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ACKNOWLEDGEMENT

On the very outset of this report, I would like to extend my sincere & heartfelt obligation
towards all the personages who have helped me in this Endeavour. Without their active
guidance, help, cooperation & encouragement, I would not have made headway in the
project.
I am extremely thankful and pay my gratitude to my faculty guide Dr. Kartik
Chandra Paul for his valuable guidance and support on completion of this project in
its presently.
I extend my gratitude to Vidyasagar University for giving me this opportunity.
I also acknowledge with a deep sense of reverence, my gratitude towards my parents
and member of my family, who has always supported me morally as well as
economically.
At last but not least gratitude goes to all of my friends who directly or indirectly
helped me to complete this project report.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Thanking You
Abhijit Paul

CERTIFICATE FROM THE FACULTY GUIDE


This is to certify that the project work entitled STUDY OF LIQUIDIDTY AND
PROFITABILITY OF TATA STEEL AND THEIR RELATIONSHIP is a bonafide work
carried out by Abhijit Paul, a candidate of MBA (2014-2016) of Department of Business
Administration (Vidyasagar University) under my guidance and direction.

Table of Contents
SECTION 1

INTRODUCTION
WHAT IS LIQUIDITY
PROCESS TO MEASURES LIQIDITY
WHAT DO LIQUIDITY RATIOS MEASURES
PROFITABILITY
REASONS FOR COMPUTING PROFITABILITY
PROCES TO MEASURES PROFITABILTY

SECTION 2

LITERATURE REVIEW
INTRODUCTION TO THE STUDY
OBJECTIVES OF THE STUDY
SCOPE OF THE STUDY
RELATIONSHIP BETWEEN LIQUIDITY AND PROFITABILITY
LIMITATION OF THE STUDY

SECTION 3
A BRIEF INTRODUCTION TO TATA STEEL
SECTION 4
RESEARCH METHODOLOGY
DATA COLLECTION METHOD
TOOLS AND TECHNIQUIES FOR ANALYSIS
SECTION 5
DATA ANALYSIS
INTERPETATIONS AND FINDINGS
RECOMMENDATION
SECTION 6
CONCLUSION
BIBILOGRAPHY
1.1 INTRODUCTION
For a successful business enterprise two types of assets are very important i.e. fixed assets
and current assets. Fixed assets viz., land & building, plant & machinery, furniture etc. are

not purchased for the purpose of sale but for the purpose of earning profit for a long
period in the future. On the other hand, current assets viz., stock, debtors, bills receivable,
cash and bank balance etc. are purchased for the production of goods and sales of those goods
through the process of operating cycle i.e. conversion of raw material into work-inprogress, work-in-progress into finished goods, finished goods into debtors and debtors are
converted into cash or bills receivable. The fixed assets are used in order to increase the
production of an organization and the current assets use the more fixed assets in day
to day working. The management of this working capital is known as working capital
management (Pandey & Jaisal, 2011). Working capital plays an important role in firm's
growth and profitability and is tightly interlinked with the concept of liquidity . This
liquidity-profitability relationship is associated with the maintenance of the proper level
of working capital. Liquidity and profitability are the two important and vital aspects of
corporate business life. No firm can survive without liquidity . Without making any profit
a firm may be considered as sick but one having no liquidity may soon meet its downfall
and ultimately die. As a matter of fact, liquidity is a pre-requisite for the survival of a
business firm. Thus, the liquidity management has become a basic and broad aspect of
judging the performance of a corporate entity.
1.2 WHAT IS LIQUDITY
Liquidity describes the degree to which an asset or security can be quickly bought or sold in
the market without affecting the asset's price.
Accounting liquidity measures the ease with which an individual or company can meet their
financial obligations with the liquid assets available to them. There are several ratios that
express accounting liquidity.
Cash is considered the standard for liquidity because it can most quickly and easily be
converted into other assets. If a person wants a Rs.1,000 refrigerator, cash is the asset that can
most easily be used to obtain it. If that person has no cash, but a rare book collection that has
been appraised at Rs.1,000, they are unlikely to find someone willing to trade them the
refrigerator for their collection. Instead, they will have to sell the collection and use the cash
to purchase the refrigerator. That may be fine if the person can wait months or years to make
the purchase, but it could present a problem if the person only had a few days. They may
have to sell the books at a discount, instead of waiting for a buyer who was willing to pay the
full value. Rare books are therefore an illiquid asset.

For an entity, such as a person or a company, accounting liquidity is a


measure of their ability to pay off debts as they come due, that is, to have access to
their money when they need it.

1.3 PROCESS TO MEASURE LIQUIDITY


There are some ratio which is used to measure to liquidity. They are------

Current Ratio

The current ratio is the simplest and least strict ratio. Current assets are those that can
reasonably be converted to cash in one year.
Current Ratio = Current Assets / Current Liabilities

Acid-Test or Quick Ratio

The acid-test or quick ratio is slightly more strict. It excludes inventories and other current
assets, which are not as liquid as cash and cash equivalents, accounts receivable and shortterm investments.

