Financial Analysis at Tata Motors

 

  SUMMER INTERNSHIP PROJECT REPORT

On FINANCIAL ANALYSIS AT TATA MOTORS

SUBMITTED FOR PARTIAL FULFILMENT OF REQUIREMENT FOR THE AWARD OF DEGREE Of 

MASTER OF BUSINESS ADMINISTRATION ADMINISTRATION UNDER THE GUIDANCE OF MISS REVA VIG SUBMITTED BY NIVESH GURUNG

ROLL NO. 20MBA0001 DEV BHOOMI INSTITUTE OF TECHNOLOGY CHAKRATA ROAD , NAVGOAN , MANDUWALA, DEHRADUN UTTARAKHAND

 

DECLARATION

I her hereby eby decla declare re tha thatt thi thiss proj project ect work entl entled ed FINANCIAL ANALYSIS AT

TATA MOTORS .

is my work, carried out under the guidance of my faculty guide

This report neither full nor in part has ever been submied for award of any other degree of either this university or any other university.

NIVESH GURUNG

 

CERTIFICATE BY GUIDE

I have the pleasure in cerfying that NIVESH GURUNG is a student of Dev Bhoomi Instute of Technology . His University Roll No

He has completed his project work Title as “  

FINANCIAL ANALYSIS AT TATA MOTORS

I cerfy that this is his original eort & has not been copied from any other source. This project has also not been submied in any other University for the purpose of award of any Degree. This project fulls the requirement of the curriculum prescribed by DBIT University, Dehradun, for the said course. I recommend this project work for evaluaon & consideraon for the award of Degree to the student.

Signature Name of the Guide

:

 

TABLE OF CONTENTS

SNO. 1 2

INDEX INTRODUCTION REVIEW OF

3

LITERATURE RESEARCH METHDOLOGY

4

DATA ANLAYSIS AND

5 6

INTERPRETATION RESEARCH FINDINGS CONCLUSION AND

7

SUGGESITON REFERENCES

4

PAGE NO.

 

CHAPTER-1

EXECUTIVE SUMMARY

Financial statements provide summarized view of the financial position and Operation of the company. Therefore, now a day it is necessary to all companies to know as well as to show the financial soundness i.e. position and operation of Company to their stakeholders. It is also necessary to company to know their financial position and operation of the company.

5

 

INTRODUCITON

The financial statement provides the basic data for financial performance analysis. The financial statements  provide a summarized view of the financial position and operations of a firm. Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business. The analyst first identifies the information relevant to the decision under consideration from the total information contained in the financial statements. The analysis of  financial statements is an important aid to financial analysis. a nalysis. They provide information on how the firm has  performed in the past and what is its current financial position. Financial analysis is the process of  identi ide ntifyi fying ng the financ financial ial streng strengths ths and weakne weakness ss of the fir firm m fr from om the availa available ble account accounting ing data data and financial statements. The focus of financial analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of  evaluating relationship between component parts of financial statements to obtain a better understanding of  the firm’s position and performance. This study aims at analyzing the overall financial status of the TATA MOTORS by using various financial tools. TATA MOTORS LTD is located at Bombay House, 24 Horni Mody St, Mumbai 400 001.

 

The study of finan financial cial state statement ment is prep prepared ared for the purpo purpose se of prese presentin nting ga

 periodical review or report by the management of and deal with the state of investment in  business and result achieved during the period under review. They reflect the financial  position and operating strengths or weaknesses of the concern by properly establishing relationship between the items of the balance sheet and remove statements. Financial statement analysis can be under taken either by the management of the firm or by the outsid outsidee parties. The nature of anal analysis ysis defers depend depending ing upon the purpo purpose se of the analysis. The analyst is able to say how well the firm could utilize the resource of the society in generating goods and services. Turnover ratios are ar e the best tools in deciding these aspects. Hence it is overall responsibility of the management to see that the resource of the 6

 

firm is used most efficiently and effectively and that the firm’s financial position is good. Financial statement analysis does indicate what can be expected in future from the firm. Meaning of Financial Statement Financial statements refer to such statements which contains financial information about an enterprise. They report profitability and the financial position of the business at the end of accounting period. The team financial statement includes at least two statements which the accountant prepares at the end of an accounting period. The two statements are: 

 The Balance Sheet



 Profit And Loss Account

They provide some extremely useful information to the extent that balance Sheet mirrors the financial  position on a particular date in terms of the structure of assets, liabilities and owners equity, and so on and an d the Profit and Loss account shows the results of operations during a certain period of time in terms of the reven revenue uess ob obta tain ined ed and and the the co cost st incu incurr rred ed durin during g the the ye year ar.. Th Thus us th thee fi fina nanci ncial al st stat atem emen entt pr prov ovid ides es a summarized view of financial position and operations of a firm

Meaning of Financial Analysis The first task of financial analysis is to select the information relevant to the decision under consideration to the total information contained in the financial statement. The second step is to arrange the information in a way to highlight significant relationship. The final step is interpretation and drawing of inference and conclusions. Financial statement is the process of selection, relation and evaluation.

7

 

Features of Financial Analysis 

 To present a complex data contained in the financial statement in simple and understandable form.



 To classify the items contained in the financial statement inconvenient and rational groups.



To

make

comparison

between

various

groups

conclusions.

Purpose of Analysis of financial statements 

To know the earning capacity or profitability.



 To know the solvency.



 To know the financial strengths. 

 To know the capability of payment of interest & dividends.



 To make comparative study with other firms.



 To know the trend of business.



 To know the efficiency of mgt.



 To provide useful information to mgt

8

to

draw

various

 

Procedure of Financial Statement Analysis 

The following procedure is adopted for the analysis and interpretation of financial statements:-



The analyst should acquaint himself with principles and postulated of accounting. He should know the plans and policies of the managements managements that he may be able to find out whether these plans are  properly executed or not.



 The extent of analysis should be determined so that the sphere of work may be decided. If the aim is find out. Earning capacity of the enterprise then analysis of income statement will be undertaken. On the other hand, if financ financial ial position position is to be studie studied d then then balance balance sheet analysis analysis will be necessary.



  The financial financial data be given in statement statement should be recognized recognized and rearranged. rearranged. It will involve the grouping similar data under same heads. Breaking down of individual components of statement according to nature. The data is reduced to a standard form. A relationship is established among financial statements with the help of tools & techniques of analysis such as ratios, trends, common size, fund flow etc.



 The information is interpreted in a simple and understandable way. The significance and utility of  financial data is explained for help indecision making.



 The conclusions drawn from interpretation are presented to the management in the form of reports.

9

 

Analyzing financial statements involves evaluating three characteristics of a company: its liquidity, its  profitability, and its insolvency. A short-term creditor, such as a bank, is primarily interested in the ability of the borrower to pay obligations when they come due. The liquidity of the borrower is extremely important in evaluating the safety of a loan. A long-term creditor, such as a bondholder, however, looks to  profitability and solvency measures that indicate the company’s ability to survive over a long period of  time. Long-term creditors consider such measures as the amount of debt in the company’s capital structure and its ability to meet interest payments. Similarly, stockholders are interested in the profitability and solvency solve ncy of the company. They want to assess the likelihood likelihood of dividends and the growth potential potential of the stock . Comparison can be made on a number of different bases. Following are the three illustrations: 1.

Intra-company basis.

  This basis compares an item or financial relationship relationship within a company in the current year with the same item or relationship in one or more prior years. For example, Sears, Roebuck and Co. can compare its cash  balance at the end of the current year with last year’s balance to find the amount of the increase or  decrease. Likewise, Sears can compare the percentage of cash to current assets at the end of the current year with the percentage in one or more prior years. Intra-company comparisons are useful in detecting changes in financial relationships and significant trends. 2. Industry averages.  This basis compares an item or financial relationship of a company with industry averages (or norms)  published by financial ratings organizations such as Dun & Bradstreet, Moody’s and Standard & Poor’s. For example, Sears’s net income can be compared with the average net income of all companies in the retail chain-store industry. Comparisons with industry averages provide information as to a company’s relative performance within the industry. 3. Intercompany basis. This basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies. The comparisons are made on the basis of the published financial statements of the individual companies. For example, Sears’s total sales for the year can be compared with the total sales of its major competitors such as Kmart and Wal-Mart. Intercompany comparisons are useful in determining a company’s competitive position. 10

 

Tools of Financial Statement Analysis

Various tools are used to evaluate the significance of financial statement data. Three commonly used tools are these: 

Ratio Analysis



Funds Flow Analysis

 

Cash Flow Analysis

Ratio Analysis:



Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results.



Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future.

Meaning of Ratio: A ratio is one figure express in terms of another figure. It is a mathematical yardstick that measures the relationship two figures, which are related to each other and mutually interdependent. Ratio is express by dividing one figure by the other o ther related figure. Thus a ratio is an exp expression ression relating one number to another. 11

 

It is simply the quotient of two numbers. It can be expressed as a fraction or as a decimal or as a pure ratio or in absolute figures as “so many times”. As accounting ratio is an expression relating two figures or  accounts or two sets of account heads or group contain in the financial statements.

Meaning of Ratio Analysis:

Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and  profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an analyst but their group of ratio he would prefer depends on the purpose and the objective of analysis. While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool. Thiss techni Thi technique que is called called cross-sec cross-sectional tional analysis analysis. Cross-sectional analysis compares financial ratios of  severa sev erall compan companies ies from from the same same indust industry. ry. Ratio Ratio analys analysis is can provid providee valuabl valuablee inform informati ation on about about a company's financial health. A financial ratio measures a company's performance in a specific area. For  example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt  per equity. You can use this information to make a judgment as to which company is a better investment risk.

However, you must be careful not to place too much importance on one ratio. You obtain a better  indication of the direction in which a company is moving when several ratios are taken as a group. 12

 

Objective of Ratios:   A)

Ratios are worked out to analyze the following aspects of business organizationSolvency-

1)

Long term

2)

Short term

3)

Immediate

B)

Stability

C)

Profitability

D)

Operational efficiency

E)

Credit standing

F)

Structural analysis

G)

Eff ffeectiv tive uti utili lizzatio tion of of re resou sources

H)

Lever verage or exte terrnal fina inancing ing

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.



