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Assignment on
Financial statements analysis with the help of
ratiosSubmitted to
Prof. Dharmendra Jain
(Financial Management)
Submitted by Division B
Mr. Atul Rane
Roll no. 46
Anjuman-I-Islams
Allana Institute Of Management Studies & Research
Mumbai University
Academic Year 2011-12
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Introduction to Financial Statements and their differing objectives:
What are financial statements in a business enterprise?
The financial statements are:
Profit and Loss statement
Balance Sheet
Cash flow statement and
Funds flow statement
Objectives are:
Profit and Loss statement to know whether the enterprise is in profit or loss at the end ofa given period or not. The period would usually be one year. It could be as short a period
as one month even. However preparing the Profit and Loss Account every year is a must.Balance Sheet it is also referred to as statement of assets and liabilities. This is as on a
particular date. The objective is to know the financial position of the enterprise, how muchit owes to outsiders in the form of liabilities and how much it owns in the form of various
assets. Although it could be prepared on a monthly basis as at the end of every month, it is
prepared as at the end of every year again a statutory requirement besides being abusiness necessity.
Cash flow statement Cash flow statement is primarily to know the cash from operations,
investments and finance obtained and manage the liquidity in the short-run. In the short-
run, the objective could be financial planning. It lists all the cash inflows and cash outflows
to verify as to whether the system has the required liquidity or not. The business should nothave too little or too much cash. The frequency of preparing it depends upon the business
needs it could even be on a weekly basis. The minimum frequency is one month.
Funds flow statement this is the fundamental statement used for financial planning. Theminimum period is one year. It talks of all resources, be it short-term or medium-term/long-
term and the uses to which these are put to. The objective is to ensure that proper funding
takes place in the business enterprise and that there is no diversion of working capital toacquiring fixed assets.
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Example no. 1 - A sample of Profit and Loss Account (R upees in Lacs )
Income from operations 100
Operating expenses:
Salaries 30
Repairs and maintenance 3
Depreciation 10
Office and general expenses 10
Marketing expenses including
Commission, if any 7
Interest and other
Charges 10
Total expenses 70
Profit before tax 30
Tax at 35% 10.5
Profit after tax 19.5
Dividend 7.5
Profit retained in
Business [Retained Earnings] 12
Learning points:
Interest is charged to income before determining the profit of the organisation. Once the profit
of the organisation is determined, tax is paid at the stipulated rate and the dividend is paid onlyafter this. Thus, dividend is profit allocation.
This difference between interest and dividend gives opportunity to business enterprises, to
have a mix of capital of the owners and loans taken from outside, so that they can save on tax,
through the interest charged as expense on the income. The amount of tax so saved is calledtax shield on the interest.
In the case of profit distributed among the partners as well in the case of dividend distributed
among the shareholders, these are not taxed again in the hands of the owners.
Linkage between balance sheet and profit and loss accounts
The above statement is known as the Profit and Loss Account. This records the income andexpenditure for a given period and is closed as soon as the period is over. The residual profit, as it
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belongs to the owners, gets transferred to the capital account in another statement, called Balance
Sheet.
The balance sheet tells us about the following:
How much money has the business enterprise raised?
Which are the sources for the money?
What is the use for this money?
Example no. 2
The balance sheet is also known as Assets and Liability statement. A sample balance sheet is
shown below:
(Rupees in lacs)
Liabilities Assets
Share capital: 100 Fixed Assets 60
Reserves: 150 Less: Depreciation 30
(Retained profits Net Fixed Assets: 30
Over a period of Investments: 80
Time) Current Assets:
Net worth 250 Bills Receivable 100
Bank overdraft 30 Cash and Bank 35
Creditors for expenses 10 other current assets 60
Other current liabilities 15 Total current assets 195
Total current liabilities 55
Total Liabilities 305 Total Assets 305
Suppose profit for the year is Rs.30 lacs after paying tax and dividend. This would be transferredto the balance sheet and the reserves at the end of the current year would be Rs.150 lacs + Rs.30
lacs = Rs.180 lacs. Similarly the depreciation claimed on the fixed assets and shown as an
operating expense would also get transferred to the balance sheet to reduce the value of the fixed
assets.Let us assume that there is no increase in the fixed assets during the year that there are no other
changes and the depreciation for the year is Rs.10 lacs. We can construct the balance sheet for the
next year without much change, excepting to accommodate these figures of depreciation andincrease in reserves.
