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Financial Statement Analysis[1][1]

Financial Statement Analysis[1][1]

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Financial Statement Analysis
Financial Statement Analysis

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Chapter 6

Financial Statements Analysis

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6-1

FINANCIAL STATEMENTS ANALYSIS
Ratio Analysis Common Size Statements Importance and Limitations of Ratio Analysis Mini Case
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6-2

Ratio Analysis

ret the financial statements so that the strengths and w

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6-3

Basis of Comparison

are compared with past ratios for the same firm. It indicates the directi

hose of others in the same lines of business or for the industry as a w 3) Comparison with standards or industry average.

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Types of Ratios
Liquidity Ratios Capital Structure Ratios Profitability Ratios Efficiency ratios Integrated Analysis Ratios Growth Ratios

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Net Working Capital
Net working capital is a measure of liquidity calculated by subtracting current liabilities from current assets.
Table 1: Net Working Capital Particulars Total current assets Total current liabilities NWC Table 2: Change in Net Working Capital Particulars Current assets Current liabilities NWC Company A Rs 1,00,000 25,000 75,000 Company B Rs 2,00,000 1,00,000 1,00,000
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Company A Rs 1,80,000 1,20,000 60,000

Company B Rs 30,000 10,000 20,000

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Liquidity Ratios

ios measure the ability of a firm to meet its short-term o

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6-7

Current Ratio

Ratio is a measure of liquidity calculated dividing the current assets by the current li

Current Ratio =

Current Assets Current Liabilities

Particulars Current Assets Current Liabilities Current Ratio

Firm A Rs 1,80,000 Rs 1,20,000 = 3:2 (1.5:1)

Firm B Rs 30,000 Rs 10,000 3:1
6-8

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Acid-Test Ratio

o takes into consideration the differences in the liquidity of the compo

Acid-test Ratio =

Quick Assets Current Liabilities

Quick Assets = Current assets – Stock – Pre-paid expenses
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Example 1: Acid-Test Ratio
Cash Debtors Inventory Total current assets Total current liabilities (1) Current Ratio (2) Acid-test Ratio Rs 2,000 2,000 12,000 16,000 8,000 2:1 0.5 : 1

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Supplementary Ratios for Liquidity
Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio

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Inventory Turnover Ratio

ow fast inventory is sold. A high ratio is good from the viewpoint of liquidity and vice ventory does not sell fast and stays on the shelf or in the warehouse for a long time.

Inventory turnover ratio =

Cost of goods sold Average inventory

The cost of goods sold means sales minus gross profit. The average inventory refers to the simple average of the opening and closing inventory.
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Example 2: Inventory Turnover Ratio

f 20 per cent. The stock at the beginning and the end of the year was Rs 35,0

(Rs 3,00,000 – Rs 60,000) nventory turnover ratio (Rs 35,000 + Rs 45,000) ÷ 2 6 (times per year) = =

12 months nventory holding periodInventory turnover ratio, (6) = =

2 months

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Debtors Turnover Ratio

h ratio is indicative of shorter time-lag between credit sales and cash collecti

Debtors turnover ratio

=

Net credit sales Average debtors

Net credit sales consist of gross credit sales minus returns, if any, from customers. Average debtors is the simple average of debtors (including bills receivable) at the beginning and at the end of year.
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Example 3: Debtors Turnover Ratio

g amount of debtors at the beginning and at the end of the year respe

Rs 2,40,000 Debtors turnover ratio (Rs 27,500 + Rs 32,500) ÷ 2 8 (times per year) = =

12 Months Debtors collection period Debtors turnover ratio, (8) = 1.5 Months =

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Creditors Turnover Ratio

ccounts are to be settled rapidly. The creditors turnover ratio is an important

Creditors turnover ratio =

Net credit purchases Average creditors

Net credit purchases = Gross credit purchases - Returns to suppliers. Average creditors = Average of creditors (including bills payable) outstanding at the beginning and at the end of the year.
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Example 4: Creditors Turnover Ratio

ples has made credit purchases of Rs 1,80,000. The amount payable to the c is Rs 42,500 and Rs 47,500 respectively. Find out the creditors turnover ratio

