Capital Investment in

Manufacturing
Companies vs
Service Companies
Group 4
23P010 Arjun Baweja​​ 23P044 Gaurav Sangle
23P022 Kavit Chadha​ 23P050 Shubh Jain
23P040 Raman Kumar​ 23P054 Sourav Aggarwal
 Objectives

To evaluate the financing pattern of

Fixed assets 01 02
To test the efficiency of fixed assets
utilization

To assess the impact of fixed assets

on sales and operating profits. 03 04 To assess Fixed Assets vs. Net
Current Assets – Operating risk
.

05
To compare Manufacturing
companies and service companies
with respect to Capital Investment
trends
 Manufacturing Companies
• Capital investment in manufacturing industries refers to the funds that are invested in purchasing new equipment,
machinery, technology, and infrastructure to improve or expand manufacturing processes

• Capital investment is crucial for the growth and sustainability of manufacturing industries, as it enables them to stay
competitive by adopting new technologies and processes, increasing efficiency, and producing higher quality products

• Overall, capital investment in manufacturing industries requires careful planning and execution to ensure success

Industry Steel & Iron Products Steel & Iron Products Tyres & Allied

Headquartered Mumbai Mumbai Gurugram

Founded 1982 1907 1972

Market Cap INR 2,020 billion INR 1,900 billion INR 298 billion
 Financing Pattern of Fixed Assets
Fixed Asset to Net Worth Ratio
Fixed Assets to Net Worth Ratio Debt to Equity Ratio
Apollo Tyres JSW Steel Tata Steel Apollo Tyres JSW Steel Tata Steel
2.5 1.4
2 1.2
1
1.5 0.8
1 0.6
0.5 0.4
0.2
0 0
2020-21 2021-2022 2022-2023 2020-21 2021-2022 2022-2023

Company Mean Company Mean

Apollo Tyres 2.27 Apollo Tyres 0.57
JSW Steel 1.87 JSW Steel 1.2
Tata Steel 1.59 Tata Steel 0.9

• This ratio shows the relationship between net worth and

investment in fixed assets (i.e. gross block less depreciation)
• Normally the ratio may be >1 because efficient financial
management claims that there should be some fixed
interest-bearing capital in the firm's financial structure
• For all the companies the ratio is on an average 1 over the
years, indicating most of the owner’s fund utilization in
financing fixed asset
• This ratio shows less <1 for the entire period indicating the
adequacy of long- term funds to finance the fixed assets
• The share of fixed assets on an average had constituted 0.7 time of
long-term funds in the companies over the years
• It also reflects that after meeting the entire fixed assets
requirements, the companies were able to provide on an average
0.3 time of long-term funds to finance the net working capital
 Utilization of Fixed Assets
Company Mean
Fixed Asset Turnover Ratio
Apollo Tyres 1.24
1.6
JSW Steel 1.24
2022-23 1.4

1.4 Tata Steel 1.47

• The effective utilization of fixed assets in an enterprise

1.7
is gauged by the fixed assets turnover ratio.
2021-22 1.4
• It measures the competency with which a firm is utilizing
1.2 its investment in fixed assets.

• Tata Steel has maintained the ratio of greater than 1 with a

1.1 mean of 1.06 over the 3 years indicating marketing
efficiency and effective utilization of fixed assets by the
2020-21 0.9
company.
1.1
• JSW Steel had close to 1 in 2020-21 but then improved in
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 the coming years indicating effective utilization of the
fixed assets.
Tata Steel JSW Steel Apollo Tyres
 Relation with Profitability
Impact of Fixed Assets (Gross Block) on Sales and Operating Profits

Tata Steel Apollo Tyres JSW Steel

300 250 250
250 200 200
200
150 150
150
100 100
100
50 50 50

0 0 0
2021 2022 2023 2021 2022 2023 2021 2022 2023

Sum of Blocks Sum of Sales Sum of Blocks Sum of Sales Sum of Blocks Sum of Sales
Sum of Operating Profit Sum of Operating Profit Sum of Operating Profit

*With a view to studying the trends in gross block, sales and operating profits, indices for these variables have been computed taking 2020-21 as the base year.

