financial analysis of TATA STEEL

PREPARED BY : RUTAVYAS

INDEX


SR.NO. PARTICULARS PAGENO..

1. PREFACE2. ACKNOWLEDGEMENT3. COMPANY PROFILE4. ABOUT PRODUCTS5. HISTORY OF THE COMPANY6. DIRECTOR’S REPORT7. AUDITOR’S REPORT8. INTRODUCTION OF FINANCE9. MEANING OF FINANCE10. MEANING OF FINACEIAL MGT11. UTILITIES OF FINACE FUNCTION12. FINANCE FUNCTION13. FINANCEIAL HIGHLIGHTS14. ACCOUNTING POLICIES15. RATIOS AND ITS CLASSIFICATION16. CLASSIFICATION 0F RATIOS17. IMPORTANCE OF RATIOS19. LIMITATIONS OF RATIOS20. UTILITIES OF RATIOS21. RATIO ANALYSIS & ITS

INTERPRITATION22. COMMONSIZE STATEMENTS

BALANCESHEETPROFIT AND LOSS

23. CASHFLOW STATEMENT24. CONCLUSION

25. ENCLOSURESP&L A/CBALANSE SHEETCASHFOW STATEMENT

26. BIBLOGRAPHY


PREFACE


It is an exciting movement for me to present this

project report. Proper care was taken while organizing the report so

that it is easy to read and understand.

It has been a rich experience to work on this

project as a part of practical training on company’s financial report of

three years data as a part towards the partial completion of BBA

course.

Without practical knowledge and experience no one

can be reflect so, Gujarat university has made the students to

prepare a financial report of a company, which is an integral part of

practical training subject in 3 years BBA program.

The financial training is a very important and

integral part of experience to develop managerial ability at the level of

BBA the students are required to study financial aspects of any

company to get the format calculated knowledge about the subject.

The main object is to know the financial position of the company. I

have prepaid the project report on “TATA STEEL LTD.” the report

defects the financial position of the company.


ACKNOWEDGEMENT

I am highly thankful to every one who has helped me for

the successful completion of my project report. First of all I am

thankful to MR.V.B.PATEL, The director of G.L.S.I.B.A., for providing

me an opportunity to apply my theoretical knowledge through the

grand project as a part of the BBA curriculum..

Secondly, I am also indebted to GLS INSTITUTE OF

BUSINESS ADMINISTRATION and Prof. SHREEDA SHAH , Whose

constant support and guidance benefited me immensely right to

make this report.

RUTA VYAS.


NAME OF THE COMPANY : TATA STEEL LTD.

REGISTERED OFFICE : Bombay house, 24, homi mody street, fort Mumbai 400 001.

TEL : (022) 6665 8282 (022) 6665 7725

E-MAIL : [email protected]

WEBSITE : http://www.tatasteel.com

SHARE REGISTRARS : TSR Darashaw ltd.6-10 , Haji musa patrawala Industrial estate, 20, DR.E. Moses road, mahalaxmi, Mumbai 400 001Tel : (022) 6656 8484 Fax : (022) 6656 8494 / 6656 8496E-mail : [email protected] : http://www.tsrdarashaw.com

LEGAL ADVISORS : AZB & PARTNERS Amarchand & Mangaldas& Suresh A.

shroff & co. Mulla & Mulla and Craigieblunt & caroe Herbert Smith LLP Cleary Gottlieb Steen& Hamilton LLP LinklatersLLP Freehills Milbank, tweed, handley & Mcloy LLP.

AUDITORS : Messrs Deloitte Haskins & Sells


BOARD OF DIRECTORS :

1. Chairman : MR. RATAN TATA

2. Non-Executive Deputy Chairman: MR JAMES LENG

3. Company Director : MR. NUSLIN N WADIA

4. Company Director : MR.S.M. PALIA

5. Financial Institution’s nminee: MR.SURESH KRISHNA


http://www.tatasteel.com/Company/jamesleng.asp

http://www.tatasteel.com/Company/suresh.asp

http://www.tatasteel.com/Company/sam.asp

http://www.tatasteel.com/Company/nusli.asp

6. Board Member :MR. ISHAAT HUSSAIN

7. Board Member : DR. JAMSHED J IRANI

8. Board Member : MR.SUBODH BHARGAVA

9. Non-ExecutiveIndependentDirector:DR.ANTHONYHAYWARD z

10. Non-ExecutiveIndi.director:MR.JACQUESSCHRAVEN


http://www.tatasteel.com/Company/jacobus.asp

http://www.tatasteel.com/Company/anthony-hayward.asp

http://www.tatasteel.com/Company/s_bhargava.asp

http://www.tatasteel.com/Company/irani.asp

http://www.tatasteel.com/Company/ihussain.asp

11. Non - Executive Non independent Director: Mr Philippe Varin

12. Managing Director : Mr B Muthuraman


http://www.tatasteel.com/Company/muthuraman.asp

http://www.tatasteel.com/Company/philippe-varin.asp

ABOUT THE PRODUCTS

Tata Steel`s Jamshedpur Works produces hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, construction rebars and bearings. In an attempt to 'decommoditise' steel, Tata Steel has introduced brands like Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements),


Tata Wiron (galvanized wire products), Tata Pipes (pipes for construction) and Tata Structura (contemporary construction material).Apart from these product brands, the company also has in its folds a service brand called “steeljunction”.

Corus’ main operating divisions comprise Strip Products, Long Products and Distribution & Building Systems Division.

The NatSteel group produces construction grade steel such as rebars, ‘cut-and-bend’ cages for construction, mesh, precage bore pile, PC wires and PC strand.

Tata Steel Thailand produces round bars and deformed bars for the construction industry.


Established in 1907, Tata Steel is the world’s 6th largest steel company with an existing annual crude steel capacity of 30 million tones. Asia’s first integrated steel plant and India’s largest integrated private sector steel company is now the world’s second most geographically diversified steel producer, with operations in 26 countries and commercial presence in over 50 countries.

Tata Steel completed 100 glorious years of existence on August 26, 2007 following the ideals and philosophy laid down by its Founder, Jamshedji Nusserwanji Tata. The first private sector steel


plant which started with a production capacity of 1,00,000 tones has transformed into a global giant.

Tata Steel plans to grow and globalize through organic and inorganic routes. Its 6.8 million tones per annum (MTPA) Jamshedpur Works plans to achieve specific capacity by 2010. The Company also has three Greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh and proposed steel making facilities in Vietnam.