(Rs 1,80,000) Creditors turnover ratio (Rs 42,500 Rs 47,500) ÷ 2 =

4 (times per year) =

12 months reditor’s payment periodCreditors turnover ratio, (4) = 3 months =

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s a bearing on the liquidity of a firm. The cash cycle captures the inter

The combined effect of the three turnover ratios is summarised below:
Inventory holding period Add: Debtor’s collection period Less: Creditor’s payment period 2 months + 1.5 months – 3 months 0.5 months

horter is the cash cycle, the better are the liquidity ratios as measured above

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DEFENSIVE INTERVAL RATIO Defensive interval ratio is the ratio between quick assets and projected daily cash requirement.
Liquid assets Projected daily cash requirement

Defensive-interval ratio =

Projected cash operating expenditure jected daily cash requirement Number of days in a year (365) =

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Example 5: Defensive Interval Ratio

om the next year is Rs 1,82,500. It has liquid current assets amounting

Projected daily cash requirement = Defensive-interval ratio =

Rs 1,82,500 = Rs 500 365 Rs 40,000 Rs 500 = 80 days

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Cash-flow From Operations Ratio
Cash-flow from operation ratio measures liquidity of a firm by comparing actual cash flows from operations (in lieu of current and potential cash inflows from current assets such as inventory and debtors) with current liability.

Cash-flow from operations ash-flow from operations ratio = Current liabilities

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Leverage Capital Structure Ratio
There are two aspects of the long-term solvency of a firm: (ii) Ability to repay the principal when due, and • Regular payment of the interest . Capital structure or leverage ratios throw light on the long-term solvency of a firm. Accordingly, there are two different types of leverage ratios.

These ratios are computed from the balance sheet computed from the Incom Second type: These ratios are • • • Debt-equity ratio Debt-assets ratio Equity-assets ratio

• •

Interest coverage ratio Dividend coverage ratio
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I. Debt-equity ratio
Debt-equity ratio measures the ratio of long-term or total debt to shareholders equity.

Debt-equity ratio measures the ratio of long-term debt + Other Current Total Debt Debt-equitytotal de3bt to shareholders equity Liabilities = Total external ratio = term or Shareholders’ equity Obligations
If the D/E ratio is high, the owners are putting up relatively less money of their own. It is danger signal for the lenders and creditors. If the project should fail financially, the creditors would lose heavily. A low D/E ratio has just the opposite implications. To the creditors, a relatively high stake of the owners implies sufficient safety margin and substantial protection against shrinkage in assets.
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Long-term Debt + Short

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ntly its credit standing is not adversely affected, its ope

of low debt-equity ratio is that the shareholders of the benefits of trading on

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Trading on Equity
Trading on equity (leverage) is the use of borrowed funds in expectation of higher return to equity-holders. Trading on Equity Particular (a) Total assets Financing pattern: Equity capital 15% Debt (b)Operating profit (EBIT) Less: Interest Earnings before taxes Less: Taxes (0.35) Earnings after taxes Return on equity (per cent) A 1,000 1,000 — 300 — 300 105 195 19.5 (Amount in Rs thousand) B 1,000 800 200 300 30 270 94.5 175.5 21.9 C 1,000 600 400 300 60 240 84 156 26 D 1,000 200 800 300 120 180 63 117 58.5
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II. Debt to Total Capital

n creditors’ funds and owner’s capital can also be expressed using D

Debt to total capital ratio =

Total debt Permanent capital

Permanent Capital Long-term debt.