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The balance sheet as at the end of the next year would look as under:
(Rupees in Lacs)
Liabilities Assets
Share capital 100 Fixed assets 60
Reserves and surplus 180 Less: depreciation 40
Net worth 280 Net fixed assets 20
Bank overdraft 30 Investments 100
Creditors for expenses 10 Bill Receivable 120
Other current liabilities 15 Cash and Bank 35
Total current Other current assets 60
liabilities 55 Total current assets 195
Total liabilities 335 Total Assets 335
We see that between the two balance sheets, there are two changes
Investment has gone up by Rs.20 lacs and
Bill receivable has gone up by Rs.20 lacs.
The total is Rs.40 lacs. Where have these funds come from? This amount is the total of profittransferred to balance sheet from the profit and loss account and depreciation added back, as it
does not involve any cash outlay. The figure is Rs.30 lacs + Rs.10 lacs = Rs.40 lacs. This figure is
referred to as internal accruals.
This need not be the case all the times. Where we use these funds entirely depends upon thebusiness priority and what I have shown is only a sample.
Learning points:
The business enterprise generates funds from operations, known as internal accruals
comprising depreciation (which is added back, being only a book-entry) and profit after tax anddividend;
Where these funds are used is entirely dependent upon business exigencies;
Depreciation claimed in the books as an expense goes to reduce the value of the fixed assets in
the books, while profit after tax and dividend is shown as Reserves and increases the networth of the company.
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Key pointers to balance sheet and profit and loss statements:
A balance sheet represents the financial affairs of the company and is also referred to as
Assets and Liabilities statement and is always as on a particular date and not for a period.
A profit and loss account represents the summary of financial transactions during a
particular period and depicts the profit or loss for the period along with income tax paid onthe profit and how the profit has been allocated (appropriated).
Net worth means total of share capital and reserves and surplus. This includes preference share
capital unlike in Accounts preference share capital is treated as a debt. For the purpose of debt
to equity ratio, the necessary adjustment has to be done by reducing preference share capitalfrom net worth and adding it to the debt in the numerator.
Reserves and surplus represent the profit retained in business since inception of business.
Surplus indicates the figure carried forward from the profit and loss appropriation account to
the balance sheet, without allocating the same to any specific reserve. Hence, it is mostlycalled unallocated surplus. The company wants to keep a portion of profit in the free form
so that it is available during the next year for appropriation without any problem. In the
absence of this arrangement during the year of inadequate profits, the company may have towrite back a part of the general reserves for which approval from the board and the general
members would be required.
Secured loans represent loans taken from banks, financial institutions, debentures (either from
public or through private placement), bonds etc. for which the company has mortgagedimmovable fixed assets (land and building) and/or hypothecated movable fixed assets (at times
even working capital assets with the explicit permission of the working capital banks)
Usually, debentures, bonds and loans for fixed assets are secured by fixed assets, while loans
from banks for working capital, i.e., current assets are secured by current assets. These loansenjoy priority over unsecured loans for settlement of claims against the company.
Unsecured loans represent fixed deposits taken from public (if any) as per the provisions of
Section 58 (A) of The Companies Act, 1956 and in accordance with the provisions of
Acceptance of Deposit Rules, 1975 and loans, if any, from promoters, friends, relatives etc. forwhich no security has been offered.
Such unsecured loans rank second and subsequent to secured loans for settlement of claims
against the company. There are other unsecured creditors also, forming part of current
liabilities, like, creditors for purchase of materials, provisions etc.
Gross block = gross fixed assets mean the cost price of the fixed assets. Cumulative
depreciation in the books is as per the provisions of The Companies Act, 1956, Schedule XIV.It is last cumulative depreciation till last year + depreciation claimed during the current year.
Net block = net fixed assets mean the depreciated value of fixed assets.
Capital work-in-progress This represents advances, if any, given to building contractors,
value of building yet to be completed, advances, if any, given to equipment suppliers etc.
Once the equipment is received and the building is complete, the fixed assets are capitalised inthe books, for claiming depreciation from that year onwards. Till then, it is reflected in the
form of capital work in progress.
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Investments Investment made in shares/bonds/units of Unit Trust of India etc. This type of
investment should be ideally from the profits of the organisation and not from any other funds,which are required either for working capital or capital expenditure. They are bifurcated in the
schedule, into quoted and traded and unquoted and not traded depending upon the nature
of the investment, as to whether they can be liquidated in the secondary market or not.