Cash Ratio

The cash ratio is the most exacting of the liquidity ratios, excluding accounts receivable as
well as inventories and other current assets. More than the current ratio or acid-test ratio, it
assess an entity's ability to stay solvent in the case of an emergency. Even highly profitable
companies can run into trouble if they do not have the liquidity to react to unforeseen events.
Cash Ratio = (Cash and Cash Equivalents + Short-Term Investments) / Current
Liabilities

1.4 WHAT DO LIQUIDITY RATIOS MEASURES ?


Liquidity ratios work with cash and near-cash assets (together called current assets) of a
business on one side, and the immediate payment obligations include dues to suppliers,

operating and financial expenses that must be paid shortly and maturing installments under
long-term debt. Liquidity ratios measure a business ability to meet the payment obligations
by comparing the cash and near-cash with the payment obligations. If the coverage of the
latter by the former is insufficient, it indicates that the business might face difficulties in
meeting its immediate financial obligations. This can, in turn, affect the companys business
operations and profitability.
The near-cash assets are not all equal in their nearness to cash. Inventories are farthest from
cash (apart from advance payments and such minor items) as they typically become
receivables can also be very far from cash if customers are given several months to pay their
dues.
It is thus the speed of converting the different near-cash assets into cash that is important. The
cash conversion cycle measures this speed, and is used along with liquidity ratios to asses a
business short-term financial prospects.
Liquidity is the ability to repay short-term debt. We measure liquidity by comparing the
firms liquid assets cash or assets that will be turned into cash in the operating cycle to the
amount of short-term debt outstanding, which is the measurement provided by the current
ratio and the quick or acid-test ratio. We can also measure liquidity by comparing how
quickly accounts receivables turn over ( how long it takes to collect them on average) and
how quickly inventories turn over. The more quickly these assets can be turned over, the
more liquid the firm is.
1.5 PROFITABLITY
Profitability is the primary goal of all business ventures. Without profitability the business
will not survive in the long run. So measuring current and past profitability and projecting
future profitability is very important.
Profitability is measured with income and expenses. Income is money generated from the
activities of the business. For example, if crops and livestock are produced and sold, income
is generated. However, money coming into the business from activities like borrowing money
do not create income. This is simply a cash transaction between the business and the lender to
generate cash for operating the business or buying assets.
Expenses are the cost of resources used up or consumed by the activities of the business. For
example, seed corn is an expense of a farm business because it is used up in the production
process. Resources such as a machine whose useful life is more than one year is used up over

a period of years. Repayment of a loan is not an expense, it is merely a cash transfer between
the business and the lender.
1.6 REASON FOR COMPUTE PROFITABILITY
Whether you are recording profitability for the past period or projecting profitability for the
coming period, measuring profitability is the most important measure of the success of the
business. A business that is not profitable cannot survive. Conversely, a business that is
highly profitable has the ability to reward its owners with a large return on their investment.
Increasing profitability is one of the most important tasks of the business managers.
Managers constantly look for ways to change the business to improve profitability. These
potential changes can be analyzed with a pro forma income statement or a Partial Budget.
Partial budgeting allows you to assess the impact on profitability of a small or incremental
change in the business before it is implemented.
A variety of Profitability Ratios can be used to assess the financial health of a business. These
ratios, created from the income statement, can be compared with industry benchmarks.
Also, Income Statement Trends can be tracked over a period of years to identify emerging
problems.
1.7 PROCESS TO MEASSURE PROFITABLITY
To measure profitability there are some ratios like-------

Profit Margin Ratio

Net sales is calculated by subtracting any returns or refunds from gross sales. Net
incomeequals total revenues minus total expenses and is usually the last number reported on
theincome statement.
Profit Margin Ratio = Net Income / Net sale or revenue

Gross Profit Margin Ratio

Gross Profit Margin Ratio is calculated by dividing gross profit by net sales.
Gross Profit Margin Ratio = Gross Profit/Net sale

Return On Investment (ROI)

To calculate return on investment, the benefits (or returns) of an investment are divided by
Total asset. The result can be expressed as a percentage or a ratio.

Return on Investment (ROI) = Net Profit after Tax / Total Asset

Return On Capital Employed

The return on capital employed measures the proportion of adjusted earnings to the amount of
capital and debt required for a business to function. For a company to remain in business
over the long term, its return on capital employed should be higher than its cost of capital;
otherwise, continuing operations gradually reduce the earnings available to shareholders.
Return On Capital Employed=Earnings before interest and taxes/Total assets - Current
liabilities

SECTION 2

LITERATURE REVIEW
INTRODUCTION TO THE STUDY
OBJECTIVES OF THE STUDY
SCOPE OF THE STUDY
LIMITATION OF THE STUDY
INTODUCTION TO THE COMPANY