Through investments in Corns, Millennium Steel (renamed Tata Steel Thailand) and Nat Steel Asia, Singapore, the Tata Steel has created a manufacturing and marketing network in Europe, South East Asia and the Pacific-rim countries. Chorus, which manufactured over 20 MT of steel in 2008, has operations in the UK, the Netherlands, Germany, France, Norway and Belgium. Tata Steel (Thailand) is the largest producer of long steel products in Thailand, with a manufacturing capacity of 1.7 MT. Nat Steel Asia produces about 2 MT of steel products annually across its regional operations in seven countries.

Tata Steel, through its joint venture with Tata Blue Scope Steel Limited, has also entered the steel building and construction applications market.

The iron ore mines and collieries in India give the Company a distinct advantage in raw material sourcing. Tata Steel is also striving towards raw materials security through joint ventures in Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman.

Exploration of opportunities in titanium dioxide business in TamilNadu, Ferro-chrome plant in South Africa and setting up of a deep-sea port in coastal Orissa are integral to the Growth and Globalization objective of Tata Steel.


DIRECTOR’S REPORT

MR.B. MUTHURAMAN,

THE MANAGING DIRECTOR.

TATA STEEL LTD.


Tata Steel turned hundred in 2007-08 – a hundred years of value creation for its stakeholders, of nation building, of service to society and of customer care. The sustained success of Tata Steel over one hundred years has been due to its empowered, energetic and enthused employees, its oneness with the society, its adaptability to changes in the external environment and its financial prudence.

Ever since 1991, freed from the shackles of administered control which had curbed competitiveness, innovation and growth for several decades, Tata Steel began a journey. The years 1991 to 2000 was a period of self renewal for Tata Steel - scrapping obsolete equipment and technology and bringing in new technology and equipment, initiating several improvement projects, severe cost control measures, initiating IT support systems for decision making, institutionalisation of better market and customer focus and sowing the seeds of changing mindsets. With all these efforts, Tata Steel, by the year 2001, had become one of the lowest cost producers of steel in the world and began to be recognised in the global steel industry. We had earned the right to grow.

The years 2000 to 2005 were years of intense strategic thinking about the company’s future, formulating and initiating plans for the company’s organic growth in Jamshedpur and initiation of greenfield projects in India - in the realisation of a strong demand growth in India and the beginnings of the larger role that Tata Steel could play in the global stage. Business processes were further strengthened, continuous improvements became embedded into the day to day work style, marketing initiatives were further strengthened in terms of branding and getting into customer value management and a systematic retail value management. For retail products, Tata Steel set up a unique distribution system, unknown in India till then. Tata Steel’s first overseas acquisition, that of NatSteel, based in Singapore, took place in 2004. So did the first overseas joint venture for coking coal in Australia. These were part of the strategic plan detailed out during 2000–2004.


Memoranda of Understanding with the State Governments of Orissa, Chhattisgarh and Jharkhand for Greenfield steel plants in these states were signed during 2004 and 2005.

By 2005, Tata Steel was well on its journey. The acquisition of Millennium Steel in Thailand was a step in that journey. So were the setting up of Tata BlueScope Steel Ltd. to venture downstream into construction solutions and the formation of the joint venture with NYK for ocean logistics. The Corus acquisition, consummated on 3rd April 2007 was a major milestone in Tata Steel’s journey of becoming global. With this, Tata Steel, with a crude steelmaking capacity of 28.1 million tonnes per annum became the sixth largest steel company in the world with presence in several countries across continents.

Currently, the global steel industry is going through unprecedented times. The steel demand is strong with over 6% growth year on year over the last seven years – unseen in the last several decades, primarily driven by robust growth in China, India, South East Asia, Middle East, Russia and Brazil. The iron ore and coking coal prices are at a record high both due to insufficient capacity creation for these and the heavy consolidation of minerals companies. Oil prices and ocean freight rates are at an all time high. The combined effect of all these have driven steel prices to a level higher than ever before – though there is increasing pressure on margins of steel companies due to very high input costs.

AUDITORS REPORT

Auditors’ ReportTO THE MEMBERS OFTATA STEEL LIMITED

1. We have audited the attached Balance Sheet of TATA STEEL LIMITED, as at 31st March, 2008, the Profit and Loss


Account for the year ended on that date and the Cash Flow Statement for the year ended on that date both annexedthereto in which are incorporated the Returns from the Singapore Branch audited by another auditor. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statement presentation. We believe that our audit providesa reasonable basis for our opinion.

3. As required by the Companies (Auditor’s Report) Order, 2003 issued by the Central Government of India in terms ofsub-section (4A) of Section 227 of the Companies Act, 1956, we enclose in the Annexure a statement on the mattersspecified in paragraphs 4 and 5 of the said Order to the extent applicable.

4. Further to our comments in the Annexure referred to in paragraph (3) above, we report that :

(a) we have obtained all the information and explanations, which to the best of our knowledge and belief were necessaryfor the purposes of our audit;

(b) in our opinion, proper books of account as required by law have been kept by the Company so far as appears fromour examination of the books and proper returns adequate for the purposes of our audit have been received fromthe Singapore Branch not visited by us. The Branch Auditor’s Report has been forwarded to us and appropriately


dealt with;

(c) the Balance Sheet, the Profit and Loss Account and Cash Flow Statement dealt with by this report are in agreementwith the books of account and with the audited returns from the branch;

(d) in our opinion, the Balance Sheet, the Profit and Loss Account and Cash Flow Statement dealt with by this reportcomply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956;

(e) in our opinion, and to the best of our information and according to the explanations given to us, the said accountsgive the information required by the Companies Act, 1956, in the manner so required and give a true and fair viewin conformity with the accounting principles generally accepted in India :

(i) in the case of the Balance Sheet, of the state of affairs of the Company as at 31st March, 2008;

(ii) in the case of the Profit and Loss Account, of the profit of the Company for the year ended on that date;and

(iii) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

5. On the basis of written representations received from the directors, as on 31st March, 2008 and taken on record by theBoard of Directors, we report that none of the directors is disqualified as on 31st March, 2008 from being appointed asa director in terms of clause (g) of sub-section (1) of Section 274 of the Companies Act, 1956.

For Deloite Haskins & SelsChartered Accountants,P. R. RAMESHPartner.


Membership No. : 70928Mumbai, 26th June, 2008

INTRODUCTION TO FINANCE

Finance is one of the major functional areas of management function of finance area is the part at economic activity. Finance is the life blood of business.

Finance is the process of organization in which there is the flow of funds so that business can carry out it objective in the efficient manner.


The scope of financial management that is the views about finance functions has undergone remarkable changes over time. Till 1950, finance functions was regarded as the function of only raising finance for business, and consequently the discussion centered round different sources of finance, financial institutions and financial documents etc, since last 30-40 years, however an effective and efficient utilization of finance has also been considered as an important function of financial management.

