ANALYSIS OF FINANCIAL

STATEMENTS

TOPIC: Ratio analysis of financial

statements

Submitted by: Pravin Choudhary

Roll no.: 106
Class: TYBBA(B)
 RATIO ANALYSIS OF TATA
MOTORS

TATA MOTORS
Tata Motors Indian multinational automotive
manufacturing company, headquartered in the city of
Mumbai, India which is part of Tata Group. The company
produces passenger cars, trucks, vans, coaches, buses,
luxury cars, sports cars, construction equipment.
Indian multinational automotive manufacturing
company, headquartered in the city of Mumbai, India
which is part of Tata Group. The company produces
passenger cars, trucks, vans, coaches, buses, luxury
cars, sports cars, construction equipment
RATIO ANALYSIS
Ratio analysis is one of the powerful tools of financial
analysis. It refers to the systematic use of ratios to
interpret the financial statements in terms of the
operating performance and financial position of a firm. It
involves comparison for a meaningful interpretation of
the financial statements. Financial statement ratio
analysis focuses on three key aspects of a business:
liquidity, profitability, and solvency.
 A. LIQUIDITY RATIO

 Current Ratio = Current Assets = 2:1

Current Liability

Note- 2:1 is considered as a healthy current ratio

The current ratio is a liquidity ratio that measures a
company’s ability to pay short-term obligations or those
due within one year. It tells investors and analysts how a
company can maximise the current assests on its
balance sheet to satisfy its current debt and other
payables.

Example: -

TATA MOTORS 2022

Current Ratio 0.98

Interpretation
It is warning sign for the TATA MOTORS, it simply
means that TATA MOTORS has in-sufficient Asset to pay
liabilities.
  Quick Ratio = Quick Asset = 1:1
Quick Liabilities

Note - 1:1 is considered healthy quick ratio

The quick ratio measures a company’s capacity to pay

its current liabilities without needing to sell its inventory
or obtain additional financing. The quick ratio is
considered a more conservative measure than the
current ratio, which includes all current assests as
coverage for current liabilities.

Example: -

TATA MOTORS 2022

Quick Ratio 0.75

Interpretation
So, the quick ratio TATA MOTORS show that the
company is unable to meet its short-term obligations.
B. SOLVENCY RATIO

 Debt Equity Ratio = Debt (long term)

Equity (shareholders’ funds)

Note - 2:1 is considered as a healthy solvency ratio

The debt-to-equity (D/E) ratio compares a

company's total liabilities to its shareholder equity
and can be used to evaluate how much leverage a
company is using. Higher-leverage ratios tend to
indicate a company or stock with higher risk to
shareholders

Example: -

TATA MOTORS 2022

Debt Equity Ratio 2.22

Interpretation

It is considered as good debt equity ratio for large

industry. This ratio tells us that for every 100 Rs
invested in the TATA MOTORS, about 66 Rs come
 from debt, while other 33 Rs come from the
company’s Equity.

 Interest Coverage Ratio

= Profit before interest and
tax
Fixed Interest

Note - 6 to 7 times is considered a healthy interest

coverage ratio

The interest coverage ratio is used to measure how

well a firm can pay the interest due on outstanding
debt. The interest coverage ratio is calculated by
dividing a company's earnings before interest and
taxes (EBIT) by its interest expense during a given
period.

Example: -

TATA MOTORS March 22

Interest coverage Ratio 2.98 times

Interpretation
The interest coverage ratio of TATA MOTORS Is
2.98. it means that the profit of TATA MOTORS are
2.98 times in comparison to fixed interest charges this
indicates that the firm will not be able to pay the
interest on long-term loans regularly.

C. TURNOVER RATIO

 Inventory Turnover Ratio = Cost of goods sold

Average inventory

Note - 5 to 10 times is considered as a healthy

inventory turnover ratio

The inventory Turnover ratio is an effective measure

of how well a company is turning its inventory into
sales. The ratio also shows how well management
is managing the costs associated with inventory and
whether they are buying too much inventory or too
little.

Example: -

TATA MOTORS March 2022

Inventory turnover ratio 7.66 Times

Interpretation
 TATA MOTORS has good inventory turnover ratio. It
indicates that TATA MOTORS sell and restock there
inventory every 1-2 months and they have sufficient
stocks.

 Trade receivable turnover ratio

= Net credit sales
Average trade receivables

Note – The more the better

The receivables turnover ratio measures the

efficiency with which a company can collect on its
receivables or the credit it extends to customers.
The ratio measures how many times a company’s
receivables are converted to cash in a certain
period.

Example:-

TATA MOTORS March 2022

Trade receivable 8.008 times
turnover ratio

Interpretation
 TATA MOTORS has good trade receivables
turnover ratio. The company collect its debts
efficiently.

D. PROFIRABILITY RATIO

 Gross profit ratio = Gross profit X 100

sales

Note = 50% to 70% is considered as a healthy

gross profit ratio.

It helps to measure how much profit a company

makes from the sales of goods and services after
deducting the direct costs. In simple words, it is
simple metric to measure the company’s
profitability.

Example: -

TATA MOTORS MARCH 2022

Gross profit ratio 42.7%
 Interpretation

So, TATA MOTORS has good gross profit ratio of

42.7% which means that the company is making
profits from the sales of goods and services after
deducting the direct costs.

 Operating profit ratio

= Operating ratio X 100
Sales
The operating profit margin ratio indicates how
much profit a company makes after paying for
variable costs of production such as wages, raw
materials, etc. it is also expressed as a percentage
of sales and then shows the efficiency of s company
controlling the costs and expenses associated with
business operations.

Example: -

TATA MOTORS March 2022

Operating profit ratio -4.11%

Interpretation
 The operating profit ratio of TATA MOTORS is
4.11% it means that company spends too much
money on manufacturing product or its overhead
costs are too high.

 Net profit ratio = Net profit X 100

Sales

The net profit percentage is the ratio of after tax to

net sales. It reveals the remaining profit after all
costs of production, administration, and financing
have been deducted from sales, and income taxes
recognized.

Example: -

TATA MOTORS MARCH 2022

Net profit ratio -4.11%

Interpretation

The net profit ratio of TATA MOTORS is – 4.11%

that indicate that the company is making less
money than it is spending.

 Return on investment ratio

= Net profit interest, tax and dividend
Capital employed
 Return on investment show how well a company is
managing his capital and how much company can
multiply those capital.

Example: -

TATA MOTORS March 2022

Return on investment -7.92%

Interpretation
The ROI of TATA MOTORS is - 7.92% this mean
that the investment is generating loss and company
is unable to multiply his capital.

CONCLUSION

Current Ratio 0.98 Below the

standard

Quick Ratio 0.75 Below the

standard

Debt Equity Ratio 2.22 Average

Interest coverage ratio 2.98 Below the

standard

Inventory turnover ratio 7.66 Good

Trade receivable ratio 8.008 times Good

Gross profit Ratio 42.7% Good

Operating profit ratio -4.18% Below the

standard

Net profit ratio -4.11% Below the

standard

Return on investment -7.92% Below the

ratio standard