Current assets Both gross and net current assets (net of current liabilities) are given in thebalance sheet.
Miscellaneous expenditure not written off can be one of the following
Company incorporation expenses or public issue of share capital, debenture etc. together
known as preliminary expenses written off over a period of 5 years as per provisions of
Income Tax. Misc. expense could also be other deferred revenue expense like product launchexpenses.
Other income in the profit and loss account includes income from dividend on share
investment made in other companies, interest on fixed deposits/debentures, sale proceeds of
special import licenses, profit on sale of fixed assets and any other sundry receipts. Provision for tax could include short provision made for the earlier years.
Provision for tax is made after making all adjustments for the following:
Carried forward loss, if any;
Book depreciation and depreciation as per income tax and
Concessions available to a business entity, depending upon their activity (export business,
S.S.I. etc.) and location in a backward area (like Goa etc.)
As per the provisions of The Companies Act, 1956, in the event of a limited company
declaring dividend, a fixed percentage of the profit after tax has to be transferred to the GeneralReserves of the Company and entire PAT cannot be given as dividend.
With effect from 01/04/02, dividend tax on dividends paid by the company has been
withdrawn. From that date, the shareholders are liable to pay tax on dividend income. Thus fora period of 5 years, the position was different in the sense that the company was bearing the
additional tax on dividend.
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Other parts of annual statements
The Directors Report on the year passed and the future plans;
Annexure to the Directors Report containing particulars regarding conservation of energy
etc; Auditors Report as per the Manufacturing and Other Companies (Auditors Report) Order,
1998) along with Annexure;
Schedules to Balance Sheet and Profit and Loss Account;
Accounting policies adopted by the company and notes on accounts giving details about
changes if any, in method of valuation of stocks, fixed assets, method of depreciation on fixed
assets, contingent liabilities, like guarantees given by the banks on behalf of the company,guarantees given by the company, quantitative details regarding performance of the year
passed, foreign exchange inflow and outflow etc. and
Statement of cash flows for the same period for which final accounts have been presented.There is a significant difference between the way in which the statements of accounts are prepared
as per Schedule VI of the Companies Act and the manner in which these statements, especially,balance sheet is analysed by a finance person or an analyst. For example, in the Schedule VI, the
current liabilities are netted off against current assets and only net current assets are shown. This is
not so in the case of financial statement analysis. Both are shown fully and separately without anynetting off.
At the end of any financial year, there are certain adjustments to be made in the books of accounts
to get the proper picture of profit or loss, as the case may be, for that particular period. For
example, if stocks of raw materials are outstanding at the end of the period, the value of the samehas to be deducted from the total of the opening stock (closing stock of the previous year) and the
current years purchases. This alone would show the correct picture of materials consumed during
the current year.
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The principal tool of analysis
Ratio analysis i.e. to determine the relationship between any set of two parameters and compare
it with the past trend. In the statements of accounts, there are several such pairs of parameters and
hence ratio analysis assumes great significance. The most important thing to remember in the caseof ratio analysis is that you can compare two units in the same industry only and other factors like
the relative ages of the units, the scales of operation etc. come into play.
Let us see some of the important types of ratios and their significance:
Liquidity ratios;
Turnover ratios;
Profitability ratios;
Investment on capital/return ratios;Leverage ratios and
Coverage ratios.
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Acid test ratio or quick asset ratio:
Quick assets = Current assets (-) Inventories which cannot be easily converted into cash. This
assumes that all other current assets like receivables can be converted into cash easily. This ratio
examines whether the quick assets are sufficient to cover all the current liabilities. Some of the
authors indicate that the entire current liabilities should not be considered for this purpose and onlyquick liabilities should be considered by deducting from the current liabilities the short-term bank
borrowing, as usually for an ongoing company, there is no need to pay back this amount, unlike the
other current liabilities.
Significance = coverage of current liabilities by quick assets. As quick assets are a part of current
assets, this ratio would obviously be less than current ratio. This directly indicates the degree of
excess liquidity or absence of liquidity in the system and hence for proper measure of liquidity,
this ratio is preferred. The minimum should be 1:1. This should not be too high as the opportunitycost associated with high level of liquidity could also be high.
What is working capital gap?