• It is observed that the sales growth rate
was always more than that of rate of
growth of gross block in the company
• Hence, it may deduce that the
investment in gross block as compared to
incremental sales shows optimum
utilization of gross block expansion
• The impact of expanded gross block and
improved sales on operating profit
hadn’t shown consistency during the
period
• It is observed that the sales growth • It is observed that the sales growth rate
rate was always more than that of was always more than that of rate of
rate of growth of gross block in the growth of gross block in the company
company • Hence, it may deduce that the
• Hence, it may deduce that the investment in gross block as compared
investment in gross block as compared to incremental sales shows optimum
to incremental sales shows optimum utilization of gross block expansion
utilization of gross block expansion • The impact of expanded gross block and
• The impact of expanded gross block and improved sales on operating profit
improved sales on operating profit was hadn’t shown consistency during the
significant as it increased over time period
 Service Companies
• Service companies may have a different approach to fixed asset investment compared to manufacturing or production
companies, as they rely less on physical assets and more on intangible assets like human capital, intellectual property
and technology

• However, certain amount of fixed asset investment such as on R&D facility and data centres are important for service
companies as it can help them to improve service delivery, increase productivity, expand their business, and increase
their overall value

Industry IT - Software IT - Consulting E-services (Naukari.com,

Shiksha)
Headquartered Pune Mumbai Noida

Founded 1981 1907 1995

Market Cap INR 6,270 billion INR 14,180 billion INR 677 billion
 Financing Pattern of Fixed Assets

Fixed Assets to Net Worth Ratio Debt to Equity Ratio

Infosys TCS Info Edge Infosys TCS Info Edge
0.3 0.12
0.25 0.1
0.2 0.08
0.15 0.06
0.1 0.04
0.05 0.02
0 0
2020-21 2021-2022 2022-2023 2020-21 2021-2022 2022-2023

Company Mean Company Mean

Infosys 0.25 Infosys 0.1

TCS 0.22 TCS 0.1

Info Egde 0.01 Info Egde 0.0

• Since in a service industry the Fixed asset investment is much less, this ratio is also <1
• Also, it can be observed that Debt to Equity ratio is <0.5, it means that all these services companies have negligible debts
• Also, it can be observed that for Info Edge the ratio is the least being an e-service company requiring even lesser fixed asset
investment than consulting companies like Infosys and TCS which operate on a physical platform
 Utilization of Fixed Assets

Company Mean
Fixed Asset Turnover Ratio
Infosys 6.56

16.4 9.94
TCS
2022-23 11.7
Info Egde 13.74
7.6

15.2

2021-22 9.8 • Again, owing to these being service companies

where fixed assets investments are less, the Fixed
6.6 Asset Turnover ratio is high showing effective
utilization
9.6
• Info Edge has the highest ratio indicating the
2020-21 8.3
lowest capital investment and its impact on sales
5.5 owing to its e-service model

0 2 4 6 8 10 12 14 16 18

Info Edge TCS Infosys

 Relation with Profitability
Impact of Fixed Assets (Gross Block) on Sales and Operating Profits
Info Edge Infosys TCS
250 160 160
140 140
200
120 120
150 100 100
80 80
100 60 60
40 40
50
20 20
0 0 0
2021 2022 2023 2021 2022 2023 2021 2022 2023

Sum of Blocks Sum of Sales Sum of Blocks Sum of Sales Sum of Blocks Sum of Sales
Sum of Operating Profit Sum of Operating Profit Sum of Operating Profit

*With a view to studying the trends in gross block, sales and operating profits, indices for these variables have been computed taking 2020-21 as the base year.

• It is observed that the sales growth rate
was always more than that of rate of
growth of gross block in the company
• Hence, it may deduce that the
investment in gross block as compared
to incremental sales shows optimum
utilization of gross block expansion
• The impact of expanded gross block and
improved sales on operating profit had
declined significantly during the period
of 3 years
• It is observed that the sales growth rate was • It is observed that the sales growth rate
always more than that of rate of growth of was always more than that of rate of
gross block in the company growth of gross block in the company
• Hence, it may deduce that the investment • Hence, it may deduce that the
in gross block as compared to incremental investment in gross block as compared
sales shows optimum utilization of gross to incremental sales shows optimum
block expansion utilization of gross block expansion
• The impact of expanded gross block and owing to service industry
improved sales on operating profit had • The impact of expanded gross block and
showed consistency during the period of 3 improved sales on operating profit had
years showed consistency during the period
of 3 years
 Operating Risk