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.

Pre-Requisitess to Ratio Analysis: Pre-Requisite 13

 

In order to use the ratio analysis as device to make purposeful conclusions, there are certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are not conditions for calculations for  meaningful conclusions. The accounting figures are inactive in them & can be used for any ratio but meaningful & correct interpretation & conclusion can be arrived at only if the following points are well considered. 1)

The The dat dates es of dif differ eren entt fi financ nancia iall st stat atem emen entts ffrrom wher wheree dat dataa iiss tak taken en must must be sa same me..

2)

If possible, onl only audit dited financial state atemen entts should be conside derred, othe herrwise ther eree mus ustt be sufficient evidence that the data is correct.

3)

Acco Accoun untting ing pol polici cies es fol follo lowe wed d by diff differ eren entt firm firmss mus must be sam same in case case of of cros crosss sect sectio ion n anal analys ysiis otherwise the results of the ratio analysis would be distorted.

4)

One One rat ratio io may may not not thr throw ow ligh lightt o on n any any pe perf rfor orma manc ncee of th thee fir firm. m. Ther Theref efor ore, e, a gro group up of ra rati tios os must must be  preferred. This will be conductive to counter checks.

5)

Last Last but but not not le leas ast, t, the the anal analys ystt mus mustt fin find d out out tha thatt tthe he two two fi figu gure ress bein being g used used to to calc calcul ulat atee a rat ratio io must must  be related to each other, otherwise there is no purpose of calculating a ratio.

GUIDELINES OR PRECAUTIONS FOR USE OF RATIOS: The calculation of ratios may not be a difficult task but their use is not easy. Following guidelines or factors may be kept in mind while interpreting various ratios are 

Accuracy of financial statements



Objective or purpose of analysis



Selection of ratios



Use of standards



Caliber of the analysis 14

 

Importance of Ratio Analysis: As a tool of financial management, ratios are of o f crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the  performance of a firm. Ratio analysis is relevant in assessing assessing the performance of a firm in respect of the following aspects: 1] Liquidity position 2] Long-term solvency 3] Operating efficiency 4] Overall profitability 5] Inter firm comparison 6] Trend analysis.

1] Liquidity position: -

With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they  become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratio is particularly useful in credit analysis by bank & other suppliers of short term loans.

15

 

2] Long-term solvency: -

Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the long-term creditors, security   analyst & the present &  potential owners of a business. The long-term solvency is measured by the leverage/ capital structure &  profitability ratio Ratio analysis s that that focus on earning power & operating efficiency. Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. 3] Operating efficiency:

Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in management & utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analys ana lysis, is, dependent dependent upon the sales revenues revenues generate generated d by the use of its assetsassets- total total as wel welll as its components.

profitability ty: 4] Overall profitabili Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the manage man agemen mentt is constan constantly tly concer concerned ned about about overal overalll profit profitabi abilit lity y of the enterp enterpris rise. e. That That is, they they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners & secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken & all the ratios are considered together.

5] Inter firm comparison:

Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. This is made possible due to inter firm comparison & comparison with the industry 16

 

averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. One of the popular techniques is to compare the ratios of a firm with the industry average. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which which it belongs belongs.. An inter inter firm firm compar compariso ison n would would demons demonstra trate te the fi firms rms positi position on vice-v vice-vers ersaa its competitors. If the results are at variance either with the industry average or with those of the competitors, the firm can seek to identify the probable reasons & in light, take remedial measures. 6] Trend analysis:

Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement, that is, whether the movement is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the  present level may be satisfactory but the trend may be a declining one.

Advantages of Ratio Analysis: Financ Fin ancial ial ratios ratios are essent essential ially ly conc concern erned ed with with the identi identific ficati ation on of signif significa icant nt account accounting ing data data relationships, which give the decision-maker insights into the financial performance of a company. The advantages of ratio analysis can be summarized as follows: 

Ratios Rat ios facili facilitat tatee conduct conducting ing trend trend analys analysis, is, which which is import important ant for decisi decision on mak making ing and forecasting.



Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm.



Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons.



The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm. 17

 

18

 

COMPANY PROFILE

Tata Motors Group, a USD 42 billion organisation, is a leading automobile manufacturer with a  portfolio that includes a wide range of cars, sports vehicles, trucks, buses and defence vehicles. Our marque can be found on and off-road in over 175 countries around the globe.

Part of the USD100 billion Tata group founded by Jamsetji Tata in 1868, Tata Motors is among the world’ world’ss leadin leading g manufa manufactu cturer rerss of automo automobil biles. es. They They are India' India'ss lar larges gestt automo automobil bilee manufacturer, and continue to take the lead in shaping the Indian commercial vehicle landscape, with the introduction of leading-edge powertrains and electric solutions packaged for power   performances and user comfort at the lowest life-cycle costs. Their Their new passenger cars and util utilit ity y vehic vehicle less are are ba base sed d on Impac Impactt Desi Design gn an and d of offe ferr a su supe peri rior or bl blen end d of pe perf rfor orma mance nce,, driveability and connectivity.

19

 

NEED OF STUDIES 

The financial performance of the company is known by calculating financial statement and ratio.



To know the organizational activity.



To know the societies contribution to build the industry and also organization .

OBJECTIVES OF STUDY 

To find out the financial performance of the organization for last 5 years through ratio analysis.



To know the utilization of financial resources.

20

 

CHAPTER-2

INTRODUCTION TO THE STUDY

The study paper on the topic “a study financial Ratio Analysis at TATA MOTORS” is partial fulfillment of requirement of BBA course . It was an opportunity to learn practical aspects of Motors. I have chosen this topic because “ratios are use to interpret the financial statements so that strengths and weakness of a firm as well as to know its historical performance and current financial condition can be determined.” My study covers the calculation of ratios for TATA MOTORS and to know their financial  performance.

 RATIO ANALYSIS  When we observed the financial statements comprising the balance sheet and profit or loss account is that they do not give all the information related to financial operations of a firm, they can provide some extremely useful information to the extent that the balance sheet, shows the financial position on a particular date in terms of structure of assets, liabilities and owners equity and profit or loss account shows the results of operation during the year. Thus the financial statements will provide a summarized view of the firm. There fore in order to learn about the firm the careful examination of in valuable reports and statements through financial analysis or  ratios is required.  MEANING AND DEFINITION  Ratio analysis is one of the powerful techniques which is widely used for interpreting financial statements. This technique serves as a tool for assessing the financial soundness of the business. The idea of ratio analysis was introduced by Alexander wall for the first time in 1919. Ratios are quantitative relationship between two or more variables taken from financial statements. Ratio analysis is defined as, “The systematic use of ratio to interpret the financial statement so that the strength and weakness of the firm as well as its historical performance and current 21

 

financial condition can be determined. In the financial statements we can find many items are co-related with each other For example current assets and current liabilities, capital and long term debt, gross profit and net profit purchase and sales etc. To take managerial decision the ratio of such items reveals the soundness of financial position. Such information will be useful for creditors, shareholders management and all other people who deal with company.  IMPORTANCE  As a tool of financial management ratio are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis and enables the drawing infere inf erences nces regard regarding ing the perfor performan mance ce of a firm. firm. Ratio Ratio analys analysis is is relevan relevantt in assess assessing ing the  performance of a firm in respect of the following aspects: 

Liqu Liquid idit ity y posi positi tion on Long Long tter erm m solv solven ency cy Oper Operat atin ing g effi effici cien ency cy Over Overal alll prof profit itab abil ilit ity y

Inte Interr firm firm com compa pari riso son n Tren Trend d analysis.  Liquidity Position: With the help of ratio analysis conclusions can be drawn regarding the liquidity position of a firm would be satisfactory if it is able to meet its current obligations when it become due. A firm can be said to have the ability to meet its short term liabilities if it has sufficient liquid funds to  pay the interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios are particularly useful in credit analysis by banks and other o ther suppliers of short term loans.  Long term solvency: Ratio analysis is equally useful for assessing the long term financial viability of a firm. This aspect of the financial position of a borrower is of concern to the long term creditors, security analysts and the present and potential owners of a business. The long term solvency is measured  by the leverage/capital structure and profitability ratios which focus on earning power and operating efficiency. Ratio analysis reveals the strengths and weakness of a firm in this respect. The leverage ratio for instance, will indicate whether a firm has reasonable proportion of  22

 

various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. Operating Efficiency: Yet another dimension of the usefulness of the ratio analysis, relevant from the viewpoint of  management, is that it throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets total as well as its components. Overall Profitability: Unlike the outside parties which are interested in one aspect of the financial position of a firm, the management is constantly concerned about the overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together.  Inter firm Comparison: Ratio analysis not only throws light on the financial position of a firm but also serves as a stepping stone to remedial measures. This is made possible due to inter firm comparison and comparison with industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. one of the popular techniques is to compare the ratios of a firm with the industry average. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs. An interfere comparison would demonstrate the firm’s position vis-à-vis its competitors. If the results are at variance varia nce either with the indust industry ry average or with those of the competitors competitors,, the firm can seek to identify the probable reasons and, in that light, take remedial measures. Trend Analysis: Finally, ratio analysis enables a firm to take the time dimension into account. In other words, 23

 

whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of a trend analysis of ratios lies in the fact that the analysts can know the direction of movement, that is, whether the movement is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the present level may be satisfactory but the trend may be a declining one.  Limitations: Rati Ra tio o analy analysi siss is a wi widel dely y us used ed tool tool of fina financi ncial al an anal alys ysis is.. Yet, Yet, it su suff ffer erss fr from om vario various us limitations.The operational implication of this is that while using ratios, the conclusions should not be taken on their face value. Some of the limitations which characterise ratio analysis are i)

Difficulty in comparison

ii)

Impact of inflation, and

iii)

Conceptual d diiversity.

