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2009

**FINANCIAL RATIO ANALYSIS
**

ABHIJIT SAMANTA

INTERNATIONAL SCHOOL OF BUSINESS

& MEDIA ; KOLKATA

It is measured by: .Page | 2 FINANCIAL RATIO ANALYSIS OF TATA STEEL 1.039. However it does not mean any increase or decrease in current ratio of any company gives the growth profile of the company. They also reflect the firm’s ability to meet financial contingencies that might arise. It may signify higher unused cash. (A) Current Ratio: .The industry norm value of current ratio is 2:1.94 st Analysis: .26 6.94 0.70 5.707. inventory which again may result in inventory carrying cost.This ratio indicates the firm’s ability to meet its current liabilities. . (All figures are in crore. As per Balance Sheet 31 March 2008 & 2009. This ratio is of very high importance to the suppliers of short term funds like the bankers and trade creditors.) Year 2008 2009 Current Asset 3.Current Ratio = Current Assets / Current Liabilities.613.855. Liquidity Ratios:Liquidity Ratios measures the ability of the firm to meet its short term obligations.86 Current Ratio 0. In both the years the Current ratio for Tata Steel is same.05 Current Liabilities 3. However it does not mean so that higher current ratio means good company profile.

039. (All figures are in crore. Cash in Hand is more liquid that the same cash equivalent of inventory.72 3.52 0. But this is not the reality.26 6.Page | 3 (B) Quick Ratio:- This ratio is calculated on pre assumption that all the current assets are of same level of liquidity.86 3.570.Prepaid Expense) / Current Liability.52 3.As per the industry norms the Quick Ratio should be 1:1.442. In other words the profitability ratio reflects a company’s operating performance.) st Year (Current Assets – Current Liabilities InventoryPrepaid Expense) Current Ratio 2008 2009 13. It is calculated by (Current AssetInventory – Prepaid Expense / Current Liability) Quick Ratio = (Current Assets – Inventory. Profitability Ratio:This ratio shows a company’s effectiveness on generating profit. 2.57 Analysis:. But for the current year the situation is more balanced. There is a huge difference between the Quick Ratios of the company.855. It also shows the decreasing trend. So to get a real picture of liquidity we calculate Liquid Ratio. As per Balance Sheet 31 March 2008 & 2009. In the year 2008 there was high unutilized cash. .

It is the amount of each rupee of sale that left over after repaying the Cost of Goods Sold.Page | 4 (A) Gross Profit Ratio:. Now the Gross Profit Ratio is a ratio of Gross Profit to the Sales. Change in cost of production. (B) Operating Profit Margin: This ratio signifies the operational efficiency of any business entity. Operating profit ratio= (operating profit (EBIT)/sales)*100 .624. Change in Sales Volume.Gross Profit is defined as Sales – Cost of Goods Sold.05 8295. We calculate this ratio by the following formula. According to the data of 2007 and 2008 there is a decrease of Tata Steel in earning the Gross profit which we can find out form the above table. This ratio can be changed by 1. Gross Profit Ratio = (Gross Profit / Sales)*100 As per Balance Sheet 31 March 2008 & 2009.84 Sales 19. 2.83 24.04 Gross Profit Margin 37. This ratio is calculated with the help of the following formula.It indicates the Gross Profit over sales of any company.) st Year 2008 2009 Gross Profit 7515. Changes in sales price 3. (All figures are in crore.69% Analysis: .933.70% 33. We express it in terms of Gross Profit Margin. In this case a lower ratio indicates the higher efficiency.

It relates the firms Net Profit and the firm’s Sales level.83 24.624.25 9. Net Profit Margin = (Net Profit after Tax / Sales)*100 . (C ) Net Profit Ratio: .34 Profit Sales 19.933.There is a decrease in Operating Profit Ratio for Tata Steel. on the basis of the calculated data we can say that the operating efficiency of Tata Steel has actually increased for the current year with a comparison between 2008 and 2009. According to the sales figure the EBIT value in 2009 in comparatively less than that of 2008.Page | 5 As per Balance Sheet 31 March 2008 & 2009.94% 37.360. including cost of goods sold. depreciation. general and administrative expenses.) st Year 2008 2009 Operating (EBIT) 8. (All figures are in crore. It indicates what percentage of every rupee of sales the firm was able to transform into the Net Profit.04 Gross Profit Margin 41. interest and taxes This ratio is calculated by the following formula. The net profit margin measures the profit that is available from each rupee of sales after all expenses have been paid. So.68% Analysis: .278. As we know a lower operating profit ratio indicates higher efficiency of the firm. selling.

624.04 Net Profit Margin 23.21 Sales 19.09% Analysis: .83 24. Return of Total Asset = (Net Profit after Tax / Total Assets)*100 . So. It is calculated by the following formula.Page | 6 As per Balance Sheet 31 March 2008 & 2009. (All figures are in crore. In other words it indicates the how much profit the firm has gained by utilizing its resources. (D) Return on total assets: .It relates the profit of the firm to its tangible assets.) st Year 2008 2009 Net Profit after Tax (PAT) 4670. here analyzing the consecutive two years data we can see that the profitability of Tata Steel has actually decreased in 2009 than of the year 2008.We can see that there is a decrease in the Net Profit Margin.43% 21. Actually it indicates the firm’s ability to transfer its sales into the net profit.49 5193.933.

