TASK- 14

Submitted By:
Anjali Kanwar
Junior Research Analyst
22WM60 B2
 RATIO ANALYSIS

MARGIN RATIOS
1. Gross Profit Margin Ratio: Gross profit margin ratio, is a profitability ratio that
compares the gross margin of a company to its revenue. It shows how much profit a
company makes after paying off its Cost of Goods Sold (COGS).
The ratio indicates the percentage of each dollar of revenue that the company retains
as gross profit.
The Formula for Gross Profit Margin:
Gross Profit Margin = Revenue – COGS x 100
Revenue

where:
COGS = Cost of goods sold
The higher the Margin the better is the profitability of the company.
EBITDA margin for the firms of past 3 years:

EBITDA MARGIN
(Gross Profit Margin)
80

70

60

50

40

30

20

10

0
2019 2020 2021

CONCLUSION: The gross profit earned on a rupee received as sales revenue, was
very low for Tata Power in all 3 years, it is decreasing, when compared to its peers. In
2021, Tata Power’s profit was 19.68 paisa on 1 rupee of sales, compared to 49.76
paisa for Adani Power Ltd.
2. Operating Profit or EBIT Margin: The ratio is used to calculate operating profit
earned on a rupee received as sales received as sales revenue by the firm. This ratio is
calculated in
The formula for calculating EBIT margin is shown below:

Operating Profit Ratio: Operating Profit x 100

Sales

OR
Earnings before Interest and Taxes (EBIT) x 100
Sales

where;
Operating Profit = Sales- COGS – Selling Expenses – Dep. & Amort. Exp.
This ratio helps us analyse the operating performance of the company.
The higher the ratio, better is the performance of the company.
EBIT Margin for the firms for past 3 years:

EBIT MARGIN
60

50

40

30

20

10

0
2019 2020 2021

CONCLUSION: The operating profitability or EBIT margin of Tata Power remained

below its peer i.e., Adani Power Ltd except for 2019. In 2021, Tata Power earned
12.39 paisa of operating profit per rupee of sales compared to 38.51 paisa by Adani
Power Ltd.
3. Net Profit or PAT Margin: Net profit margin indicates the percentage of net profit
earned on the total income received in the form of sales revenue.

The formula for calculating PAT margin is shown below:

Net Profit Ratio = Net Profit x 100 OR Earnings after Taxes (EAT) x 100
Sales Sales

where;
Net Profit = Profit after paying all the interest and Tax expenses
PAT = Profit after Taxes
The higher the ratio, better the performance of the company.
PAT margin for the firms in the past 3 years:

PAT MARGIN
20

15

10

0
2019 2020 2021

-5

-10

CONCLUSION: In terms of PAT margin, Adani Power has performed better than
Tata Power in 2 of the 3 years. In 2021, the PAT margin for Adani Power was 17.72%
as compared to 0.49% for Tata Power.
PROFITABILITY RATIOS
1. Return on Assets (ROA): Profitability can be measured by establishing relationship
between net profit and total assets. The ratio measures the relationship between total
funds invested i.e., total assets and net profit after tax.
The formula for calculating ROA is shown below:

ROA = Net Profit after taxes

Average Total
Assets

This ratio measures the profitability of investments which reflects managerial

efficiency. The higher the ratio, the better is the profit earning capacity of the firm or
vice versa.

ROA of the firm for the past 3 years:

RETURN ON ASSETS
8

0
2019 2020 2021

-2

-4

CONCLUSION: The ROA of Tata Power remained almost same for 3 years whereas the
ROA of Adani Power kept increasing after 2019. In 2021, the ROA of Adani Power was
5.99% as compared to 1.54% for Tata Power.
2. Return on Equity (ROE): Equity shareholders are the real owners of a company.
Therefore, the profitability of a company from the owners' point of view should be
viewed in terms of return to equity shareholders.
This ratio is calculated by using the below formula:

ROE = Net Income / Shareholders’ Equity

This ratio is the best indicator of the company's profit earning capacity. The higher the
ratio, the better the performance and prospectus of the company. It provides adequate
test to evaluate whether a company has earned satisfactory return for its equity
shareholders or not.
The investor can decide to invest or not to invest in the equity shares of a company by
comparing it with the normal rate of return in the market.
ROE of the firms for past 3 years

