Michael Barlage Mukul Tewari , Fei Chen, Kevin Manning (NCAR)
5-CHAPTER-5(by mukul)
Transcript of 5-CHAPTER-5(by mukul)
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CHAPTER-5
RESULTS AND INTERPRETATION
5.1 Ratio Analysis
Ratio analysis is one of the techniques to evaluate the financial condition and
performance of a business concern. Simply, ratio means the comparison of one figure
to other relevant figure or figures. Ratio analysis is the fundamental analysis of anycompany. It has so many advantages and helps to find out the following things.
1. To workout the profitability2. To workout the solvency3. Helpful in analysis of financial statement4. Helpful in comparative analysis of the performance5. To simplify the accounting information6. To workout the operating efficiency7. To workout short-term financial position8. Helpful for forecasting purposes
There are mainly six types of ratios. These are Liquidity ratio, profitability ratio,
management efficiency ratio, operating ratio, cash flow ratioand investment ratio.
5.1.1 Liquidity Ratio
Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity driving
the proportion of current assets available to cover current liabilities.The concept
behind this ratio is to ascertain whether a company's short-term assets (cash,
cash equivalents, marketable securities, receivables and inventory) are readily
available to pay off its short-term liabilities (notes payable, current portion of term
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debt bles, accrued expenses and taxes). In t eory, t e hi herthe current ratio, the
better.
Formul
Y r 2005-06 2006-07 2007-08 2008-09 2009-10
Current
Ratio
5.01 3.27 3.21 2.65 2.56
able 5.1 CurrentRatio
Fi ure 5.1 CurrentRatio
Interpretation
1. The company is maintaining current ratio more than 2 which is good.2. As the companys current assets can be quickly converted in cash so it should
not keep current assets more than 3. More the current assets, the profit will be
less.
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Current Ratio
CurrentRatio
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3. As the companys inventory has quick liquidity, current ratio is moresignificantthan quick ratio forthis company.
QuickRatio
The quick ratio is a liquidity indicator that further refines the current ratio by
measuring the amount of the most liquid current assets there are to cover current
liabilities. The quick ratio is more conservative than the current ratio because it
excludes inventory and other current assets, which are more difficultto turn into cash.
Therefore, a higher ratio means a more liquid current position.
Formula
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Quick
Ratio
4.51 2.99 2.96 2.46 2.39
Table 5.2 QuickRatio
Figure 5.2 QuickRatio
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QuickRatio
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Interpretation
1. The companys quick ratio is more than 2, it shows the companys healthyfinancial position.
2. Company has good liquidity.3. It can meetthe short term stress with no stress.4. As the difference in current ratio and quick ratio is less, so companys
inventory managementis very good. And the companys current assets are not
dependent on inventory.
5. In previous years it has maintained quick ratio more than 4 also, which is thereason ofless profit.
Debt E uity Ratio
The debt equity ratio compares a company's total liabilities to its total share holders
equity. This is a measurement of how much suppliers, lenders, creditors and obligors
have committed to the company versus whatthe shareholders have committed.
Formula:
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Debt
Equity
Ratio (%)
16.1 18.12 30.98 43.11 39.87
Table 5.3 Debt Equity Ratio
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Figure5.3 Debt Equity Ratio
Interpretation
1. Companys debt equity ratio is less than 50%, which is not good.2. Forthe less debt equity ratio the company ROE is less.3. It shows companys inefficient fund management.4. Though itis increasing, butin very slow manner.5. The company is taking minimum risk.
5.1.2 Profitability Ratio
Return on E uity
This ratio indicates how profitable a company is by comparing its net income toits
average shareholders' equity. Thereturn on equity ratio (ROE) measures how much
the shareholders earned for their investment in the company. The higher the ratio
percentage, the more efficient managementis in utilizing its equity base and the better
return is to investors.