2.1 LITERATURE REVIEW


Understanding the Relationship Between Liquidity and Profitability Efficient working capital
management is an important aspect of corporate strategy whose main aim is to create
shareholder value (Shin & Soenen, 1998). An excessive investment in current assets
would reduce the rate of return for shareholders (Vishnani, 2007). The literature in
this

chapter

supports

efficient working capital

management,

highlighting similar

academic work that finds a significant negative relationship between measures of


liquidity and those of profitability. This is consistent across different industries,
company sizes and geographic regions. It therefore follows that management would do well
to improve liquidity, as measured by the cash conversion cycle, in order to maximize
shareholder returns.
Efficient Liquidity Management
Holmstrom & Tirole, 2000, list a number of decisions that corporations make which affect
their funding ability. First, the corporations capital structure sets a time table for the
reimbursement of investors. A decision to hold short-term debt, for instance, is
different to holding long-term debt as its repayment falls due much sooner. Preference
stock

holders require a non-negotiable periodic payment compared to a subjective yet

generous payment required by common stock holders. Secondly, corporations do not invest
all their resources in profitable long-term projects. They also invest in less profitable
liquid assets that are held on their balance sheets. Also, rather than hoarding liquidity
themselves, corporations may secure lines of credit from financial institutions. Lastly,
Corporations engage in risk management and can use derivatives to hedge specific risks.
Foreign exchange swaps are a common tool to hedge against unfavorable movements
in exchange rates, especially for businesses involved in foreign trade.There are a
number of arguments that have been put forward for the value of liquidity
management. Two of the main arguments are taxes and managerial incentives.
Holmstrom and Tirole, 2000, however, not too convinced by the mentioned arguments
suggest that liquidity management derives its rationale from the corporations concern for
refinancing. This is after they argue that, the ArrowDebreu-McKenzie model ignores a
fundamental need by firms to refinance their activities. Further the model downplays a lot
of the reasons mentioned above as the key reasons for managing liquidity. For instance,
capital structure is considered irrelevant (Miller & Modigliani, 1958), because firms
need not hoard cash as they can issue claims against the full value of the new
investments, and claimholders cannot gain by having firms engage in risk management

since reshuffling state contingent resources in a complete market does not affect the market
portfolio.In trying to reduce the probability of running out of cash, companies try to manage
liquidity

efficiently

by

planning

and

controlling

current

assets

and

current

liabilities(Eljelly, 2004). They do this in such a manner that eliminates the risk of the
inability to meet due short-term obligations, on one hand, and avoid excessive investment in
these assets, on the other. Also, from an operating point of view, working capital has
increasingly been looked at as a restraint on financial performance, since the assets do not
contribute to return on equity (Sanger, 2001).
Measures of Liquidity and Profitability
There are arguments for a cash conversion cycle approach to liquidity analysis. Some
common approaches to liquidity analysis used by financial analysts and financial
managers in the assessment of firm liquidity are static (Richard & Laughlin, 1980). The
various components of working capital investments do not enjoy the same life expectancy,
nor are they transformed into usable liquidity flows at the same speed. The current ratio, a
static view, is used by financial analysts as a key indicator of a firms liquidity position.
The ratio is commonly used because of its simplicity, extensive scholarly reference and
its intuitive appeal compared to other measures .If it is the protection of firms against
liquidity upsets when there are unanticipated discrepancies in the amount and timing of
operating cash inflows and outflows, then the use of total current asset coverage of
outstanding current liabilities can surely not be more reliable or superior to cash reserve
investments in combination with unused borrowing capacity.The acid test ratio was
created in response to the current ratios criticisms. More liquid assets are used in the
numerator of the formula to take into

consideration the qualitative differences in the

liquidity attributes of current asset investments. For this reason inter-firm and inter-period
comparisons of current ratio statistics are of questionable value to the financial analyst.
For instance, increases in current assets of a lower liquidity standard in a period maybe
a sign of a deteriorating liquidity position rather than an improving position. In his 1968
work on the prediction of corporate bankruptcy, Altman picks a working capital measure of
liquidity over the current ratio and quick ratio. The working capital based ratio was a better
measure of liquidity and therefore showed greater statistical significance. Static measures of
liquidity have the inherent potential of misinterpreting the firms relative liquidity position
(Richard & Laughlin, 1980). The usefulness of both static liquidity indicators is limited by
their inability

to provide adequate information about the cash flow attributes of the

transformation process with a firms working capital position. Rather than taking a going-

concern approach to liquidity analysis, static liquidity indicators merely represent a


liquidation position of the firm. Operating cash flow coverage, rather than asset liquidation
value, is the crucial element in liquidity analysis. Incorporating accounts receivable and
inventory turnover measures into an operating cycle concept provides a more appropriate
view of liquidity management than the static measures mentioned earlier.

2.2 INTRODUCTION TO THE STUDY


For a successful business enterprise two types of assets are very important i.e. fixed assets
and current assets. Fixed assets viz., land & building, plant & machinery, furniture etc. are
not purchased for the purpose of sale but for the purpose of earning profit for a long
period in the future. On the other hand, current assets viz., stock, debtors, bills receivable,
cash and bank balance etc. are purchased for the production of goods and sales of those goods
through the process of operating cycle i.e. conversion of raw material into work-inprogress, work-in-progress into finished goods, finished goods into debtors and debtors are
converted into cash or bills receivable. And Profitability is the primary goal of all business
ventures. Without profitability the business will not survive in the long run. So measuring
current and past profitability and projecting future profitability is very important.

2.3 OBJECTIVES OF THE STUDY


Primary Objective:
To study the liquidity and profitability of TATA Steel from FY 2010-2011 to FY 2014-15 and
recommend suggestion.
Secondary Objective:
To find out the liquidity of TATA Steel through various liquidity ratio.
To find out the profitability of TATA Steel through various profitability ratios.
To find out is there any relationship between liquidity and profitability of a company.

