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Financial Accounting Term Paper

Under Dr. Jayanta Kumar Seal

Submitted By
Shorya Gupta (45)
Ishan Gupta (16)
Mohit Mahajan (25)
Udit Bhatia (51)

Company: Steel Authority of India Limited


Competitors:

Tata Steel
JSW Steel
Visa Steel

Source of Data: moneycontrol.com

Debt Coverage Ratios


Interest Coverage Ratio
Interest coverage ratio determines how easily a company can pay interest on the
outstanding debt. The interest coverage ratio is calculated by diving a companys
earnings before interest and taxes (EBIT) of one period by the companys
interest expenses of the same period.

Interest Rate Coverage


Ratio
Tata Steel
SAIL
JSW Steel
Visa Steel
Industry Average

Mar-14 Mar-13 Mar-12


4.35
6.41
5.53
3.19
5.59
9
2.25
2.33
2.67
0.06
-0.64
0.29
2.4625 3.4225 4.3725

Mar-11 Mar-10
5.85
6.26
15.86
26.26
3.43
4.44
2.14
2.22
6.82
9.795

Interest Coverage Ratio


30
25
20
15
10
5
0
-5

Mar-14

Tata Steel

Mar-13

SAIL

Mar-12

JSW Steel

Mar-11

Visa Steel

Mar-10

Industry Average

Analysis-We can see that there is a falling trend in the interest coverage ratio of
SAIL which is consistent with the industry average. This indicates that the
industry as a whole is suffering from higher interest payment for the debt raised
as a component of its revenues. It is seen that the industry as a whole is
becoming strained on debt financing.
In case of SAIL, in 2010, its EBIT were 26.26 times its interest expense which
today has remained 3.19 times only. This is due to its debt increasing from Rs.
16,000 crores In 2010 to Rs. 24,000 crores in 2014. Simultaneously, its EBIT also
declined in the same period.

Debt-To-Capital Ratio
Debt to Capital ratio is a measurement of a company's financial leverage,
calculated as the company's debt divided by its total capital. Debt includes all
short-term and long-term obligations. Total capital includes the company's debt
and shareholders' equity, which includes common stock, preferred stock,
minority interest and net debt.
Calculated as:

Total Debt to Capital


ratio
Tata Steel
SAIL
JSW Steel
Visa Steel
Industry Average

Mar-14 Mar-13
0.57
0.52
0.39
0.43
1.06
1.09
6.33
4.25
2.0875 1.5725

Mar12 Mar-11 Mar-10


0.4
0.54
0.5
0.47
0.45
0.56
0.86
0.69
0.74
5.13
3.99
3.63
1.715 1.4175 1.3575

Total Debt to Capital Ratio


7
6
5
4
3
2
1
0
Mar-14
Tata Steel

Mar-13
SAIL

Mar-12
JSW Steel

Mar-11
Visa Steel

Mar-10
Industry Average

Analysis- SAIL has kept its Debt to Capital structure significantly lower than the
industry average. This has been possible due to higher reserves accumulation
over the years.

Financial Charges Coverage Ratio Post tax


A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as
interest and leases. It is calculated as the following:

Financial Charges
Coverage Ratio Post Tax
Tata Steel
SAIL
JSW Steel
Visa Steel
Industry Average

Mar-14 Mar-13 Mar-12 Mar-11 Mar-10


5.27
5.58
4.57
5.08
5.62
5.48
5.78
8.75
14.46
21.15
2.7
2.48
3.19
3.81
4.98
0.35
0.69
0.64
1.99
2.07
3.45 3.6325 4.2875
6.335
8.455

Financial Charges Coverage Ratio Post Tax


25
20
15
10
5
0
Mar-14
Tata Steel

Mar-13
SAIL

Mar-12
JSW Steel

Mar-11
Visa Steel

Mar-10
Industry Average

Analysis-Traditionally SAIL has maintained the highest Financial Charges


Coverage ratio and well above the industrial average. It has been in a relatively
better condition than its peers. However, the steep decline of the ratio over the
years is a cause of concern.