 Difficulty in Comparison: One seriou seriouss limita limitati tion on of ratio ratio analysi analysiss arises arises out of the diffi difficul culty ty associ associate ated d with with their  their  comparisons are vitiated by different procedures adopted by various firms. The differences may relate to: Differences in the basis of inventory valuation (e.g. last in first out, first in first out,



average cost and cost); Different depreciation methods (i.e. straight line vs. written

down basis) 

Estimated working life of assets, particularly of plant and equipment;



Amortization of intangible assets like good will, patents and so on;



Amortization of deferred revenue expenditure such as a s preliminary expenditure and



Discount on issue of shares; Capitalization of lease; 24

 



Treatment of extraordinary items of income and expenditure; and so on.

Secondly, apart from different accounting procedures, companies may have different accounting  periods, implying differences in the composition of the assets, particularly current assets. For  these reasons, the ratios of two firms may not be strictly comparable. Another basis of comparison is the industry average. This presupposes the availability, on a compre com prehens hensive ive scale, scale, of variou variouss ratios ratios for each each indust industry ry group group over a period period of ti time. me. If, however as is likely such information is not compiled and available, the utility of ratio analysis would be limited.  Impact of Inflation: The second major limitation of the ratio analysis as a tool of financial analysis is associated with  price level changes. This, in fact, is a weakness of the traditional financial statements which are  based on historical costs. An implication of this feature of the financial statements as regards ratio analysis is that assets acquired at different periods are, in effect, shown at different prices in the  balance sheet, as they are not adjusted for changes in the price level. As a result, ratio analysis will not yield strictly strictly comparable and, therefore, therefore, dependable results. results. To illustrate, illustrate, there are two firms which have identical rates of returns on investments, say 15%. But one of these had acquired its fixed assets when prices were relatively low, While the other one had purchased them when prices were high. As a result, the book value of  the fixed assets of the former type of firm would be lower, while that of the latter higher. From the point of view of profitability, the return on the investment of the firm with a lower book  value would be overstated. Obviously, identical rates of returns on investment are not indicative of equal profitability of the two firms. This is a limitation of ratios. Conceptual diversity: Yet another factor which influences the usefulness of ratios is that there is difference of opinion regarding the various concepts used to compute the ratios. There is always room for diversity of  opinion opini on as to what constitutes constitutes shareholders shareholders equity, debt, assets, assets, and profit profit and so on. Different firms may use these terms in different senses or the same firm may use them to mean different things at different times. 25

 

Tata on a single ratio, for a particular purpose purpose may not be a conclusive conclusive indicator. For instance, the current ratio alone is not a as adequate measure of short term financial strength; it should be supplemented by the acid test ratio, debtors turnover ratio and inventory turnover ratio to have real insight into the liquidity aspect. Finally, ratios are only a post mortem analysis of what has happened between two balance sheet dates. dat es. For one thing, thing, the position position in the interim interim period period us bit revealed revealed by ratio ratio analysi analysis. s. Moreover, they give no clue about the future. Liquidity Ratios:

The importance of adequate liquidity in the sense of the ability of a firm to meet current/short term obligations when they become due for payment can hardly be overstressed. In fact, liquidity is a prerequisite for the very survival of a firm. The short term creditors of the firm are interested in the short term solvency or liquidity of a firm. But liquidity implies, from the viewpoint of  utilization of the funds of the firm that funds are idle or they earn very little. A proper balance  between the two contradictory requirements, that is, liquidity and profitability profitability is required for efficient financial management. The liquidity ratios measure the ability of firm to meet its short term obligations and reflect the short term financial solvency of a firm. Long –term Solvency Ratio:

The second category of financial ratios is leverage or capital structure ratios. The long term creditors would judge the soundness of a firm on the basis of the long term financial strength measured in terms of its ability to pay the interest regularly as well as repay the installment of the  principal on due dates or in one lump sum at the time of maturity. The long term solvency ratio of a firm can be examined by using leverage or capital structure ratios. The leverage or capital structure ratios may be defined as financial ratios which throw light on the long term solvency of  a firm as reflected in its ability to assure the long term creditors with regard to: (1) Periodic  payment of interest During the period of the loan and (2) Repayment of principal on maturity or  in pre determined installments at due dates. Activity Ratios:

Activity ratios are concerned with measuring the efficiency in asset management. These ratios are also called efficiency ratios or assets utilization ratios. The efficiency with which the assets 26

 

are used would be reflected in the speed and rapidity with which assets are converted into sales. The

greater

is

the

rate

of

turnover

or

conversion,

the

more

efficient

is

the

utili utilizat zation/ ion/man managem agement, ent, other other things things being being equal. equal. For this this reason reason,, such such ratios ratios are also also designated as turnover ratios. Turnover is the primary mode for measuring the extent of efficient employment of assets by relating the assets to sales. An activity ratio may, therefore, be defined as a test of the relationship between sales and the various assets of a firm. Profitability Ratios:

We know that the net operating result ,i.e. operating net profit, is not the sole criterion of  the firm although the same is the primary objevtives of all business enterprises .Becau .Be cause, se, profit profit is needed needed

for extens extension ion

and

develop developmen mentt

also. also. Mor Moreov eover, er,

variou variouss

interested inter ested groups groups consider consider it from their own interest. interest. For example example , an investor investor is interested in higher returns, creditors want better security, workers want higher wages etc. All these these problems problems can be solved solved if the the concern concern earns adequate adequate profits profits and naturally naturally  profit is the yardstick of measuring the overall efficiency of firm.Profits are the margin of  safety to a creditor, test of efficiency efficiency and control to the management , worth of investments to the owners , measure of tax paying paying capacity to a government etc. etc. Thus, profi profits ts are the index of economic progress of a country , as a whole. For this purpose profitability ratios are calculated in order to measure the overall efficiency of a firm. Profitability ratios are usually expressed in terms of percentage.

27

 

Profitability ratios are, again, of following two types: a)General Profitability Ratio Ratio (In terms of sales) 1)Gross Profit Ratio

b)Overall Profitability (In terms of investment) 1)Return on Capital Employed

2 ) Net Profit Ratio

2)Return on Ordinary Share capital

3)

Operating Profit 3)Return on Total Resources

4) Fund

Operating Profit Ratio

5)

Profit Cover Ratios 5)Dividend Yeild Ratio 6)Dividend Pay-out Rati Ra tio o 7) 7)Di Divi vide dend nd Per  Per  shar sharee 8) 8)Ea Earn rnin ing g Pr Pric icee Ratio 9)Earning Per  Sharee 10)Pri Shar 10)Price ce Earnin Earning g Rati Ra tio o 11)As 11)Asse sets ts Cover  Cover  12) 2)C Capital Tur urn nove ver  r  Ratio 13) Turnover to Proprietor’s Fund Ratio

4)Return on proprietor’s

14) Turnover Turnover to Fixed Assets Ratio Ratio 15) Turnover to Assets and Liabilities Ratio 16) Net Profit to Total Assets Ratio 17) Net Profit to Fixed Assets Ratio 18) Assets to Proprietorship Proprietorship Ratio

28

 

General Profitability Ratios:

(1 )Gross Profit Ratio

This is the ratio of Gross Profit to Net Sales and expressed as a percentage. It is also called Turnover Ratio. It reveals the the amount of Gross Profit for each rupee of sale. It is highly hig hly signifi significant cant and importan importantt since since the earnin earning g capacit capacity y of the busine business ss

can be

ascertained by taking taking the margin between cost of goods and sales. sales. The higher the ratio, the greater will be the margin, and this is why it is called Margin Ratio. Management is always interested interested in a high margin margin in order to cover the operating operating expenses expenses and sufficient return on the Proprietor ‘s Fund. It is very useful as a test of profitability and management efficiency . 20% to 30% Gross profit Ratio may be considered normal: Gros Grosss Prof Profit it Rati Ratio= o= Gros Grosss

Pr Prof ofit it/N /Net et

Sa Sale less

*100 INTERPRETATION AND SIGNIFICANCE This ratio reveals the efficiency of the firm about the goods goo ds produced.Since gross profit is the difference difference between between selli selling ng price price and cost of goods sold the the higher the profit, profit, better  better  will be the financial performances.  NET PROFIT RATIO

This is the ratio of Net Profit to Net Sales and is also expressed aass a percentage. It indicates the amount of sales left for for shareholders after all all costs and expenses have been met. The higher the ratio, the greater will be profitability---and the higher the return to the shareholder share holders. s. 5% to 10% may be considered considered the normal. normal. It is a very useful useful tool to control the cost of production production as well as to iincrease ncrease sales:  Net Profit Ratio=Net Profit /Net Sales*100

This ratio measures the overall efficiency of the management. Practically ,it measures the firm’s over overal alll p prrofi ofitabil abiliity. ty. It is the dif differ eren ence ce bet between ween Gros Grosss Pro Proffit and and ope opera rattin ing g

and and

non-operating income minus operating and non-operating expenses after deduction of tax. This ratio is very significant as, if it is found to be very low, many problems may arise, dividend may not be paid, operating expenses

may not be paid etc. Moreover, 29

 

higher profit earning capacity protects a firm against many financial hindrances(e.g. advers adv ersee econom economic ic condit condition ion)) and, natura naturall lly, y, higher higher the ratio, ratio, the better better will will be the  profitability. OPERATING RATIO

This is the ratio of operating expenses or operating cost of sales. It may be expressed as a percentage and it reveals the amount of sales required to cover the cost of goods sold  plus operating ope rating expenses. expen ses. The lower the ratio the higher is the profitability and the better is the management efficiency. 80% to 90% may be considered as normal. Operating Ratio= Cost of goods sold+Operating Expenses/Sales *100

Operat Ope rating ing Expens Expenses es consist consist of (i)Off (i)Office ice and Administ Administrat rative ive expenses, expenses, and (ii) Selling Selling and Distribution expenses and the two components of this ratio are Operating Expenses and Net Sales. INTERPRETATION AND SIGNIFICANCE

The primary purpose of this ratio is to compare the different cost components in order to ascertain any change in cost composition, i.e. increase or decrease and to see which element of  cost has increased and which one decreased. Moreover, there is no standard or norm about this ratio since it varies from firm to firm---depending on the nature and type of the firm and its capital structure. For a better performance, a trend analysis of the ratios for some consecutive consec utive years many present present a valuable valuable informati information. on. If non- operating operating expenses expenses are considered by mistake, the same may present a wrong information. OPERATING PROFIT RATIO