=

Shareholders’

equity +

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III. Debt to total assets ratio
Debt to total assets ratio =
Proprietary Ratio Proprietary ratio indicates the are financed by owners funds. extent to which assets

Total debt Total assets

Proprietary ratio =
Capital Gearing Ratio

Proprietary funds X 100 Total assets

Capital gearing ratio is used to know the relationship between equity funds (net worth) and fixed income bearing funds (Preference shares, debentures and other borrowed funds.
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Coverage Ratio
Interest Coverage Ratio Interest Coverage Ratio measures the firm’s ability to make contractual interest payments. Interest coverage ratio = Dividend Coverage Ratio
Dividend Coverage Ratio measures the firm’s ability to pay dividend on preference share which carry a stated rate of return.

EBIT (Earning before interest and taxes) Interest

Dividend coverage ratio =

EAT (Earning after taxes) Preference dividend
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Total fixed charge coverage ratio
Total fixed charge coverage ratio measures the firm’s ability to meet all fixed payment obligations. Total fixed charge = coverage ratio EBIT + Lease Payment Interest + Lease payments + (Preference dividend + Instalment of Principal)/(1-t)

Total Cashflow Coverage Ratio
However, coverage ratios mentioned above, suffer from one major limitation, that is, they relate the firm’s ability to meet its various financial obligations to its earnings. Accordingly, it would be more appropriate to relate cash resources of a firm to its various fixed financial obligations.
EBIT + Lease Payments + Depreciation + Non-cash expenses Lease payment + + Interest (Principal repayment) (1– t) + (Preference dividend) (1 - t)
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Total cashflow = coverage ratio

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Debt Service Coverage Ratio
Debt-service coverage ratio (DSCR) is considered a more comprehensive and apt measure to compute debt service capacity of a business firm.

DSCR

=

t=1

n

EATt

+

Interestt

t=1 n

+

Depreciationt

+

OAt

Instalmentt

DEBT SERVICE CAPACITY Debt service capacity is the ability of a firm to make the contractual payments required on a scheduled basis over the life of the debt.
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Example 6: Debt-Service Coverage Ratio
Agro Industries Ltd has submitted the following projections. You are required to work out yearly debt service coverage ratio (DSCR) and the average DSCR.
(Figures in Rs lakh) Year Net profit for the year 1 2 3 4 5 6 7 8 21.67 34.77 36.01 19.20 18.61 18.40 18.33 16.41 Interest on term loan during the year 19.14 17.64 15.12 12.60 10.08 7.56 5.04 Nil Repayment of term loan in the year 10.70 18.00 18.00 18.00 18.00 18.00 18.00 18.00

he net profit has been arrived after charging depreciation of Rs 17.68 lakh every year
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Solution
Table 3: Determination of Debt Service Coverage Ratio (Amount in lakh of rupees)
Year Net profit Depreciation Cash Principal Interest available instalment (col. 2+3+4) 4 19.14 17.64 15.12 12.60 10.08 7.56 5.04 Nil 5 58.49 70.09 68.81 49.48 46.37 43.64 41.05 34.09 6 10.70 18.00 18.00 18.00 18.00 18.00 18.00 18.00 Debt obligation (col. 4 + col. 6) 7 29.84 35.64 33.12 30.60 28.08 25.56 23.04 18.00 1.83 DSCR [col. 5 ÷ col. 7 (No. of times)] 8 1.96 1.97 2.08 1.62 1.65 1.71 1.78 1.89

1 1 2 3 4 5 6 7 8

2 21.67 34.77 36.01 19.20 18.61 18.40 18.33 16.41

3 17.68 17.68 17.68 17.68 17.68 17.68 17.68 17.68

Average DSCR (DSCR ÷ 8)

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Profitability Ratio
Profitability ratios can be computed either from sales or investment. Profitability Ratios Related to Sales • • Profit Margin Expenses Ratio • • Profitability Ratios Related to Investments Return on Investments

Return on Shareholders’ Equity

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Profit Margin
Gross Profit Margin
Gross profit margin measures the percentage of each sales rupee remaining after the firm has paid for its goods.