. 3. It also means to achieve a certain amount of revenue Tata Steel has used more amount of its capital.49 5193.Again we can see that there is reduction in the return to total asset ratio.92% 8. Fixed Assets Turnover Ratio= Sales / Fixed Assets. It measures the ability of the firm to manage assets and convert into cash. (All figures are in crore. The return Tata Steel earned over their Total Asset in 2008 the value reduced in the year 2009.It indicates the efficiency of utilization of fixed assets. Turnover Ratios:- These ratios determine how quickly certain assets are converted into cash.Page | 7 As per Balance Sheet 31 March 2008 & 2009. (A) Fixed assets turnover ratio: .52 58. It is calculated by the following formula.21 Total Assets Return of Total Asset 9.075. High turnover ratios are usually associated with good asset management and low turnover ratios with poor asset management.741.77 Analysis:. The fixed assets turnover ratio is the sales turnover divided by the fixed assets.84% 2008 2009 47.) st Year Net Profit after Tax (PAT) 4670.

(B)Total assets turnover ratio:. 12.933.482.70 Analysis: . .) st Year 2008 2009 Sales 19. Total assets turnover ratio is defined as sales turnover divided by the total assets.624.For both of the years 2008 and 2009 the fixed asset turnover ratio of Tata Steel is more than 1. Total Asset Turnover Ratio= Sales Turnover / Total Assets.56 14. The turnover has actually increased here.623.22 Fixed Asset Turnover Ratio 1.Page | 8 As per Balance Sheet 31 March 2008 & 2009. This ratio is calculated by the following formula.83 24. But the turnover is also very good in the year 2008. It is measure of firm’s total assets management. As we know this ratio shows the company’s ability to turn its fixed assets into the turnover.04 Fixed Assets.57 1.It measures the overall efficiency and performance of the assets employed in business. (All figures are in crore.

00 9.00 .77 Total Asset Turnover Ratio 0.42 Analysis: .Here for both the years the value of Total Asset Turnover Ratio is same it is showing that overall turnover of assets to sales remained same for both the years.741.52 58. (C ) Debtors Turnover ratio/Average collection period:This ratio indicates the efficiency of the firm in collecting its receivables from its customers to whom the firm has sold on credit. It indicates the effectiveness of the collection policy adopted by the firm.42 0.04 Total Assets. (All figures are in crore.075. Debtors Turnover Ratio= (Debtors / Credit Sells)*365 As per Balance Sheet &P&L 31 March 2008 & 2009. 47.624. (All figures are in crore.Page | 9 st As per Balance Sheet 31 March 2008 & 2009.933.) st Year 2008 2009 Debtors Turnover Ratio 11. It is calculated by the following formula.83 24.) Year 2008 2009 Sales Turnover 19.

The above ratio is calculated by the following formula. Generally very high debt is not preferred by the investors because it signifies the risk and high form of equity has threat of hostile bid and acquisition.Leverage ratios indicate the extent to which the firm has financed its assets by borrowing.Though it doesn’t signify anything related to meeting short term liability it is often discussed under this topic. The use of debt financing increases the risk of the firm. The more extensive the use of debt. For both the years the value is good.As it shows the company’s ability to recover the amount that is market due or in other words the company has sold on credit. the higher would the firm’s leverage ratios and more risk present in the firm. It is very important for any company to calculate this ratio as depending on that the company can decide about its current position to recover the receivables. Some of the leverages ratios are explained below. (4) Leverages Ratios:.P a g e | 10 Analysis: . (4) Debt Equity Ratio:. A firm has two options when going for expansion one is raising debt and other going for public issue. Debtors Equity Ratio= (Total Debt / Equity) . The leverage ratios reflect the financial risk posture of the firm.

(B) Interest coverage ratio:. Here in this case we can see that the interest coverage ratio is decreasing. (All figures are in crore.07 1. Interest coverage ratio = EBIT/Interest As per Balance Sheet &P&L 31 March 2008 & 2009.71 Analysis: It actually measures the firm’s ability to meet the interest obligations. . it means the firm’s ability is reducing.P a g e | 11 As per Balance Sheet &P&L 31 March 2008 & 2009.Here we can see that in both Debt Equity Ratio and in Long Term Debt Equity Ratio has increase for both of the years. The above ratio is calculated by the following formula. Logically speaking that when this ratio for any company increase it does not show good performance of the company.35 5. (All figures are in crore.) st Year 2008 2009 Debt Equity Ratio 1.08 1.) st Year 2008 2009 Interest coverage ratio 8.This ratio is the sum of the net earnings before taxes and interest charge divided by the interest expenditure.31 Analysis: .34 Long Term Debt Equity Ratio 1.

. As here we can see that there is decrease in the price earnings ratio it show’s a decrease in company’s growth profile.It actually denotes the company’s future prospect. (All figures are in crore.This ratio highlights the relationship between the market price of a share and the current earnings per share. on the other hand is the value of equity as perceived by investors. The market value. Price earnings ratio = Market Price per share / earnings per share. Since the earnings form the basis for dividend payments as well as a basis for any future increase in the market price of the shares. investors are always extremely interested in knowing the earnings per share.97 Analysis: .38 2. As per Balance Sheet &P&L 31 March 2008 & 2009.) st Year 2008 2009 Price Earnings Ratio: 10. (B) Earnings per share:- The shareholders invest their money with the expectation of getting dividends and capital appreciation on the shares.P a g e | 12 ( 5) Market value ratios:(A) Price Earnings Ratio: . .

(All figures are in crore. It is good symbol form the company prospective as well as from the Share Holder’s prospective also.45 66.) st Year 2008 2009 Earnings per share 60. .80 Analysis: -Here it shows that for Tata Steel the earning per share increasing.P a g e | 13 Earnings per share: (Net profit after taxes – Preference dividends) / Number of ordinary shares As per Balance Sheet &P&L 31 March 2008 & 2009. Seeing more earning there is a chance for share holders to invest on the company.

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