report on ratio analysis (reliance infrastructure limited)

Reliance Infrastructure Limited

Ratio Analysis“Mini Report Of Financial Ratios”

F.Y.2007 TO F.Y. 2009

Submitted By: Miss.Priyanka Khedekar.

Roll NO.12, MMS (Finance),

VSIM

Khed, Ratnagiri

ABOUT THE COMPANY

Reliance Infrastructure Limited (formerly Reliance Energy Limited) is a part of the

Reliance Anil Dhirubhai Ambani Group, India’s second largest business house.

Incorporated in 1929, Reliance Infrastructure is one of India’s fastest growing companies

in the infrastructure sector. It ranks among India’s top listed private companies on all

major financial parameters, including assets, sales, profits and market capitalization.

Reliance Infrastructure companies distribute more than 25 billion units of electricity to

over 25 million consumers across an area that spans over 1,24,300 sq kms and includes

India’s two premier cities, Mumbai and Delhi. The Company generates over 940 MW of

electricity through its power stations located in Maharashtra, Andhra Pradesh, Kerala,

Karnataka and Goa.

Reliance Infrastructure has emerged as the leading player in India in the Engineering,

Procurement and Construction (EPC) segment of the power sector.

In the last few years, Reliance Infrastructure has expanded its foot-print much beyond the

power sector. Currently, Reliance Infrastructure group is engaged in the implementation

of projects not only in the field of generation, transmission, distribution and trading of

power but also in other key infrastructural areas such as highways, roads, bridges, metro

rail and other mass rapid transit systems, special economic zones, real estate, etc.

In order to appropriately reflect the diverse businesses being carried on by it, Reliance

Infrastructure Limited changed its name, effective April 28, 2008, from Reliance Energy

Limited to Reliance Infrastructure Limited.

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RATIO ANALYSIS

FINANCIAL ANALYSIS

Financial analysis is the process of identifying the financial strengths and

weaknesses of the firm and establishing relationship between the items of the balance

sheet and profit & loss account.

Financial ratio analysis is the calculation and comparison of ratios, which

are derived from the information in a company’s financial statements. The level and

historical trends of these ratios can be used to make inferences about a company’s

financial condition, its operations and attractiveness as an investment. The information in

the statements is used by

Trade creditors, to identify the firm’s ability to meet their claims i.e. liquidity

position of the company.

Investors, to know about the present and future profitability of the company and

its financial structure.

Management, in every aspect of the financial analysis. It is the responsibility of

the management to maintain sound financial condition in the company.

RATIO ANALYSIS

The term “Ratio” refers to the numerical and quantitative relationship

between two items or variables. This relationship can be exposed as

Percentages

Fractions

Proportion of numbers

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Ratio analysis is defined as the systematic use of the ratio to interpret the

financial statements. So that the strengths and weaknesses of a firm, as well as its

historical performance and current financial condition can be determined. Ratio reflects a

quantitative relationship helps to form a quantitative judgment.

STEPS IN RATIO ANALYSIS

The first task of the financial analysis is to select the information relevant to the

decision under consideration from the statements and calculates appropriate

ratios.

To compare the calculated ratios with the ratios of the same firm relating to the

pas6t or with the industry ratios. It facilitates in assessing success or failure of the

firm.

Third step is to interpretation, drawing of inferences and report writing

conclusions are drawn after comparison in the shape of report or recommended

courses of action.

BASIS OR STANDARDS OF COMPARISON

Ratios are relative figures reflecting the relation between variables. They

enable analyst to draw conclusions regarding financial operations. They use of ratios as a

tool of financial analysis involves the comparison with related facts. This is the basis of

ratio analysis. The basis of ratio analysis is of four types.

Past ratios, calculated from past financial statements of the firm.

Competitor’s ratio, of the some most progressive and successful competitor firm

at the same point of time.

Industry ratio, the industry ratios to which the firm belongs to

Projected ratios, ratios of the future developed from the projected or pro forma

financial statement

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NATURE OF RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial

statements. It is the process of establishing and interpreting various ratios for helping in

making certain decisions. It is only a means of understanding of financial strengths and

weaknesses of a firm. There are a number of ratios which can be calculated from the

information given in the financial statements, but the analyst has to select the appropriate

data and calculate only a few appropriate ratios. The following are the four steps involved

in the ratio analysis.

Selection of relevant data from the financial statements depending upon the

objective of the analysis.

Calculation of appropriate ratios from the above data.

Comparison of the calculated ratios with the ratios of the same firm in the past, or

the ratios developed from projected financial statements or the ratios of some

other firms or the comparison with ratios of the industry to which the firm

belongs.

IN THE VIEW OF FUNCTIONAL CLASSIFICATION THE RATIOS ARE

1. Liquidity ratio

2. Leverage ratio

3. Activity ratio

4. Profitability ratio

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DATA ANALYSIS

(1) Liquidity Ratio:

1) Measures ability of a company to meet its current obligations.