In the words of Husbund and Dockey “Finance may be said to be the circulatory system of the economic body making possible the needed co-operation between many units of activity.

MEANING OF FINANCIAL MANAGEMENT

In simple words, financial management means raising of adequate funds at the minimum cost and using them effectively in business. In other words, financial management is concerned with the financial problem of the business organization. It is with the problems of raising finance to establish, expand and modernize business unit, the problems of providing fixed and working capital, the problem of distribution of income etc.


Hoagland says, “Financial management is concerned mainly with such matters as, how a business corporation raises its finance and how it makes use of it”.

According to Soloman, “Financial management it’s concerned with the efficient use of an important economic resource, namely, capital funds”.

Thus, financial management does not stop at procuring the required finance. It has also to see that it is effectively utilized in business. It is concerned with maintaining adequate funds on hand to meet the expenses of both revenue and capital nature. It has to manage the finances in such a way that the goal of business, say, profit maximization, is realized.

UTILITIES OF FINANCIAL MANAGEMENT

Needless to say that without adequate finance, no business can succeed. It is easy to imagine the plight of the management which due to insufficiency of finance cannot make payment for raw materials and wages on time. It is not possible to avail of the opportunities if adequate finance is not available.


The significance of financial management will be clear from the following points.

Success of promotion

Smooth running of the enterprise

Finance for expansion

Cash planning

FINANCE FUNCTION

The principal contents of the modern approach to financial management can be said to be.

How large should an enterprise be, and how fast should it grow?

In what form should it hold assets?

What should be the composition of its liabilities?


These three questions posed above cover between them the major financial problems of a firm. In other words, finance according to the new approach is concerned with the solution of three major problems relating to the question of investment, financing and dividend decisions.

This financial management in the modern sense of the term can be categories into three major decisions as function of finance.

The investment decision

The finance decision

The dividend policy decision

INVESTMENT DECISION

Investment decision is a long term financial decision. It is concerned with allocation of capital. It has to invest the funds in such a way that it would be beneficial for the organization. The assets, which can be acquired, fall into two broad groups:-1i) long –term assets, which yield a return over a period of time in future. Ii) Short-term assets or current assets, which on the normal course of the business are convertible into cash without diminution in value usually with in a year. The first category of assets is known as working capital budgeting. This aspect of financial decision making with references to current assets of short-term assets is known as working capital management. Investment decisions are considered to be risky decision because uncertainly plays an important role in these decisions.

FINANCE DECISION

The second major decision involved in financial management is financing decision. The investment decision is more important compared to finance decision. The concern of the financing decision is with the financing mix or capital structure of average. The term capital structure refers to the proportion of the sources to finance the investment requirements i.e. whether entire capital required should be raised by equity shares or the aspects of the financial decision. The theory of capital structure between equity


and borrowed capital has to be decided. There are two ways of talking financial decisions. First the theory of capital structure, which shows the theoretical relationship between the employment of debt and the return to the shareholders as also the financial risk. A proper balance between debt and equity to ensure a trade off between and return to the shareholder is necessary for any capital structure. The second aspect of the financial decision is the determination of an appropriated capital structure. Thus the finance decision is concerned with major two aspects namely capital structure and its decision.

DIVIDEND POLICY DECISION

It is also one of the most important financial decisions to be taken by the financial managers. This decision is concerned with the divisible profits of the company.

a. They can be distributed to the shareholders in the form of dividend.

b. They can be retained in the business.

This decision is to be taken after taking into consideration the psychology of the investors who wish to get a better yield on their investment. This decision helps in deciding as to which course should be followed depending on the dividend pay-out ratio i.e. what proportion of net profits should be paid to the shareholders. The final decision will depend upon the preference of the shareholders and investments opportunities available.

FINANCIAL HIGHLIGHTS

2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01

1.eBIDTa Turnover

42.73% 41.18% 40.03% 42.48% 33.61% 26.82% 20.23% 25.53%

2. PBT Turnover 35.28% 34.82% 33.87% 36.17% 24.59% 14.39% 3.70% 8.74%

3. Return on AverageCapital

21.97% 32.37% 40.81% 49.69% 28.10% 16.29% 6.51% 9.88%


Employed

4.Return on Average net Worth

22.84% 36.09% 42.90% 62.01% 46.28% 35.88% 6.38% 12.65%

5.Asset Turnover

106.25% 77.02% 108.76% 110.41% 100.78% 78.21% 63.4% 63.62%

6.Average Inventory to Turnover

11.13% 11.40% 11.80% 9.83% 10.07% 11.10% 12.79% 13.46%

7.Average Debtors to Turnover

2.65% 2.96% 3.27% 3.88% 6.75% 10.38% 15.48% 15.86%

8.Gross Block to net Block

1.65 1.68 1.68 1.65 1.69 1.64 1.56 1.49

9.Net Debt to Equity

0.61 (0.12) 0.02 0.15 0.36 1.02 1.75 1.06

10. Current Ratio 0.90 2.18 1.10 1.10 1.03 1.35 1.53 1.54

11.Interest Cover Ratio

9.04 37.01 43.08 29.36 22.82 5.14 1.68 2.60

12.

Net Worth Per Share ( post CCPS conversion)

379.00 214.80 171.68 123.68 78.77 86.35 66.81 107.90

13.Earnings Per Share (Basic)

67.17 65.28 63.35 62.77 31.55 27.44 5.51 14.64

14.Dividend Payout (equity)

29.18% 26.16% 23.40% 23.64% 23.84% 32.90% 71.80% 37.12%

15. P/e Ratio 10.32 6.89 8.47 6.39 12.16 4.88 17.72 8.36

Accounting Policies And Notes

Notes of account:-

All the figures have been rounded off to the nearest rupee. The previous year’s figures have been regrouped where ever necessary to facilitate comparison.


Parities balance subject to confirms reconciliation of final statement ,if any.

Extra ordinary items represents adjustment of income relating to earlier year.

Accounting policies:-

1) Accounting Concept

Accounting Policies not specifically refer to otherwise are consistent and in consonance with generally accepted accounting principles end the accounting standards pronounced by ICAI.

The financial statements are prepared under the historical cost convention on the basis of going concern with revenue recognized and expenses accented on there actual unless other wise specifically stated.

2) Sales turnover, duties and Taxes

Sales turnover is inclusive of excise duty payable by the company but excludes all other taxes realized from the customers on account of the government. Excise duty pay for on sales is accounted for when the finished products are dispatched from bonded premises

3) Valuation of inventories

Raw materials, packing materials, stores and stores and spares and consumable are valued at cost computed on FIFO basis.


