Q11. Ratio analysis of JSW

LIQUIDITY RATIOS: Liquidity ratios measure company’s ability to meet its short term obligations.

RATIO NAME 2010 2009 2008 2007Current Ratio 0.51 0.50 0.62 0.782

Current Ratio is measure of current assets in relation of current liabilities, higher value means that the company has enough liquid assets to meet all the current liability, lower value of current ratio means that the company is dependent more on operating cash flow and outside financing to meet its current liability.Current ratio for JSW has seen a sharp fall in year 2009, balance sheet analysis gives an explanation for this we see a sharp rise in current liability head of advances from customer and also sundry creditors. This can be a good sign displaying industry trust in a growing company. In the above mentioned period current assets have increased but there has been a less drastic increase as compared to current liability.

QUICK RATIO 0.30 0.28 0.27 0.43Quick Ratio is more conservative measure of current assets it generally includes heads from the balance sheet which can be easily converted into cash. Thus it is generally assumed that inventory in the stock is not quickly converted into cash and similar is the treatment with the prepaid expenses to the employees and other prepaid expenses because they cannot be recovered soon. It is also important to note that very high quick ratio means that liquid ratios are lying idle and they are not invested properly.For JSW quick ratio calculation we have excluded inventory head and other prepaid expenses from the current asset value. Quick ratio for the company has remained almost constant over a period of 3 years; this can be attributed to increase in various types of loans given to subsidiaries and others.

EFFICIENCY RATIOS: Efficiency ratios also known as activity ratios are the measure of how well a company carries out its day to day activities, such as collection of receivables and management of inventory.

AVERAGE COLLECTION

PERIODAverage collection period is measure of period in which the sales made on credit are converted into cash. It is calculated by formula Average Collection period = Days*Acc. Receivables/(Total Credit Sales)This is a good measure of collection efficiency of the company as lower value implies that sales made on credit is converted into cash fast.

DOH(Days) 40.78 41.71 39.41 32.01

DOH (Days on Hand) also known as inventory days basically gives a measure of the number of days for which the inventory is in hand i.e. In store before it is converted into revenue. It is measured by the formula 365*Average Inventory Value/Cost of goods sold. Lower value meaning that the inventory is in hand for lower period before being converted into revenue for the given period(which is assumed to be one year for our calculation)

As we can see that the DOH was lower in the year 2008 period because economy was good during that period and that’s why it was easy to sell the inventory and the balance sheet also reveals that the inventory was lower for these periods. But in 2009 the DOH has increased because of slow down and higher inventory maintained by the company. This has decreased in year 2010, despite increased inventory levels showing good signs also concurrent with the industry growth ratios for the same period.

Days Payable

SOLVENCY RATIOS: Solvency ratios measure company’s ability to meet long term obligations. Subset of these ratios is Leverage Ratios and Long Term Debt Ratios.

DEBT EQUITY 1.19 1.41 0.98 0.74Debt equity ratio is one of the important ratios as far as solvency ratios are concerned. Measured by dividing total debt by total Shareholder’s equity. It is a measure of shareholder’s book value when compared to the total debt on the company. Higher value means there is more debt and can be an alarming or a good thing based on situation. If the company has made higher investments then its debt equity ratio might go up for the given period which can be a good sign as is the case with JSW steels. Whereas decrease in equity worth also leads to higher debt equity ratio which is not a good thing.In case of JSW steels debt equity rose considerably in 2009 because of sudden jump in the debt in from of secured loans. Whereas in 2010 it has fallen because of considerable increase in Reserves, share capital remaining almost constant at a level of 520+. The jump in reserves can be attributed mainly to 1444 cr Rs of jump in profits. Increase in profit is also reflected in Debenture Redemption Reserve which has seen a 3000% increase from 4.04 to 129.04.Situation for the company seems to be sanguine Profits increasing and debt has remained almost constant (3% increase).

INTEREST COVERAGE 4.13 2.76 6.02 5.71Interest Coverage ratio also known as times interest earned is an important ratio giving an idea of how many times EBIT (Earnings Before Interest and Tax) can cover company’s Interest payments. Greater value of Interest Coverage Ratio shows stronger position showing company has greater ability to make payment out of its operating income. A value less than one is bad for the company showing that the company in order to cover the interest payments has to deplete capital.JSW shows strong position in these terms as shown by the positive trend in the Interest Coverage Ratio, though the value is lower than 2008 values but showing strong position of the company.

PROFITABLITY RATIO: Profitability Ratios are sometimes the key focus of the analysts because they reflect the ability of the company to generate profit from the capital invested and is the key determinant of company’s overall value and the value of securities it issues. It also reflects the ability of the management of the company.

ROE(%) 23 3.86 29.92 34.07Return on equity measures the return earned by a company on its equity capital, including minority

equity, preferred equity and common equity. This measure is done over Net Income ie Net Income/Total Equity.DuPont Analysis: ROE = Net Profit Margin*Asset Turnover*Leverage. Where

1. Leverage = Total Asset/Average Share Holder’s equity.2. Profitability = EBT/EBIT3. Asset Turn Over =EBIT/Total Assets

Now ROE can be divided into three components and analysis can be done respectively which component is improving or decreasing ROE and then management can concentrate on respective sections.

LEVERAGE 2.70 3.04 2.50 1.74Leverage as its clearly visible has fallen from 2009 levels that is because the shareholders have increased the investments into the company increasing shareholder’s equity by 18.6%.

Profitability 0.476 0.127 0.639 0.680Profitability seems to be the main reason for the fall of ROE in 2009, and it can be explained by the macroeconomic conditions prevailing during that period of slow down. And high earnings this year has again led to almost 4 times increase in profitability showing its positive effect on ROE for the current financial.

Asset Turn Over 0.179 0.100 0.187 0.288Asset Turn Over ratio is basically the EBIT earned over total value of the asset, so measuring the contribution of the assets to generation of the Earnings for the corresponding financial.This is also a contributor to the increase in the ROE for the year 2010 attributed again to the increase in EBIT in 2010 when compared to the year 2009.