Company Mean ROA(%)

Apollo Tyres 0.30 2.53
Current Assets to Fixed Assets Rati o JSW Steel
Tata Steel
0.49
0.53
6.53
7.06
Apollo Tyres JSW Steel Tata Steel Infosys TCS Info Edge TCS 5.45 27.86
33.0867244829887 Info Edge 27.85 41.76
Infosys 3.47 19.7
30.0507745266781

• Manufacturing companies tend to have higher capital

20.4297259894824 requirements than service companies, which means they may
have a lower CA to FA ratio
• For a mature company, ratio of 1:2 or 1:3 is considered ideal

5.79636248948696
5.52179454499108

• We can see that for the companies given the mean over the
5.04753673292999

3.66850496887627

3.45491323844804
3.29765977086388

years has been within the range, hence indicating operating

0.635116170268421
0.571336182410879

0.548186520161842
0.547728594762113
0.410769474999146
0.376968855802999

efficiency
0.316115608108012
0.299717843377109
0.294288646019294

• Service companies tend to have lower capital requirements,

which means they may have a higher CA to FA ratio
• The mean ratio over the years for the service companies is on
the higher end, indicating operating efficiency from a working
2020-21 2021-22 2022-23 capital model. However, this high ratio can also indicate a lack
of capital investment which is needed for long term growth
 Comparative Analysis
 It can be inferred regarding the financing pattern of
manufacturing companies that the net worth and long term
debt is utilised for funding Fixed asset
FA to Net FA Turnover
Industry Company Debt to Equity
Worth Ratio Ratio  While in service companies the same is low as indicated by
the significantly lower ratios [FA to Net Worth & FA to
Apollo Tyres 2.27 0.57 1.24 debt]

 The CA to FA ratio as assessed in the previous slide indicates

JSW Steel 1.87 1.2 1.24 a higher ratio for service industries owing to them relying
more on their current assets to generate revenue than its
Manufacturing fixed assets
Tata Steel 1.59 0.9 1.47
 Whereas a lower ratio for manufacturing companies
them being capital assets intensive
Infosys 0.25 0.1 6.56
 Service companies (Infosys, TCS, Info Edge) have
0.22 0.1 9.94 significantly higher FA Turnover Ratios compared to
TCS manufacturing companies (Apollo Tyres, JSW Steel, Tata
Steel). This suggests that service companies generate
Service
0.01 0.0 13.74 more sales per unit of fixed assets
Info Edge
 Also, as understood previously, the correlation with
profitability of FA investment can be traced clearly, and
depending on under or over utilisation the investments
decisions can be made
 Key Takeaways and Recommendations

 Based on assessment of ratios as assessed in previous slides, companies should make capital
investment decisions based on their industry and sectors. It is important for companies to gauge these
factors before making investment decisions

 Our select companies' analysis inferred that these companies were in line with the ideal ratios w.r.t.
Fixed assets, indicating optimum capital investment and utilisation over the years

 The difference of capital investment requirement in manufacturing and service companies should be
understood and according to the business model, strategic decision about investments in capital assets
should be made

 The analysis of FA turnover and profitability impact must be done YoY to keep a check on optimum
utilisation of investments made

 Also, a check on CA to FA ratio should be kept to minimise operating risk, i.e., minimum levels of CA
& FA are present in service and manufacturing companies

Hence, to conclude it can be said that capital investment decisions are critical success factors for any
company and require strategic approach
 Refrences

• Financial Statements of companies

• http://www.aceanalyser.com/Analyser.aspx?MenuCode=C3
• https://www.researchgate.net/publication/317347182_Financing_Pattern_and_Utilization_of_Fixe
d_Assets_-_A_Study
• https://www.screener.in/
• https://www.moneycontrol.com/financials/tatasteel/ratiosVI/TIS/3#TIS
• https://www.statista.com/
• https://www.investopedia.com/terms/c/capital-investment.asp
• https://advantage.marketline.com
YOU HELD THROUGH !
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