The difference between all the current assets known as Gross working capital and all the current
liabilities other than bank borrowing. This gap is met from one of the two sources, namely, networking capital and bank borrowing. Net working capital is hence defined as medium and long-
term funds invested in current assets.
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Turn over ratios:
Generally, turn over ratios indicate the operating efficiency. The higher the ratio, the higher the
degree of efficiency and hence these assume significance. Further, depending upon the type of
turnover ratio, indication would either be about liquidity or profitability also. For example,
inventory or stocks turn over would give us a measure of the profitability of the operations, whilereceivables turnover ratio would indicate the liquidity in the system.
Debtors turnover ratiothis indicates the efficiency of collection of receivables and contributes
to the liquidity of the system.
Formula = Total credit sales/Average debtors outstanding during the year. Hence the minimumwould be 3 to 4 times, but this depends upon so many factors such as, type of industry like capital
goods, consumer goods capital goods, this would be less and consumer goods, this would be
significantly higher;
Conditions of the market monopolistic or competitive monopolistic, this would be higher andcompetitive it would be less as you are forced to give credit;
Whether new enterprise or established new enterprise would be required to give higher credit in
the initial stages while an existing business would have a more fixed credit policy evolved over the
years of business;
Hence any deterioration over a period of time assumes significance for an existing business this
indicates change in the market conditions to the business and this could happen due to general
recession in the economy or the industry specifically due to very high capacity or could be this unit
employs outmoded technology, which is forcing them to dump stocks on its distributors and hencerealisation is coming in late etc.
Average collection period = inversely related to debtors turnover ratio.
For example debtors turnover ratio is 4. Then considering 360 days in a year, the average
collection period would be 90 days. In case the debtors turnover ratio increases, the averagecollection period would reduce, indicating improvement in liquidity.
Formula for average collection period = 360/receivables turnover ratio.
The above points for debtors turnover ratio hold good for this also. Any significant deviation
from the past trend is of greater significance here than the absolute numbers. No minimum and no
maximum.
Inventory turnover ratio as said earlier, this directly contributes to the profitability of the
organisation.
Formula = Cost of goods sold/Average inventory held during the year.
The inventory should turn over at least 4 times in a year, even for a capital goods industry. But
there are capital goods industries with a very long production cycle and in such cases, the ratiowould be low. While receivables turn over contributes to liquidity, this contributes to profitability
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due to higher turnover. The production cycle and the corporate policy of keeping high stocks
affect this ratio. The less the production cycle, the better the ratio and vice-versa. The higher the
level of stocks, the lower would be the ratio and vice-versa. Cost of goods sold = Sales profit Interest charges.
Current assets turnover rationot much of significance as the entire current assets are involved.
However, this could indicate deterioration or improvement over a period of time. Indicatesoperating efficiency.
Formula = Cost of goods sold/Average current assets held in business during the year.
There is no min or maximum. Again this depends upon the type of industry, market conditions,
managements policy towards working capital etc.
Fixed assets turnover ratio
Not much of significance as fixed assets cannot contribute directly either to liquidity orprofitability. This is used as a very broad parameter to compare two units in the same industry and
especially when the scales of operations are quite significant.
Formula = Cost of goods sold/Average value of fixed assets in the period (book value).
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Profitability ratios
Profit in relation to sales and profit in relation to assets:
Profit in relation to sales this indicates the margin available on sales;
Profit in relation to assets this indicates the degree of return on the capital employed inbusiness that means the earning efficiency.
Example no. 3
Units A and B are in the same type of business and operate at the same levels of capacities. Unit Aemploys capital of 250 lacs and unit B employs capital of 200lacs. The sales and profits are as
under:
Parameter Unit A Unit B
Sales 1000lacs 1000lacs
Profits 100lacs90lacs
Profit margin on sales 10% 9%
Return on capital employed 40% 45%
While Unit A has higher profit margins, Unit B has better returns on capital employed.
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Profit margin on sales:
Gross profit margin on sales and net profit margin ratio
Gross profit margin =
Formula = Gross profit/net sales.
Gross profit = Net sales (-) Cost of production before selling, general, administrative expenses and
interest charges.
Net sales = Gross sales (-) Excise duty.
This indicates the efficiency of production and serves well to compare with another unit in thesame industry or in the same unit for comparing it with past trend. For example in Unit A and Unit
B let us assume that the sales are same at Rs.100lacs.