2) Indicates short-term financial stability of a company

3) Indicates present cash solvency & ability to remain solvent times of

adversities.

a) CURRENT RATIO:

Current Ratio measures firm’s Short –Term solvency. It indicates the

availability of current assets in rupees for every one rupee of current liability.

Current Assets

Current Ratio =

Current Liabilities

(Rupees In Crores)

Year Current Assets Current Liabilities Ratio

2007-08 12967.91 3130.66 4.14

2008-09 9021.46 3377.81 2.67

2009-10 8803.63 5421.75 1.62

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ANALYSIS AND INTERPRETATION:

From the above chart, it shows the decline trend during F.Y. 2007 to F.Y.2009.

It was high in F.Y.2007 at 4.14 times which further reduced to 1.62 times in F.Y. 2009

which is lower than standard i.e. 2:1.

In F.Y. 2007 the ratio was high due to the high Cash & Bank balance which

further reduced to 2.67 times in F.Y. 2008. In F.Y.2009 the ratio was very low because of

increase in Current Liability.

The continuous decrease in Current Ratio is not good for company’s financial

health. So company has to take necessary action to improve current ratio.

b) QUICK RATIO:

Quick ratio is a test of liquidity than the current ratio. The term liquidity refers to

the ability of a firm to pay its short-term obligations as & when they become due.

Quick Assets

Quick Ratio=

Quick Liabilities

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(Rupees In Crores)

Year Quick Asset Current Liabilities Ratio

2007 12675.22 3130.66 4.05

2008 8721.17 3377.81 2.59

2009 8362.95 5421.75 1.54


The chart shows continuous decline trend from F.Y.2007 to F.Y. 2008. The ratio

is above the standard i.e. 1:1. In F.Y. 2007 the ratio was high at 4.5 times due to

tremendous increase in Cash & Bank Balance which was25 times greater than F.Y.2008,

also in F.Y. 2007. Further it reduced to 1.54 times but we cannot say that the liquid

position of the company is good because in F.Y. 2009 company’s Cash & bank balance

and Debtors has increased.

Thus, the company can suffer the shortage of fund due to slow paying, doubtful &

long duration outstanding debtors.

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c) PROPRIETOR RATIO:

It measures the relationship between funds invested in business by the owners

with the total fund invested in business.

Proprietor Ratio: Proprietor’s Fund

Total Asset

(Rupees In Crores)

Year Proprietor’s Fund Total Asset Proprietor Ratio

2007 9339.24 18584.15 0.50

2008 11686.96 20,322.32 0.58

2009 11907.44 24,855.32 0.48

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The chart shows fluctuation trend during the year. It was high in F.Y. 2008

which indicates that company is less dependent on outside funds for working & company

is quite solvent. In F.Y. 2009 it dipped by 21 % as compared to F.Y. 2008.

(2) Financial Leverage Ratio:

1) Indicates the financial structure of the organisation, i.e. the proportion of Debt as

compared to owner’s funds.

2) Source of Funds:

i. External Fund

ii. Internal Fund

Debt-Equity Ratio:

Higher the ratio less secured is the creditors, lower the ratio creditors enjoy higher

degree of safety

Debt

Debt Equity Ratio:

Equity

(Rupees In Crores)

Year Debt Equity Debt-Equity Ratio

2007 9339.24 5858.32 1.59

2008 11686.96 4988.88 2.34

2009 11907.44 7332.18 1.62

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At early stage i.e. in F.Y. 2007 it was low at 1.59 times which further increased to

2.34 times in F.Y. 2008 and later on it further decreased to 1.62 times.

The low ratio indicates that lenders contribution is lower than owner’s

contribution. But in FY 2008 the lenders contribution is higher than owner’s contribution

which indicates that Creditors are less secured than shareholders of the company.

(3.i) Profitability Ratio:

1) Measures overall efficiency of the business.

2) Indicates whether utilization of business assets and funds are done

effectively.

a) Gross Profit Ratio:

It shows the operating efficiency of the business. It measures the

efficiency of production as well as pricing.

Gross Profit

Gross Profit Ratio = X 100

Sales

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(Rupees In Crores)

Year G/P Net SalesGross Profit Ratio

%

2007 872.37 3610.95 24.16

2008 1151.70 4419.87 26.06

2009 1193.43 7183.10 16.61

b) Net Profit Ratio:

It shows the overall efficiency of the business. Higher the ratio indicates higher

efficiency of business and better utilization of total resources.

Net profit after tax

Net Profit Ratio: X 100

Sales

(Rupees In Crores)

Year N/P Net SalesNet Profit Ratio

%

2007 801.45 3610.95 22.19

2008 1084.63 4419.87 15.01

2009 1138.88 7183.10 15.85

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In FY 2007 & FY 2009 the G/P Ratio & Net Profit Ratio were increased

simultaneously. There was slightly difference between them. But in FY 2008 the G/P

increases at a faster rate as compared to Net profit. This indicates that operating expenses

relative to sales have been increasing. The increasing expenses should be identified &

controlled.

