Financial Accounting Term Paper_SAIL

7/23/2019 Financial Accounting Term Paper_SAIL

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Financial Accounting Term Paper

Under Dr. Jayanta Kumar Seal

Submitted By

Shorya Gupta (45)

Ishan Gupta (16)

Mohit Mahajan (25)

Udit Bhatia (51)


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Company: Steel Authority of India Limited

Competitors:

Tata Steel JSW Steel

Visa Steel

Source of Data: moneycontrol.com


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Debt Coverage Ratios

Interest Coverage Ratio

Interest coverage ratio determines how easily a company can pay interest on the

outstanding debt. The interest coverage ratio is calculated by diving a companys

earnings before interest and taxes (EBIT) of one period by the companys

interest expenses of the same period.

Analysis-We can see that there is a falling trend in the interest coverage ratio of

SAIL which is consistent with the industry average. This indicates that the

industry as a whole is suffering from higher interest payment for the debt raised

as a component of its revenues. It is seen that the industry as a whole is

becoming strained on debt financing.

In case of SAIL, in 2010, its EBIT were 26.26 times its interest expense which

today has remained 3.19 times only. This is due to its debt increasing from Rs.

16,000 crores In 2010 to Rs. 24,000 crores in 2014. Simultaneously, its EBIT also

declined in the same period.

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Mar-14 Mar-13 Mar-12 Mar-11 Mar-10

Interest Coverage Ratio

Tata Steel SAIL JSW Steel Visa Steel Industry Average

Interest Rate Coverage

Ratio Mar-14 Mar-13 Mar-12 Mar-11 Mar-10

Tata Steel 4.35 6.41 5.53 5.85 6.26

SAIL 3.19 5.59 9 15.86 26.26

JSW Steel 2.25 2.33 2.67 3.43 4.44

Visa Steel 0.06 -0.64 0.29 2.14 2.22Industry Average 2.4625 3.4225 4.3725 6.82 9.795


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Debt-To-Capital Ratio

Debt to Capital ratio is a measurement of a company's financial leverage,

calculated as the company's debt divided by its total capital. Debt includes all

short-term and long-term obligations. Total capital includes the company's debt

and shareholders' equity, which includes common stock, preferred stock,

minority interest and net debt.

Calculated as:

Total Debt to Capital

ratio Mar-14 Mar-13

Mar-

12 Mar-11 Mar-10

Tata Steel 0.57 0.52 0.4 0.54 0.5

SAIL 0.39 0.43 0.47 0.45 0.56

JSW Steel 1.06 1.09 0.86 0.69 0.74Visa Steel 6.33 4.25 5.13 3.99 3.63

Industry Average 2.0875 1.5725 1.715 1.4175 1.3575

Analysis-SAIL has kept its Debt to Capital structure significantly lower than the

industry average. This has been possible due to higher reserves accumulation

over the years.

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Total Debt to Capital Ratio



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Financial Charges Coverage Ratio Post tax

A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as

interest and leases. It is calculated as the following:

Financial Charges

Coverage Ratio Post Tax Mar-14 Mar-13 Mar-12 Mar-11 Mar-10

Tata Steel 5.27 5.58 4.57 5.08 5.62

SAIL 5.48 5.78 8.75 14.46 21.15

JSW Steel 2.7 2.48 3.19 3.81 4.98

Visa Steel 0.35 0.69 0.64 1.99 2.07


Analysis-Traditionally SAIL has maintained the highest Financial Charges

Coverage ratio and well above the industrial average. It has been in a relatively

better condition than its peers. However, the steep decline of the ratio over the

years is a cause of concern.

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Financial Charges Coverage Ratio Post Tax



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TsiraR evonru

Inventory Turnover Ratio

A ratio showing how many times a company's inventory is sold and replaced

over a period. The days in the period can then be divided by the inventory

turnover formula to calculate the days it takes to sell the inventory on hand or"inventory turnover days."

Inventory Turnover Ratio of SAIL n major competitors over last 5 years

Mar14 Mar13 Mar12 Mar11 Mar10

SAIL 3.45 2.79 3.37 5.13 6.02

JSW Steel 5.87 7.31 7.40 7.97 7.10

TATA Steel 5.79 7.71 8.05 7.62 7.44

VISA Steel 6.78 3.62 3.87 3.57 3.64


Analysis- SAILs inventory ratio used to be high in previous years but with time

it has come down. This show increase in its inventory, that is less sales. However

for Mar14 it has slightly increased showing increase in sales. Also difference in

value of this ratio w.r.t industry average has increased.

