Financial

Managem
ent
SLP 2

Liquidity / Solvency Ratio:

Current Ratio:
This ratio shows the capacity of the firm to pay off its current liabilities by its current assets.
Usually an average industry ratio of 1 is considered to be prudent. Ambuja Cements has high
current ratio of 1.75 as compared to the India cements which has 0.65 and Ultratech 1.25. The
reason is it has huge amounts of cash and equivalents balances in current assets. Also, India
cements registered an unhealthy ratio on account of its low current assets and high current
liabilities.

Quick Ratio:
This ratio measures an immediate solvency position of the firm. The inventories are excluded
from the quick assets of the firm for calculating this ratio. The immediate realisation of quick
assets and pay off of quick liabilities normally happen in 2-3 months. Ambuja Cements has
reported a good quick assets ratio over the five year period and has finally registered 1.41 in
2012. Whereas the competitors India Cements and Ultratech has reported 0.43 and 0.88
respectively for the year under consideration.

Cash Ratio:
This ratio measures the immediate payoff of current liabilities from the cash and equivalents
available. The more the ratio it can it be said that idle and unutilised cash. Ambuja Cements
has ratio of 0.75, whereas India Cements has approx 0.0 ratio and ultratech has 0.02. The
reason for Ambuja Cementss ratio to be high is because it is offering a low credit period to
customers and hence it realizes cash early as compared to its competitors. The average
industry ratio is 0.26 which is considered to be a healthy position for operating in the
markets.

All these solvency ratios are well above industry average and company was able to maintain
the same position over the years so it is healthy position of Ambuja Cements according to
creditors and short term debtors point of view.

Efficiency Ratio/ Turnover Ratios:

Total asset Turnover Ratio:
This ratio measures the total assets utilised in generating sales of the given year. The industry
return is 80% while Ambuja Cements has effective asset utilisation of 91%. Hence it is more
efficient as compared to industry. Competitor Ultratech has the same 90% and India Cements
has 59% of asset turoner ratio for the period. So the position of the firm is much stronger
compared to competitors as it is efficiently utilizing its assets in generating every Rupee of
sale.

Receivables Turnover Ratio:

This ratio measures the number of times accounts receivable has been turned over into cash
in the given period. The industry average is 30 times whereas for Ambuja Cements receivable
turnover is 48 times. Competitors India Cements and Ultratech has 15 and 26 times the
receivable turnover. So conversion for Ambuja Cements is faster and shows efficiency in
collecting cash.

Inventory Turnover Ratio:

This ratio tells us how many times the raw material stock is getting converted into finished
goods. The higher the ratio the better it is and vice versa. The industry average is 4 times
whereas Ambuja Cements has 5.82 times inventory turnover ratio. The rival India Cement
has 2.22 and Ultratech has 4.58 times. For Ambuja Cements, the ratio is above the average
ratio thereby signifies better performance in the industry.

All the turnover ratios for Ambuja Cements are well above industry average. So its
performance is better compared to its competitors. Also over the years, it is able to improve
its performance thereby displaying gradual increase in these ratios.

Profitability Ratios:
Gross Profit Margin, Operating Margin and Net Profit Margin:
The ratio is decreasing over the year which implies that manufacturing cost is increasing
compared to price. When operating margin is concerned, Ambuja Cements and Ultra-Tech
show fairly similar performance while India Cement being in corporate debt restructuring
shows very low operating margin as most of the part of revenue is spent on pending
employees salaries and interest paid on debt.
Despite showing the lower gross profit margin compared to industry, Ambuja Cements is able
to maintain the operating profit margin higher which shows the effectiveness of the to deal
with selling, general and administrative expenses.
The net profit margin has reduced over the period for Ambuja Cements for the period 20082012. The reasons are increase in provision for taxes, increase in depreciation and finance
charges. Ultra tech's income tax expense has gone up considerably by 24% and finance cost
has reduced thereby maintaining a good net margin of 17%. In comparison to the average
industry ratio Ambuja Cementss net profit margin is lower i.e. at 12% which is because of
our high tax liabilities which reduces its reporting net profit after tax.

ROA:
ROA has been decreasing over the years for Ambuja Cements and it has fallen to 0.12 this
year because company has invested more amount in current assets but unable to utilize those
optimally so as to maintain the ratio. Ultra-Tech shows the similar performance as that of
Ambuja but India Cements shows very poor performance as its Net Income is low due to high
debts.