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(3.ii) In relation to Capital Employed:

a) Return On Investment:

It measures the overall performance of the company that is utilization of total

resources and funds available with the company.

EBT But AT

Return On Investment: X 100

Total Assets/ Liability

(Rupees In Crores)

Year EBIT Total Assets

Return On

Investment Ratio

(%)

2007 872.37 18584.63 4.69

2008 1151.70 20322.32 5.67

2009 1193.43 1193.43 4.80

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In this ratio higher the ratio is better which indicates the better utilization of funds

also indicates earning capacity of the business.

From the above chart it shows the fluctuating trend during the year. It was high in

FY 2008 at 5.67%. Further it was decreased to 4.80%.

b) Return On Net Worth

It measures the productivity of shareholders funds. Higher the ratio indicates

better utilization of shareholders funds or higher productivity of owner’s funds.

Net Profit After Tax

Return On Net Worth: X 100

Equity Shareholder Fund

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(Rupees In Crores)

Year PAT Net Worth

Return On Net

Worth

Ratio (%)

2007 801.45 9339.24 8.58

2008 1084.63 11686.96 9.28

2009 1138.88 11907.44 9.56


From the above chart it shows the increasing trend which is good indicator for

firm & their prospective indicators. In FY 2007 it was 8.58% which further increased to

9.56% in FY 2009.

It is good sign for prospective share holders of R-INFRA.

4) Other Ratio:

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a) Interest Coverage Ratio:

This ratio is used to test the firms Debt- Servicing Capacity.

Interest Coverage Ratio: EBIT

Interest

(Rupees In Crores)

Year EBIT InterestInterest Coverage

Ratio ( Rs.)

2007 872.37 250.32 3.49

2008 1151.70 308.76 3.73

2009 1193.43 330.50 3.61

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The Interest Coverage Ratio shows the number of times the interest charges are

covered by funds that are ordinary available for their payment.

The above chart shows relative constant fluctuation because it was Rs.3.49 in FY

2007 which further increased to Rs.3.73 in FY 2008 & 3.61 in FY 2009.

Too high ratio indicates the firm is very conservative in using debt & that is not

using credit to best advantage of shareholder. In R-INFRA the ratio is high in FY 2008

i.e. Rs. 3.73 crores.

b) Earnings Per Share:

EPS calculation made over the years indicates whether or not the firm’s earnings

power on per-share basis has changed over the period.

Year

Earnings After

Tax – Preference

Dividend

No. Of Shares Paid

Up

EPS

( Rs. Per Share)

2007 801.45 22.857 35.06

2008 1084.63 23.562 46.03

2009 1138.88 22.607 50.37


The ratio shows increasing trend. It increased from Rs. 35.06 per share to

Rs.50.37 per share from FY 2007 to FY 2009. EPS simply implies the profitability of the

firm on per share of basis.

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From this we can say that the overall profitability of the firm is showing good

position in near future.

c) Dividend Per Share Ratio:

DPS is the earnings distributed to ordinary shareholders divided by the number of

ordinary share outstanding.

Equity Dividend

Dividend Per Share:

No. Of Equity Shares

Year Equity Dividend No. Of Equity

Shares

DPS

( Rs. Per Share)

2007 121.12 22.857 5.30

2008 147.73 23.562 6.27

2009 157.69 22.607 7.00

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From the above chart the ratio was Rs. 5.3 per share in FY 2007 which further

increased to Rs. 6.27 per share to Rs.7 per share in FY 2008 & FY 2009 respectively.

This means that, in case of FY 2009, company distributed Rs. 7 as dividend out of

Rs. 50.37 per share (EPS). The difference per share is retained in the business.

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FINDIGS

1) There is continuous decrease in Current Ratio. Thus, it is necessary to take

corrective actions.

2) The company can suffer the shortage of fund due to slow paying, doubtful & long

duration outstanding debtors.

3) The lenders contribution is higher than owner’s contribution which indicates that

Creditors are less secured than shareholders of the company.

4) The operating expenses relative to sales have been increasing.

5) Proprietary ratio of the company fluctuates during the period of study. It shows

the change in the value of reserves and surplus in the form of shareholders’ fund.

6) R-INRA is far better in covering its fixed cost with the interest coverage ratio.

7) The overall financial condition of R-INFRA is good.

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CONCLUSION

The R-INFRA’s overall position is at a good position. Particularly the

current year’s position is well due to raise in the profit level from the last year position. It

is better for the organization to diversify the funds to different sectors in the present

market scenario.

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report on ratio analysis (reliance infrastructure limited)

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