. It is calculated by dividing the

current closing price of the stock by the latest quarter's book value per share.

For value investors, M/B remains a tried and tested method for finding low-priced stocks that the

market has neglected. If a company is trading for less than its book value (or has a M/B less

than one), it normally tells investors one of two things: either the market believes the asset value

is overstated, or the company is earning a very poor (even negative) return on its assets. Indus

motors I having a positive value and is increased in 2014 showing a positive trend in market

value as well it gain investors trust.

CONCLUSION

Indus Motor Company performance is well and stayed aligned with the competition. However, in

preparation for the new model, the last quarter witnessed the start of run-out of the 10th

Generation Corolla and re-tooling of the assembly lines requiring plant closures. There were 18

non-production days during the year as against 53 days of plant closure last fiscal year. This

coincidently occurred at a time when in response to the Government’s intervention to strengthen

the value of Pak Rupee we led the auto industry with major reductions in product prices.

Customers lauded the price reduction initiative, and while it created a favorable environment

providing a boost in the market place, the Company was unable to backfill its inventory resulting

in about 1,500 units of lost production and sales.

The market condition is still not completely fine, however Indus Motors plans to increase their

sales in 2015. So far, they are on their target and achieved highest number of sales until May

2015 comparing previous same year’s time. The launch of New model (Yaris / Vitz) will boost

sales as small segment in cars was missing after stopping the production of Daihatsu Coure.

Indus Motors launched Electric car (Prius), which is much appreciated by Government because

of their environment friendly behavior.

Despite so many hurdles and problems, Indus motors keep performing well and gaining trust of

its shareholder. The policy of quality and customer satisfaction making it hot favorite among car

buyers. This is the reason Indus Motor is able to survive and grow in difficult times.

REFERENCE:

1. http://www.investopedia.com/terms/b/booktomarketratio.asp

2. http://www.toyota-indus.com/

3. Analysing financial statement & ratios by Holcomb Hathayway

4. http://www.paksuzuki.com.pk/Automobile/Pages/Home.aspx

5. http://www.honda.com.pk/