RETURN ON EQUITY
300

250

200

150

100

50

0
2019 2020 2021

CONCLUSION: The ROE of Adani Power remained above Tata Power in 2020 and
2021which indicates that the equity shareholders earned more by investing the shares
of Adani Power when compared to Tata Power. But the overall trend of ROE in the
past 3 years have shown a decline in the earnings of the shareholders, that indicates
that the company experienced a decreased in their profitability over the years. This
can be a cause of concern for the management.
3. Return on Capital Employed: The primary objective of making investment in any
business is to obtain adequate return on capital invested. Therefore, to measure the
overall profitability of the firm, it is essential to compare profit with capital employed
with this objective, return on capital employed is calculated. It is also called "Return
on investment (ROI). This ratio expresses the relationship between profit and capital
employed and is calculated in percentage by dividing the net-profit by capital
employed.
The ROCE calculated as follow:

ROCE (Pre-Tax) = Earnings before interest and taxes (EBIT) x 100

Capital Employed

The comparison of this ratio with that of similar firms and with industry average over
a period of time would disclose as to how effectively the long term funds provided by
owners and creditors have been used. The higher the percentage. the better would be
the utilisation of funds.

ROCE of the firms for past 3 years

RETURN ON CAPITAL EMPLOYED

18

16

14

12

10

0
2019 2020 2021

CONCLUSION: ROCE of Tata Power has declined in 2019 and then increased in
2020 and again declined in 2021 which indicates that the management was not
successful in generating the maximum returns from their investment decisions. But
when we compare the ROCE of Tata Power with Adani Power, we can see that the
returns have also declined over the years. Hence, economic slowdown can also be a
reason for industrywide decline in returns on investments.
TURNOVER RATIOS
1. Asset Turnover Ratio: This ratio expresses the relationship between net revenue
from operations or net sales and total assets or investments of a firm.
It is also called "Total investment Turnover Ratio” and is calculated by using the
following formula:

Asset Turnover Ratio = Net Sales / Average Total Assets

A higher assets turnover ratio is the indicator of effective utilisation of investment in

assets, whereas lower assets turnover ratio indicates that assets are not properly
utilised in comparison to revenue from operations

The ATR of the firms for past 3 years.

ASSET TURNOVER RATIO

39

38

37

36

35

34

33

32

31

30

29
2019 2020 2021

CONCLUSION: Tata Power has the highest Asset turnover ratio in all the three
years, compared to Adani Power. This indicates that the assets were properly utilized
by management in the firm when compared to the competitors in the industry.
2. Inventory Turnover Ratio: The inventory turnover ratio is calculated to consider
the adequacy of the quantum of capital and its justification for investing in inventory
turnover ratio normally establishes the relationship between revenue from operations
(Sales) and average inventory.
The inventory turnover ratio can be calculated by applying the following formula:

Inventory Turnover Ratio = Cost of Goods Sold / Avg. Inventory

Inventory velocity: The inventory turnover ratio also indicates the inventory velocity
with which inventory moves through the business. The inventory velocity can be
calculated by applying the following formula:

Average inventory = (beginning inventory + ending inventory) / 2

INVENTORY TURNOVER RATIO

20
18
16
14
12
10
8
6
4
2
0
2019 2020 2021

CONCLUSION: Adani Power had a better TRTR ratio and velocity compared to
Tata Power in 2021. The performance of Adani Power remains consistent.
ANALYSIS:
After performing ratio analysis by considering the historical performance of Tata
Power Ltd. and comparing that with Adani Power Ltd., we can conclude that the
company is lagging behind its competitor in terms of Margin ratios. This may be due
to the very large operating and non-operating costs involved in managing the stores,
in terms of profitability ratios, the company is again lagging than Adani Power. The
main reason behind Adani Power having more profitability ratio is the proper
management of the company and efficient utilization of its resources and less
wastages.
The Adani Power Ltd. has a decent performance in its turnover ratios, which is an
indicator of proper working capital management. No excessive funds were stuck in
the form of inventory and the payment of Trade receivables and payables were all at
time to maintain healthy corporate relations