Balance Sheet AnalysisPresented to Miss Sidra Waheed
[General Tyres]
By: Hassan CheemaSection: B
Financial Analysis of General Tyres Section: B
Table of Contents
EXECUTIVE SUMMARY: 3
INTRODUCTION 4
Key Operating and Financial data 5
Balance Sheet 6
PROFIT AND LOSS 9
Cash flow statement 10
General Tyres Pak. 11
Capital Structure & Solvency Ratios 11
Return on Invested Capital Ratios 12
Profit Margin Ratios 14
Asset Utility Ratios 15
Liquidity Ratios16
FIVE YEARS GROWTH RATE 18
TREND INDEX 19
PER SHARE RESULTS 20
COMMON SIZE ANALYSIS OF CA AND CL 21
CASHFLOW RATIOS 22
Conclusion: 23
Formulas Used in Calculations 24
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Financial Analysis of General Tyres Section: B
EXECUTIVE SUMMARY:
After analyzing the financial statements of three years. We come to know
that General Tyres are doing well in the industry but not up to the
expectations of stock holders. It is a very well-known company.
Profitability of the firm has decreased due to higher level of increase in
cost of goods sold as compared to increase in the sales. Company is not
getting good revenues and profits. Solvency ratios of the company are also
not very good and indicate that company is relying more on current or
short term debt instead of long term deb. However, company is facing
problem in liquidity measures and this might be because its focus is on
long-term profits not on short-term profits. Market measures indicate
decreasing trends in the value of the securities of the company But the
Company is paying good dividends to its shareholders. Company total
assets are also decreasing. In short we can say that company is not doing
well in the market and is not getting good revenues and sales to meet the
demand of shareholders and creditors. However focus should be made on
liquidity measures of the company.
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Financial Analysis of General Tyres Section: B
INTRODUCTION
The company was incorporated in Pakistan on March 7, 1963 as a private
limited company and was subsequently converted into a public limited
company. The company's shares are quoted on the Karachi and Lahore
stock exchanges. The company is engaged in the manufacture of tyres
and tubes for automobiles. The company had entered into a Royalty
Technical Service Agreement dated September 1, 1984 (the 'TSA') with
General Tire International Company (GTIC), USA whereby the company
was allowed to use the GT1C's trademarks such as 'General' and 'General
Tire'. The TSA was last extended by mutual consent of the company and
GTIC on August 15, 1999 up to October 31, 1999. On October 29, 1999,
GTIC communicated its decision not to extend the TSA. According to the
provisions of the TSA the company could use the aforementioned
trademarks during a compliance period of three months after the
termination of the TSA.
However, upon the request of the company, GTIC has been extending the
compliance period of the TSA from time to time and the compliance period
was last extended upto August 31, 2000 which was accepted by the
company. GTIC has sent a compliance extention letter upto September
30, 2000 and has shown its willingness to extend the compliance period
further, in pursuance to the execution of a new TSA. However, the
compliance letters have not been executed subsequent to August 31,
2000. In the event that the TSA is not extended the company's status as a
'going concern' is not expected to be affected
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Financial Analysis of General Tyres Section: B
General Tyres Pak.
Key Operating and Financial data Rs in million
2008 2007 2006Operating ResultsGross Sales 4348 3698 3267Net Sales 3732 3198 2803Gross Profit 522 598 627Profit B4 tax 210 328 377Profit After Tax 127 204 236Cash Dividends* 17.5% - -
Bonuses issued
Financial Position
Operating fixed assets
2620 2080 1526
Shared capital 598 598 598
Reserves and inappropriate profit
697 675 472
Shareholder’s equity 1295 1273 1070
Long term loans and liabilities
467 390 153
Analysis
I see that Operating and financial positions are showing that as company’s
sales are increasing but profits are decreasing and in the same time long
term loans are also increasing showing that company is relying on debt.
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Financial Analysis of General Tyres Section: B
General Tyres Pakistan
Balance Sheet. As at June 30, 2008.