Ts iraR revonru
Inventory Turnover Ratio
A ratio showing how many times a company's inventory is sold and replaced
over a period. The days in the period can then be divided by the inventory
turnover formula to calculate the days it takes to sell the inventory on hand or
"inventory turnover days."

Inventory Turnover Ratio of SAIL n major competitors over last 5 years


SAIL
JSW Steel
TATA Steel
VISA Steel
Industry Average

Mar14
3.45
5.87
5.79
6.78
5.47

Mar13
2.79
7.31
7.71
3.62
5.35

Mar12
3.37
7.40
8.05
3.87
5.67

Mar11
5.13
7.97
7.62
3.57
6.07

Mar10
6.02
7.10
7.44
3.64
6.05

9
8
7
6

SAIL

JSW Steel

TATA Steel

VISA Steel

2
1

0
Mar'14

Mar13

Mar12

Mar11

Mar10

Analysis- SAILs inventory ratio used to be high in previous years but with time
it has come down. This show increase in its inventory, that is less sales. However
for Mar14 it has slightly increased showing increase in sales. Also difference in
value of this ratio w.r.t industry average has increased.

Debtors Turnover Ratio


An accounting measure used to quantify a firm's effectiveness in extending credit
as well as collecting debts. The receivables turnover ratio is an activity ratio,
measuring how efficiently a firm uses its assets.
Formula:

Debtors Turnover Ratio of SAIL n major competitors over last 5 years


SAIL
JSW Steel
TATA Steel
VISA Steel
Industry
Average

Mar14
9.43
21.71
66.21
20.41
29.44

Mar13
9.71
22.20
53.21
9.23
23.58

Mar12
10.39
22.02
44.91
27.44
26.19

Mar11
11.11
29.12
51.10
23.00
28.58

Mar10
12.46
32.95
68.46
15.72
32.39

80
70
60
50

SAIL
JSW Steel

40

TATA Steel

30

VISA Steel

20
10
0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis- Debtors Turnover ratio should be high as 1/(Debtors Turnover ratio)


gives Days Sales Outstanding (DSO) i.e. number of days your creditors delayed
payments. SAILs Debtors Turnover ratio w.r.t previous year performance of
SAIL, has decreased thus increasing DSO. Also this ratio for SAIL has always been
way below the industry average indicating large DSO.

Asset Turnover Ratio


The ratio of the value of a companys sales or revenues generated relative to the
value of its assets. The Asset Turnover ratio can often be used as an indicator of
the efficiency with which a company is deploying its assets in generating
revenue.
Asset Turnover = Sales or Revenues / Total Assets
Generally speaking, the higher the asset turnover ratio, the better the company
is performing, since higher ratios imply that the company is generating more
revenue per dollar of assets. Yet, this ratio can vary widely from one industry to
the next. As such, considering the asset turnover ratios of an energy company
and a telecommunications company will not make for an accurate comparison.
Comparisons are only meaningful when they are made for different companies
within the same sector.
Asset Turnover Ratio of SAIL n major competitors over last 5 years
SAIL
JSW Steel
TATA Steel
VISA Steel
Industry
Average

Mar14
0.72
0.91
0.46
0.38
0.61

Mar13
0.75
1.06
0.50
0.25
0.64

Mar12
0.82
1.06
0.49
0.85
0.80

Mar11
0.79
1.07
0.45
0.81
0.78

Mar10
0.95
0.92
0.43
0.88
.79

1.2
1
0.8
SAIL
JSW Steel

0.6

TATA Steel
VISA Steel

0.4
0.2

0
Mar'14

Mar'13

Mar'12

Mar'11

Mar'10

Analysis- This ratio for SAIL has continuously been declining indicating
decrease in its sales. Although this ratio is decreasing but SAIL continues to
maintain it above industry standards.