It is a modified version of Net Profit to Sales Ratio. Here, the non-operating incomes and expenses are to be adjusted (i.e. to be excluded) with the net profit in order to find out the amount of operating net profit. It indicates the amount of profit earned for each rupee of  sales after dividing Operating Net Profit by Net Sales. It is also expressed as a percentage: 30

 

Operating Profit Ratio= Operating Net Profit/Net Sales*100

Here, Operating Net Profit=Net Profit-Income from external securities and others (i.e. nontrading incomes)+Non-operating expenses(i.e. Interest on Debentures etc.). (I) DIVIDEND COVERAGE RATIOS

a) Preference Shareholders’ Coverage Ratio

It indicates indicates the number number of times the Preference Preference Dividends Dividends are are covered by the Net Profit (i.e.,  Net Profit after Interest and Tax but before Equity Dividend). The higher the coverage the better will be the financial strength. It reveals the safety margin available to the Preference Shareholders: Prefernce Shareholders’ Coverage Raito

= Net Profit( after Interest and Tax but before Equity Dividend) /Preference Dividend

(ii)Equity Shareholders’ Coverage Ratio

It indicates the number of times the equity dividends are covered by the Net Profit (i.e.  Net Profit after Interest, Tax and Pref. Dividend).The higher the coverage, the better will  be the financial stenghth and the fairer the return for the shareholder since maintenance of  dividend is assured. Equity Shareholders’ Coverage Ratio

= Net Profit(after Interest, Tax and Pref. Dividend)/ Equity Dividend

(b) INTEREST INTEREST COVERAGE COVERAGE RATIO 31

 

It indicates the number of times the fixed interest charges (Debenture Interest, Interest on Loans etc.) are covered by the Net Profit (i.e. Net Profit before Interst and Tax).  Net Profit (before Tax and Interest)(EBIT) Interest)(EBIT)

Interest Coverage Ratio= Fixed Interest and Charges

(c) (c)

TOTA TOTAL L COVE COVERA RAGE GE RATI RATIO O

The coverage ratio is a measure of a company's ability to meet its financial obligations. In broad term te rms, s, the the highe higherr the the co cove vera rage ge ra rati tio, o, the the be bett tter er the the ab abil ilit ity y of th thee en ente terp rpri rise se to fu fulf lfil illl it itss obligations to its lenders. lenders. The trend of coverage ratios ratios over time is also studied studied by analysts and investors to ascertain the change in a company's financial position.

(d) OVERALL PROFITABILITY RATIO

i)

Retu Return rn on on Capi Capita tall Empl Employe oyed/ d/Ret Retur urn n on Inve Invest stme ment nt

Retu Re turn rn on ca capi pita tall empl employ oyed ed (ROCE) is a fina financ ncia iall ra rati tio o th that at meas measur ures es a co comp mpan any' y'ss

 profitability and the efficiency with which its ca capit pital al is employed. RO ROCE CE is calculated as: ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed.

Return Retur n on Investment Investment (ROI) (ROI) is a performance performance measure, used to evaluate evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI measures the amoun am ountt of return on an investment, relative to the investment’s cost. To calculate ROI, the  benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.

ii)

Return on on Eq Equity 32

 

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a

company generates with the money shareholders have invested.

iii) ii i) Retu Return rn on Comm Common on Equi Equity ty

Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Net income is for the full fiscal year  (before dividends paid to common stock holders ho lders but after dividends to preferred stock.) iv)

Ret Return urn on Asset ssetss

Return Ret urn on Assets Assets (ROA) is an indicator of how profitable a company is relative to its

total assets. ROA gives an idea as to how efficient management is at using its assets to generate genera te earnings. earnings. Calculated Calculated by dividing dividing a company's company's annual earnings earnings by its total assets, ROA is displayed as a percentage.

v)

Cash return on on Asset

Definition. Cash ROA (TTM) is the amount of cashflow from operations (CFO) over a firm's total assets. Typically, a ROA compares net income (NI) to a firm's total assets. The difference  between using CFO and NI is that CFO is harder to manipulate than NI, thus a better indicator  of true return. vi) Return on Proprietor’s Fund/Earning Fund/Earning Ratio

Return on shareholders' investment ratio is a measure of overall profitability of the business and

is computed by dividing the net income after interest and tax by average stockholders' equity. ... The ratio is usually expressed in percentage.

vii)Return on Ordinary Shareholder’s Equity 33

 

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a

company generates with the money shareholders have invested.

viii) Net profit to Fixed Asset ratio:- This is the the ratio of Net Profit to Fixed Assets which indicates whether or not the fixed assets have been effectively utilized in the business. ix)Net Profit to Total Assets:- This is the ratio of net profit to total assets. It also indicates whether the total assets of the business have been properly used or not. If not properly used, it  proves inefficiency on o n part of the management. It also helps to measure the profitability of the firm. x) Price Earning Ratio:- It is the ratio which relates to the market price of the shares to earning  per equity shares. A high ratio satisfies the investors and indicates the share prices that are comparatively lower in relation to recent earning per share. xi)Earning Price Ratio/Earning Yield:- Yield is expressed in terms of market value per share. This ratio is calculated by dividing earning per share by the market price per share. xi xii) i)Ea Earn rnin ing g Pe Perr Shar Share: e:-- This This is ca calc lcul ulat ated ed by di divi vidi ding ng th thee ne nett pr prof ofit it (a (aft fter er ta tax x an and d  pref.dividend) available to the share holders by the number of ordinary share. It indicates the  profit available to the ordinary share holders on per share basis. xiii) Dividend Yield Ratio:- It is calculated by cash dividend per share by the market value  per share. It is very important to the new investors. xiv)Dividends Payout Ratio:- The dividend payout ratio is the amount of dividends  paid to stockholders relative to the amount of total net income of a company. The amount that is not  paid out in dividends to stockholders is held by the company for growth. The amount that is kept by the company is called retained earnings. xv) Dividend Dividend per share:share:-  Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the 34

 

total dividends paid out by a business, including interim dividends, over a period of time by the number of outstanding ordinary shares issued. xvi)Capital Turnover Ratio:- The working capital turnover ratio is also referred to as net sales to workin working g capital. It indica indicates tes a compan company's y's effectiv effectivenes enesss in using using it itss workin working g capital. The working capital turnover ratio is calculated as follows: net annual sales divided by the average amount of working capital during the same 12 month period. xvii) Turnover Turnover to Proprietors Proprietors fund Ratio:- 1) Ratio of fixed assets to shareholders or proprietors' funds. 2) Ratio of current assets to shareholders or proprietors' funds. xvii xviiii)

Asse Assetts to to Pro Propr priiet etor orsh shiip Rat Ratio io::- Pr Propr opriet etar ary y rat ratio io.. Equ Equity ity ratio. The proprietary

ratio (also known as the equity ratio) is the proportion of shareholders ' equity to total assets, and as such provides a rough estimate of the amount of capitalization currently used to support a business.

xix)Price-book Ratio:- The price-to-book ratio (P/B Ratio) is 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 boo book k value  per share. A lower P/B ra ratio tio could mean that the stock is undervalued. xx) Market price per share:- The Price-Earnings Ratio is calculated calculated by dividing the current market price per share of the stock  by earnings per share (EPS). (Earnings per share are calculated by dividing net income by the number of shares outstanding.)

xxi)Book-value xxi)Book-val ue per share:share:- The book value per share formu formula la is used to calculate calculate the per share value of a company based on its equity available to common shareholders. The term

"book value" is a company's assets minus its liabilities and is sometimes referred to as stockholder's equity, owner's equity, shareholder's equity, or simply equity.

35

 

FORMULAS:-

i)

Retu Return rn on Capi Capita tall Emp Emplo loyed yed = Net Net pr prof ofit it(a (aft fter er ta tax) x) / Ca Capi pita tall eemp mplo loye yed d

ii)

Ret Return urn on Equi Equitty = Net Net Inco Income me / Avg. Avg. Sha Sharreh ehol olde ders rs ( incl includ udiing  pref. shareholders

iii)

fund)

Re Retturn urn on Commo Common n Equi Equitty = Ear arni ning ng aft after TaxTax-Pr Pref ef.. Div Div / Equity Shareholder’s

Fund * 100

iv) iv)

Retu Return rn on on Asse Assets ts = Ea Earn rnin ing g befor beforee inte intere rest st and and tax tax / Tot Total al Ass Asset etss * 100

v)

Cash Cash Ret Retur urn n on Asse Assets ts = Cash Cash flo flows ws fro from m Oper Operat atin ing g acti activi viti ties es / Tota Totall Asse Assets ts * 100

vi) vi)

Retu Return rn on propr proprie ieto tors rs fund fund/e /ear arni ning ng ratio ratio=n =net et profi profit( t(af afte terr tax) / propre propreit itor orss fund

vii) vii)

Ret Return urn on ordin ordinary ary share share hold holders ers equity equity (ROE)= (ROE)=net net prof profit it (aft (after er tax tax and and pref. dividend)/proprietors equality(less Pref. share capital)

viii) viii)

Net profit profit to fixe fixed d asset assetss rati ratio= o= Net Net profi profitt / Fixe Fixed d Assets Assets

ix) ix)

Net Net Pro Profi fitt to to Tot Total al Asse Assets ts Rati Ratio= o= Net Net Pr Prof ofit it// Tot Total al Ass Asset etss

x)

Pric Pricee Earn Earnin ing g Rati Ratio= o= Mar Marke kett Pric Pricee of Sha Share re / Earn Earnin ing g per per Shar Sharee

xi) xi)

Ea Earn rnin ing g price price Rati Ratio/ o/Ea Earn rnin ing g Yiel Yield d = Ea Earn rnin ing g per shar sharee / Ma Mark rket et pric pricee  per Share

xii) xii)

Ea Earn rnin ing g Per Sha Share re = Net Net Profi Profitt avail availabl ablee to Ord. Ord. Shar Shareh ehol olde ders rs / No. No.

xiii) xiii)

of Ordinary Shares Div Divide idend nd Yield Yield Ratio Ratio = Divide Dividend nd per per Share Share / Earni Earnings ngs per Shar Sharee

xiv)) xiv

Divide Dividend nd Pay-o Pay-out ut Rati Ratio= o= Divi Dividen dend d per Share Share / Earn Earning ingss Per Per share share

xv xv))