2008Rupees in
2007Thousand
s
2006
Share Capital And ReserveShare Capital.Authorised75,000,000 ordinary shares of Rs 10 each
750,000 750,000 750,000
Issued, subscribed and paid-upReserve
597,713697,584
597,713675,186
597713650,168
1,297,297 1,272,899 1,257,536
Long term merhaba financing
200,000 300,000 400,000
LONG TERM LOANS 200,000 - -
LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE
66,846 89,823 90,879
STAFF BENEFITS 119,350 107,269 101,368
DEFFERED CREDIT 430 577 600
DEFFERED TAXATION 33,298 7,726 5,246
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Financial Analysis of General Tyres Section: B
LONG TERM DEPOSIT FRO, DEALERS
9,350 9,200 9,000
CURRENT LIABILITY AND PROVISIONSCURRENT MATURITY OFLong term merhaba financing
100,000 100,000 100,000
LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE
22,950 12,820 10,124
SHORT TERM FINANCE
410,764 50,000 47,000
RUNNING FINANCES UNDER MARK UP ARRANGEMENTS
97,829 101,063 105,657
PAYABLES 708,207 528,237 478.543
ACCURED MARK UP 7,778 2,860 2,568
PROVISIONS 121,300 118,200 17,152
3,393,399 2,700,674 1972,212
ASSETSPROPERTY, PLANT AND EQUIPMENT
1,456,300
1,019,272
937,421
INTANGIBLE 482 554 598
INVESTMENTS - - -
LONG TERM LOANS AND ADVANCES
4,234 5,173 5,254
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Financial Analysis of General Tyres Section: B
LONG TERM DEPOSITS AND PREPAYMENTS
7,559 8,514 9,213
CURRENTS ASSETS:
STOCK 1,012,679 880,196 720,210
TRADE DEBT 409,711 322,341 256,514
LOANS AND ADVANCES
15,367 10,336 9,621
DEPOSITS AND PREPAYMENTS
34,600 51,683 623,547
OTHER RECEIVABLES 32,047 33,651 33,920
TAXATION 40,158 15,278 10,152
CASH AND BANK BALANCE
78,975 79,556 80,102
1,924,8243,393,399
1,667,1612,703,161
1,477,214
1,972,212
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Financial Analysis of General Tyres Section: B
PROFIT AND LOSS STATEMENT
FOR THE YEAR ENDED JUNE 30, 20082008
Rupees in
2007Thousan
dsNET SALESCOST OF SALES
3,731,9943,210,524
3,197,7172,614,233
2,802,669
2,521,313
GROSS PROFIT 521,470 583,484 626,591
ADMINISTRATION EXPDUSTRIBUTION COST
75,763156,398
90,009147,608
90,214138,923
OPERATING COST 267,923 319,042 384,156
FINANCE COST 83,085 124,662 132,958
PROFIT AFTER TAXATION
126,998 205,005 235,847
BASIC EPS 2.12 3.41 3.95
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Financial Analysis of General Tyres Section: B
Cash flow statement
Cash flow from operating activities
Note
2008Rs in ,000
2007 2006
Cash from operations
40 371,970 258,162 217,874
Staff retirement gratuity paid
(5,612) (3,507) (2,140)
Compensated absence paid
(998) (84) (70)
Long term deposits from dealers
150 200 210)
Financial charges paid
(82,049) (15,157) (13,145)
Tax paid (82,393) (111,045) (132,211)Long term loans and advances
939 (1,509) (1,612)
Long term deposits and prepayment
955 (3,124) (4,114)
Net cash from operations
202,962 124,736 117,658
Cash flow from investing activitiesFixed capital expenditure
(547,673) (504,042) (487,125)
Proceed on disposal of FA
2,953 - -
Profit on bank deposits
543 189 170
Net cash from Investments
(544,177) (503,853) (447,745)
Cash flow from financing activitiesLong term murabaha financing
(100,000) 300,000 400,000
Liabilities against (12,847) (1,635) (1,125)
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Financial Analysis of General Tyres Section: B
assetsLong term loans 476196 - 1070381Short term finances 360,764 50,000 47,256Dividends paid (104,049) (125) (104)Net cash from financing
343,868 343,240 342,958
Cash equivalent (+,-)
2,653 30,877 51,457
Cash equivalent at beg year
(21,507) 9,370 10,810
Cash equivalent at end year
41 (18,854) (21,507) (24,210)
General Tyres Pak.
Capital Structure & Solvency Ratios
2008 2007 2006Total debt/ equity
2,098,102 / 1,295297 = 1.62
1427775 / 1275,386 = 1.21
901,831 /1,070,381 = 0.843
Total debt ratio
2,098,102 / 3,393,399 = 0.62
1,427,775 / 2,703,161 = 0.53
901,831 / 1,972,212 = 0.457
Long term debt / Equity
476,196/ 1,295,297 = 0.368
399,023 / 1,275,386 = 0.893
162,050 / 1,070, 381 = 0.151
Equity / total debt
1,295,297 / 2, 098, 102 = 0.617
1,275,386 /1,427, 775 = 0.893
1,070,381/901,831 = 1.19
Fixed assets / Equity
1,468,828 /1,295297 = 1.13
1,036,000/1,275,386 = 0.64
601,961/1,070,381 = 0.56
C.L / T.L. 1,468,828/ 2098,102 = 0.7
931,810/ 1,427,775 = 0.71
639,497/901,831 = 0.71
Analysis
I see the debt to equity ratio is increasing indicating that the firm has
started to focus and rely on the debt financing instead of equity financing.