Liquidity and Solvency Ratios


Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations.
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". The Current
Ratio formula is:

SAIL
JSW Steel
Tata Steel
Visa Steel
Industry
Average

Mar 14
0.79
1.02
0.62
0.33
0.69

Mar 13
1.01
0.82
0.57
0.46
0.465

Mar 12
1.22
0.88
0.86
0.29
0.8125

Mar 11
1.21
0.76
0.93
0.47
0.8425

Current Ratio
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Mar' 14

Mar' 13
SAIL

JSW Steel

Mar' 12
Tata Steel

Mar' 11
Visa Steel

Analysis The average of the 4 players comes out to be =0.765, thus we can see that For SAIL,
it is 0.79 which is greater than the average. SAIL is in good position in paying out its obligation.

Quick Ratio
An indicator of a companys short-term liquidity. The quick ratio measures a
companys ability to meet its short-term obligations with its most liquid assets. For
this reason, the ratio excludes inventories from current assets, and is calculated as
follows:
Quick ratio = (current assets inventories) / current liabilities, or Quick ratio
= (cash and equivalents + marketable securities + accounts receivable) /
current liabilities.
The quick ratio measures the dollar amount of liquid assets available for each dollar
of current liabilities.
SAIL
JSW Steel
Tata Steel
Visa Steel
Industry
Average

Mar 14
0.62
0.67
0.27
0.27
0.4575

Mar 13
0.68
0.71
0.32
0.40
0.5275

Mar 12
0.82
0.69
0.61
0.19
0.5775

Mar 11
1.35
0.54
0.69
0.25
0.7075

Quick Ratio
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Mar' 14

Mar' 13
SAIL

JSW Steel

Mar' 12
Tata Steel

Mar' 11
Visa Steel

AnalysisThe average of the 4 players comes out to be = 0.5675, thus we can see that For
SAIL, it is 0.62, which is greater than the average. A quick ratio of 0.8675 of SAIL
means that the company has Re 0.8675 of liquid assets available to cover each Re
1 of current liabilities. The higher the quick ratio, the better the companys
liquidity position. Also known as the acid-test ratio or quick assets ratio.

Debt Equity Ratio


A measure of a companys financial leverage calculated by dividing its total
liabilities by stockholders equity. It indicates what proportion of equity and debt
the company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total


liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this
ratio can be applied to personal financial statements as well as corporate ones.
SAIL
JSW Steel
Tata Steel
Visa Steel
Industry
Average

Mar 14
0.57
1.06
0.39
6.33
2.0875

Mar 13
0.52
1.09
0.43
4.25
1.5725

Mar 12
0.40
0.86
0.47
5.13
1.715

Mar 11
0.54
0.69
0.45
3.99
1.4175

Debt Equity Ratio


7
6
5
4
3
2
1
0
Mar' 14

Mar' 13
SAIL

JSW Steel

Mar' 12
Tata Steel

Mar' 11
Visa Steel

AnalysisThe average of the 4 players comes out to be = 1.691875, thus we can see that
For SAIL, it is 0.57, which is lesser than the average. A high debt/equity ratio
generally means that a company has been aggressive in financing its growth with
debt. This can result in volatile earnings as a result of the additional interest
expense. Generally auto manufacturing companies tend to have this ratio>2.
High debt to equity is not preferred as the cost of this debt financing may
outweigh the return that the company generates on the debt through investment
and business activities and become too much for the company to handle.

Profitability Ratios

Operating profit Margin (%)


It gives an idea about how much a company makes on each rupee of sales. Its
value is given by

For SAIL, operating profit margin decreased from 11.26 % in 2013 to 9.23% in
2014.
It is the amount of profit realized from a business's operations after taking out
operating expenses - such as cost of goods sold (COGS) or wages - and
depreciation. Operating income takes the gross income (revenue minus COGS)
and subtracts other operating expenses and then removes depreciation. It is
given by:
Operating Income = Gross Income Operating expenses Depreciation &
Amortization
Year