Finished goods are valued at cost of manufactures or net realizable value, which ever is lower and also includes the provision for excise duty likely to be payable up on stock of finished goods lying at the year end in factory premises.

4) Fixed Assets and Depreciation

Fixed assets are valued at cost, net of the credit set off, plus all other expenses specifically incurred in their procurement and installation at factory premises. The cost also includes preoperative expenses incurred during construction period which are capitalized as per recognized accounting practices.

Depreciation is provided for under written down value method at the rates described under schedule 14 of Companies act 1956.

5) Contingent Liability

This are not provided for but disclosed by way of notes of Account .

6) Foreign Currency Transaction

Transaction denominated as in foreign currencies are normally recorded at exchange rate prevailing at the time of transaction. Any income or


exchange difference either on settlement or on expense on account of exchange difference either on settlement or on transaction is recognized in the P&L A/c exception cases where they relate to the acquisition of fixed assets in which they are adjusted to the carrying cost of such assets.


CLASSIFICATION OF RATIOS

MEANING OF RATIO ANALYSIS :-

One of the most important method of analysis of financial statement is ratio analysis. Ratio analysis is a numerical figure which is used to find out relationship between different statements, single statement carries no meaning.

Ratio is a term, which establishes the relationship between two figures. It is relationship of one amount to another amount. It is numerator and denominator. It can be expressed as a simple fraction, decimal fraction or percentage. The ratio can be expressed as:

PURE RATIO PERCENTAGE RATIO TIMES RATIO

1 Pure ratio is expressed as 2:1.2 Percentage ratio is expressed as % (percentage)3 Times ratio is expressed as – TIMES.

Any of these ratios can be adopted for studies depending upon the characteristic of the items. For E.g.: Liquidity ratio is always expressed in pure form.

A ratio has to assess the performance and financial condition of an organization. It is very important tool in financial analysis and controlling. It facilitates the top management to pay sound managerial decision


CLASSIFICATION OF RATIO

On the basis of objectives and purposes ratio are classified as under:

1. LIQUIDITY RATIO 2. PROFIRABILITY RATIO3. LEVERAGE RATIO4. ACTIVITY / EFFICINCY RATIO5. COVERAGE RATIO.

LIQUIDITY RATIO

These ratios measure the firm’s ability to meet short term obligation as well as they become due. This ratio shows short term financing solvency of the firm. Usually following ratios are calculated:

# Current Ratio # Quick Ratio

PROFITABILITY RATIO This ratio measures management’s overall effectiveness as shown by the returns generated on sales and investment usually three types of profitability ratios are calculated. The various types of profitability ratios are:


1. IN RELATION TO SALES

# Gross Profit Ratio # Net Profit Ratio

2.IN RELATION TO INVEST.

# Return on total Assets # Return on Capital Employed # Return on Equity

3.IN RELATION TO EQ. SH. HOLDERS FUNDS

# Return on Equity Share Holder’s Fund # Earning Per Share # Dividend Per Share # Price Earning Ratio

LEVERAGE RATIO

This ratio shows the long term financial solvency that measures the enterprise's ability to pay the interest and to repay the capital amount on maturity or in pre-determined installments at due dates. Usually, the following ratios are calculated to judge the long term financial solvency of the firm.

# Dept Equity ratio


PROFITABILITY RATIO

IN RELATION TO SALES TO

SALES

IN RELATION TOINVESTMENT

IN RELATION TOEQ.SHARE HOLDERS

FUND

# Proprietary ratio # Capital gearing ratio # Long term funds to fixed assets ratio

ACTIVITY / EFFICIENCY RATIO

This ratio measures the effectiveness with which a firm uses its available resources. This ratio is also called efficiency ratio or turnover ratio. Since they indicate the speed with which the resources are being turned into sales. Usually the following turnover ratios are calculated:

# Stock Turnover Ratio # Debtor’s Turnover Ratio # Debt Collection Period # Creditor’s Turnover Ratio # Debt Payment Period OR Creditor’s Velocity # Working Capital Turnover Ratio # Book Value Per Share # Total Assets Turnover Ratio


IMPORTANCE OF RATIO ANALYSIS

Importance of Ratios:

In application to studying the rupee amount shown in the financial statements, relationships between different items may be established by computing various ratios. The relation between two related items of financial statement is known as Ratio. A ratio is thus, one number expressed in terms of other Ratios are particularly useful in comparing one year’s performance with other years, as well as one company’s performance with another’s. In many cases the average ratios relating to companies in particular industries are available, and an individual company’s ratio may be compared with such an average.

Ratios help to make qualitative judgments depending upon the calculations made which are quantitative judgments. The ratio analysis involves comparison for a useful interpretation of the financial statements. A single ratio in itself does not indicate favorable or unfavorable condition. It should be compare with some standard. Standard of comparison may decided by the company or firm itself.

IMPORTANCE/UTILITY :

1) Profitability: Useful information about the trend of profitability is available from profitability ratios. The gross profit


ratio, net profit ratio of return on investment give a good idea of the profitability of business. On the basis of these ratios, investors get an idea about the overall efficiency of business, the management gets an idea about the efficiency of managers and bank as well as other creditors draws useful conclusions about repaying capacity of the borrowers.

2) Liquidity: In fact, the use of ratios was made initially to ascertain the liquidity of business. The current ratio, liquid ratio and acid test ratio will tell whether the business will be able to meet its current liabilities as and when they mature. Banks and other leaders will be able to conclude from these ratios whether the firm will be able to pay regularly the interest & loan installments.

3) Efficiency: The turnover ratios are excellent guides to measure the efficiency of managers. E.g. the stock turnover will indicate how efficiently the sale is being made, the debtors’ turnover will indicate the efficiency of collection department and assets turnover shows the efficiency with which the assets are used in business. All such ratios related to sales present a good picture of the success or otherwise of the business.

4) Inter firm comparison: The absolute ratios of a firm are not of much use, unless they are compared with similar ratios of other firms belonging to the same industry. This is interring firm comparison, which shows the strength and weakness of the firm as compared to other firms and will indicate corrective measures.

5) Indicate trend:


The ratios of the last three to five years will indicate the trend in the respective fields. For example, the current ratios of a firm are lower than the industry average, but if the ratios of last five years show an improving trend, it is an encouraging trend. Reverse may also be true. A particular ratio of a company for one year may compare favorably with industry average but, of its trend shows a deteriorating position, if is not desirable. Only ratio analysis will provide this information.