This will also lead to an increase in the firm’s financial cost. We can also
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Financial Analysis of General Tyres Section: B
judge by the ratios that the firm is relying more on current or short term
debt instead of long term debt. The increase debt level currently indicates
that the company has a reputable credibility in the market however if the
same trend continues to exist then this will eventually hurt the credibility of
the organization.
General Tyres Pak.
Return on Invested Capital Ratios
2008 2007 2006ROA[NI + int. exp(1-t)] / total assets
[126998+86967 (1-0.35)] / 3393399 = 5.40%
[205005+17082(1-0.35)] / 2703161 = 7.99%
[235847+7553(1-.35)] / 1972212 = 12.55%
ROCE(NI – preferred dividend) / equity +Long term debt
126998 /1295297+ 476196 = 9.80%
205005 / 1275386 = 16.07%
235847 / 1070381 = 22.03%
Return on LTD & Equity [NI + Int. exp (1-t)] / LTL + Equity
[126998+ 86967 (1- 0.35)] / 476196 + 1295297 = 10.36%
[205005 +17082(1-.35)] / 399023 + 1275386 = 12.91%
[235847 + 7553(1-0.35)] / 162, 050 + 1070381 = 19.53%
Financial Leverage Index ROCE / ROA
0.098 / 0.054 = 1.82
0.1607 / 0.0799 = 2.011
0.2203 / 0.1255 = 1.76
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Financial Analysis of General Tyres Section: B
Analysis
These ratios show gloomy picture for the firma s both ROA and the ROE
has decreased meaning that the investor would be no longer willing to
invest in this firm as the return earned on it is decreasing with the passage
of time. The major reasons for decrease in both the ratios is that the
interest expense of the firm has dramatically increased and the due to this
and the increasing cost of good the net income has decreased hence the
ratio calculated show a decreasing trend.
Three years ago the roce was very healthy i-e 30% and investor could
invest in this company but company started relying on debt for financing its
long term investments and there is 95% increase in the long term asset in
last 3 years. This massive investment is supported by the debt. As a result
company is now at a position when profits are decreasing and share
holders may be reluctant to invest more money in company. So company
can face problem in getting equity finance. But company have to make
steps to keep the finance cost low to chance the position in coming years.
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Financial Analysis of General Tyres Section: B
General Tyres Pak.
Profit Margin Ratios
2008 % 2007 % 2006 %
Gross profit
margin
521,470/ 3731994
= 14%
583484 / 3197717
= 18.2%
626591 /2802669 =
22.3%
Operating profit
margin
210083 / 3731994
= 5.6%
329667 / 3197717
= 10.3%
377459 / 2802669
= 13.47%
Net profit margin 126998 / 3731994
= 3.4%
205005 / 3197717
= 6.4%
235, 847 / 2802669
= 8.4%
Profitability of the firm has decreased due to higher level of increase in
cost of goods sold as compared to increase in the sales. Net profit margin
has decreased by double amount in the recent years due to significant
increase in the finance cost of the firm which is increasing due to higher
borrowing done by the firm in order to finance its operations on a daily
basis.
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Financial Analysis of General Tyres Section: B
Long term loan have been increase by 20% from last year loan and
76.83% from last three year figure.. due to massive reliance on debt as
source of finance profitability figure in decreasing. So this company is
“struck in the middle
General Tyres Pak.
Asset Utility Ratios
2008 2007 2006
Sales / cash & equivalent
3731994/78975=47.26
3197717/79556=40.19
2802669/44811=62.54
Sales / receivables
3731994/47414=78.71
3197717/43987=72.70
2802669/49810=56.27
Sales /inventory
3731994/1313906=2.84
3197717/1154316=2.77
2802669/896978 =3.12
Sales / working capital
3731994/455996=8.18
3197717/753981=4.24
2802669/730754=3.84
Sales / fixed asset
3731994/1468575=2.54
3197717/1036000=3.09
2802669/601961=4.66
Sales / total Assets
3731994/3393399=1.10
3197717/2703161=1.18
2802669/1972212=1.42
Sales / 3731994/1468828=2.54
3197717/913180=3.50
2802669/639497=4.38
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Financial Analysis of General Tyres Section: B
Short term liabilities
Table analysis how company’s asset are utilized in making sales or how
many times assets have been converted in to sales, the greater the
turnover the better will be for the company. Evaluating the general trend
we can say that the firm is efficiently and effectively utilizing the current
assets however the fixed assets are not contributing much towards sales
generations and are on a decreasing trend over the past three years.