Di Divi vide dend nd Per Per Shar Sharee = Divi Divide dend nd paid paid to to Ordi Ordina nary ry Shar Shareh ehol olde ders rs / No. No. of Ordinary shares

xvi)) xvi

Capita Capitall Turnove Turnoverr Ratio= Ratio= Sale Sales( s( Turno Turnover ver)) / Avera Average ge Capit Capital al Emplo Employed yed

xvii)

Turnover Turnover to to Propriet Proprietor’s or’s Fund Ratio= Ratio= Sales( Sales( Turnover) Turnover) / Proprie Proprietor’s tor’s Fund

xviii)) Assets xviii Assets to Propri Proprietors etorship hip Ratio= Ratio= Total Total Assets Assets / Proprietor’ Proprietor’ss Fund xix) xix)

Pr Pric icee-Boo Book k Valu Valuee Rati Ratio= o= MPS MPS / Book Book Valu Valuee Per Per Shar Sharee 36

 

REVIEW OF LITERATURE Horne Hor ne and Wachowic Wachowicz, z, (2000) (2000) Working Working capital capital is an import important ant tool tool for growth growth and  profitability for corporations. If the levels of working capital c apital are not enough, it could lead to shortages and problems with the day-to-day operations.  Lazard’s and Tryfonidis (2006) investigated the relationship of corporate profitability and working capital management for firms listed at Athens Stock Exchange. They reported that there the re is statist statistical ically ly signif significan icantt relati relations onship hip betwee between n profit profitabi ability lity measure measured d by gross gross operating profit And the Cash Conversion Cycle. Furthermore, Managers can create profit  by correctly handling the individual individual components of working capital to an optim optimal al level.

Shah and Sana (2006) used Avery small sample of 7 oil and gas sector firms to investigate this relationship for period 2001-2005.The results suggested that managers can generate  positive return for the shareholders by effectively managing working capital.

Ganesan (2007) selected telecommunication equipment industry to study the effectiveness of working capital management. The sample included for his research paper included 443annual financial statements of 349telecommunication equipment companies covering the period 2001 to 2007. The statistical tests used included correlation, regression analyses and Analysis of variance (ANOVA). The results showed those days of the working capital negatively affects the profitability of these firms but in reality it does not affect the transportability of firms in telecommunication equipment industry.

Sen. M (2009) (2009) examined the ISE (Istanbul Stock Exchange) Exchange) listed firms and checked out th thee relat relatio ions nshi hip p with with th thee work workin ing g capit capital al.. Acco Accord rdin ing g to th them em th ther eree is ne nega gati tive ve 23 relati rel ations onship hip among among variab variables les.. His research research uncove uncovered red the import importanc ancee of the financ financee directors who act as moderators or catalysts to increase the productivity of the firm in other  words they positively affect the firm’s performance.

Juliet D’Souza and William L.Megginson (1999) 10  have studied the financial

and operating performance of privatized firms during the 199 1990s. 0s. This study compares the 37

 

 pre and post privatization financial and operating performance of 85 companies from 28 industrialized countries that were privatized through public share offerings for the period from 1990 through through 1996. 1996. The significant significant increases increases in profitabili profitability, ty, output, output, operating efficiency, dividend payments and significant decreases in leverage ratios for the full samp sample le of firm firmss af afte terr pr priv ivat atiza izati tion on were were no noti tice ced. d. Capi Capita tall ex expe pend ndit itur ures es in incre crease ase signif sig nifican icantly tly in absolu absolute te terms, terms, but not relativ relativee to sales. sales. Emplo Employme yment nt declin declines, es, but insignificantly. The findings of the study strongly suggest that privatization yields significant performance improvements.

Rupa Rege Nitsure and Mathew Joseph (1999)11  in their study entitled,

“Liberalisation and the Behaviour of Indian Industry (A Corporate - Sector Analysis  based on Capacity Utilisation) examined the impact of economic reform on productive capacity capaci ty creation and utilization utilization across various various Motors in the nineties. The results results sugges sug gestt that that althou although gh substan substantial tial achiev achieveme ements nts occurr occurred ed initial initially ly in creati creation on and utilization utili zation of capacities in the various Motors, there is significant significant room for further  further  improvement in utilization. It analyzed the determinants of capacity use such as credit flows, import liberalization, fiscal consolidation and demand conditions, using pane data for 802 firms for the period 1993-98 to suggest an optimum combination of policies that is critical for realizing the unused capacity.

Rajeswari (2000)12  studied the Liquidity Management of Tamil Nadu Cement

Corporation Ltd. Alangulam-A Case Study. It can be concluded from the analysis, the liquidity position of TANCEM is not stable. Regarding liquidity ratios, there was too much of liquidity in the first two years of the study period. A very high degree of  liquidity liqui dity is also bad as idle assets earn nothing nothing and affects profitability. profitability. It can be concluded that the liquidity management of TANCEM is poor and is not satisfactory. satis factory.

Dabasish Sur, Joydeep Biswas and Prasenjit Ganguly (2001) 13  studied the

Liquidity Management in Indian Private Sector Enterprises - A case study of Indian

Primary Prima ry Aluminum Aluminum industry. industry. From the analysis, it may be summarized that the overall  performance regarding liquidity management at INDAL was better in terms of efficient utilization of short term funds, whereas HINDALCO was unable to do so. A very high degree of positive correlation between liquidity and profitability in case of both the 38

 

companies was a notable feature, reflecting the favorable effect of liquidity on  profitability.

Aggarwal and Singla (2001)14 in their study developed a single index of financial

 performance through the technique of Multiple Discriminant Analysis (MDA), They attempt to identity from among the 11 ratios, used as inputs, those ratios, which are relevant in distinguish between profit making units and loss making units in Indian paper  industry. The study indicates that model has correctly classified 82.14 percent of units selected as profit making and loss marking. The study also shows that inventory turnover  ratio, interest interest coverage coverage ratio, net profit profit to total assets and earning per share are the most important indicators of financial performance. The study also suggests that the results of MDA can be used as predictor of future profitability / sickness. Joanne Loundes (2001)15  in the study „The Financial performance of Australian

Governmen Gover nmentt Trading Trading Enterprises Enterprises Pre-and Post-Reform Post-Reform‟‟ revealed revealed that during during the 1990's 1990's th there ere were were severa severall meas measur ures es in intr trod oduc uced ed to impr improv ovee th thee effic efficie ienc ncy y an and d finan financi cial al  performance of government trading enterprises in Australia. The purpose of this study was to discover whether there had been any change in the financial performance of  government trading enterprises operating in electricity, gas, water, railways and ports Motors as a result of these changes. The study reveals that it does not appear to have been a noticeable enhancement in the financial performance of most of this business, although railways have improved slightly, from a low base. bas e.

Mark Rogers Rogers (2001) (2001)16  in his research research the effect of diversi diversific ficatio ation n on firm firm

 performance analyses the association between diversification and firm performance in a sample sam ple of up to 1449 1449 large large Austra Australian lian firms (1994 to 1997). 1997). Firm Firm perfor performan mance ce is

measured by profitability and, for quoted firms, market value. Results from the full sample shows that more focused firms have higher profitability. This result controls for  firm specific effects and other determinants of profitability. However, this association is not found in sub- sample regressions for listed firms. This is true both when either   profitability or market value is used as a performance measure. The results may indicate that listed firms may be under closer scrutiny scrutiny and compe competitive titive pressures pressures that ensure, ensure, on average, that these firms are at their optimal degree of diversification. 39

 

Dabasish Sur (2001)17  studied the Liquidity Management: An overview of four 

companies in Indian Power Sector. In this study a comparative analysis regarding the liquidity management in Electricity generation and distribution industry has been made for the period 1987-88 to 1996-97. The study reveals that the overall liquidity should be managed in such a way that not only it should not hamper profitability but also its contribution towards increase in profitability should be positive. Derek Der ek Boswor Bosworth th and Joann Joannee Lound Loundes es (2002) (2002)18  in hi hiss study study en enti titl tled ed th thee

Dyna Dy nami micc pe perfo rform rman ance ce of Aust Austral ralia ian n Ente Enterp rpri rises ses in inve vesti stiga gate te th thee in inte tera racti ction on of  discretionary investments (R&D, capital investment, training and advertising), innovation, productivity and profitability within a dynamic framework of firm  performance. A dynamic and closed model of firm performance is set up, and the resulting empirical model is tested as a series of recursive equations, using a four-year   balanced panel data set of Australian firms drawn from the Business Longitudinal Survey. The results indicate that current economic profit has an important role to play in enabli ena bling ng firms firms to invest, invest, and the findings findings indica indicate te which which of these these investm investment entss are complements and which are substitutes. The study explores the impact of these discretionary investments on innovation and total factor productivity performance. Finally, the impact of past discretionary investments both directly and indirectly (that is, via innovation and  productivity performance) on current profitability is examined. Past values of these investments have a significant influence on current profit, effectively closing the model.

„Use  of   „Z‟ „Z‟   score analysis for evaluation of financial Mansur A. Mulla (2002)19 in „Use  health of textile mills - A case study‟ has been made an insight into the financial health of  Shri Venkatesh Co-operative Textile Mills Ltd., Arunageri of Dharwad District. The „Z‟ score analysis has been applied to evaluate the general trend in financial health of a firm over a period by using many of the accounting ratios. From the study it was concluded that the textiles mill under study was just on the verge of financial collapse. On the one hand, current assets declined because of the negative profitability performance, whereas on the other hand, the current liabilities were on the increase because of poor  liquidity performance of the mill.