Example no. 4
Parameter Unit A Unit B
Sales 100lacs 100lacs
Cost of production 60lacs 65lacs
Gross profit 40lacs 35lacs
Deduct: Selling general,
Administrative expenses and interest 35lacs 30lacs
Net profit 5lacs 5lacs
While both the units have the same net profit to sales ratio, the significant difference lies in the fact
that while Unit A has less cost of production and more office and selling expenses, Unit B hasmore cost of production and less of office and selling expenses. This ratio helps in controlling
either production costs if cost of production is high or selling and administration costs, in case
these are high.
Net profit/sales ratio net profit means profit after tax but before distribution in any form.
Formula = Net profit/net sales.
Tax rate being the same, this ratio indicates operating efficiency directly in the sense that a unit
having higher net profitability percentage means that it has a higher operating efficiency. In casethere are tax concessions due to location in a backward area, export activity etc. available to one
unit and not available to another unit, then this comparison would not hold well.
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Investment on capital ratios/Earnings ratios:
Return on net worth
Profit After Tax (PAT) / Net worth.
This is the return on the shareholders funds including Preference Share capital. Hence Preference
Share capital is not deducted. There is no standard range for this ratio. If it reduces it indicates lessreturn on the net worth.
Return on equity
Profit After Tax (PAT) Dividend on Preference Share Capital / Net worth Preference share
capital.
Although reference is equity here, all equity shareholders funds are taken in the denominator.
Hence Preference dividend and Preference share capital are excluded. There is no standard rangefor this ratio. If it comes down over a period it means that the profitability of the organisation is
suffering a setback.
Return on capital employed (pre-tax)
Earnings Before Interest and Tax (EBIT) / Net worth + Medium and long-term liabilities.
This gives return on long-term funds employed in business in pre-tax terms. Again there is nostandard range for this ratio. If it reduces, it is a cause for concern.
Earning per share (EPS)
Dividend per share (DPS) + Retained earnings per share (REPS). Here the share refers to equity
share and not preference share.
The formula is = Profit after tax (-) Preference dividend (-) Dividend tax both on preference andequity dividend / number of equity shares.
This is an important indicator about the return to equity shareholder. In fact P/E ratio is related to
this, as P/E ratio is the relationship between Market value of the share and the EPS. The higher
the PE the stronger is the recommendation to sell the share and the lower the PE, the stronger is therecommendation to buy the share.
This is only indicative and by and large followed. There is something known as industry averageEPS. If the P/E ratio of the unit whose shares we contemplate to purchase is less than industry
average and growth prospects are quite good, it is the time for buying the shares, unless we knowfor certain that the price is going to come down further. If on the other hand, the P/E ratio of the
unit is more than industry average P/E, it is time for us to sell unless we expect further increase in
the near future.
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Leverage ratios
Leverages are of two kinds, operating leverage and financial leverage. However, we are concerned
more with financial leverage. Financial leverage is the advantage of debt over equity in a capital
structure. Capital structure indicates the relationship between medium and long-term debt on the
one hand and equity on the other hand. Equity in the beginning is the equity share capital. Over aperiod of time it is net worth (-) redeemable preference share capital.
It is well known that EPS increases with increased dose of debt capital within the same capital
structure. Given the advantage of debt also, as even risk of default, i.e., non-payment of interestand non-repayment of principal amount increases with increase in debt capital component, the
market accepts a maximum of 2:1 at present. It can be less.
Formula for debt/equity ratio = Medium and long-term loans + redeemable preference share capital
/ Net worth (-) Redeemable preference share capital.
From the working capital lending banks point of view, all liabilities are to be included in debt.Hence all external liabilities including current liabilities are taken into account for this ratio. We
have to add redeemable preference share capital and reduce from the net worth the same as in theprevious formula.
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Coverage ratios
Interest coverage ratio
This indicates the number of times interest is covered by EBIT.
Formula = EBIT / Interest payment on all loans including short-term liabilities.
Minimum acceptable is 2 to 2.5:1. Less than that is not desirable, as after paying interest, tax has to
be paid and afterwards dividend and dividend tax.
Asset coverage ratio
This indicates the number of times the medium and long-term liabilities are covered by the book
value of fixed assets.
Formula = Book value of Fixed assets / Outstanding medium and long-term liabilities.
Accepted ratio is minimum 1.5:1. Less than that indicates inadequate coverage of the liabilities.