Gross profit margin =

Gross Profit X 100 Sales

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Net Profit Margin
Net profit margin measures the percentage of each sales rupee remaining after all costs and expense including interest and taxes have been deducted. Net profit margin can be computed in three ways Earning before interest and taxes Net sales Earnings before taxes Net sales Earning after interest and taxes Net sales
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i. Operating Profit Ratio =

ii. Pre-tax Profit Ratio =

iii. Net Profit Ratio =

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owing information of a firm, determine (i) Gross profit margin 1. Sales 2. Cost of goods sold 3. Other operating expenses
(1) Gross profit margin = Rs 1,00,000 Rs 2,00,000 Rs 50,000 Rs 2,00,000

Rs 2,00,000 1,00,000 50,000
= 50 per cent

(2) Net profit margin =

= 25 per cent

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Expenses Ratio
i. Cost of goods sold = ii. Operating expenses = Cost of goods sold X 100 Net sales Administrative exp. + Selling exp. Net sales Administrative expenses Net sales Selling expenses Net sales X 100 X 100

iii. Administrative expenses = iv. Selling expenses ratio = v. Operating ratio =

X 100

Cost of goods sold + Operating expenses X 100 Net sales Financial expenses Net sales X 100
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vi. Financial expenses =

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Return on Investment
Return on Investments measures the overall effectiveness of management in generating profits with its available assets. i. Return on Assets (ROA) ROA = EAT + (Interest – Tax advantage on interest) Average total assets

ii. Return on Capital Employed (ROCE) ROCE = EAT + (Interest – Tax advantage on interest) Average total capital employed
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Return on Shareholders’ Equity
Return on shareholders equity measures the return on the owners (both preference and equity shareholders) investment in the firm. Return on total shareholders’ equity = Net profit after taxes X 100 Average total shareholders’ equity Return on ordinary shareholders’ equity (Net worth) = Net profit after taxes – Preference dividend X 100 Average ordinary shareholders’ equity
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Efficiency Ratio
Activity ratios measure the speed with which various accounts/assets are converted into sales or cash. Inventory turnover measures the efficiency of various types of inventories. Cost activity/liquidity of i. Inventory Turnover measures theof goods sold Inventory Turnover Ratio = Average inventory inventory of a firm; the speed with which inventory is sold Cost of raw materials of i. Inventory Turnover measures the activity/liquidityused Raw materials turnover = inventory of a firm; the speed with whichmaterial inventory Average raw inventory is sold i. Inventory Turnover measuresCost activity/liquidity of the of goods manufactured Work-in-progress turnover = Average work-in-progress inventory inventory of a firm; the speed with which inventory is sold
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Debtors Turnover Ratio
Liquidity of a firm’s receivables can be examined in two ways.
Credit sales i. Inventory Turnover i. Debtors turnover = measures the activity/liquidity of inventory of a firm; the speed with which inventory is sold bills receivable (B/R) Average debtors + Average 2. Average collection period = Months (days) in a year Debtors turnover

Months measures the (x) (Average Debtors + Average (B/R) i. Inventory Turnover(days) in a year activity/liquidity of inventory of a Alternatively = Total sold firm; the speed with which inventory is credit sales

Ageing Schedule enables slow paying debtors.

analysis

to

identify
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Assets Turnover Ratio
Assets turnover indicates the efficiency with which firm uses all its assets to generate sales. Cost activity/liquidity i. Total assets turnover = Inventory Turnover measures the of goods sold of inventory of i. a firm; the speed with which inventory total assets Average is sold ii. Fixed assets turnover = Cost of goods sold Average fixed assets

Cost of goods sold i. Inventory Turnover measures the activity/liquidity of inventory of iii. Capital turnover = Average capital a firm; the speed with which inventory is sold employed Cost of goods sold iv. Current assets turnover = Average current assets i. Inventory capital turnover = Costactivity/liquidity of inventory of Turnover measures the of goods sold v. Working Net working capital a firm; the speed with which inventory is sold
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1) 2)

Return on shareholders’ equity = EAT/Average total shareholders’ equity. Return on equity funds = (EAT – Preference dividend)/Average ordinary shareholders’ equity (net worth).