Formula
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Debt Equity Ratio
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Year 2005-06 2006-07 2007-08 2008-09 2009-10
R E (%) 8.79 6.82 12.23 8.72 12.20
Table 5.4 Return on Equity
Figure 5.4 Return on Equity
Interpretation
1. Average R E is less than 10%, which is bad enough.2. It should gain 15% R E to show its good performance.3. In the new projects in should utili e the maximum debt.4. It is maintaining huge amount of working capital. It should reduce the working
capital and invest in some long term to get more profit.
5. Share holders money is not efficiently employed.
Return on Assets
This ratio indicates how profitable a company is relative to its total assets. The return
on assets (R A) ratio illustrates how well management is employing the company's
total assets to make a profit. The higher the return, the more efficient management is
in utili ing its asset base. The R A ratio is calculated by comparing net income to
average total assets, and is expressed as a percentage.
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ROE (%)
ROE ( )
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Formula:
Year 2005-06 2006-07 2007-08 2008-09 2009-10
ROA (%) 9.93 6.76 13.63 9.66 12.32
Table 5.5 Return on Assets
Figure 5.5Return on Assets
Interpretation
1. As itis a production company it has to maintain large amount of assets for itsoperation. Stillits average ROA is more than 11% which is very good.
2. The good ROA is showing efficient utilization of assets.Return on CapitalEmployed
The return on capital employed (ROCE) ratio, expressed as a percentage,
complements the return on equity (ROE) ratio by adding a company's debt liabilities,
or funded debt, to equity to reflect a company's total "capital employed". This
measure narrows the focus to gain a better understanding of a company's ability to
generate returns from its available capital base.
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ROA (%)
ROA
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Formula
Year 2005-06 2006-07 2007-08 2008-09 2009-10
ROCE 7.27 6.09 12.36 8.83 11.17
Table 5.6 Return on Capital Employed
Figure 5.6 Return on Capital employed
Interpretation
1. Companys average ROCE is less than 10, which shows companys inabilityto generate profit from the employed capital.
2. Though the companys borrowing cost is less than 8%, but its ROCE is lessthan ROE. It shows the inefficient capital budgeting.
3. Itis because of keeping so much money in shortterm unnecessarily.Operating Profit Margin
Operating profit margin analysis is to detect consistency or positive/negative trends in
a company's earnings. Positive profit margin analysis translates into positive
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ROCE
ROCE
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investment quality. To a large degree, it is the quality, and growth, of a company's
earnings that drive its stock price.
Formula
Year 2005-06 2006-07 2007-08 2008-09 2009-10
OPM (%) 38.84 34.38 42.79 22.82 32.05
Table 5.7 Operating Profit Margin
Figure 5.7 Operating Profit Margin
Interpretation
1.
Companys OPM is more than 34% which is very good.2. To increase companys return, it should increase the sell by reaching the
maximum limit of mining oflignite and by producing more power.
5.1.3 Management Efficiency Ratio
Inventory Turnover Ratio
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OPM (%)
OP
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The inventory turnover ratiomeasures the number of times a company sells its
inventory during the year. A high inventory turnover ratioindicated that the product is
selling well and vice versa.Inventory Turnover Ratio = cost of goods sold / average inventory.
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Inventory TO
ratio
6.17 5.24 6.67 6.82 7.93
Table 5.8 Inventory Turnover Ratio
Figure 5.8 Inventory Turnover Ratio
Interpretation
1. Companys inventory turnover ratio is more than 6%, which shows thatcompany is selling its product very well.
2. The company has good inventory management3. As the raw material for power production is readily available, so the company
can decrease the inventory and increase more inventory turnover ratio. It will
result more profit.
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Inventory TO ratio
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5.1.4 Operating Performan e Ratio
Value Added per Employee
It simply measures the amount of value added that is (sales-raw materials-outsiders
services)/total no of employee.
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Value added/
employee (in Rs)
1036468 1090907 1276836 1218369 1844515
Table 5.9 Value Added/ Employee (in Rs)
Figure 5.9 Value Added/ Employee (in Rs)
Interpretation
1. Companys value added/employee is good enough.2. It indicates the good human resource management.3. Companys operating performance is high.