Debt Service coverage ratio
This indicates the ability of the business enterprise to service its borrowing, especially medium andlong-term. Servicing consists of two aspects namely, payment of interest and repayment of
principal amount. As interest is paid out of income and booked as an expense, in the formula it gets
added back to profit after tax. The assumption here is that dividend is ignored. In case dividend ispaid out, the formula gets amended to deduct from PAT dividend paid and dividend tax.
Formula is:PAT (+) Depreciation (+) Amortisation (DRE write-off) (+) Int. on med. & long-term liabilities
Interest on medium and long-term borrowing (+) Instalment on medium and long-term borrowing.
This is assuming that dividend is not paid. In the case of an existing company dividend will have tobe paid and hence in the numerator, instead of PAT, retained earnings would appear. The above
ratio is calculated for the entire period of the loan with the bank/financial institution. The minimum
acceptable average for the entire period is 1.75:1. This means that in one year this could be less butit has to be made up in the other years to get an average of 1.75:1.
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Let us now analyse some ratios of Tata Motors financial statements for the
year 2009 & 2008.
BALANCE SHEET OF TATA MOTORS
PARTICULARSMar '09 Mar '08
SOURCES OF FUNDS
Total Share Capital 514.05 385.54
Equity Share Capital 514.05 385.54
Share Application Money 0.00 0.00
Preference Share Capital 0.00 0.00
Reserves 11,855.15 7,428.45
Revaluation Reserves 25.07 25.51
Networth 12,394.27 7,839.50
Secured Loans 5,251.65 2,461.99
Unsecured Loans 7,913.91 3,818.53
Total Debt 13,165.56 6,280.52
Total Liabilities 25,559.83 14,120.02
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APPLICATION OF FUNDS
Gross Block 13,905.17 10,830.83
Less: Accum. Depreciation 6,259.90 5,443.52
Net Block 7,645.27 5,387.31
Capital Work in Progress 6,954.04 5,064.96
Investments 12,968.13 4,910.27
Inventories 2,229.81 2,421.83
Sundry Debtors 1,555.20 1,130.73
Cash and Bank Balance 638.17 750.14
Total Current Assets 4,423.18 4,302.70
Loans and Advances 5,909.75 4,831.36
Fixed Deposits 503.65 1,647.17
Total CA, Loans & Advances 10,836.58 10,781.23
Deffered Credit 0.00 0.00
Current Liabilities 10,968.95 10,040.37Provisions 1,877.26 1,989.43
Total CL & Provisions 12,846.21 12,029.80
Net Current Assets -2,009.63 -1,248.57
Miscellaneous Expenses 2.02 6.05
Total Assets 25,559.83 14,120.02
Contingent Liabilities 5,433.07 5,590.83
Book Value (Rs) 240.64 202.70
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PROFIT AND LOSS ACCOUNT OF TATA MOTORS
PARTICULARS
Mar '09 Mar '08
INCOME
Sales Turnover 28,538.20 33,123.54
Excise Duty 2,877.53 4,355.63
Net Sales 25,660.67 28,767.91
Other Income 921.29 734.17
Stock Adjustments -238.04 -40.48
Total Income 26,343.92 29,461.60
EXPENDITURE
Raw Materials 18,801.37 20,891.33
Power & Fuel Cost 304.94 325.19
Employee Cost 1,551.39 1,544.57
Other Manufacturing Expenses 866.65 904.95
Selling and Admin Expenses 1,652.31 2,197.49
Miscellaneous Expenses 1,438.89 964.78
Preoperative Exp Capitalised -916.02 -1,131.40
Total Expenses 23,699.53 25,696.91
Operating Profit1,723.10 3,030.52
PBDIT 2,644.39 3,764.69
Interest 704.92 471.56
PBDT 1,939.47 3,293.13
Depreciation 874.54 652.31
Other Written Off 51.17 64.35
Profit Before Tax 1,013.76 2,576.47
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Extra-ordinary items 15.29 0.00
PBT (Post Extra-ord Items) 1,029.05 2,576.47
Tax 12.50 547.55
Reported Net Profit1,001.26 2,028.92
Total Value Addition 4,898.16 4,805.58
Preference Dividend 0.00 0.00
Equity Dividend 311.61 578.43
Corporate Dividend Tax 34.09 81.25
Shares in issue (lakhs) 5,140.08 3,855.04
Earning Per Share (Rs) 19.48 52.63
Equity Dividend (%) 60.00 150.00
Book Value (Rs) 240.64 202.70
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ratio
minimum investment in
inventory. Higher the ratio,the better.