40

 

Wolf Wo lfga gang ng Auss Aussen eneg egg g and and Rank Ranko o Je Jeli licc (2 (200 002) 2)20  exa examin minee operat operating ing

 performance of 154 Polish, Hungarian and Czech companies that were fully or   partially privatized between January 1990 and December 1998. The study reveals that privatized firms in the sample did not manage to increase profitability, and significantly reduced efficiency and output in the post privatization period. Enterprises privatized through mass privatization programs (Czech SOEs) achieved lower profitability in the post-privatization period compared to their counterparts  privatized through case- by - case method. Czech companies have also maintained much higher bank borrowings after privatizations than their polish and Hungarian counterparts. The study further reveals that private sector IPOs underperforms their   privatization counterparts in terms of profitability, efficiency, capital investments an and d ou outp tput ut.. Fina Finall lly y fi firm rm‟s ‟s si size ze do does es no nott seem seem to in influ fluen ence ce ke key y pe perfo rform rman ance ce measures in selected countries.

Sudarsana Reddy (2003)21  studied the Financial Performance of Paper industry

in AP. The main objectives set for the study are to evaluate the financing methods and  practices to analyze the investment pattern and utilization of fixed assets, to ascertain the working worki ng capital condition, condition, to review the profitabili profitability ty performance performance and to suggest suggest

measures to improve the profitability. The data collected have been examined through ratios,, trend, common size, comparative ratios comparative financial statement analysis and statistical statistical tests have been applied in appropriate context. The main findings of the study are that A.P  paper industry needs the introduction of additional funds along with restructuring of  finances and modernization of technology for better operating performance.

RBI Corporate Studies Division (2003) 22  has made an attempt to study the

 performance of corporate business sector during the first half of 2002-2003. The results of 146 private companies of various sectors were analyzed on the various parameters of   performance. Aggregation and comparison of the results of the first two quarters were done on these performance parameters. It was concluded that the performance of the  private sector was better when compared with the first half of the previous year 

41

 

(2001-2002). This was indicated by the following parameters viz., higher sales, reduced interest payments and ultimately improved profitability. Sector- industry wise analysis of   performance has been done to highlight those areas where the performance has been  better vis-à-vis sectors, which have lagged behind in performance.

Ram Kumar Kakani, Biswatosh Saha and Reddy (2003) 23  attempts to provide

an empirical validation validation of the widely held existing theories on the determinants determinants of firm  performance in the Indian context. The study s tudy uses financial statements and capital market data of 566 large Indian firms over a time frame of eight years divided into two sub periods (1992-96 and 1996-2000) and to study Indian firm‟s financial performance across various dimensions viz., shareholder value, accounting profitability and its component comp onents, s, growth and risk of the sample firms. The study found that size, marketing marketing expenditure and international diversification had a positive relation with a firm‟s market valuation. The study also found that a firm‟s ownership compositions, particularly the

level lev el of equity equity ownersh ownership ip by domesti domesticc financ financial ial instit instituti ution on and disperse dispersed d public public shareholders, and the leverage of the firm were important important factors affecting its financial  performance. Laurent Weill (2004)24  in his study leverage and corporate performance-a

frontier front ier efficiency analysis analysis provides new empiric empirical al evidence evidence on a major corporate corporate governance gove rnance issue: the relationship relationship between leverage and corporate corporate performance. performance. His study provides provides two major importance importance‟s ‟s to this literature literature by applying applying frontier efficiency techniques to obtain performance measures for companies from several countries (France, Germany and Italy). The study proceeds to regressions of corporate performance on a various set of variables including leverage. The study found mixed evidence depending on the country; while significantly negative in Italy, the relationship between leverage and corporate performance is significantly positive in France and

42

 

Germany.

This

tends

to

support

the

influence

of

some

institution

characteristics on this link.

his study study uses firm firm le leve vell da data ta to ex exam amin inee th thee Petia Peti a Topalova Topalova (2004) (2004)25  in his  performance of India‟s non financial corporate sector since 1989 and evaluate its financial vulnerabilities. The study shows promising trends in liquidity, profitability and leverage of the sector emerged in the early 1990s, they experienced a reversal after 1996.  Nevertheless, most indicators were still at comfortable levels, and there is evidence of  improvement in 2002. The study also reveals that a number of firms still face problems servicing their debt obligations, posing a risk to lenders. The study of aggregate interest coverage of the corporate sector indicates that potential non-performing loans of the

corporate sector remain high. high. This underscores underscores the need of the corporate sector remain high. This underscores the need for close monitoring of the corporate sector se ctor in the future.

Raghunatha Reddy and Padma (2005)26  in their study, an attempt has been

made to study the impact impact of mergers on corporate performance. performance. It compares compares the pre and  post merger operating performance of the corporations involved in merger to identify their financial characteristics. Empirical research on share price performance suggests that acquiring firm generally earns positive returns prior to announcement, but less than the market market portfolio in the post liberalisation liberalisationss period in general and analysis of the pre and post merger operating performance of the acquiring firm.

Santimoy Patra (2005)27 the impact of liquidity on profitability is analysed in his

study considering the case Tata Iron & Steel Company Limited. The study of the impact of liquidity ratios on profitability showed both negative and positive association. Out of  seven liquidity ratios selected for this study, four ratios namely current ratio, acid test ratio, current assets to total assets ratio and inventory turnover ratio showed negative correlation

43

 

with profitability ratio. However, these correlation co-efficient were not statistically significant. The remaining three ratios namely working capital turnover ratio, receivable tu turn rnov over er rati ratio o an and d ca cash sh tu turn rnov over er ra rati tio o ha have ve show shown n po posi siti tive ve as asso soci ciat atio ion n wi with th th thee  profitability ratio, all of which are statistically sta tistically significant at 5% level of significance. The result of all the correlation co- efficient is as desirable except correlation co-efficient  between inventory turnover ratio and ROI. However this undesirable sign between ITR  and ROI is not supported supported by the multiple multiple regression analysis, analysis, which shows the positive association between these two variables. There is increasing profitability which depends

upon many factors including liquidity.

RBI Bulletin (2005)28 Finance of Foreign Direct Investment companies, 2002-03.

An attempt has been made to assesses financial financial performance performance of 490 selected nonGovernment non financial foreign direct investment (FDI) companies for the period 2001  based on their audited annual accounts. The financial results of the selected company should improved performance in terms of higher growth in sales, value of production, manufacturing expenses and gross profit during 2002-03 compared with the respective growth rates in the previous year. The profitability ratios like profit margin, return on network netwo rk increased during the year under under review company company having having major portion portion of FDF from UK, USA, Switzerland and Mouritius registered net flow of foreign companies in all the three years.

S.P.Singh (2006)29  in his study performance of sugar mills in Uttar Pradesh by

ownership, owner ship, size and location. Performance Performance assessment of the sugar industry industry and setting setting targets for the relatively inefficient mill to improve their efficiency and productivity is crucial, crucia l, as the interest interest of various various stakeholder stakeholderss are largely dependent dependent on its performance performance.. The performance of the mills is found to vary significantly across sector, plant size and region. The private sector mills achieve the highest efficiency scores, followed by the cooperative sector. It has also been observed that the mills with bigger plant size attain

44

 

relatively higher efficiency scores, moreover, the mills located in the WK found better   performer as compared c ompared to their counter parts of other regions. Labour and energy inputs are found highly underutilized in almost all the inefficient mills.

Debasish Sur and Kaushik Chakraborty (2006) 30  in his study financial

 performance of Indian Pharmaceutical industry : The Indian Pharmaceutical industry has  been playing a very significant role in increasing the life expectancy and in decreasing the mortality rate. It is the 5 th  largest in terms of volume and the 14 th  largest in value terms in the world. The comparative analysis the financial performance of Indian Pharmaceutical industry for the period 1993 to 2002 by selecting six notable companies of the industry. The comparison has been made from almost all points of view regarding financial performance using relevant statistical tools.

Kapil Choudhary (2007)31 in his study performance of the common stocks under 

alternative altern ative investment strategies .While the efficient market hypothesis hypothesis denies denies the  possibility of earning abnormal returns, the fundamental analysts assert that investment strategies strateg ies based on the accounting accounting numbers numbers may be indicators indicators of feature investment investment  performance. The present study examines the relationship between investment  performance of equity securities and alternative investment strategies based on their  market capitalization, P/E ratio and earning per share. During the period from January 1997 to December 2005, the low market capitalization, capitalization, P/E ratio, and earning earning per share  portfolios on average earned higher absolute rate of return than the high market capitalization, P/V ratio, and earning per share portfolios respectively. Among the three investment inves tment strategies the low market capitalizatio capitalization n investment investment strategy was found superior to both low P/E ratio and low earning earning per share investment strategies in terms of  absolute and risk adjusted rate of return.

45

 

P.Janaki Ramudu and S.Durga Rovo (2007) 32  in his study Receivables

management manag ement in the commercial vehicles vehicles industry industry in India. India. This paper examines examines the efficiency of receivables management of the Indian commercial vehicles industry. This study reveals that the industry as a whole had managed receivables efficiently, where as a few individual companies had for less satisfactory scores in this respect. The study reveals that the level of investment in receivables as a percentage of sales across the industry was reasonable less. When benchmarked against the industry average, Ashok  Leyl Le ylan and d and and Swar Swaraj aj Mazd Mazdaa had had re reco cord rded ed po poor or pe perf rfor orma manc ncee in th thee re rece ceiv ivab able less management, where as a Tata Motors, Bajaj Tempo, and Eicher Motors, did well. Monicor Singhania (2007)33  in his study Dividend policy of India companies.