2.4 SCOPE OF THE STUDY


This research provides me with an opportunity to explore in the field of Human Resources.
This
research also provides to know the feedback of people involved in the Training and
development process.
2.5 RELATIONSHIP BETWEEN LIQUIDITY AND PROFITABLITY
The financial manager is always confused in the ground of liquidity vs. profitability. He has
to strike a balance between the two.
1. The firm has adequate cash to pay for its bills.
2. The firm has sufficient cash to make unexpected large purchases and, above all.
3. The firm has cash reserve to meet emergencies, at all times.
Liquidity and Profitability are very closely related. When one increases the other decreases.
Apparently liquidity and profitability goals conflict in most of the decisions which the
finance manager makes. For example, it higher inventories are kept in anticipation of increase
in pries of raw materials, profitability goal is approached but the liquidity of the firm is
endangered. Similarly, the firm by following a liberal credit policy may be in a position to
push up its sales but its liquidity decrease.
There is also a direct relationship between higher risk and higher return Higher risk on the
one hand endangers the liquidity the firm, higher return on the other hand increase its
profitability. A company may increase its profitability by having a very high debt equity ratio.
However, when the company raises funds from outside sources, it is committed to make the
payment of interest, etc. at fixed times and in fixed amounts and hence to that extent of its
liquidity is reduces.
Thus, in every area of financial management, the financial, manager is to choose between risk
and profit and generally he chooses in between the two. He should forecast cash flows and
analyze the various sources of funds. Forecasting of cash flow and managing the flow of
internal fund are the functions which lead to liquidity, cost control and forecasting future
profits are the functions of finance manager which lead to profitability. An efficient finance
manager fixes that level of operations where both profit and risk are optimized.

2.6 LIMITATION OF THE STUDY

The study has taken into account only five years for comparative analysis.
Time and other resources have proved to be a constraint.
It has always not been possible to get the full information.
Since the study is based only on secondary data, so the reliability of
information may not be ensured.
No primary data is used for the study.

SECTION 3
A BRIEF INTRODUCTION TO TATA STEEL

3.1 INTODUCTION TO THE COMPANY


HISTORY OF TATA STEEL
Tata Steel Limited (formerly Tata Iron and Steel Company Limited (TISCO)) is an
Indian multinational steel-making company headquartered in Mumbai, Maharashtra, India,
and a subsidiary of the Tata Group. It was the 11th largest steel producing company in the
world in 2013, with an annual crude steel capacity of 25.3 million tones, and the second
largest steel company in India (measured by domestic production) with an annual capacity of
9.7 million tones after SAIL
Tata Steel has manufacturing operations in 26 countries, including Australia, China, India, the
Netherlands, Singapore, Thailand and the United Kingdom, and employs around 80,500
people. Its largest plant is located in Jamshedpur, Jharkhand. In 2007 Tata Steel acquired the
UK-based steel maker Corus which was the largest international acquisition by an Indian
company until that date. It was ranked 486th in the 2014 Fortune Global 500 ranking of the
world's biggest corporations. It was the seventh most valuable Indian brand of 2013 as
per Brand Finance.
Tata Iron and Steel Company was established by Dorabji Tata on 26 August 1907, as part of
his father Jamsetji's Tata Group. By 1939 it operated the largest steel plant in the British
Empire. The company launched a major modernization and expansion program in 1951. Later
in 1958, the program was upgraded to 2 Million metric tonnes per annum (MTPA)
project. By 1970, the company employed around 40,000 people at Jamshedpur, with a further
20,000 in the neighboring coal mines. In 1971 and 1979, there were unsuccessful attempts to
nationalize the company. In 1990, it started expansion plan and established its subsidiary Tata
Inc. in New York. The company changed its name from TISCO to Tata Steel in 2005. Tata
Steel on Thursday(12 Feb 2015) announced buying three strip product services centers in
Sweden, Finland and Norway from SSAB to strengthen its offering in Nordic region. The
company, however, did not disclose value of the transactions.
Acquisitions
NatSteel in 2004: In August 2004, Tata Steel agreed to acquire the steel
making operations of the Singapore-based NatSteel for $486.4 million in
cash. NatSteel had ended 2003 with turnover of $1.4 billion and a profit
before tax of $47 million. The steel businesses of NatSteel would be run