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Val e a e / em loyee (i s)
Value added/ employee
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5.1.5 Cash Flow Indi ator RatioDividend Payout Ratio
This ratio identifies the percentage of earnings (net income) allocated to pay
cash dividends to shareholders.
Formula
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Dividend
Payout Ratio
(%)
46.83 30.92 33.28 40.89 26.88
Table 5.10 Dividend Payout Ratio
Figure 5.10 Dividend Payout Ratio
Interpretation
1. The dividend payout ratio is very less. It distracts the investors.
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Dividend Payout Ratio(%)
Dividend Payout Ratio
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2. As the company has more amount of money, needed for operation andmaintenance it should pay much more dividend
5.1.6 Investment RatioA stock's dividend yield is expressed as an annual percentage and is calculated as the
company's annual cash dividend per share divided bythe current price ofthe stock.
Formula:
Year 2005-06 2006-07 2007-08 2008-09 2009-10
DividendYield (%)
4.20 2.52 3.72 3.57 3.25
Table 5.11 Dividend Yield
Figure 5.11 Dividend Yield
Interpretation
1. The dividend yield is very poor. The investors are getting only 3-4% return ontheir hand.
2. It wont attractthe investors who depend on the return of share.
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Dividend Yield( )
Dividend Yield(%)
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5.2 Wor ing Capital Management
Working capital is a financial metric which represents operating liquidity available to
a business, organi ation, or other entity, including governmental entity. Along with
fixed assets such as plant and equipment, working capital is considered a part of
operating capital. Net working capital is calculated as current assets minus current
liabilities. If current assets are less than current liabilities, an entity has a working
capital deficiency, also called a working capital deficit.
Net Working Capital = Current Assets Current Liabilities
Statement of urrent assets
(Rs in rore)
Current Assets 2005-06 2006-07 2007-08 2008-09 2009-10
Inventories 358.45 455.59 448.05 535.85 502.96
Sundry Debtors 168.34 89.41 218.83 781.44 1611.62
Cash And Bank
Balance
2549.12 4253.06 4749.56 5452.20 4823.61
OtherCurrent Assets 202.85 232.52 159.67 189.47 164.56
Loans And Advance 337.64 367.61 307.64 598.11 581.59
Total Current Assets 3616.40 5398.09 5883.75 7557.07 7684.36
Table 5.12 Statement ofCurrent Assets
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Figure 5.12 Total Current Assets
Statement of urrent liabilities
(Rs in rore)
Current liabilities 2005-06 2006-07 2007-08 2008-09 2009-10
Sundry creditors 246.32 258.64 439.68 734.16 1175.70
Work in progress 92.75 418.76 486.65 471.41 426.60
Other liabilities 254.75 559.26 539.63 454.13 296.21
Mine closure 0.00 0.00 0.00 399.2 491.40
Provision 146.33 416.62 368.08 792.66 613.28
Total Current
liabilities
740.15 1653.28 1834.04 2851.56 3003.19
Table 5.13 Statement ofCurrent Liabilities
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Total Current Assets
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Figure 5.13 Total Current Liabilities
Figure 5.14 Sundry Debtors & Sundry Creditors
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Total Current liabilities
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Net Working Capital
(Rs in crore)
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Total Current Assets 3616.40 5398.09 5883.75 7557.07 7684.36
Total Currentliabilities 740.15 1653.28 1834.04 2851.56 3003.19
Net Working capital 2876.25 3744.81 4049.71 4705.51 4681.17
Table 5.14 Net Working Capital
Figure5.15 Net Working Capital
Interpretation
1. Total current assets are increasing with the increase of currentliabilities.2. Net working capitalis increasing exceptin the year 2009-10.3. Sundry debtor and sundry creditor both a/c are increasing. Butthe percentage
ofincrease in debtoris more than the creditor. The company should manage
the sundry debtor efficiently.