General Tyres Pak.
Liquidity Ratios
Measure 2008 2007 2006 UNITSCurrent Ratio 1.31 1.83 2.14 RatioAcid-test ratio 0.086 0.135 0.148 RatioAccounts receivable turnover
78.71 72.70 56.27 Times
Inventory turnover 2.44 2.77 3.12 TIMESDay’s sales in receivable
4.57 4.95 6.40 Days
Day’s sales in inventory
126.74 126.95 115.22 Days
Approximate conversion period
131.31 135.9 121.62 Days
Cash to current assets
0.041% 0.048% 0.033% %
Cash to current liabilities
0.054% 0.087% 0.070% %
Liquidity Index 794.10 86.01 104.55 Days Working capital 455996 753981 730754 $
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Financial Analysis of General Tyres Section: B
Day’s purchase in accounts payable
75.65 66.22 69.85 Days
Average bet trade cycle
55.66 68.68 51.77 days
Cash provided by operation to avg. current liabilities
0.253 0.283 0.264 %
The short term liquidity analysis is very crucial for the company, as it determines its
current liquidity position. This will help the financial analyst make a better decision about
the need for money to finance company’s operations from any external sources or is the
company in a state to do it internally. The liquidity position of the firm is crucial as shows
the decrease current assets and a decreasing acid test ratio. The turnover and the day
sales ratio has also increased which signifies that the firm has started a lenient credit
policy which is why their cash is stuck with the creditors and in the form of inventory for a
longer period of time. Working capital is also decreasing which indicates that the firm will
eventually face liquidity problems in running its daily operations if the trends continue to
exist.
Common size income statement:
Majority of the revenue generate are distributed in the CGS. We see
that the CGS has increased over the period of time however
administrative and distribution expenses are decline hence we expect
that the net income would increase but the CGS is growing at higher
rate as compared to the decline of other expense. We also see that
the finance cost has increased significantly which indicates that debt
has been increased in order to finance the operations of the firm.
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Financial Analysis of General Tyres Section: B
GENERAL TYERS PAKISTAN
FIVE YEARS GROWTH RATE
3year growth rate %
net sales 56.45845093
net income 79.77114418
equity 22.57393932
dividends 85.22134201
Net sales are growing at the 56% rate. Net income also shows rapid
growth of 79% over the years. Dividends are growing which shows that
company is paying high dividends to share holders. Equity is growing at
22%.
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Financial Analysis of General Tyres Section: B
GENERAL TYRES
TREND INDEX
Trend index of selected accounts 2008 2007 2006
Cash and bank balances 106.52% 96.52% 100%
Other receivables 512.50 467.56 100
Stock-in-trade 156.05 124.90 100
total current assets 131.95 112.49 100
total current liabilities 116.02 104.45 100
Long-term loans 435.47 165.81 100
total equity 185.22 132.48 100
Net sales 156.46 122.56 100
Cost of sales 156.80 125.96 100
Distribution costs 162.96 120..49 100
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Financial Analysis of General Tyres Section: B
Administrative expenses 5.84 46.31 100
Finance costs 213.11 157.96 100
Profit before taxation 179.71 101.62 100
Profit after taxation 179.77 100.77 100
This is the trend analysis which shows that cash, total current assets,
current liabilities, long term financing, finance cost, share holders equity,
net sales, CGS, interest expense, EBT, net income and total cost and
expense are on rising trends. They are increasing with passage of time.
On the other hand other administration expense decreased.
GENERAL TYRES
PER SHARE RESULTS
per share results 2008 2007 2006
Net sales 44.83 35.12 28.65
Profit after taxation 3.37 1.89 1.87
Dividend paid 1.10 0.90 0.89
book value 7.96 5.69 4.30
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Financial Analysis of General Tyres Section: B
These are all per share results. Sales per share is increasing from 2006-
2008. Net income shows a rise. Dividends per share also rise because
company paid more dividends. Book value of the company is increasing
per share which is good for the company. As equity contribution increases
book value also increases.