Mar '14

SAIL

Mar '13

Mar '12

Mar '11

Mar '10

JSW

8.39

10.34

13.04

16.37

22.89

19.24

19.38

17.77

17.42

20.08

TATA

23.95

30.72

29.12

33.99

39.06

VISA

3.72

-8.81

5.86

15.41

17.25

50
40
30
20
10
0
Mar'14

Mar'13

Mar'12

Mar'11

-10

-20
SAIL

JSW

TATA

VISA

Mar'10

Return on Net Worth


Also called return on Equity, it is calculated as
Return on Equity = Net Income/Shareholder's Equity
For SAIL, we see the below data for % ROE

Year

Mar '14

Mar '13

Mar '12

Mar '11

Mar '10

SAIL

6.12

5.59

8.92

13.34

20.29

JSW

8.56

5.55

9.02

8.77

12.07

TATA

9.65

10.48

9.17

12.72

14.68

VISA

-41.55

-17.52

-50.69

14.54

15.18

30
20
10
0
-10

Mar '14

Mar '13

Mar '12

Mar '11

Mar '10

SAIL

JSW

-20

TATA

-30

VISA

-40
-50
-60

1. Trend in SAILs Average over past 5 years


a. ROE has consistently been on a decline over 4 years; it experienced
a slight jump in 2014.
2. Performance of SAILs ROE Compared to Industry Average
a. SAIL commands around 14% of market share.
b. Its market share has dropped from 18.8% in 2009-10 to 14 % in
2014-15.

Return on Long Term Funds(%)


Return of Long Term funds is calculated as
RLTF= EBIT/Long term funds
For SAIL and the industry, we see the below data for % RLTF

Comparison with Industry Average


We see that SAIL on average provides higher Earnings before interest and tax
than the competitors but the RLTF is decreasing every year.

YEAR

Mar '14

Mar '13

Mar '12

Mar '11

Mar '10

SAIL

5.75

8.05

JSW

12.79

14.08

12.99

13.56

12.08

TATA

9.25

13.38

12.81

14.78

14.93

VISA

0.33

-3.08

4.74

11.56

12.36

12.02 --

20.4

25
20
15

SAIL
JSW

10

TATA
VISA

5
0
Mar '14

Mar '13

Mar '12

Mar '11

Mar '10

-5

Analysis- Taking the example of the last 2 years we see that SAILs earning to
Long term debt ratio has come down slightly. This can be attributed to

Decrease in EBIT from 4176 Crores in Mar13 to 3082 Crores in Mar14 .


The percentage increase in Long term funds is even higher causing the
Return on Long Term Fund to decrease.
o Increase in EBIT is due to increase of about 10000cr in sales
o Increase of about 1000cr in other income
A higher increase in Long term funds
o Long term funds increased from 32223cr in 2012 to 35359cr in
2013
o Increase in the shifting and rehabilitation fund from 1977cr to
2307cr
o Total other long term liabilities increased from 2647cr to 3137cr
o Other long term provisions including OBR Adjustment account
have also increased by 3200cr

Net Profit Marginr(%)


Also called return on revenue, profit margin, net margin.

It is the ratio of profitability upon sales


Profitability here suggest to the net profit after interests, tax,
depreciations and amortisations
This is in an important parameter in comparing the industries in the
similar domain

Year

Mar '14

SAIL

Mar '13

Mar '12

Mar '11

Mar '10

5.62

5.16

15.41

15.37

13.25

19.73

23.35

JSW

4.7

2.94

5.07

5.07

8.7

VISA

-14.8

-17.09

-8.7

3.95

4.02

TATA
STEEL

7.7 --

15.93

30
25
20
15
SAIL

10

TATA STEEL

JSW

0
-5

Mar '14

Mar '13

Mar '12

Mar '11

Mar '10

VISA

-10
-15
-20

Analysis- The increase in profit for the year was mainly due to the increase in
the EBITDA and also decrease in the prior period adjustment, reduction due to
the extra ordinary items and also lesser deferred tax vis-a-vis 2013.