4. The cash and bank balance ofthe company show the good liquidity position ofthe company.
5. Though the sales are increasing butthe company is maintaining the sameinventory level, which shows companys good inventory management.
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Total Current Assets
Total Currentliabilities
Net Working capital
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Figure 5.16 CF from operating activities
Figure 5.17 CF from investing activities
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CF from o erati g a tivities
CF from operating
activities
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CF from investing a tivities
CF from investment
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Figure 5.18 CF from financing activities
Figure 5.19 Net cash inflow
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Net ash inflow
Net cash inflow
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Figure 5.20 Cash Flow
Interpretation
1. Cash flow from operating activities is good enough, which shows the companyis performing well.
2. Cash flow from operating activities is greater than investing and financingactivities for most of the years.
3. There is cash outflow from investing activities, which shows the company istaking new project.
4. The cash outflow from financing activities describes the dividend payment.5. Cash flow from investing and financing activities is fluctuating very highly.6. The company has good cash inflow for all year except 2009-10.7. The companys average cash inflow is 489.8 per year, which means the
company is in good position.
8. The main source of cash outflow is purchasing fixed assets.9. In the year of 2008-2009 the company had high amount of other non- cash
charges.
10.Either cash inflow or outflow from or to sundry debtors is very high.11.In the year of 2005-06 it has cash inflow of Rs109.77 crore for extra-ordinary
items.
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CF from operatingactivities
CF from investment
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CF from financingactivities
Net cash inflow
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12.The company is not paying dividend regularly. So, the cash out flow fordividend is not constant. Though the dividend is constant except year 2006-07.
13.It took huge long-term loan during the year 2007-08 and 2008-09.
As a result
the amount of paying is interest is also increasing.
14.The company is not giving any loan and advances for last 5 years.15.In the year of 2006-07 the company sold its major amount of investments and
purchased same amount of fixed assets.
16.The company is managing same level of inventory. So the cash outflow orinflow for inventory is minimum.
17.The company is selling its fixed assets least amount.
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Figure 5.21 Fund Flow
Interpretation
1. This Fund flow statement shows that sources and applications of fund are wellmanaged.
2. The major sources of fund are long term secured loan and operating activities.3. Fixed asset is the main application of fund.4. The company has average fund flow of Rs.1500 crore which describe sound
financial position of the company.
5. Misc. expenses are increasing every year.6. The company is mainly trying to decrease the deferred tax liability. And it is
the application of fund.
7. The company is increasing its working capital every year except 2010, whichtells that company is in good position.
5.5Statisti al AnalysisCorrelation between wor ing apital and profit.
(Rs. in rore)
Year 2005-06 2006-07 2007-08 2008-09 2009-10
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FundFlo
Fund Flo
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Net Wor ing
apital
2876.25 3744.81 4049.71 4705.51 4681.17
Net Profit702.35 566.78 1101.57 821.09 1247.46
Table 5.17 Correlation between Net WC & Net Profit
Correlation coefficient =0.585
Interpretation
1. Net profit is not positively related with working capital.2. As the correlation coefficient is less, so net profit is less related with working
capital.
Correlation between sales and net profit.
(Rs. in rore)
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Sales 2201.41 2108.11 2981.65 3354.91 4121.03
Net Profit702.35 566.78 1101.57 821.09 1247.46
Table 5.18 Correlation between sales& Net Profit
Correlation coefficient =0.86
Interpretation
1. Net profit is strongly positively correlated with sales.2. Net profit is increasing with more sales and decreasing with less sales.
Correlation between net profit and dividend.
(Rs. in rore)
Year 2005-06 2006-07 2007-08 2008-09 2009-10
Net Profit702.35 566.78 1101.57 821.09 1247.46
Dividend335.54 201.33 335.54 335.54 335.54
Table 5.19 Correlation between Net Profit& Dividend
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Correlation coefficient=0.64
Interpretation
1.
Dividend is positively correlated with net profit.2. The correlation coefficient value is less, which tells that dividend policy is
not including net profit.