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Mar'14 Mar13 Mar12 Mar11 Mar10

SAIL

JSW Steel

TATA Steel

VISA Steel


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Debtors Turnover Ratio

An accounting measure used to quantify a firm's effectiveness in extending credit

as well as collecting debts. The receivables turnover ratio is an activity ratio,

measuring how efficiently a firm uses its assets.

Formula:

Debtors Turnover Ratio of SAIL n major competitors over last 5 years


SAIL 9.43 9.71 10.39 11.11 12.46

JSW Steel 21.71 22.20 22.02 29.12 32.95

TATA Steel 66.21 53.21 44.91 51.10 68.46

VISA Steel 20.41 9.23 27.44 23.00 15.72Industry

Average

29.44 23.58 26.19 28.58 32.39

Analysis- Debtors Turnover ratio should be high as 1/(Debtors Turnover ratio)

gives Days Sales Outstanding (DSO) i.e. number of days your creditors delayed

payments. SAILs Debtors Turnover ratio w.r.t previous year performance of

SAIL, has decreased thus increasing DSO. Also this ratio for SAIL has always been

way below the industry average indicating large DSO.

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Mar'14 Mar'13 Mar'12 Mar'11 Mar'10

SAIL

JSW Steel

TATA Steel

VISA Steel


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Asset Turnover Ratio

The ratio of the value of a companyssales or revenues generated relative to the

value of its assets. The Asset Turnover ratio can often be used as an indicator of

the efficiency with which a company is deploying its assets in generating

revenue.

Asset Turnover = Sales or Revenues / Total Assets

Generally speaking, the higher the asset turnover ratio, the better the company

is performing, since higher ratios imply that the company is generating more

revenue per dollar of assets. Yet, this ratio can vary widely from one industry to

the next. As such, considering the asset turnover ratios of an energy company

and a telecommunications company will not make for an accurate comparison.

Comparisons are only meaningful when they are made for different companies

within the same sector.

Asset Turnover Ratio of SAIL n major competitors over last 5 years


SAIL 0.72 0.75 0.82 0.79 0.95

JSW Steel 0.91 1.06 1.06 1.07 0.92

TATA Steel 0.46 0.50 0.49 0.45 0.43

VISA Steel 0.38 0.25 0.85 0.81 0.88

Industry

Average

0.61 0.64 0.80 0.78 .79

Analysis- This ratio for SAIL has continuously been declining indicating

decrease in its sales. Although this ratio is decreasing but SAIL continues to

maintain it above industry standards.

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SAIL

JSW Steel

TATA Steel

VISA Steel


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Liquidity and Solvency Ratios

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations.

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio". The Current

Ratio formula is:

Mar 14 Mar 13 Mar 12 Mar 11

SAIL 0.79 1.01 1.22 1.21

JSW Steel 1.02 0.82 0.88 0.76

Tata Steel 0.62 0.57 0.86 0.93Visa Steel 0.33 0.46 0.29 0.47

Industry

Average

0.69 0.465 0.8125 0.8425

Analysis

The average of the 4 players comes out to be =0.765, thus we can see that For SAIL,

it is 0.79 which is greater than the average. SAIL is in good position in paying out its obligation.

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0.81

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Mar' 14 Mar' 13 Mar' 12 Mar' 11

Current Ratio

SAIL JSW Steel Tata Steel Visa Steel


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Quick Ratio

An indicator of a companys short-term liquidity. The quick ratio measures a

companys ability to meet its short-term obligations with its most liquid assets. For

this reason, the ratio excludes inventories from current assets, and is calculated as

follows:

Quick ratio = (current assets

inventories) / current liabilities, or Quick ratio= (cash and equivalents + marketable securities + accounts receivable) /

current liabilities.

The quick ratio measures the dollar amount of liquid assets available for each dollar

of current liabilities.


SAIL 0.62 0.68 0.82 1.35

JSW Steel 0.67 0.71 0.69 0.54

Tata Steel 0.27 0.32 0.61 0.69

Visa Steel 0.27 0.40 0.19 0.25

Industry

Average

0.4575 0.5275 0.5775 0.7075

Analysis-

The average of the 4 players comes out to be = 0.5675, thus we can see that For

SAIL, it is 0.62, which is greater than the average. A quick ratio of 0.8675 of SAIL

means that the company has Re 0.8675 of liquid assets available to cover each Re

1 of current liabilities. The higher the quick ratio, the better the companys

liquidity position. Also known as the acid-test ratio or quick assets ratio.

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0.81

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Mar' 14 Mar' 13 Mar' 12 Mar' 11

Quick Ratio



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Debt Equity Ratio

A measure of a companys financial leverage calculated by dividing its total

liabilities by stockholders equity. It indicates what proportion of equity and debt

the company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead of total

liabilities in the calculation. Also known as the Personal Debt/Equity Ratio, this

ratio can be applied to personal financial statements as well as corporate ones.


