Financial Ratio Analysis, TATA STEEL
Financial Ratio Analysis, TATA STEEL
Financial Ratio Analysis, TATA STEEL
2009
FINANCIAL RATIO
ANALYSIS
ABHIJIT SAMANTA
1. Liquidity Ratios:-
Liquidity Ratios measures the ability of the firm to meet its short term obligations.
They also reflect the firm’s ability to meet financial contingencies that might arise.
(A) Current Ratio: - This ratio indicates the firm’s ability to meet its current
liabilities. This ratio is of very high importance to the suppliers of short term funds
like the bankers and trade creditors.
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
Analysis: - The industry norm value of current ratio is 2:1. However it does not
mean so that higher current ratio means good company profile. It may signify
higher unused cash, inventory which again may result in inventory carrying cost.
In both the years the Current ratio for Tata Steel is same. However it does not
mean any increase or decrease in current ratio of any company gives the growth
profile of the company.
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(B) Quick Ratio:- This ratio is calculated on pre assumption that all the
current assets are of same level of liquidity. But this is not the reality. Cash in
Hand is more liquid that the same cash equivalent of inventory. So to get a real
picture of liquidity we calculate Liquid Ratio. It is calculated by (Current Asset-
Inventory – Prepaid Expense / Current Liability)
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
Analysis:- As per the industry norms the Quick Ratio should be 1:1. There is a
huge difference between the Quick Ratios of the company. It also shows the
decreasing trend. In the year 2008 there was high unutilized cash. But for the
current year the situation is more balanced.
2. Profitability Ratio:-
This ratio shows a company’s effectiveness on generating profit. In other words the
profitability ratio reflects a company’s operating performance.
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(A) Gross Profit Ratio:- Gross Profit is defined as Sales – Cost of Goods Sold.
Now the Gross Profit Ratio is a ratio of Gross Profit to the Sales. We express it in
terms of Gross Profit Margin. It is the amount of each rupee of sale that left over
after repaying the Cost of Goods Sold.
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
Analysis: - It indicates the Gross Profit over sales of any company. This ratio can
be changed by 1. Change in Sales Volume. 2. Changes in sales price 3. Change in
cost of production.
According to the data of 2007 and 2008 there is a decrease of Tata Steel in earning
the Gross profit which we can find out form the above table.
This ratio signifies the operational efficiency of any business entity. In this case a
lower ratio indicates the higher efficiency.
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
(C ) Net Profit Ratio: - It relates the firms Net Profit and the firm’s Sales
level. It indicates what percentage of every rupee of sales the firm was able to
transform into the Net Profit. The net profit margin measures the profit that is
available from each rupee of sales after all expenses have been paid, including cost
of goods sold, selling, general and administrative expenses, depreciation, interest
and taxes
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
Analysis: - We can see that there is a decrease in the Net Profit Margin.
Actually it indicates the firm’s ability to transfer its sales into the net
profit. So, here analyzing the consecutive two years data we can see that
the profitability of Tata Steel has actually decreased in 2009 than of the
year 2008.
(D) Return on total assets: - It relates the profit of the firm to its
tangible assets. In other words it indicates the how much profit the firm
has gained by utilizing its resources.
It is calculated by the following formula.
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
Analysis:- Again we can see that there is reduction in the return to total
asset ratio. The return Tata Steel earned over their Total Asset in 2008
the value reduced in the year 2009. It also means to achieve a certain
amount of revenue Tata Steel has used more amount of its capital.
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
Analysis: - For both of the years 2008 and 2009 the fixed asset turnover ratio of
Tata Steel is more than 1. As we know this ratio shows the company’s ability to
turn its fixed assets into the turnover. The turnover has actually increased here. But
the turnover is also very good in the year 2008.
As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)
Analysis: - Here for both the years the value of Total Asset Turnover Ratio is
same it is showing that overall turnover of assets to sales remained same for both
the years.
As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)
(4) Debt Equity Ratio:- Though it doesn’t signify anything related to meeting
short term liability it is often discussed under this topic. A firm has two options
when going for expansion one is raising debt and other going for public issue.
Generally very high debt is not preferred by the investors because it signifies the
risk and high form of equity has threat of hostile bid and acquisition.
As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)
Analysis: - Here we can see that in both Debt Equity Ratio and in Long Term Debt
Equity Ratio has increase for both of the years. Logically speaking that when this
ratio for any company increase it does not show good performance of the
company.
(B) Interest coverage ratio:- This ratio is the sum of the net earnings before
taxes and interest charge divided by the interest expenditure.
As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)
Analysis: -
It actually measures the firm’s ability to meet the interest obligations. Here in this
case we can see that the interest coverage ratio is decreasing, it means the firm’s
ability is reducing.
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(A) Price Earnings Ratio: - This ratio highlights the relationship between the
market price of a share and the current earnings per share. The market value, on the
other hand is the value of equity as perceived by investors.
Price earnings ratio = Market Price per share / earnings per share.
As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)
(B) Earnings per share:- The shareholders invest their money with the
expectation of getting dividends and capital appreciation on the shares. . Since the
earnings form the basis for dividend payments as well as a basis for any future
increase in the market price of the shares, investors are always extremely interested
in knowing the earnings per share.
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As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)
Analysis: -Here it shows that for Tata Steel the earning per share increasing. It is
good symbol form the company prospective as well as from the Share Holder’s
prospective also. Seeing more earning there is a chance for share holders to invest
on the company.