6) Useful for Budgetary Control: Regular budgetary reports are prepared in a business where the system of budgetary control is in use. If various ratios are presented in these reports, if will give a fairly good idea about various aspect of financial position.

7) Useful for Decision making: Ratio guide the management in making some of the importation show an unsatisfactory position, the management may decide to get additional liquid funds. Even for capital expenditure decisions, the ratio of return on investment will guide the management can be judged on the basis and efficiency of each department can thus be determined.


LIMITATIONS OF RATIO ANALYSIS

Every coin has two sides and therefore ratio analysis also has certain limitations. The major limitations are as follows.

1) Historical Analysis: Ratio analysis is basically historical in nature since the financial statements on the basis of which these ratios are established, are historical in nature unless the ratio analysis is based on the projected financial statements prepared to plan the future.

2) Not Free From Bias: In many circumstances, the accountant has to make a choice out of various alternatives available. E.g. Method of depreciation, method of valuation of inventory, etc. since the subjectivity is inherent in the personal Judgment. The financial statements are therefore not free from bias. Thus, ratios analysis is also not free from bias

3) Quantitative analysis and not quality analysis : The ratio analysis being quantitative in nature ignores the qualitative factors which in certain cases may overtake the quantitative factors. For instance, when conducting the analysis of a customer seeking credit, he deserve to be granted the credit on the basis of the financial statements he has submitted but in reality his character and his credit worthiness may be doubtful.


4) Price level changes to be considered : A ratio can be accurately interpreted only if the effect of change in prices which may have taken place, is adjusted in the figures used in the ratio, for example, Fixed Asset Turnover Ratio would not give a brighter picture than that justified by the circumstances unless the fixed assets are revalued at their replacement costs.

1.LIQUIDITY RATIO : The ratio measures the firms ability to meet short term obligations as and when they become due. These ratios show the short term financial solvency of the firm usually the following two ratios are calculated for this purpose.

Current ratioLiquid ratio or Quick ratio.

CURRENT RATIO :

MEANING :This ratio establishes a relationship between current asserts and current liabilities.

OBJECTIVE :The objective of computing this ratio is to measure the ability of the firm and meet its short term obligation and reflect the short term financial strength or solvency of a firm in other words the objective is to measure the safely margin available for short term creditors.

COMPONENTS :


There are two components of this ratio which are as under:

A.Current assets:

Current assets means the assets which can be convert into cash within a shorter period of time they are as under:

Cash balance,Marketable securities,Bills receivables,Prepaid expenses,Income occurred but that due,Advance payment of tax,Bank balance,Debtors (less provision),All types of stocks (w.i.p, r.m, finish goods),Incomes due, but not received.

B.CURRENT LAIBILITIES :

It means the liabilities which are expected to be measured within shorter period of time and include the following:

Creditors,Bills payable,Short term loans and advances,Provision for taxation,Bank overdraft,Income received in advance,Unclaimed dividend.

CALCULATION :


This ratio is computed by dividing the current assets by the current liabilities. This ratio is usually express as a pure ratio. For ex. 2:1 in form of formula this ratio may be express as under.

CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES

2005-06 = 3002.74 2835.99 = 1.06:1

2006-07= 10646.163523.2 = 3.02:1

2007-08 = 3613.73855.26 = 0.94:1

Year 2005-06 2006-07 2007-08

Current assets 3002.74 10646.16 3613.7

Current liabilities 2835.99 3523.2 3855.26

Current ratio 1.06:1 3.02:1 0.94:1


INTERPRITATION:

It indicates rupees of current assets available for each rupee of current liabilities. Higher the ratio greater the margin of safety for short term creditors position and visa-versa. Traditionally a current ratio of 2:1 is considered to be the satisfactory ratio.

Current ratio is very different in all three years. In 2005-06 to 2007-08 the ratio is 1.06:1 to 0.94:1.

LIQUIDE RATIO/ ACIDE RATIO/ QUICK RATIO:-

MEANING : This ratio establishes a relationship between quick assets and current liabilities.

OBJECTIVE:The objective of computing of this ratio is to measure the ability of the firm to meet its short term obligation as and when due without relying upon stock.

COMPONENTS:


There are two components of this ratio which are as under.

QUICK ASSETS = CURRENT ASSETS- STOCK-CURRENT LIABILITIES – B.O.D

CALCULATION:This ratio is calculated by dividing two quick Asset by liquid liabilities. These ratio is usually expressed as a pure ratio. for ex. 1:1 in the form of a formula this ratio may be expressed as under.

QUICK RATIO = CURRENT ASSETS – STOCK

CURRENT LIABILITIES – B.O.D

2005-06 = 1270.65 2835.94 = 0.45:1

2006-07 = 8818.62

3523.20 = 2.50:1

2007-08 = 5332.99 3555.26 = 1.50:1

Year 2005-06 2006-07 2007-08

Liquid assets 1270.65 8818.62 5332.99

Liquid liabilities 2835.94 3523.20 3555.26

Liquid Ratio 0.45:1 2.50:1 1.50:1


INTERPRETATION:

This ratio is useful to know whether any firm is able to pay back its liabilities immediately, if it is required. Suddenly the ideal ratio is normally 1:1

Liquid Ratio has also Increased from 0.45: to 1.50:1 in 2005-06 to 2007-08. It shows the efficient management and efficient use of liquid assets

2.PROFITABILITY RATIO:

IN RELATIOTION TO SALES :

GROSS PROFIT RATIO:

MEANING:-This ratio measures the relationship between gross profit and net sales.

OBJECTIVE:-


The main objective is to computing this ratio is to determine the efficiency with which production or purchase.

COMPONENTS:- There are two components of this ratio which are as under:

A. Gross profit which is the excess of net sales (sales – sales return) over cost of goods sold = (opening stock of raw material + purchase related expense – closing stock of raw material)

B. Net sales:- Sales – Sales return

CALCULATION:- This ratio is computed by dividing the G.P. by the net sales. It is expressed as percent age. In the form of a formula. This ratio may be expressed as under:

GROSS PROFIT RATIO = GROSS PROFIT * 100 NET SALES

2005-06 = 9769.12 * 100 15139.39 = 64.53%

2006-07 = 10902.72 * 100 17552.02 =62.12%

2007-08 = 12604.19 * 10019693.28 =64.03%

Year 2005-06 2006-07 2007-08Gross profit 97690.12 10902.72 12604.19

Net sales 15139.39 17552.02 19693.28


Gross profit ratio

64.53% 62.12% 64.03%

INTERPRETATION:- There is no ideal proportion is decided or fixed up to know the satisfactory condition as to profitability of a unit. Here, in year 2005-06 the gross profit ratio is 64.53% which decreased in 2006-07 and reached to 62.12%. although there is increase in 2007-08 and reached up to 64.03%. in short it is decreasing. so, it is not profitable for the company.