SAIL 0.57 0.52 0.40 0.54

JSW Steel 1.06 1.09 0.86 0.69

Tata Steel 0.39 0.43 0.47 0.45

Visa Steel 6.33 4.25 5.13 3.99

Industry 2.0875 1.5725 1.715 1.4175

Analysis-

The average of the 4 players comes out to be = 1.691875, thus we can see that

For SAIL, it is 0.57, which is lesser than the average. A high debt/equity ratio

generally means that a company has been aggressive in financing its growth with

debt. This can result in volatile earnings as a result of the additional interest

expense. Generally auto manufacturing companies tend to have this ratio>2.

High debt to equity is not preferred as the cost of this debt financing may

outweigh the return that the company generates on the debt through investment

and business activities and become too much for the company to handle.

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Debt Equity Ratio



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Profitability Ratios

Operating profit Margin (%)

It gives an idea about how much a company makes on each rupee of sales. Its

value is given by

For SAIL, operating profit margin decreased from 11.26 % in 2013 to 9.23% in

2014.

It is the amount of profit realized from a business's operations after taking out

operating expenses - such as cost of goods sold (COGS) or wages - and

depreciation. Operating income takes the gross income (revenue minus COGS)and subtracts other operating expenses and then removes depreciation. It is

given by:

Operating Income = Gross Income Operating expenses Depreciation &

Amortization

Year Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

SAIL 8.39 10.34 13.04 16.37 22.89

JSW 19.24 19.38 17.77 17.42 20.08

TATA 23.95 30.72 29.12 33.99 39.06

VISA 3.72 -8.81 5.86 15.41 17.25

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SAIL JSW TATA VISA


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Return on Net Worth

Also called return on Equity, it is calculated as

Return on Equity = Net Income/Shareholder's Equity

For SAIL, we see the below data for % ROE


SAIL 6.12 5.59 8.92 13.34 20.29

JSW 8.56 5.55 9.02 8.77 12.07

TATA 9.65 10.48 9.17 12.72 14.68

VISA-41.55 -17.52 -50.69 14.54 15.18

1. Trend in SAILs Average over past 5 years

a. ROE has consistently been on a decline over 4 years; it experienced

a slight jump in 2014.

2. Performance of SAILsROE Compared to Industry Average

a. SAIL commands around 14% of market share.

b. Its market share has dropped from 18.8% in 2009-10 to 14 % in

2014-15.

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Mar '14 Mar '13 Mar '12 Mar '11 Mar '10 SAIL

JSW

TATA

VISA


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Return on Long Term Funds(%)

Return of Long Term funds is calculated as

RLTF= EBIT/Long term funds

For SAIL and the industry, we see the below data for % RLTF

Comparison with Industry Average

We see that SAIL on average provides higher Earnings before interest and tax

than the competitors but the RLTF is decreasing every year.

YEAR Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

SAIL 5.75 8.05 12.02 -- 20.4

JSW 12.79 14.08 12.99 13.56 12.08

TATA 9.25 13.38 12.81 14.78 14.93

VISA 0.33 -3.08 4.74 11.56 12.36

Analysis- Taking the example of the last 2 years we see that SAILs earning to

Long term debt ratio has come down slightly. This can be attributed to

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Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

SAIL

JSW

TATA

VISA


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Decrease in EBIT from 4176 Crores in Mar13 to 3082 Crores in Mar14 .

The percentage increase in Long term funds is even higher causing the

Return on Long Term Fund to decrease.

o Increase in EBIT is due to increase of about 10000cr in sales

o Increase of about 1000cr in other income

A higher increase in Long term funds

o Long term funds increased from 32223cr in 2012 to 35359cr in

2013

o Increase in the shifting and rehabilitation fund from 1977cr to

2307cr

o Total other long term liabilities increased from 2647cr to 3137cr

o Other long term provisions including OBR Adjustment account

have also increased by 3200cr


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Net Profit Margin(%)

Also called return on revenue, profit margin, net margin.

It is the ratio of profitability upon sales

Profitability here suggest to the net profit after interests, tax,

depreciations and amortisations

This is in an important parameter in comparing the industries in thesimilar domain


SAIL 5.62 5.16 7.7 -- 15.93

TATA

STEEL 15.41 15.37 13.25 19.73 23.35

JSW 4.7 2.94 5.07 5.07 8.7

VISA -14.8 -17.09 -8.7 3.95 4.02

Analysis- The increase in profit for the year was mainly due to the increase in

the EBITDA and also decrease in the prior period adjustment, reduction due to

the extra ordinary items and also lesser deferred tax vis-a-vis 2013.

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Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

SAIL

TATA STEEL

JSW

VISA

Financial Accounting Term Paper_SAIL

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