Case Study of Financial Analysis of Tata Motors

From the following selected financials of Tata Motors for the period 2014 – 15 to 2018 – 19,
appraise its financial health from the point of view of liquidity, solvency, profitability and
efficiency.

Particulars 2014-15 2015-16 2016-17 2017-18 2018-19

(I) Related to Liquidity

Current Assets 13633.39 10027.16 6700.55 8506.83 10616.45

Inventory 2590.26 1762.68 100.85 20.22 1736.00

Trade Receivables 2708.32 1818.04 1216.70 1114.48 1568.46

Cash and Bank Balances 1840.96 462.86 226.15 944.75 452.08

Short – term loans and 1792.21 1424.29 1185.26 1508.27 1704.86

Other Current Assets 113.41 104.26 109.06 117.03 252.85

CURRENT LIABILITIES 22138.17 21104.61 18797.53 20370.63 17751.06

Short – term bank 3007.13 6216.91 4769.08 7762.01 3351.74

Trade Payables 8705.53 8455.02 9672.36 8852.65 8916.60

Other current liabilities 7470.95 4923.10 2463.18 3142.88 4267.23

Short term provisions 2954.56 1509.58 1892.91 613.09 1215.49

Credit sales 58650.42 48665.28 37101.74 38829.49 45879.45

Cost of goods sold 44303.71 36932.75 29152.13 33236.85 35816.47

Cost of raw materials used 33894.82 27244.28 20492.87 22155.23 24313.08

Credit purchases 40328.77 33108.73 25542.69 27920.47 29572.35

Average debtors 2655.56 2263.18 1517.37 1165.59 1341.47

Average creditors 8781.05 8580.28 9063.69 9262.51 8884.63

Current ratio 0.62 0.48 0.36 0.42 0.60

Acid test ratio 0.41 0.26 0.15 0.18 0.32

Net working capital -8504.78 -11077.45 -12096.98 -11863.80 -7134.61

Creditors turnover ratio 4.59 3.86 2.82 3.01 3.33

Debtors cycle (days) 16.53 16.97 14.93 10.96 10.67

Creditors cycle (days) 79.47 94.59 129.52 121.09 109.66

(II) Related to Solvency Analysis

Share Capital 634.75 638.07 643.78 643.78 679.18

Reserve and Surplus 18732.91 18496.77 18532.87 14218.81 21688.90

Shareholder’s Fund 19367.66 19134.84 19176.65 14862.59 22368.08

Long – term Borrowings 8004.50 8051.78 9746.45 12318.96 10687.94

Short – term Borrowings 3007.13 6216.91 4769.08 7762.01 3351.74

Deferred Tax Liabilities 98.80 -126.88 -1360.32 764.23 -83.84

Total Debt 11110.43 14141.81 13155.21 20845.20 13955.84

Long Term Debt 8103.30 7924.90 8386.13 13083.19 10604.10

Total External Borrowings 34893.27 33049.93 30557.77 35080.58 30058.17

EBT 1926.27 600.80 -485.94 -3570.97 513.80

Interest 849.44 1051.45 1008.62 1151.07 1108.24

EBIT 2775.71 1652.25 522.68 -2419.90 1621.84

Total Assets 13712.92 10134.96 6739.06 8572.97 10705.91

Total debt – equity ratio 0.57 0.74 0.69 1.40 0.62

Long term debt – equity 0.42 0.41 0.44 0.88 0.47

Interest coverage ratio 3.27 1.57 0.52 -2.10 1.46

Total debt to asset ratio 0.81 1.40 1.95 2.43 1.30

Long term debt to assets 0.59 0.78 1.24 1.53 0.99

(III) Related to Profitability

Revenue from Operations 54306.55 44765.72 34288.11 36294.74 42369.82

Cost of goods sold 44303.71 36932.75 29152.13 33236.85 35816.47

Gross Profit 10002.85 7832.97 5135.98 3057.89 6553.35

EBIT 2775.71 1652.25 522.68 -2419.90 1621.84

Other Income 574.08 2088.20 3833.03 1881.41 2132.92

Operating Profit 2201.83 -435.95 -3310.35 -4301.31 -511.08

EAT 1242.33 301.81 334.52 -4738.95 234.23

Average net block 14218.30 15237.63 15348.16 15511.90 15773.60

Average total capital 28006.56 26219.56 24543.31 23465.61 28104.84

Average total assets 54354.87 53222.85 50959.59 49838.80 51184.71

Average Equity Funds 19819.65 19251.25 19155.75 17019.62 18615.34

Gross Profit ratio 18% 17% 15% 8% 15%

Operating Profit ratio 4% -1% -10% -12% -1%

Net Profit ratio 2% 1% 1% -13% 1%

Cost of goods sold ratio 82% 83% 85% 92% 85%

ROR on capital employed 10% 6% 2% -10% 6%

ROR on total assets 5% 3% 1% -5% 3%

ROR on equity funds 6% 2% 2% -28% 1%

(IV) Related to Efficiency Analysis

Cost of material used 33894.82 27244.28 20492.87 22155.23 24313.08

Cost of goods sold 44303.71 36932.75 29152.13 33236.85 35816.47

Average total assets 54354.87 53222.85 50959.59 49838.80 51184.71

Average fixed assets 14218.30 15237.63 15348.16 15511.90 15773.60

Average current assets 12342.29 11923.94 8437.01 7656.02 9639.44

Net working capital -8504.78 -11077.45 -12096.98 -11863.80 -7134.61

Net Sales 54306.56 44765.72 34288.11 36294.74 42369.82

Total assets turnover ratio 0.82 0.69 0.57 0.67 0.70

Total assets turnover ratio 1.00 0.84 0.67 0.73 0.83

Fixed assets turnover ratio 3.12 2.42 1.90 2.14 2.27

Fixed assets turnover ratio 3.82 2.94 2.23 2.34 2.69

Capital turnover ratio 1.58 1.41 1.19 1.42 1.27

Current assets turnover 3.59 3.10 3.46 4.34 3.72

Current assets turnover 4.40 3.75 4.06 4.74 4.40

Working capital turnover -5.21 -3.33 -2.41 -2.80 -5.02