by the company through a wholly owned subsidiary called Natsteel Asia


Pte Ltd. The acquisition was completed in February 2005. At the time of
acquisition, NatSteel had a capacity of about 2 million tones per annum of
finished steel.
Millennium Steel in 2005: Tata Steel acquired a majority stake in the
Thailand-based steelmaker Millennium Steel for a total cost of $130
million. It paid US$73 million to Siam Cement for a 40% stake and offered
to pay 1.13 baht per share for another 25% of the shares of other
shareholders. For the year 2004, Millennium Steel had revenues of
US$406 million and a profit after tax of US$29 million. At the time of
acquisition, Millennium Steel was the largest steel company in Thailand
with a capacity of 1.7 million metric tones per annum, producing long
products for construction and engineering steel for auto industries.
Millennium Steel has now been renamed to Tata Steel Thailand and is
headquartered in Bangkok. On 31 March 2013, it held approx. 68% shares
in the acquired company.
Corus in 2007: On 20 October 2006, Tata Steel signed a deal with Anglo-Dutch company,
Corus to buy 100% stake at 4.3bn ($8.1 billion) at 455 pence per share. On 19 November
2006, the Brazilian steel company Compendia (CSN) launched a counter offer for Corus at
475 pence per share, valuing it at 4.5 billion. On 11 December 2006, Tata preemptively
upped its offer to 500 pence per share, which was within hours trumped by CSN's offer of
515 pence per share, valuing the deal at 4.9 billion. The Corus board promptly
recommended both the revised offers to its shareholders. On 31 January 2007, Tata Steel won
their bid for Corus after offering 608 pence per share, valuing Corus at 6.7 billion ($12
billion).
In 2005, Corus employed around 47,300 people worldwide, including 24,000 in the UK. At
the time of acquisition, Corus was four times larger than Tata Steel, in terms of annual steel
production. Corus was the world's 9th largest producer of Steel, whereas Tata Steel was at
56th position. The acquisition made Tata Steel world's 5th largest producer of Steel.
2 Rolling mill companies in Vietnam in 2007: Tata Steel through its wholly owned
Singapore subsidiary, NatSteel Asia Pte Ltd, acquired controlling stake in two rolling mill
companies located in Vietnam: Structure Steel Engineering Pte Ltd (100% stake) and
Vinausteel Ltd (70% stake). The enterprise value for the acquisition was $41 million. With

this acquisition, Tata Steel got hold of two rolling mills, a 250k tones per year bar/wire rod
mill operated by SSE Steel Ltd and a 180k tonnes per year reinforcing bar mill operated by
Vinausteel Ltd.

Operations
Tata Steel is headquartered in Mumbai, Maharashtra, India and has its
marketing headquarters at the Tata Centre in Kolkata, West Bengal. It has
a presence in around 50 countries with manufacturing operations in 26
countries including: India, Malaysia, Vietnam, Thailand, UAE, Ivory Coast,
Mozambique, South Africa, Australia, United Kingdom, The Netherlands,
France and Canada.[24]
Tata Steel primarily serves customers in the automotive, construction, consumer goods,
engineering, packaging, lifting and excavating, energy and power, aerospace, shipbuilding,
rail and defense and security sectors.

TABEL SHOWING INDIAS CRUDE STEEL MARKET SHARE BY PRODUCTION


IN FY 15 (%)

SAIL

TATA STEEL

RINL

OTHERS

22

19

53

Market Share

SAIL
TATA STEEL
RINL
OTHERS

TABLE SHOWING SEGMENT-WISE MARKET SHARE OF MAJOR PLAYERS IN


2011-12 (in %)

PARTICULARS

SAIL

TATA

JSW

ESSAR

OTHES
(INCLUDIN

STEEL

STEEL

STEEL

G
IMPORTS)

Construction

11

6.3

4.3

1.6

76.8

Automotive

3.5

23.6

14.8

7.1

51

Power plant equipment 25.5

.2

1.7

3.3

69.3

Other capital goods

4.2

27.4

7.7

43.1

7.5

10.4

81.8

Oil

&

gas,

17.6

water .3

transportation
Railway wagon

73.3

.35

23.2

White goods

4.8

25.4

7.3

13.5

49

Tube Making

36.5

16.3

15.9

Link

5.6

25.7

https://www.google.co.in/search?

q=market+share+of+tata+steel+in+indian+steel+industry&biw=1280&bih=699&tbm=is
ch&tbo=u&source=univ&sa=X&ved=0ahUKEwjs_teAkK7MAhWNcI4KHVzwBYwQs
AQISw#imgrc=nmksKX3d8do_RM%3A

SECTION 4
RESEARCH METHODOLOGY
DATA COLLECTION METHOD
TOOLS AND TECHNIQUIES FOR ANALYSIS

4.1 RESEARCH METHODOLOGY


This project study is aimed at analyzing the liquidity and profitability of TATA Steel from FY
2010-2011 to FY 2014-15
RESEARCH:
Systematic and organized effort to investigate a scientific problem.
Identify the problem.
Gather information.
Analyze the data.
Take corrective action and solve the problem.
RESEARCH METHODOLOGY:
It is the way to systematically solve the research problem. This study on Liquidity
and Profitability and their relationship of TATA Steel is an analytical study because the facts
and information that is readily available are being used to make critical evaluation.
RESEARCH DESIGN:

Research design is a blue print or a planned procedure for conducting research


program.
4.2 DATA COLLECTION METHOD:
Nature of Data
The data collected is secondary in nature. This is due to the nature of analysis, which only
call for secondary data.
Source of Data
The source of data is various year balance sheet of TATA Steel which is available
on their website and also their profit & loss account.

4.3 TOOLS AND TECHNIQUIES FOR ANALYSIS :


Various tools and techniques are used for the analysis are as follows.
For liquidity analysis the following ratios are used..

Current Ratio

The current ratio is the simplest and least strict ratio. Current assets are those that can
reasonably be converted to cash in one year.
Current Ratio = Current Assets / Current Liabilities

Acid-Test or Quick Ratio

The acid-test or quick ratio is slightly more strict. It excludes inventories and other current
assets, which are not as liquid as cash and cash equivalents, accounts receivable and shortterm investments.