3)

Earnings per share (EPS) = Net profit available to equity shareholders’ (EAT – Dp)/Number of equity shares outstanding (N).

4)

Dividends

per

share

(DPS)

=

Dividend

paid

to

ordinary

shareholders/Number of ordinary shares outstanding (N). 5) 6) 7) 8) 9) Earnings yield = EPS/Market price per share. Dividend Yield = DPS/Market price per share. Dividend payment/payout (D/P) ratio = DPS/EPS. Price-earnings (P/E) ratio = Market price of a share/EPS. Book value per share = Ordinary shareholders’ equity/Number of equity shares outstanding.
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Integrated Analysis Ratio

ratios provide better insight about financial and economic analysis o
(1) Rate of return on assets (ROA) can be decomposed in to (i) Net profit margin (EAT/Sales) (ii) Assets turnover (Sales/Total assets) (2) Return on Equity (ROE) can be decomposed in to (i) (EAT/Sales) x (Sales/Assets) x (Assets/Equity)

(ii) (EAT/EBT) x (EBT/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity
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Rate of Return on Assets EAT as percentage of sales EAT Divided by Sales Sales Fixed assets Assets turnover Divided by Plus Total Assets Current assets

Gross profit = Sales less cost of goods sold Minus Expenses: Selling Administrative Interest Minus Income-tax

Alternatively Shareholder equity Plus Long-term borrowed funds Plus Current liabilities

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Return on Assets
Earning Power
Earning power is the overall profitability of a firm; is computed by multiplying net profit margin and assets turnover. Earning power = Net profit margin × Assets turnover Where, Net profit margin = Earning after taxes/Sales Asset turnover = Sales/Total assets Earning after the activity/liquidity of inventory of Sales EAT i. Inventory Turnover measurestaxes x x Earning Power = a firm; the speed with which inventory isTotal Assets Total assets sold Sales

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EXAMPLE: 8
Assume that there are two firms, A and B, each having total assets amounting to Rs 4,00,000, and average net profits after taxes of 10 per cent, that is, Rs 40,000, each. Firm A has sales of Rs 4,00,000, whereas the sales of firm B aggregate Rs 40,00,000. Determine the ROA of firms A and B. Table 4 shows the ROA based on two components.

Table 4: Return on Assets (ROA) of Firms A and B Particulars 1. Net sales 2. Net profit 3. Total assets 4. Profit margin (2 ÷ 1) (per cent) 5. Assets turnover (1 ÷ 3) (times) 6. ROA ratio (4 × 5) (per cent) Firm A Rs 4,00,000 40,000 4,00,000 10 1 10 Firm B Rs 40,00,000 40,000 4,00,000 1 10 10
6 - 47

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Return on Equity (ROE)
ROE is the product of the following three ratios: Net profit ratio (x) Assets turnover (x) Financial leverage/Equity multiplier Three-component model of ROE can be broadened further to consider the effect of interest and tax payments.

Net Profit EBT EBIT EAT i. Inventory Turnover measures the activity/liquidity of x = x Sales Earnings before taxes speed with which inventory is sold Sales inventory of a firm; the EBIT
As a result of three sub-parts of net profit ratio, the ROE is composed of the following 5 components.