GENERAL TYRES
COMMON SIZE ANALYSIS OF CA AND CL
CURRENT ASSETS 2008
2007 2006
Stores and spares 1.60%
1.14% 1.04%
Stock-in-trade 28.09
26.37 23.75
Trade debts 5.24 3.20 4.11Current maturity of finance under musharika arrangements
0.04 0.24 0.27
Loans, advances and prepayments 2.94 2.52 2.90short term prepayments 0.06 0.04 0.00accrued mark up 0.54 0.39 0.00Other receivables 8.87 9.49 2.28Taxation – net 0.00 0.69 0.47Cash and bank balances 52.6
155.92 65.1
7
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Financial Analysis of General Tyres Section: B
total current assets 100.00
100.00
100.00
CURRENT LIABILITIESCurrent portion of liabilities against assets subject to finance lease
0.08 0.43 0.46
Short-term running finances 0.00 0.00 0.00Advances from customers and dealers 96.7
399.41 66.0
0accrued markup 0.33 0.16 0.00Creditors and accrued liabilities 0.00 0.00 18.7
4provision for other liabilities 0.00 0.00 8.67provision for taxation-net 2.86 0.00 0.00Dividends 6.71total current liabilities 100.
00100.0
0100.
00
This table shows the current assets an liabilities. The percentage of each
asset item to total current asset and each current liability item to total
current liability. In assets side the greater contribution is of stock in trade
and cash and bank balances. In liabilities the percentage of advances from
customers is higher to total liabilities.
GENERAL TYRES ANALYSIS OF
CASHFLOW RATIOS
Cash flow adequacy ratio= 3 year sum of sources of cash flow
3 year sum of capital exp/inv/cash div
=0.640
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Financial Analysis of General Tyres Section: B
This ratio gives insight into whether company generates sufficient revenues to
cover its capital expenditures, investment in inventories and cash dividends.
This ratio shows that cash generated from operations are insufficient and there
is a need for external financing
Cash reinvestment ratio= cash by operations-dividends
FA+inv+nwc
2008=28.4%
2007=4%
2006=9.5%
This ratio gives insight into the amount of cash reinvested into the
company for both asset replacement and growth. This ratio is on an
increasing Trend which is good for the company.
Conclusion:
From the point of view of the investor I would not invest in the company as
the returns on investment are decreasing. Until the firm is able to control its
cost the net income will continue to decreasing resulting in a marginal
return to the investor. From the point of view of the creditors the company
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Financial Analysis of General Tyres Section: B
is in need for external financing hence it is search of debtors but looking at
the liquidity position of the company there isn’t any risk that the company
might default. There is no risk that company will default as company has
good base of assets and reserve in hand. Company is sales are increasing
and products are in demand, though profit is not in line with sale. But it is
not a good short term investment as company not seem to produce good
short term profit The company earning is decreasing and seem to
decrease more in coming years that’s due to massive increase in debt as
source of finance. As it’s a fixed cost and company need to change either
its source of finance or to increase it sales to nullify the fixed cost effect
Hence financially the company is not strong enough and in a more
efficient manner in order to improve it’s financial
Formulas Used in Calculations
Profit Margin Ratios
Formulas to calculate profit margin ratios: Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales. Pretax Margin Ratio = net profit before taxes / sales. Operating Profit Margin (Operating Margin) = net income before interest and taxes /
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Financial Analysis of General Tyres Section: B
sales. Profit Margin Ratios definitions and explanations:These three profit margin ratios state how much profit the company makes for every dollar/Rs of sales. The net profit margin ratio is the most commonly used profit margin ratio. A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues. A low profit margin ratio indicates that the business is unable to control its production costs. The profit margin ratio provides clues to the company's pricing, cost structure and production efficiency. The profit margin ratio is a good ratio to benchmark against competitors. The net profit margin ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio
Debt to Equity Ratio (Financial Leverage Ratio)
Formula to calculate debt to equity ratio (financial leverage ratio): Debt to Equity Ratio = Short Term Debt + Long Term Debt Total Shareholders’ Equity Debt to equity ratio definition and explanation:Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio. The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing.
Return On Invested Capital – ROIC
What Does Return On Invested Capital - ROIC Mean?A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively.
The general equation for ROIC is as follows:
Also known as "return on capital"
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Financial Analysis of General Tyres Section: B
More Accurately
Calculating ROA (Return on assets)
The simplest way to determine ROA is to take net income reported for a period and divide that by total assets. To get total assets, calculate the average of the beginning and ending asset values for the same time period.
ROA = Net Income/Total Assets OrROA = EBIT/Total Assets
ROCE (return on capital employed)
ROCE is calculated by determining what percentage of a company's utilized capital it made in pre-tax profits, before borrowing costs. To calculate ROCE, you determine what percentage of a company's invested capital it made in pre-tax profit before borrowing costs. The ratio looks like this:
= Profit Before Interest and Taxation Capital Employed
NWCRequired Net Working Capital = Cash + Account Receivable + Inventory - Account Payable - Accrued Liability
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Financial Analysis of General Tyres Section: B
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