NET PROFIT RATIO

MEANING:- This ratio measures the relationship between Net profit & Net sales.

OBJECTIVES:-The main objective of computing this ratio is to determine the overall profitability due to


various factors such as operational efficiency, trading on equity etc….

COMPONENTS:-There are two components of this ratio which are as under

A. Net profitB. Net sales

CALCULATION:-This ratio is computed by dividing the Net Profit by the Net Sales. It is expressed as a percentage. In the form of a formula this ratio can be express as under:

NET PROFIT RATIO = NET PROFIT * 100 NET SALES

2005-06 = 3506.38 * 100

15139.39 = 23.19%

2006-07 = 4222.15 * 10017552.02 = 24.06%

2007-08 = 4687.03 * 10019693.28 = 23.80%

Year 2005-06 2006-07 2007-08

Net profit 3506.38 422.15 4687.03

Net sales 15139.39 17552.02 19693.28

Net profit ratio 23.16% 24.06% 23.80%


INTERPRETATION:- There is No standard ratio is fixed up for Net Profit Ratio. Here, the net profit ratio shows upward trend. In year 2005-06 it is 23.19% it increase to 24.06% in 2006-07 and there in slight decrease in 2007-08, 23.80%.

But, this net profit ratio suggests the capacity of Tata steel co. to face the adverse economic condition.

OPERATING RATIO

MEANING: This ratio measures the relationship between operating cost and net sales.

OBJECTIVE: The main objective of computing this ratio is

to determine the operational efficiency with which production or purchases and selling operation are carried on.

COMPONENTS:


There are two components of this ratio which are as under

i. Operating cost which comprises

Cost of goods sold Other operating expenses

For eg: administration exp, selling & distribution expense, interest on short term loans, discount allowed and debtors

ii. Net sales which means Gross Sales – Sales

return

CALCULATION: This ratio is calculate by dividing the operating cost by a Net sales. This is expressed as percentage in a form of the formula, this ratio may be expressed as under.

OPERATING RATIO = OPERATING COST NET SALES

2005-06 = 14690.77 * 10015139.39 = 97.04%

2006-07 = 17464.07 * 10017552.02 = 99.50%

2007-08 = 18734.33 * 10019693.28 = 95.13%

Year 2005-06 2006-07 2007-08Cost of goods sold 5370.27 6649.3 7089.09


Operating expenses

9320.50 10814.77 11645.24

Net sales 15139.39 17552.02 19693.28Operating Ratio 97.04% 99.50% 95.13%

INTERPRITATION: This ratio indicates an average operating cost incurred on sales of goods over the ratio,

Here, in year 2005-06 the operating ratio was 97.04% in 2005-06, which increase in 2006-07 and became 99.50%. which decreased in 2007-08 and reached to 95.13%.

EXPENSES RATIO:-

MEANING : This ratio measures the relationship between different types of expenses and not sales.

OBJECTIVE :This ratio show us the proportion of expenses with respect to sales. With help of this ratios


the firm decides the measures to control the expenses for aiming at minimization of cost and maximization of profit. The following are some of the expenses ratio.

A. DIRECT EXPENSE RATIO = DIRECT EXPENSE * 100 NET SALES

B. INDIRECT EXPENSE RATIO = INDIRECT EXPENSE * 100 NET SALES

C. ADMINSTRATION EXPENSE RATIO =

ADMINSTRATION EXPENSE * 100 NET SALES

D. FINANCIAL EXPENSE RATIO = FINACIAL EXPENSE * 100

NET SALES

E. SALING & DISTRIBUTION EXPENSE RATIO=

SALING & DISTRIBUTION EXPENSE * 100 NET SALES

EXPENSE RATIO = EXPENSES * 100 NET SALES

2005-06 = 10101.42 * 10015139.39 = 67%

2006-07 = 11571.94 * 100 17552.02 = 66%

2007-08 = 13183.05 * 10019693.28 = 67%


Year 2005-06 2006-07 2007-08Expenses 10101.42 11571.94 13183.05Net sales 15139.39 17552.02 19693.28Expenses ratio 67% 66% 67%

INTERPRITATION:

By using this ratios company can control the expenses. This ratios may be also compared with the ratios of units in same measured on the basis of the trained of the ratios for some years.

Here, the expenses ratio 2005-06 to 2007-08 is same not more changes so the company position it not more affecting.

IN RELATION TO INVESTMENT :

RETURN ON CAPITAL EMPLOYED:

MEANING :This ratio measure a relationship between net profit before interest, tax and capital employed.

OBJECTIVE :


The objective of computing this ratio is to find out how efficiently the long term firm supply by the creditors and shareholders have been used.

COMPONENTS :There are two components of this ratio. which are as under. Net profit before interest and tax. Capital employed = equity share capital

+ preference share capital + reserves and surplus + p&l a/c credit balance – fictitious assets + long term debts.

CALCULATION :These ratio is computed by dividing the net profit before interest and tax by capital employed. In a form of the formula this ratio can be expressed as under.

RETURN ON CAPITAL EMPLOYED =

NET PROFIT BEFORE INTEREST ANDTAX * 100 CAPITAL EMPLOYED

2005-06 = 5358.40 * 10014617.16 = 36.60%

2006-07 = 6435.55 * 10025597.50 = 25.14%

2007-08 = 7066.36 * 10047675.52 = 14.82%

Year 2005-06 2006-07 2007-08

EBIT 5358.40 6435.55 7066.36

Capital employed 14617.16 25597.50 47675.52


Return on capital employed ratio

36.60% 25.14% 14.82%

INTERPRITATION:

This ratio indicates the firms ability and generating profit per rupee of capital employed. Here, in the year 2005-06 the ratio is 36.60% which is decreased 25.14% in the year 2006-07 and also decreased 14.82% ratio in current year.

RETURN ON SHARE HOLDERS FUND RATIO:

MEANING : These ratio measures a relationship between net profit after interest and tax and share holders fund.

OBJECTIVE :The objective of computing this ratio is to find out how efficiently the funds supplied by equity share holders have been used.


COMPONENTS : There are two components of this ratio which are as under;

Net profit after interest and tax Shareholder’s fund = equity share capital

+ preference share capital + reserves and surplus – fictitious assets.