EAT EBT

x

EBT EBIT

x

EBIT x Sales

Sales Assets

x

Assets Equity
6 - 48

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A 5-way break-up of ROE enables the management of a firm to analyse the effect of interest payments and tax payments separately from operating profitability. To illustrate further assume 8 per cent interest rate, 35 per cent tax rate and other operating expense of Rs 3,22,462 (Firm A) and Rs 39,26,462 (Firm B) for the facts contained in Example 8. Table 5 shows the ROE (based on the 5 components) of Firms A and B. Table 5: ROE (Five-way Basis) of Firms A and B Particulars Net sales Less: Operating expenses Earnings before interest and taxes (EBIT) Less: Interest (8%) Earnings before taxes (EBT) Less: Taxes (35%) Earnings after taxes (EAT) Total assets Debt Equity EAT/EBT (times) EBT/EBIT (times) EBIT/Sales (per cent) Sales/Assets (times) Assets/Equity (times) ROE (per cent) Firm A Rs 4,00,000 3,22,462 77,538 16,000 61,538 21,538 40,000 4,00,000 2,00,000 2,00,000 0.65 0.79 19.4 1 2 20 Firm B Rs 40,00,000 39,26,462 73,538 12,000 61,538 21,538 40,000 4,00,000 2,50,000 1,50,000 0.65 0.84 1.84 10 1.6 16 6 - 49

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Common Size Statements
Preparation of common-size financial statements is an extension of ratio analysis. These statements convert absolute sums into more easily understood percentages of some base amount. It is sales in the case of income statement and totals of assets and liabilities in the case of the balance sheet.

Limitations
Ratio analysis in view of its several limitations should be considered only as a tool for analysis rather than as an end in itself. The reliability and significance attached to ratios will largely hinge upon the quality of data on which they are based. They are as good or as bad as the data itself. Nevertheless, they are an important tool of financial analysis.
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CASE STUDY

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nancials of Reliance Industries Ltd (RIL) for the period 2001-2006, appraise its financial health from the point of view of liquidit Selected financial data and ratios Particulars (I) Related to Liquidity Analysis Current assets Marketable investments Inventory Debtors Advances Cash and bank balance Current liabilities Short-term bank borrowings Sundry creditors Interest accrued Creditors for capital goods Other current liabilities & provisions Other data and ratios Net working capital Credit sales Cost of goods sold Cost of raw material used Credit purchases Average debtors Average creditors Current ratio Acid test ratio Debtors turnover Creditors turnover Debtors cycle (days) Creditors cycle (days) 2001 2002 2003 2004 (Amount in Rs crore) 2005 2006

9,844.48 17,925.2523,245.88 13,025.31 536.80 3387.25 536.19 536.11 2299.85 4976.07 7510.14 7,231.22 2,722.46 1,134.17 2,975.49 3,189.93 2,922.58 3,310.27 6,756.2212,064.38 1,760.71 100.63 147.21 224.24 5,312.06 9,830.10 18,160.3916,966.15 2,148.27 337.76 7,193.77 9,145.14 3,754.50 5,847.20 8288.10 380.15 366.78 389.23 223.00 717.48 676.45 104.72 175.16 1580.89 2,670.75 1270.24 892.08 4,107.03 4,532.42 22,886.51 21,290.91 18,155.98 21,608.85 988.31 3,170.68 1.85 0.87 23 7 16 54 3,195.21 45,073.88 45,957.85 41,023.35 45,083.06 1,928.31 4,800.85 1.33 0.51 23 9 16 39 -235.14 6,279.73 49,743.5456,247.03 54,642.6041,657.92 50,378.6534,721.39 56,884.4960,246.91 2,848.97 3,094.02 7,067.65 9,413.58 0.99 1.75 0.20 .26 17 17.63 8 6.40 21 21 45 57

28,988.62 536.11 7,412.88 3,927.81 13,503.03 3,608.79 21,934.45 12,684.39 366.95 525.37 3471.80 4,885.94 7,054.17 73,164.10 53,345.03 45,931.87 70,014.80 3,558.87 11,515.6 1.66 .55 18.62 6.08 20 60

24,591.03 16.58 10,119.82 4,163.62 8,144.85 2,146.16 21,441.88 11,438.69 310.42 728.18 3,890.98 2,073.61 3,149.15 89,124.16 65,535.84 58,342.31 68,516.87 4,045.71 12,688.31 1.49 .38 21.40 5.40 17 67