The analysis revealed that while the percentage of companies declaring dividend declined over the years, the average dividend per share increased by nearly eight times . This implies that those companies declare dividend, increasingly per higher dividends over the years. Average dividend payout ratio ranged between 25% and 68% during 1992-2004. However average dividend yield showed a consistent upward trend throughout the period of study-increasing from 0.75% in 1992 to 10% in 2004. One possible reason for the increase in dividend payout may be the change in tax regime. According to tax preference or trade-off theory, favorable dividends tax should lead to higher payouts. S.K.Srivastorva (2007)34  in his study Role of Organizational management and

managerial Effectiveness in promoting performance and production. Management is a universal Phenomenon. It is present in virtually all walks of life. Management is not confin con fined ed merely merely to a factory factory or an office. office. Skillf Skillful ul manage managemen mentt is needed needed in clubs, clubs, families, famili es, Schools, Sports, teams and social functions functions like marriages, Picnics parties and so on. Lack of proper management invariable results in chaos, wastage of time, money and effort. Although management is needed in various activities, it has special

46

 

significance with respect to business business enterprises in the public as well as private sectors. Thee produc Th productiv tivee efficie efficiency ncy of bu busin siness ess firm depends depends a great great deal deal on the Quality Quality of  management. Also effectiveness of management is a major factor determining the growth and prosperity of a business on which rests the process proces s of economic growth. T.Vanniarajan and C.Samuel Joseph (2007)35  in his study An Application of 

Dupont control chart in Analyzing the financial performance of Banks. The liberalization of the finance sector in India is exposing Indian banks to a new economic environment that is characterized by increased competition and new regulatory requirements. Indian and foreign banks are explo exploring ring growth opportunities opportunities in India by introducin introducing g new  products for different customer segments, many of which were not conventionally conventionally viewed as customer for the banking industry. industry. Many Banks have, in the last ten years, witnessed witnessed new shareholders. All banks are in a position to evaluate its performance compared to others. In general, the performance of the banks may be viewed on three dimensions namely structural, operational and efficiency factors are suggested By India Bank  Association. Adolphus J. Toby, Ph.D. (2007) 36  in his study, Financial management modeling

of the perfor performan mance ce of Nigeria Nigerian n Quoted Quoted Small Small and medium medium-siz -sized ed Enterp Enterprise rises. s. It is conceptualized that sustained growth, adequate liquidity and requisine profitability in the SME sector is significantl significantly y related related to their investment investment and financing financing decisions. decisions. The empirical empir ical results show a significantly significantly inverse relationship relationship between between current current ratio and the gross profit margin, holding the working capital gap constant. The quoted SMES current assets ratio are significantly sensitive to commercial Banks „liquidity ratio, cash reserve requirements, and loan-to-deposit ratio. Overall, over model results confirm that the SME sector sect or in Nigeria Nigeria is sti still ll limited limited by the liquid liquidity ity-pro -profit fitabi ability lity dilemm dilemma, a, efficie efficiency ncy constraints, Pecking order reversals, stringent monetary policy regimes and a risk-over   banking system.

47

 

 

Review of empirical studies on profitability analysis

entitled „Impact „Impact of Debt-Equity Debt-Equity Ratio on Profitabilit ProfitabilityyRao (1985)37  in his work entitled An Explor Explorato atory ry Study Study of Engine Engineeri ering ng Indust Industry‟ ry‟,, ob observ serves es if the earning earning abilit ability y i.e i.e., .,  profitability, has any impact on the debt-equity ratio in engineering companies. The study  based on the impact of profitability on the debt-equity ratio has revealed a negative associat asso ciation ion i.e i.e., ., high high debt-eq debt-equit uity y ratios ratios meant meant low profita profitabil bility ity due to large large intere interest st  payments, whereas low debt-equity ratio caused cause d high profitability because of low interest  payments. The operating efficiency eff iciency of the firm fir m and reasonable rate of return on owner‟s capital ultimately depend on the profits earned by it. Thus, profits are necessary to run the firm in a healthy atmosphere of present day cut throat competitions and defend it from  business rivalry.

Deepak Chawola (1986)38 studied an empirical analysis of the profitability of the

Indian man-made fibres industry. This study examines and explains the trends in the  profitability of the Indian man-made fibres industry. The relevant data for the study is obtained from 17 firms found in BSE Official Directory for the period 1963-64 to 197778. An increase increase in the excise duty of man-made man-made fibres seems to be associated associated with the decline in profitability of the industry. Both concentration and vertical integration influence the profitability. However, their impact differs for cellulose and petro-chemical  based group of fibres.

Nagarajan and Burthwal (1990)39  in their research work entitled “profitability

and structure: A firm level study of Indian Pharmaceutical Industry”, intensively examined the relationship between profitability and structure, using a sample of thirtyeigh eightt ph phar arma mace ceut utica icall fir firms ms in In Indi diaa fo forr th thee pe peri riod od 19 1970 70-1 -198 982. 2. Two Two meas measur ures es of   profitability i.e., ratio of net profit to total sales revenue and the ratio of net profits to

total assets have been used to

48

 

find out the determination of profitability. The analysis demonstrated that under the condition of price controls the most significant determinant of the profitability of the firms in this industry is vertical integration. Size and advertising intensity did not appear  to be major determinants. This was perhaps due to the inability of firms to translate their  market power into prices, because of controls. The coefficient of growth rate of sales was positive and significant, suggesting that factors on the demand side of a firm had a greater impact on profitability than on the supply side.

Conyon and Machin (1991) 40  in „The Determinants of Profit Margins in U. K.

Manufacturing‟, made an attempt to find the causes of inter-industry variations in profit margins for 90 U.K. Manufacturing Motors over the period 1983 to 1986. Labour-market characteristics (such as trade union coverage and unemployment), import intensity, concentration and capital stock were taken as as independent variables. The study revealed that the union coverage and unemployment had a negative impact on profit margins. On the other hand, import import intensity, intensity, concentration concentration and capital capital stock were significant significant in explaining inter-firm variations in profit margins.

Krishnaveni (1991)41  in her study evaluated the impact of policy changes since

1982-92 on profitability and growth of firms in the industry using Tobin‟s q as a measure of profitability. profitability. The study finds no evidence evidence to show that firms have made supernormal supernormal  profits. Profitability is found to be explained mainly by age of the firms, vertical integration, diversification and industry policy dummy variables. Important determinants of the growth of firms are found as diversification, industry policy dummy variable, gross reta retain ined ed prof profit itss an and d ex expa pans nsio ion n of capaci capaciti ties. es. Resu Result ltss al also so reveal reveal di diff ffere erenc nces es in  performance between car and non-car sectors as well as within the sectors of the industry.

49

 

Chandrasekaran (1993)42  in „Determinants of profitability in Cement Industry‟ has studied the

determinants of profitability in cement industry. The objective of this study was to examine determinants of profitability in cement industry. The study aims at drawing inference on impact of policy measures which led to change in price and distribution polices relevant for cement industry. Determinants of   profitability are analysed using the technique of ordinary least squares. Based on existing theories and relevant econometric empirical works, variables are selected. The study concluded that efficiency in inventory management and efficient management of current assets were important to improve  profitability.

50

 

RESEARCH METHODOLOGY  

Research In Common Parlance Refers To Search For Knowledge. Data Knowledge.  Data had been collected by primary and secondary methods. Research Methodology is a way to systematically solve the research problem. It may  be understood as a science of studying how research is done scientifically.

The study of research

methodology gives the student the necessary n ecessary training in gathering material and arranging them. According to Hudson Maxim, “All progress is born of inquiry. Doubt is often better than overconfidence,

for it leads to inquiry, and inquiry leads to invention”. Research is an academic activity and as such the term should be used in technical sense. Research is, thus an original contribution to the existing stock of knowledge making for its DATA COLLECTION

The task of data collection begins after a research problem has been defined and research design/ plan chalked out. While deciding about the method of data collection to be used for the study, the researcher  should keep in mind two types of data. Secondary data My study is based on secondary data. Collection of secondary data

These are those data which have been already collected by someone else and which have already  been passed through the statistical process. When the researcher utilizes utilizes secondary data, then he has to look  into various sources from where they can obtain them. Secondary data may either be published data  or  unpublished data. 

Published data are available in:

a)

Vari Variou ouss pub publi lica cati tion onss of the the cen centr tral al,, stat statee and and loc local al govt govt..

 b) c)

Books magazines and newspapers Repo Report rtss an and d pu publ blic icat atio ions ns of vario various us as asso soci ciat atio ions ns co conn nnec ecte ted d wi with th Busi Busine ness ss and in indu dust stry ry,, ba bank nks, s, stock exchanges.

d)

Report Reportss prepar prepared ed by by rese researc arch h schol scholars ars,, unive universi rsitie ties, s, econom economist ist etc, etc, in in diff differe erent nt fields fields.. 51

 

Unpublished data are available from: -

Dairies, letters, unpublished biographies and autobiographies and also may be available with scholars and rese resear arch ch work worker ers, s, trad tradee as asso soci ciat atio ions ns,, la labo bour ur bu bure reau auss an and d ot othe herr pu publ blic ic// pr priv ivat atee in indi divi vidu dual alss and organizations.

Here Secondary data was collected through: -

 

 Secondary data was collected through annual report 2017-2020 Consider.

52

 

CHAPTER-3

DATA ANALYSIS AND INTERPRETATION

 Calculation and Interpretation of Ratios

1] Current Ratio: Formula:

Current assets Current ratio = Current liabilities

    YEAR

2017

Current assets Current liabilities Current ratio

2018

24,696.15 21,547.00 1.14

30,210.99 25,858.06 1.16

2019

44,743.86 32,221.16 1.38

60000

50000

40000

30000

YEAR Current Curr ent asset assetss Current liabilies

20000

Current rao

10000

0 1

Comments:

2

3

4

2020

56,298.09 45,675.71 1.23

In Tata Motors Ltd. the current ratio is 1.23:1 in 20 2018-2019. 18-2019. It means that for one rupee o off current liabilities, the current assets are 1.23 rupee is available to the them. In other words the current assets are 1.23 times the current liabilities.

 Almost 4 years current ratio is same but current ratio in 2017-2018 is bit higher, which makes company sounder.

53

 

The consistency increase in the value of current assets will increase the ability of the company to meets its obligations & therefore from the point of view of creditors the company is less risky. Thus, the current ratio throws light on the company’s ability to pay its current liabilities out of its current assets. The Tata Motors Ltd. has a goody current current ratio.

54

 

2] Liquid Ratio: Formula:

Quick assets Liquid ratio =

 

Quick liabilities

YEAR Quick assets

Quick liabilities  Liquid ratio

2017 14,576.33 21,547.00 0.67

2018 18,674.48 25,858.06 0.69

2019 24,227.75 32,221.16 0.75

2020 36029.91 45,675.71 0.78

50000 45000 40000 35000 30000

YEAR Quick assets Quick liabilies  Liquid rao

25000 20000 15000 10000 5000 0 1

2

3

4

Comments: The liquid or quick ratio indicates the liquid financial financial position of an enterprise. enterprise. Almost in all 4 years the liquid ratio is same, which is is better for the company to meet the urgency. The liquid ratio of the Tata Motors Ltd. has increased from 0.67 to 0.78 in 2018-20!9 which shows that company follow low liquidity posi position tion to

achieve high profitability. This indicates that the dependence on the long-term liabilities & creditors are more & the company is following an aggressive working capital policy.