Cash Ratio

The cash ratio is the most exacting of the liquidity ratios, excluding accounts receivable as
well as inventories and other current assets. More than the current ratio or acid-test ratio, it
assess an entity's ability to stay solvent in the case of an emergency. Even highly profitable
companies can run into trouble if they do not have the liquidity to react to unforeseen events.
Cash Ratio = (Cash and Cash Equivalents + Short-Term Investments) / Current
Liabilities
For profitability analysis the following ratios are used.

Profit Margin Ratio

Net sales is calculated by subtracting any returns or refunds from gross sales. Net
incomeequals total revenues minus total expenses and is usually the last number reported on
theincome statement.
Profit Margin Ratio = Net Income / Net sale or revenue

Gross Profit Margin Ratio

Gross Profit Margin Ratio is calculated by dividing gross profit by net sales.
Gross Profit Margin Ratio = Gross Profit/Net sale

Return On Investment (ROI)

To calculate return on investment, the benefits (or returns) of an investment are divided by
Total asset. The result can be expressed as a percentage or a ratio.

Return on Investment (ROI) = Net Profit after Tax / Total Asset

Return On Capital Employed

The return on capital employed measures the proportion of adjusted earnings to the amount of
capital and debt required for a business to function. For a company to remain in business
over the long term, its return on capital employed should be higher than its cost of capital;
otherwise, continuing operations gradually reduce the earnings available to shareholders.
Return On Capital Employed=Earnings before interest and taxes/Total assets - Current
liabilities
For analysis of the relationship between liquidity and profitability the following
statistical tools is used.
CORRELATION
Correlation is a statistical technique that can show whether and how strongly pairs of
variables are related. For example, height and weight are related; taller people tend to be
heavier than shorter people. The relationship isn't perfect. People of the same height vary in
weight, and you can easily think of two people you know where the shorter one is heavier
than the taller one. Nonetheless, the average weight of people 5'5'' is less than the average
weight of people 5'6'', and their average weight is less than that of people 5'7'', etc.

Formula for Correlation :Limitation Of Correlation


Correlation only measure a relationship, it cannot provide a conclusive reason for why theres
a relationship. A correlative finding doesnt reveal which variable influences the other. For
example, finding that demand correlates highly with price doesnt explain whether having
demand leads to more price or whether price leads to more demand.

COMPARATIVE CHART
Comparative chart is used to present the liquidity and profitability ratios of various year of
TATA Steel.

SECTION 4
DATA ANALYSIS
INTERPETATIONS AND FINDINGS
RECOMMENDATION

4.1 DATA ANALYSIS


Table 1 :- Showing calculation of current asset and current liabilities of TATA Steel
though out the study period (2010-11 to 2014-15)
For the Year end 31st march 2015
Particulars
Current Asset
Current investment
Inventories
Trade Receivables
Cash and Balances
Short term loans and advance
Other current assets
Total Current Assets
Current liabilities
Short term borrowings
Trade Payables
Other current liabilities
Short-term provisions
Total current liabilities

Rs. In crores
1000.08
8042
491.46
478.59
1781.77
55.27
11849.17
34.88
5801.98
9111.52
1675.41
16623.79

For the Year end 31st march 2014


Particulars
Current Asset
Current investment
Inventories
Trade Receivables
Cash and Balances
Short term loans and advance
Other current assets
Total Current Assets
Current Liabilities
Short term borrowings
Trade Payables
Other current liabilities
Short-term provisions
Total current liabilities
For the Year end 31st march 2013
Particulars
Current Asset
Current investment
Inventories
Trade Receivables
Cash and Balances
Short term loans and advance
Other current assets
Total Current Assets
Current liabilities
Short term borrowings
Trade Payables
Other current liabilities
Short-term provisions
Total current liabilities
For the Year end 31st march 2012
Particulars
Current Asset
Current investment
Inventories
Trade Receivables
Cash and Balances
Short term loans and advance
Other current assets
Total Current Assets
Current Liabilities
Short term borrowings
Trade Payables
Other current liabilities
Short-term provisions

Rs. In crores
2343.24
6007.81
770.81
961.16
1299.2
182.38
11564.6
43.69
8263.61
8671.67
1902.81
18881.78
Rs. In crores
434
5257.94
796.92
2192.36
2207.83
615.8
11504.85
70.94
6363.66
8509.79
1544.26
16488.65
Rs. In crores
1204.17
4858.99
904.08
3946.99
1829.25
76.09
12819.57
65.62
5883.92
8716.57
2172.38

Total current liabilities


For the Year end 31st march 2011
Particulars
Current Asset
Current investment
Inventories
Trade Receivables
Cash and Balances
Short term loans and advance
Other current assets
Total Current Assets
Current Liabilities
Short term borrowings
Trade Payables
Other current liabilities
Short-term provisions
Total current liabilities

16838.49
Rs. In crores
2999.79
3953.76
424.02
4138.78
6458.94
137.73
18113.02
149.13
4464.81
6262.1
2219.85
13095.89

Determination Of Liquidity Position of TATA Steel Ltd.