Analysis:

The appraisal of the financial health of Tata Motors is presented below:

1. Liquidity Analysis: The liquidity ratios of Tata Motors do not portray its satisfactory
position. In 2014 – 15, the current ratio was around 0.62 and it substantially reduced to an
alarmingly low level of 0.36 in 2016 – 17. Although, since then the ratio improved to 0.60
(close to what it was in 2014), still it is at an unsatisfactory level. Conventionally, a ratio
of 2:1 is considered satisfactory and Tata Motors is way below that level. Similar trends
are observed for the acid test ratio. A weak ratio of 0.41 in 2014, got weaker over the
years and touched a low of 0.15 in 2016 – 17. In spite of the fact that it has shown
improvement and reached 0.32 by the end of 2018 – 19, it still remains at unsatisfactory
level. There has been a substantial decrease in cash and bank balances since 2015 – 16,
and this appears to be a significant contributor to the decreased level of current ratio and
acid test ratio.
Another observation is that the net working capital of Tata Motors has consistently been
negative during the period from 2014 – 15 to 2018 – 19. But, it has improved from ₹
8,504.78 crore s in 2014 – 15 to ₹ 7,134.61 crores in 2018 – 19. The decline in the sales
revenue during the years could also be a factor for the reduced working capital needs.
We observe that Tata Motors is enjoying a much higher creditors payment period as
compared to the debtor’s collection period. The debtor’s collection period was about 17
days in 2014 – 15 and further dipped to 10 days in 2018 – 19. In contrast, the creditors
payment period was 80 days in 2014 – 15 and increased to 109 days by the end of the
period under study. This favourable gap provides some leverage/solace for the company
to operate at such low liquidity ratios. However, a point of caution is the decreasing
debtor’s collection period. A low credit period of 10 days could be the reason of declining
sales and requires through investigation.

II. Solvency Analysis: The solvency position of Tata Motors also appears to be
unsatisfactory. First, the interest coverage ratio is inadequate. It was somewhat at a
satisfactory level of 3.27 in 2014 - 15, it decreased to become – 2 in 2017 - 18 (when the
company suffered losses and had a negative EBIT). However, since then this ratio
improved to 1.46. Even though the ratio is positive now, it is not satisfactory and may
pose problems for the company to service its interest payments to lenders.

The total debt to assets ratio has increased from 0.81 in 2014 – 15 to 2.43 in 2017 – 18
and then decreased to 1.30 in 2018 – 19. Similarly, the long – term debt to assets ratio
from 0.59 in 2014 – 15 to 1.53 in 2017 – 18 and then decreased to 0.99 in 2018 – 19.
Although there has been a decrease in total external obligations/debt to assets ratio as well
as long term debts ratio in 2019, given its very low interest coverage ratio, the level of
debt of the firm seems to be on the higher side and needs to be reduced.

III. Profitability Analysis: The profitability analysis looks disturbing. Over the years,
there has been a dip in its profitability ratios. For instance, the gross profit ratio decreased
from 18% in 2014 – 15 to 15% in 2018 – 19. Its net profit ratio also decreased from 2% in
2014 – 15 to become negative in 2018 and finally to 1% in 2018 – 19. Consequently, the
rates of return on capital employed as well as total assets declined during the period. ROR
on capital employed declined from 10% to 6% and ROR on total assets declined from 5%
to 3%. The ROR on equity funds presents a dismal picture as it turns negative in 2017 –
18. However, this ratio did improve in the subsequent year. Overall, the profitability of
Tata Motors is a matter of serious concern.

IV. Efficiency Ratios: Analyzing the performance with respect to utilization of assets,
we find it is unsatisfactory. The total assets turnover ratio has declined from 0.82 in 2014
– 15 to 0.07 in 2018 – 19.

Also, the fixed assets turnover ratio has substantially declined from 3.12 in 2014 – 15 to
2.27 in 2018 – 19. For an automobile manufacturer, fixed assets form an important in the
total assets, and a decline in the ratio implies unutilized capacity.

The current assets turnover ratio has been stable varying from 3.59 in 2014 – 15 to 3.72 in
2018 – 19. This could be due to the inadequate amount of current assets with the
company.
Conclusion: We can conclude, that the financial health of Tata Motors is not sound given
its unsatisfactory liquidity, solvency, profitability and efficiency ratios.