55

 

Liquid ratio of Company is not favorable because the quick assets of the company are less than the quick liabilities. The liquid ratio shows the company’s ability to meet its immediate obligations promptly. promptly.

56

 

3] Proprietary Ratio: Formula: Proprietary fund

Proprietary ratio

=

OR    Total fund

  Shareholders fund Proprietary ratio  =   Fixed assets + current liabilities YEAR

2017 49,804.26 68,520.72 0.72

Proprietary fund Total fund Proprietary ratio q

2087 63,967.13 87,439.93 0.73

2019 81,448.60 105,405.58 0.77

2020 126,372.97 189,655.07 0.66

200000 180000 160000 140000 120000

YEAR Proprietary fund Total fund Proprietary rao

100000 80000 60000 40000 20000 0 1

2

3

4

Comments: The Proprietary ratio of the company is 0.66 in the year 2018-20!9. It means that the for every one rupee of

total assets contribution of 66 paisa has come from owners fund & remaining balance 34 paisa is contributed by the outside creditors. This shows that the contribution by owners to total assets is more than the contribution by outside creditors. As the Proprietary ratio is very favorable of the company. The Company’s long-term solvency position is very sound.

57

 

58

 

4] Stock Working Capital Ratio: Formula:  

Stock 

Stock working capital ratio   =   Working Capital YEAR

2016 10,119.82 3149.15 3.21

Stock  Working Capital Stock Sto ck workin working g cap capita itall

2017 12,136.51 4352.93 2.78

2018 14,247.54 12,522.70 1.13

ratio 16000 14000 12000 10000 YEAR Stock Working Capital Stock working capital rao

8000 6000 4000 2000 0 1

2

3

4

2019 14,836.72 10,622.38 1.39

Comments: This ratio shows that extend of funds blocked in stock. The amount of stock is decreasing from the year 20152016 to 2018-2019. However in the year 20!8-20!9 it has increased a little to. In the year 2007-2008 the sale is increased which affects decrease in stock that effected in increase in working capital in 2017-20!8. 59

 

It shows that the solvency position of the company is sound.

60

 

5] Capital Gearing Ratio: Formula:  

Preference capital+ secured loan

Capital gearing ratio =  

Equity capital & reserve & surplus  

YEAR

2016

Secured loan Equity capital & reserves & surplus Capital gearing ratio

2017

2018

2019

7,664.90 49,804.26

9,569.12 63,967.13

6,600.17 81,448.60

10,697.92 126,372.97

16%

15%

8.2%

8.5%

140000 120000 100000 YEAR Secured Sec ured loan Equity capital & reserves & surplus Capital gearing gearing rao

80000 60000 40000 20000 0 1

2

3

4

Comments: Gearing means the process of increasing the equity shareholders return through the use of debt. Capital

gearing ratio is a leverage ratio, which indicates the proportion of debt & equity in the financing of assets of a company.

For the last 2 years [i.e.20!7-2018 TO 2018-20!9] Capital gearing ratio is all most same which indicates, near about 8.5% of the fund covering the secured loan position. But in the year 2015-2016 the Capitalgearing ratio is 16%. It means that during the year 2005-2006 company has borrowed more secured loans 61

 

for the company’s expansion.

.

62

 

BIBLIOGRAPHY

1. FINANCIAL MANAGEMENT-III ; S Kr PAUL ; CHANDRANI PAUL Chapter Name- Classification of Ratios; Page no.- 3.28 2. https://en.wikipedia.org/wiki/Tata_Motors

3. https://money.rediff.com/companies/Tata-Motors-   srchword=Tata+Motors+Ltd.&snssrc=sugg

Ltd/10510008?

63

 

ANNEXURE

Balance sheet

(rs crore)

Mar ' 20

Mar ' 19

Mar ' 18

Mar ' 17

Mar ' 16

Sources of funds Owner's fund Equity share capital

679.22

679.18

643.78

643.78

638.07

Share application money

-

-

-

-

-

Preference share capital

-

-

-

-

-

Reserves & su surplus

20,129.93

22,582.93 14,195.94

Secured loans Unsecured loans

3,124.12 15,937.49

3,925.63 4,803.26 10,329.05 15,277.71

Total

39,870.76

37,516.79 34,920.69

18,510.00

18,496.77

Loan funds

Uses of funds Fixed assets

4,450.01 5,877.72 10,065.52 8,390.97 33,669.31

33,403.53

Gross block

35,863.28

Less : revaluation reserve

-

35,050.15 27,973.79

-

22.87

26,130.82 22.87

25,190.73

-

Le Less ss : ac accum cumul ulat ated ed 15,625.73

13,974.34 12,190.56

10,890.25 9,734.99

depreciation  Net block

20,237.55

21,075.81 15,760.36

15,217.70

Capital work-in-progress

7,236.96

Investments

17,708.16

5,686.53

6,040.79

16,963.32 16,987.17

6,355.07 18,458.42

15,455.74 4,752.80 19,934.39

64

 

 Net current assets Curr Cu rren entt asse assets ts,, loan loanss & advances

13,353.93

12,950.34 11,131.98

18,665.84

19,159.21 14,999.61

9,680.36

12,041.84

Less : current liabilities &  provisions

16,042.24

18,781.24

65

 

 

Mar ' 20

Mar ' 19

Mar ' 18

Total n neet ccu urrent aasssets

-5,311.91

-6,208.87

-3,867.63

Miscel Misc ella laneo neous us not written

-

-

-

ex expen pense sess

Total

39,870.76

37,516.79 34,920.69

Mar ' 17

Mar ' 16

-6,361.88

-6,739.40

-

33,669.31

33,403.53

18,104.92

19,580.89

 Notes: Book Boo k value value of unquote unquoted d 2,711.11

2,056.03

16,633.67

investments

218.18

144.34

275.36

Contingent liabilities

4,438.92

3,931.64

9,882.65

13,036.73

14,981.11

33958.51

33956.80

32186.80

32186.80

31901.16

investments Market Mar ket value value of quoted quoted

253.07

204.82

 Number of equity shares outstanding (Lacs)

66

 

Profit loss account

(rs crore)

Mar ' 20

Mar ' 19

Mar ' 18

Mar ' 17

Mar ' 16

Income Operating in i ncome

44,364.00

42,845.47 36,294.74

34,288.11

44,765.72

Material co c onsumed

31,928.03

29,628.79 27,489.01

26,412.31

33,620.80

Manufacturing expenses

894.51

849.04

833.35

820.83

910.42

Personnel expenses

3,558.52

3,188.97

3,091.46

2,877.69

2,837.00

Selling expenses

848.36

670.01

-

-

-

Adminstrative expenses

5,888.39

5,562.10

6,118.40

5,088.43

5,679.52

Expenses capitalised

-

-

-

-

-

Cost of sales

43,117.81

Operating profit

1,246.19

2,946.56

-1,237.48

-911.15

1,717.98

Other recurring income

978.84

1,402.31

1,881.41

3,833.03

2,088.20

Adjusted PBDIT

2,225.03

4,348.87

643.93

2,921.88

3,806.18

Financial expenses

1,590.15

1,592.00

1,611.68

1,337.52

1,387.76

Depreciation

2,969.39

2,329.22

2,603.22

2,070.30

1,817.62

Other write offs

-

-

-

-

-

Adjusted PBT

-2,334.51

427.65

-3,570.97

-485.94

600.80

Tax charges

59.22

-4.80

764.23

Adjusted PA PAT

-2,393.73

432.45

-4,335.20

874.38

727.68

 Non recurring items

-79.87

-481.17

-403.75

-539.86

-425.87

Expenses

39,898.91 37,532.22

35,199.26

43,047.74

-1,360.32 -126.88

Ot Othe herr non ca cash sh adjustments

-

-

-

-

-

Reported net profit

-2,473.60

-48.72

-4,738.95

334.52

301.81

appropriation

-50.95

1,685.91

-3,761.36

1,677.31

1,965.72

Equity dividend

49.00

-

-

555.16

566.17

Ea Earn rnig igss

befor beforee

67

 

Mar ' 20

Mar ' 19

Mar ' 18

Mar ' 17

Mar ' 16

Preference dividend

-

-

-

-

-

Dividend tax Retained earnings

12.00 -111.95

1,685.91

-3,761.36

93.40 1,028.75

79.03 1,320.52

68

 

Tata Motors Ltd. Company Financial Ratios (Rs in Cr.)

Mar 31, 2020

Analysis Mar 31, 2019

Mar 31, 2018

Mar 31, 2017

Mar 31, 2016

PER SHARE RATIOS Adjusted EPS (Rs.)

-13.28

6.55

-0.20

-6.16

1.27

Adjusted Cash EPS (Rs.)

-3.90

15.67

8.93

2.79

8.13

Reported EPS (Rs.)

-20.26

5.95

-3.05

-7.15

-0.18

Reported Cash EPS (Rs.) Dividend Per Share

-10.88

15.07

6.09

1.79

6.68

0.00

0.00

0.00

0.00

0.20

Operang Prot Per Share (Rs.)

-1.81

14.55

9.74

4.74

8.68

48.70

65.26

59.40

62.32

68.50

48.70

65.26

59.40

62.32

68.50

Net Operang Income Per Share (Rs.)

122.11

203.79

173.24

130.50

126.18

Free Reserves Per Share (Rs.)

0.00

0.00

0.00

0.00

0.00

Operang Margin (%)

-1.48

7.13

5.62

3.63

6.87

Adjusted Cash Margin (%)

-3.09

7.41

5.02

2.08

6.24

Adjusted Return On Net Worth (%)

-27.27

10.03

-0.33

-9.88

1.85

Book Value (Excl Rev Res) Per Share (Rs.) Book Value (Incl Rev Res) Per Share (Rs.)

PROFITABILITY PROFITABIL ITY RATIOS