Table 2 :- Showing calculation of current ratio of TATA Steel For the Period of 2010-11
to 2014-15

Year
2015
2014
2013
2012
2011

Current assets

Current liabilities

Rs. In crores
11849.17
11564.6
11504.85
12819.57
18113.02

Rs. In crores
16623.79
18881.78
16488.65
16838.49
13095.89

Current Ratio
0.712783908
0.612474036
0.697743599
0.761325392
1.383107219

Current Ratio
1.6
1.38

1.4
1.2
1
0.8

0.71

0.61

0.6

0.7

Current Ratio

0.76

0.4
0.2
0
2015

2014

2013

2012

2011

Findings :- From above Table 2 and the chart we can see the current ratio of TATA Steel is
not good except 2011 though the idle current ratio is 2 but it is increasing as we compare it to
2014.

Table 3 :- Showing calculation of Quick ratio of TATA Steel For the Period of 2010-11 to
2014-15
Current
Year
2015

Current

assets

Inventories

Quick Assets

liabilities

Rs. In crores
11849.17

Rs. In crores
8042

Rs. In crores
3807.17

Rs. In crores
16623.79

Quick Ratio
0.22901938

2014
2013
2012
2011

11564.6
11504.85
12819.57
18113.02

6007.81
5757.94
4858.99
3953.76

5556.79
5746.91
7960.58
14159.26

18881.78
16488.65
16838.49
13095.89

0.29429376
0.34853733
0.47276092
1.08119876

Quick Ratio
1.2

1.08

1
0.8
Quick Ratio
0.6

0.47

0.4

0.29

0.23

0.35

0.2
0
2015

2014

2013

2012

2011

Findings :- From Table 3 and the above chart we can see that quick ratio of TATA Steel is not
good except the year 2011 so the company need to develop the quick ratio because it is a key
indicator of liquidity position of company. A quick ratio of 1 is seem to be idle.

Determination Of Profitability and return on investment of TATA Steel Ltd.


Table 4 :- Showing calculation of Cash Position Ratio (CPR) of TATA Steel For the
Period of 2010-11 to 2014-15
Year

Short

Term Cash

and Super Quick Current

Cash

Loan

Balances

Assets

liabilities

Position

& Advances

Rs. In crores

Rs. In crores

Rs. In crores

Ratio

Rs. In crores
1781.77
1299.2
2207.83
1829.25
6458.94

2015
2014
2013
2012
2011

478.59
961.16
2192.36
3946.99
4138.78

2260.36
2260.36
4400.19
5776.24
10597.72

16623.79
18881.78
16488.65
16838.49
13095.89

(CPR)
0.1359714
0.11971117
0.26686175
0.34303789
0.80924015

CPR
0.9

0.81

0.8
0.7
0.6

CPR

0.5
0.4

0.34
0.27

0.3
0.2

0.14

0.12

2015

2014

0.1
0
2013

2012

2011

Findings :- From Table 4 and the above chart we can see that the Cash Position Ratio of
TATA Steel is very poor 2015 and it is decreasing as we compare it with 2011 but it is
improving as we see the CPR in the year of 2014.

Table 5 :- Showing calculation of Return on capital employed of TATA Steel For the
Period of 2010-11 to 2014-15
Year

Total Assets

Current

Capital

Net

Rs. In crores

liabilities

Employed

before

Rs. In crores

Rs.
crores

profit Return On
Capital

In interest and Employed


tax

(%)

2015
2014
2013
2012
2011

115677.12
111040.41
101876.93
95802.99
89551.72

16623.79
18881.78
16488.65
16838.49
13095.89

99053.33
92158.63
85388.28
78964.5
76455.83

Rs. In crores
8508.89
9713.5
7836.6
9857.35
9776.85

8.590211
10.53998
9.177606
12.48327
12.78758

Return on Capital Employed (%)


14

12.48

12
10

12.79

10.54
9.18

8.59

Return on Capital
Employed (%)

8
6
4
2
0
2015

2014

2013

2012

2011

Findings :- From the Above Table 5 and the chart we can see the return on capital employed
of TATA Steel is Constantly decreasing except 2014.

Table 6 :- Showing calculation of Net Profit Margin of TATA Steel For the Period of
2010-11 to 2014-15

Year
2015
2014
2013
2012
2011

Profit After Tax

Net Sales (Revenue)

Net

profit

Rs. In crores
6439.12
6412.19
5062.97
6696.42
6865.69

Rs. In crores
41785
41711.03
38199.43
33933.46
29396.35

Ratio (%)
15.41012325
15.37288818
13.25404594
19.73397349
23.35558666

Margin

Net Profit Margin Ratio (%)


25

23.36
19.73

20
15.41

15.37

15

13.25

Series 1

10
5
0
2015

2014

2013

2012

2011

Findings :- From the above Table 6 and the above chart we can see that the profit margin
ratio is decrease as we compare it with 2011 but it is increasing if we compare with 2013.

Table 7 :- Showing calculation of Return on Investment of TATA Steel For the Period of
2010-11 to 2014-15

Year
2015
2014
2013
2012
2011

Total Assets

Profit After Tax

Return

Rs. In crores
115677.12
111040.41
101876.93
95802.99
89551.72

Rs. In crores
6439.12
6412.19
5062.97
6696.42
6865.69

Investment
5.566459
5.774645
4.969692
6.989782
7.666732

on

Return on Investment
9
7.67

6.99

7
6

5.57

5.77
4.97

Return on Investment

4
3
2
1
0
2015

2014

2013

2012

2011

Findings :- From the above Table 7 and the chart it is cleared that the Return on Investment
of TATA Steel is constantly decreasing expect in the year 2014.