CALCULATION:These ratio is calculated by dividing the net profit after interest and tax by capital employed. It is expressed as a percentage in a form of a formula. This ratio can be expressed as under,

RETURN ON SHAREHOLDER’S FUND= NETPROFIT AFTER INTEREST AND TAX * 100 SHAREHOLDER’S FUND

2005-06 = 3506.38* 1009755.30 = 35.94%

2006-07 = 4222.15 * 10014096.15 = 25.95%

2007-08 = 4687.03 * 10027300.73 = 17.17%

Year 2005-06 2006-07 2007-08Profit after tax 3506.38 4222.15 4687.03Equity share holders fund

9755.30 14096.15 27300.73

Return On Equity Share Holders Fund Ratio

35.94% 29.95% 17.17%


INTERPRETATION:

This ratio indicates the firm’s ability of generating profit per rupee of share holders funds. Here, Return on equity share holders fund was decreased 35.94% to 17.17%. t is not good for company. When, increased in return on equity share holders Fund Company gives more dividend.

IN RELATION TO SHARE HOLDERS FUND

EARNING PER SHARE:

MEANING:This ratio measures the earning available to an equity shareholder on per share basis.

OBJECTIVE: The objective of computing this ratio is to measure the profitability of the firm on per equity share bases.


COMPONENTS: There are two components of these ratios which are as under:

1. Net profit after interest, tax and preference dividend.

2. No. of equity shares.CALCULATION:

This ratio is computed by dividing the net profit after interest, tax and preference dividend by the no. of equity shares. It is expressed as an absolute pure ratio in the form of the formula this ratio can be expressed as under:-

Earning per share= Net profit after interest, tax at preference Dividend No.of equity shares.

2005-06 = 3506.38 * 10055.347 = 63.35 RS. (CRORES)

2006-07 = 4222.15 * 10058.047 = 72.74 RS. (CRORES)

2007-08 = 4687.03 * 10075.67 = 61.44 RS (CRORES)

Year 2005-06 2006-07 2007-08

Profit after tax 3506.38 4222.15 4687.03

No. of shares 55.347 58.047 75.67

Earning per share 65.35 72.74 61.94


INTERPRETATION:

In general, higher the ratio better it is and vise versa. While interpreting this ratio, it must be seen whether there is any increase in equity Shareholders find as a result of retain earnings. Here, Earning per share shows downward trend. Over the year, earning per share has decreased so, this condition not attracted to investors. This has the not satisfactory position.

DIVIDEND PER SHARE:-

MEANING: This ratio measures relationship between dividend per share and no. of euity per share.

OBJECTIVE: The objective of computing this ratio is to find out the net distributedprofit after interest and preference share dividend belongs to equity

shareholder.

COMPONENTS:There are two components of these ratios which are as under :-

1. Dividend paid to equity shareholders.


2. No. of equity shares.

CALCULATION: This ratio is computed by dividing dividend paid to equity shareholdersby no. of equity shares. It is an absolute figure in the form of a formula. This ratio can be expressed as under:-

Dividend Per Share = Dividend Paid to Equity Sahreholders No. of equity shares.

2005-06 = 719.51 55.347 = 13 RS. (CRORES)

2006-07 = 943.91 58.47 = 16.26 RS (CRORES)

2007-08 = 1168.9373.06 = 16 RS. (CRORES)

Year 2005-06 2006-07 2007-08

Total dividend declared

719.51 943.91 1168.93

No. of share 55.347 58.47 73.06

Dividend per share (RS)

13 16.26 16


INTREPRETATION:

Dividend per share was increased from RS.13(CRORES) to mpany. RS. 16 (CRORES). This attracts the investor to invest in the co

PRICE EARNING RATIO / P/E RATIO :-

MEANING: This ratio measures relationship between market value of equity shares, and earnings per share.

OBJECTIVE: The objective of computing this ratio is to find out expected return on investment in equity shares.

COMPONENTS:


There are two components of this ratio which are as under:-

1. Market price per share.2. Earnings per share.

CALCULATION:

This ratio is calculated by dividing market price per equity share by dividing market price per equity share by earnings per share. It is expressed as an absolute figure in a formula this ratio can be expressed as under:-

Price Earning Ratio = Market Price Per Equity Share Earning Per Share

INTERPRETATION:

It is the most important ratio reflecting the degree to which earnings are capitalized by the stock market sentiments. The higher the ratio, the better it is. It shows the extent to which the market value of equity share has increased. Further it helps the management in planning the limit of equity capital issue. When this ratio is high, equity shares are to be issued.


3.LEVERAGE RATIO / CAPITAL STRUCTURE

DEBT- EQUITY RATIO:

MEANING: This ratio establishes a relationship between long term debts and share holder’fund.

OBJECTIVE: The objective of this ratio is to measure the relative proportion of debt and equity in the assets of the firm.

COMPONENTS: There are two components of these ratio,

LONG TERM DEBTS = long term loans whether secured for ex. bonds, debentures, loans from financial institute.

SHARE HOLDERS FUND = equity share capital + preference share capital+ credit balance of p&l a/c – fictitious assets.

CALCULATION: These ratio is expressed as a pure ratio. in the form of the formula this ratio can be expressed as under.

DEBT-EQUITY RATIO = LONG TERM DEBTS SHARE HOLDERS FUNDS

2005-06 = 2516.15 9502.03 = 26.48%

2006-07 = 9645.3313893.62 = 69.42%

2007-08= 18021.6927145.62 = 66.39%


Year 2005-06 2006-07 2007-08

Long term liabilities 2516.15 9645.33 18021.69

Share holder’s fund 9502.03 13893.62 27145.62

Debt Equity ratio 26.48% 69.42% 66.39%

INTERPRITATION :

It indicates the margin of safety to long term creditors. lower ratio means a longer safety margin for creditors. since owners equity is treated as a margin of safety by creditors and visa- versa.

Debt equity ratio is very more increases during the year 2005-06 to 2007-08. The ratio is 26.48% to 66.39%.they should try to decline this ratio for safety.

PROPRITORY RATIO:


MEANING:This ratio measures a relationship between total assets and proprietors fund of share holder’s fund.

OBJECTIVE: The objective is to find out how the proprietors have utilized the funds for purchasing the assets.

COMPONENTS: There are two components of this ratio,

1. TOTAL ASETS /TOTAL LIABILITIES2. SHAREHOLDERS FUND / PROPRITORY FUND

CALCULATION :

These ratio is Expressed in percentage form. formula of this ratio is asunder.