ROE:
This ratio tells us about the earning power of the shareholders' funds. A high return reflects
strong expansion opportunities and effective management. Ambuja Cements has failed in
increasing the return on equity and this ratio has been coming downwards over the period
under consideration from 27% in 2008 it has come down significantly to 15% in 2012. The
competitor India Cement has 16% while Ultratech has a good ratio of 27% in the year under
comparison. The average industry ratio is 16% and Ambuja Cementss ratio is close to
average ratio at 15%. Hence, it faces challenge from Ultra tech which has good returns for its
equity investors as compared to Ambuja Cements.

Leverage Ratios:
Debt Ratio:
This ratio measures the total liabilities against total assets showing how much of the firms
asset are financed by debts. The industry average is 42% whereas Ambuja Cements has 29%.
Meanwhile the competitors India Cements and Ultratech have 54% and 44% respectively.
Ambuja Cements finances most of the assets by equity as their ROE is less compared to
industry.
Also the company is able to sustain the ratio over a period of 5 years and is much lower
compared to industry.

Debt Equity Ratio:

The ratio indicates similar aspects of the company compared to previous one. Only difference
is this ratio measures the total liabilities against the equity instead of assets showing what
amount of assets are financed by debt. The average industry ratio is 0.79 whereas for Ambuja
Cements ratio is 0.41. The rival firms India Cements and Ultra tech has .80 and 1.15
respectively. Again this ratio shows that our funds are mostly financed by equity.
Also the company is able to sustain the ratio over a period of 5 years and is much lower
compared to industry.

Times Interest Earned Ratio / Interest Coverage Ratio:

The ratio compares the finance cost of a company compared to its earnings before calculating
the interest and tax as tax is deducted after interest is paid. More the debt more is the interest
paid and vice versa. The average industry ratio is 30.04 times whereas for Ambuja Cements
the ratio is 69.06. Ultratech and India Cements have the ratio of 19.24 and 1.82 respectively.
As most of the assets are financed by equity for Ambuja Cements, interest paid on debt and
overall finance cost is very less thereby leading to higher ratio. India Cements being in
corporate debt restructuring shows very poor ratio of 1.82.
In 2008, company has higher debt to finance its sales related activities. So despite having
higher earnings before tax it is showing lower ratio. Later the company was able to reduce its
debts. But again the debt increased in 2011-12 but it was not able to attain the similar trend in
its sales level. Also the cost of production increased so operating margin reduced.

From the above category of ratios, it is implied that the company is more focused towards
financing through equity instead of debts so it is reducing shareholders wealth.

1. Whether a creditor would give credit?

The efficiency ratios of the Ambuja Cements are well above the industry average so
they are collecting cash at faster rate. Also creditor would check sources of finance
while offering credit to any company. Most of the financing is done by equity for
Ambuja Cements so they have lower debt to equity ratio. Therefore it is a positive
sign for creditors as their money is in safe hands and can be returned in a lower period
compared to industry average.
So creditor would definitely like to give credit.
2. Whether a bank would lend?
Similar is the reason for banks to lend money to Ambuja Cements as stated above. On
the top of that, the solvency ratios of company are higher compared to competitors
and industry average. So assets can be liquefied quickly to claim the debt amount in
case of defaults. So it will be safer for banks to lend money to Ambuja Cements so
they will definitely lend.
3. Whether an investor should invest?
An investor usually invests looking at the P/E ratio. Lower the P/E ratio, higher the
returns.
P/E Ratio = (Market Price of Share / Earnings per share)
= (Market Price * No. of Shares / Net Income)
It indicates the amount (in Rupees) to be invested by an investor to get a gain of 1
Rupee. So, lower the ratio higher is the return on investment.
But return comes in two parts: 1. Capital gain yield
2. Dividend yield
Even though India Cements shows lower P/E, their financial condition is not stable so
risk involved in investment is very high.
Ambuja Cements

Ultra-Tech

Market Price

181.30

1969.95

P/E (avg = 15.84)

21.68

26.56

Dividend Paid

180%

90%

Face Value

10

Dividend Value

Rs. 3.6 for Rs. 181.30

Rs. 9 for Rs. 1969.95

By this fundamental analysis stock looks attractive. Even though most of the assets are
financed by equity so return on equity is lower, it is providing higher dividend.
So investor should invest in Ambuja Cements.