Table 8:- Showing All ratios of TATA Steel from FY 2010-11 to 2014-2015
Year

2015
2014
2013
2012
2011

Current

Quick

Ratio

Ratio

Capital

Margin

Investment

0.22901938
0.29429376
0.34853733
0.47276092
1.08119876

Employed
8.590211
10.53998
9.177606
12.48327
12.78758

Ratio
15.41012325
15.37288818
13.25404594
19.73397349
23.35558666

5.566459
5.774645
4.969692
6.989782
7.666732

0.712783908
0.612474036
0.697743599
0.761325392
1.383107219

CPR

0.1359714
0.11971117
0.26686175
0.34303789
0.80924015

Return On Net

Profit Return

on

Table 9 :- Showing the analysis of Correlation Coefficient ( r ) between Liquidity ratios


and Net Profit Margin ratios of TATA Steel
Correlation Coefficient Between
Liquidity Ratios
CR
QR
CPR

Net Profit Margin Ratios


0.858407139
0.976075978
0.972886628

Findings :- From the above Table 9 it is clear that the liquidity ratio of TATA Steel is very
positively related with Net Profit Margin of TATA Steel. Means to increase profit TATA Steel
have to increase its liquidity.

FINDINGS :I.

From Table 2 and the chart relating to this table we can see the current ratio of TATA
Steel is not good except 2011 though the idle current ratio is 2 but it is increasing as
we compare it to 2014. So the Company have to concentrate on this otherwise it may

II.

suffer from liquidity problem.


From Table 3 and the chart relating to this table we can see that quick ratio of TATA
Steel is not good except the year 2011 so the company need to develop the quick ratio
because it is a key indicator of liquidity position of company. A quick ratio of 1 is

III.

seem to be idle.
From Table 4 and the chart relating to this table we can see that the Cash Position
Ratio of TATA Steel is very poor 2015 and it is decreasing as we compare it with 2011

IV.

but it is improving as we see the CPR in the year of 2014.


From the Table 5 and the chart relating to this table we can see the return on capital
employed of TATA Steel is Constantly decreasing except 2014.

V.

From the Table 6 and the chart relating to this table we can see that the profit margin
ratio is decrease as we compare it with 2011 but it is increasing if we compare with

VI.

2013.
From the above Table 7 and the chart it is cleared that the Return on Investment of

VII.

TATA Steel is constantly decreasing expect in the year 2014.


From the Table 9 it is clear that the liquidity ratio of TATA Steel is very positively
related with Net Profit Margin of TATA Steel. And the liquidity position of TATA
Steel is constantly going towards bad position so if the company ignore this it may
suffer huge problem in future. It should maintain the optimum level of liquidity
because low liquidity and high liquidity nothing is good it should be optimum.
More over through the analysis it is clear that the financial performance of TATA Steel

VIII.

is decreasing as compare it as it is in FY 2010-11.


Some of the important reasons are.
The inventory held is constantly increasing, excess inventory holding is nothing but

blockage of fund. So the company need to concentrate on this.


The company doesnt meeting the debt on time.
Fixed assets are not properly using.
Poor management.

RECOMMENDATION

The current ratio and quick ratio both are less than the standard norm (2:1). That
means the company may suffer for liquidity problem to meet the debt obligation on
time and to take the opportunity the company need focus on the above ratios.

In the current assets, inventory is more. The company should focus on it because
inventory is lees quick asset.

The cash position ratio is very low. To meet the contingencies in the business cash in
hand or cash at bank is necessary. So try to maintain the optimal level of cash in hand
or cash at bank.

The ROCE is very low and also it was fluctuating. So, try to increase the sales
revenue for maximizing profits so that the ROCE may increase.

SECTION 6
CONCLUSION
BIBILOGRAPHY

CONCLUSION
In this study only secondary data is collected for five years. The liquidity
position of a company is very important and it has a great impact on its
profitability. The main purpose of the project is to analysis the liquidity and
profitability of the company and their relationship. The detailed observations are
presented in the form of analysis in the previous chapter. The major liquidity and profitability
indicator of TATA Steel for the five year period in terms of ratios like current ratios,
quick ratio, CPR, Net profit margin ratio, Return on Investment are calculated
and so many datas used in this study. The study concludes by saying that the
performance of the financial performance of TATA Steel is decrease if we
compare it with 2011 but it is increasing form FY 2014 if we compare it with
previous year and the liquidity ratios are not good it is too far from optimum.

BIBILOGRAPHY
Amengor, E. C. (2010). Importance of Liquidity and Capital Adequacy to Commercial
Banks. A Paper Presented at Induction Ceremony of ACCE, UCC Campus

Athanasoglou, P. P., S. N. Brissimis and M. D. Delis, (2005) Bank-Specific,


Industry- Specific and Macroeconomic Determinants of Bank Profitability.
Banking Act (2004); Act 673
Bashir, A. (2000). Determinants of Profitability and Rates of Return Margins in Islamic
Banks: Some Evidence from the Middle East, Grambling State University, Mimeo.

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