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CONTD. Particulars (II) Related to Solvency Analysis Free reserves Paid up capital Preference capital Bonus equity capital Total equity Long-term borrowings Current liabilities Total debt EBIT Interest Total debt-equity ratio Long-term debt-equity ratio Interest coverage ratio

2001 9,307.89 1,053.49 0.00 481.77 10,843.15 9,798.03 5,312.06 15,110.09 4,032.37 1,215.56 1.39 0.90 3.32

2002 21,834.29 1,395.85 0.00 481.77 23,711.91 16,780.21 9,830.10 26,610.31 6,307.71 1,827.85 1.12 0.71 3.45

2003 23,656.31 1,395.92 0.00 481.77 25,534.00 12,564.54 18,160.39 30,724.93 6,551.17 1,555.40 1.20 0.49 4.21

2004 33,056.50 1,395.95 0.00 481.77 34,934.22 11,149.38 12,955.22 24,104.60 7,735.86 1,434.72 0.69 .31 5.39

2005 39,010.23 1,393.09 0.00 481.77 40,885.09 6,172.98 17,131.52 23,304.50 10,537.34 1,468.66 0.57 .15 7.17

2006 48,411.09 1,393.17 0.00 481.77 50,286.03 8,185.60 16,454.48 24,640.08 11,581.10 877.04 0.49 .16 13.20

to Profitability Analysis manufacturing) goods sold ncluding other earnings)

total capital employed total assets equity funds rofit % ng profit ratio % it ratio % goods sold ratio % return on capital employed (ROCE)1 quity funds)

22886.51 21290.91 5,597.48 4,032.37 2,786.00 2,646.50 1,215.55 19235.95 29622.14 10715.17 24.46 17.62 11.56 93.03 20.07 ROR (Total assets)2 13.03 24.70

45073.88 45957.85 9,123.85 6,307.71 4,434.17 3,242.17 1,827.84 27,053.32 43,325.86 17,277.53 20.24 13.99 7.19 101.96 18.74 11.7 18.77

49,743.54 54,642.60 9,388.26 6,551.17 4,982.75 4,106.85 1,555.4 34,388.04 60,415.77 24,622.96 18.87 13.17 8.26 109.85 16.47 9.37 16.68

56,247.03 41,657.92 10,982.88 7,735.86 6,301.14 5,160.14 1,434.72 50,030.24 52,764.91 1,396.38 18.41 13.75 9.95 80.34 13.18 12.4 16.26

73.164.10 53,345.03 14,260.84 10,537.34 9,068.68 7,571.68 1,468.66 54,560.80 57,292.51 1,394.94 19.40 14.40 11.48 80.92 16.56 15.77 20.09

89,124.46 65,535.84 14,982.01 11,581.10 10,704.06 9,069.34 877.04 61,738.85 65,428.89 1,393.51 17.43 12.99 11.21 81.03 16.11 15.20 20.08

6 - 53 1. ROCE = (EAT© Tata McGraw-Hillcapital employed + Interest)/ Average Publishing Company Limited, (Total assets) = (EAT + Interest)/ Average assets 2. ROR Financial Management

Solution: The appraisal of financial health of RIL is presented below. Liquidity Analysis:

ajor reason for the sharp difference in these two liquidity ratios may be ascribed to a sign t liabilities during the 6 year period. The reliance on short-term bank borrowings, to such a

© Tata McGraw-Hill Publishing Company Limited, Financial Management

6 - 54

ays in 2004) seems to be at a very satisfactory level. In marked contrast, the creditors (which have shown sharp decrease trend over the years). Such a step would help to

Solvency Analysis:

h its operating profits (EBIT) decline by more than nine-tenth (2006), it l would stil ha

© Tata McGraw-Hill Publishing Company Limited, Financial Management

6 - 55

Profitability Analysis:

al employed. It fell from 20.07 per cent in 2001 to 16.11 per cent by 2006. However, it i

© Tata McGraw-Hill Publishing Company Limited, Financial Management

6 - 56

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