7.
Capital
turnover
ratio
Sales/capital
employed0.76 0.60
It indicates the efficiency ofthe organisation with which
the capital employed is being
utilized. Higher the ratio, thebetter.
8.Proprietary
ratioFixed assets/owners fund
0.54 0.60
Both these figures indicate
that the owners funds are
exceeding the fixed assetswhich indicate that a part of
owners funds is invested in
the current assets also.
9.
Fixed
Assets/Capit
al employedratio
Fixed
assets*100/capital
employed
32% 26%
A low value of this ratio inboth cases indicates that a
major portion of the long term
funds are invested in currentassets as compared to fixed
assets.
10.
Interest
Coverage
ratio
Profits before
interest and taxes/
Interest charges
10.70 7.84
A high ratio as indicted by the
2 figures is favorable as itindicates the protection
available to the lenders of
long term capital in the formof funds available to pay the
interest charges.
11.
Debt service
Coverageratio
(Net profit aftertaxes + Depreciation
+ Interest on term
loans)/(Interest onterm loans +
Installments of term
loans
0.47 0.35
It gives indication about the
capability of Tata Motors tomeet the obligations of long
term borrowing. A very low
value of ratio meansinsufficient earning capacity
of organisation to meet the
obligations of long termborrowing.
12.Gross profit
ratio
Gross profit *
100/net sales15.28% 16.10%
A low value shown by the 2
figures indicates that this
organisation is not able toproduce or purchase at a low
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cost. It can be increased by
either adjusting the sales priceor production cost or by
increasing volume of products
having high gross profit
margin.
13.
Net profit
ratio
(Net profit after
taxes) * 100/net
sales 15.14% 12.40%
It indicates that portion of
sales available to the ownerafter considering all types of
expenses and costs. The lower
figures alongside indicatelower profitability of the
business.
14.Operating
ratio
(Manufacturing cost
of goods sold+operating
expenses)*100/Net
sales
83.52% 81.16%
A high ratio as seen alongside
indicates that only a smallmargin of sales is available tomeet the expenses in the form
of interest, dividend and other
non-operating expenses. Alower value is generally
desirable.
15.Return on
AssetNet profit * 100
/assets36.13% 26.87%
It measures profitability of
investments in the firm.Higher value is preferred
which is not the case as perfigures shown.
16.
Return on
capital
employed
(Net profit +Interest on long
term
sources)/capitalemployed
0.73 0.57
It measures profitability ofcapital employed in the firm.
Higher value is preferred and
the situation of Mar08 wasmuch better than Mar09.
17.Return on
Shareholders
funds
Net profit after taxes* 100/ Total
shareholders funds
0.14 0.08
It measures if the firm has
earned sufficient returns for
its shareholders or not. Higherthe ratio, the better the
situation which is not the case
for Tata Motors in both theyears.
18.Earnings per
share(Net profit after
taxes- preference52.63 19.48 It measures the profits
available to the equity
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dividend)/ Number
of equity sharesoutstanding
shareholders on a per share
basis.
19.Capital to
non-currentassets ratio
Owners equity/
Non-current assets3.51 4.22
A higher capital to non-
current assets ratio indicatesthat it is easier to meet thebusiness' debt and creditor
commitments.
20.Fixed costs
to total assets
Fixed costs/ Total
assets1.09 1.06
An increase in the fixed costs
to total assets ratio mayindicate higher fixed charges,
possibly resulting in greater
instability in operations andearnings.
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Bibliography
1. http://www.moneycontrol.com/financials/tatamotors/balance-sheet/TM03#TM03
2. http://www.moneycontrol.com/financials/tatamotors/profit-loss/TM03#TM03
3. http://en.wikipedia.org/wiki/Financial_ratio
http://www.moneycontrol.com/financials/tatamotors/balance-sheet/TM03#TM03http://www.moneycontrol.com/financials/tatamotors/profit-loss/TM03#TM03http://en.wikipedia.org/wiki/Financial_ratiohttp://www.moneycontrol.com/financials/tatamotors/balance-sheet/TM03#TM03http://www.moneycontrol.com/financials/tatamotors/profit-loss/TM03#TM03http://en.wikipedia.org/wiki/Financial_ratio