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ESTIMATION OF FINANCIAL RATIOS & Z-SCORE

LIQUIDITY RATIO
A measure of the companys ability to pay its short-term debts when due.
Defined as current assets divided by current liabilities. Important Ratios:
Current Ratio = Current Assets/ Current Liabilities = 3630.90/2980.84 = 1.218 ( Recommended value is between 1.5 to 2) Quick Ratio = Current Assets Inventory / Current Liability = 3630.90-1253.22 / 2980.84 = 0.797 (Recommended value is between 1 to 2)

LEVERAGE RATIOS
These are an indication of the companys overall debt burden. Important Ratios:
Debt-to-total assets ratio = = = Times earned interest = = = Fixed charge coverage = Total debt / Total Assets 2459.43/7476.66 32.89% EBIT / Interest charges 1051.99/ (210.19+448.09) 1.598 Income for meeting fixed charges / Fixed charges = 586.60/(210.10+448.09+1047.91) (miscellaneous + Minority Interest + Interest) = 0.3438

Ratios

Formula

Calculated

Recommended

Debt-to-total assets ratio

Total debt/ Total Assets

32.89%

30-35%

Times earned interest

1.598

7-8 times

Fixed charge coverage

0.3438

5.5 times

ACTIVITY RATIOS
A measure of how effectively a company manages its assets
Inventory Turnover = Sales / Inventory = 8146.21/1253.22 = 6.50 Average Collection Period = Receivables / Sales per day = 1485.83/(8146.21/365) = 66.57 days Fixed assets Turnover = Sales / Fixed assets = 8146.21/(3221.04-719.82) =3.65 Total Assets Turnover = Sales / Total Assets = 8146.21/7476.66 = 1.089

Ratios

Formula

Calculated

Recommended

Inventory Turnover

Sales / Inventory

6.50

7 times

Average Collection Period

66.57 days

45-60 days

Fixed assets Turnover

3.65

2-3 times

Total Assets Turnover

1.089

1-2 times

PROFITABILITY RATIOS
Gross Profit Margin = (Net sales-cost of goods sold)/Sales(Revenue)
=(7987.28-5319.33-685.22-239.75)/8146.21 =0.2139=21.39%

Net Operating Margin = (Net operating profit before taxes)/sales(revenue)


=(1051.99/8146.21)=0.129=12.9%

Profit Margin on Sales=(Net profit after taxes)/sales(revenue)


= 586.60/8146.21=7.2%

Return on Total Assets Ratio = Net profit after taxes/total assets


=586.60/12812.21=4.578%

Return on Equity Ratio (Net Worth)= Net profit after taxes/net worth
=586.60/6417.99=9.139%

Ratios

Formula

Calculated

Recommended

Gross Profit Margin

21.39%

Varies

Net Operating Margin Profit Margin on Sales

12.9%

Varies

7.2%

5-8%

Return on Total Assets Ratio


Return on Equity Ratio (Net Worth)

4.578%

10%

9.139%

15%

Z SCORE

= 1.2 *( 650.06/7476.66) + 1.4*(331.84/7476.66) + 3.3 * (1051.99/7476.66)+ 0.6 *(5017.23/7476.66) + ( 8146.21/7476.66) = 0.104+0.062+0.464+0.402+1.09 = 2.123

CONCLUSION
After computing the financial ratios for Tata Chemicals and comparing with the recommended averages, we can draw the following conclusions:
From the liquidity ratios, the company will manage to pay its short-term debts when due. From the leverage ratio, the fixed charge coverage and Times earned Interest is very low. The debt-to-asset ratio is reasonable. The company needs to reduce the fixed or increase profit or income by a large amount. The activity ratios are average for the company and the company manages its assets effectively. The profitability ratios are around average.

The Altman Z score is 2.123. Scores in between 1.8 and 3 lie in a gray area. So the companys health is uncertain.