PROPRITORY RATIO = PROPRITORY’S FUND * 100 TOTAL ASSETS / TOTAL LIABILITIES

2005-06 = 9502.03* 10014617.16 = 65.01%

2006-07 = 13893.62 * 10025597.50 = 54.28%

2007-08 = 27145.62* 10047075.52 = 57.66%

Year 2005-06 2006-07 2007-08

Proprietors fund 9502.03 13893.62 27145.62

Net assets 14617.16 25597.50 47075.52

Proprietary Ratio 65.01% 54.28% 57.66%


INTERPRITATION : This ratio indicates the extent to which the assets of the firm have been purchased out of owners fund. here, Proprietary ratio shows downward trend. In year 2005-06 to 2007-08 the proprietary ratio is 65.01% to 57.66%.

CAPITAL GEARING RATIO:

MEANING : This ratio measures a relationship between equity share capital preference share capital.

OBJECTIVE: The objective of calculating this ratio is to find out proportion between preference share capital and equity share capital.

COMPONENTS : There are two components of this ratio;


1. EQUITY SHARE CAPITAL2. PREFERENCE SHARE CAPITAL

CALCULATION : This ratio is expressed in a form of formula of this ratio is,

CAPITAL GEARING RATIO = PREFERENCE SHARE CAPITAL EQUITY SHARE CAPITAL

2005-06 = 2516.15 * 100 553.67 = 454.45% 2006-07 = 9645.33 * 100

580.67 = 1661.67%

2007-08 = 23444.21 730.78 = 3214.95%

Year 2005-06 2006-07 2007-08

Fixed interest bearing capital

2516.15 9645.33 23444.21

Ordinary capital 553.67 580.67 730.78

Capital gearing ratio 454.45% 1661.67% 3214.95%


INTERPRITATION :

Higher the ratio, more proportion of borrowed capital. here, Capital gearing ratio is upward trend in capital gearing ratio in 2005-06 to 2007-08 year. The ratio is 454.45% to 3214.95%.

LONG TERM FUNDS TO FIXED ASSETS:

MEANING :This ratio establishes relationship between long term funds and fixed assets.

OBJECTIVE :The objective of calculating this ratio is to find out proportion between long term funds and fixed assets.

COMPONENTS: There are two components of this ratio,

1. Share holder + long term fund 2. Fixed assets


CALCULATION: This ratio is calculated by share holders fund and long term funds and fixed assets. in order of formula,

LONG TERM FUNDS TO FIXED ASSETS =

SHAREHOLDERS FUND + LONG TERM DEBTS FIXED ASSETS

2005-06 = 12271.45 9865.05 = 1.24:1

2006-07 = 23741.48

11040.56 = 1.08:1

2007-08 = 45321.99 12623.56 = 3.59 :1

Year 2005-06 2006-07 2007-08

Long term funds 12271.45 23741.48 45321.99

Fixed assets 9865.05 11040.56 12623.56

Long term funds to fixed ratio

1.24:1 1.08:1 3.59:1


INTERPRITATION:

Fixed assets should be purchased form long term funds only. if fixed assets are less as compare to long term funds which means fixed assets are not properly purchased and long term fund have current liabilities. it is not utilized properly. Here, Long term fund to fixes assets is increasing during the year 2005-06 to 2007-08. The ratio is 1.24:1 to 3.59:1 so, the company long term funds are very upward.


4. ACTIVITY / EFFICIENCY RATIO:

STOCK TURNOVER RATIO:

MEANING :This ratio establishes a relationship between cost of good sold and average inventory or stock.

OBJECTIVE: The objective of this ratio is to determine

efficiency with which the inventory is utilize.

COMPONENTS: There are two components of these ratio which are as under ,

COST OF GOOD SOLD = Opening stock + purchase + purchase exp.- closing stock.

OR

COST OF GOOD SOLD = NET SALES – GROOS PROFIT

AVERAGE INVENTORY = OPENING STOCK+ CLOSING STOCK 2

CALCULATION :This ratio is computed by dividing the cost of good sold by average inventory. this ratio is usually expressed as x number of times. in the form of theformula. this ratio may be expressed as under,

STOCK TURNOVER RATIO = COST OF GOOD SOLD AVERAGE INVENTORY


2005-06 = 5370.27 655.63 = 8.79 times

2006-07 = 6649.30 714.03 = 9.31 times

2007-08 = 7089.301126.39 = 6.30 times

Year 2005-06 2006-07 2007-08COGS 5370.27 6649.30 7089.69Average stock 655.62 714.03 1126.39Stock turnover ratio

8.19 9.31 6.30

INTERPRITATION: This ratio is important to know the speed of

the turn over of inventory in manufacturing firm. It can be said that the inventory is used efficiently. here, S Tock turnover ratio has decreased. It is not good for company. It also not good condition in the market. The ratio is 8.119 to 6.30 in the year 2005-06 to 2007-08.


WORKING CAPITAL TURNOVER RATIO:

MEANING :These ratio establishes relationship between net sales and working capital.

OBJECTIVE :The objective of computing this ratio is to determine the efficiency withwhich working capital is utilized.

COMPONENTS : There are two components of this ratio,

1. Net sales which means GROSS SALES- SALES RETURN

2. Working capital which means CURRENT ASSETS- CURRENT LIABILITIES.

CALCULATION:

This ratio is computed by dividing the net sales by working capital. this ratio is usually expressed as x no. of times. in the form of formula this ratio can be expressed as under,

WORKING CAPITAL = NET SALES WORKING CAPITAL

INTERPRITATION:

It indicates the firms ability to generate sales per rupee of working capital in general , higher the ratio , the more efficient the management and utilization of working capital and visa-versa.


DEBTORS TURNOVER RATIO:

MEANING:This ratio establishes a relationship between net credit shares and average trade debtors.

OBJECTIVES:The objective of calculating this ratio is to determine the efficiency with which the trade debtors are manage.

COMPONENTS:There are two components .

1. Net credit sales which means GROSS CREDIT SALES – SALES RETURN.

2. Average trade debtors(including b/p receipt) which are calculated as under

A.T.D = OPENING BALANCE OF T.D+ CLOSING BALANCE OF T.D 2

CALCULATION:

This ratio is computed by dividing net credit sales by average trade debtors. this ratio are usually expressed as x no. of times. in the form of a formula this ratio may be expressed as under,

DEBTORS T.O.R = NET CREADIT SALES AVERAGE TRADE DEBTORS OR

= No.OF DAYS IN YEAR DEBOTOR’S RATIO


2005-06 = 365 13 = 28.08 times

2006-07 = 36513 = 27.79 times

2007-08= 36510 = 36.25 times

Year 2005-06 2006-07 2007-08No. of days in a year

365 365 365

Debtors ratio 13 13 10Debtors turnover ratio

28.08 27.79 36.25

INTERPRITATION:

This ratio indicates the speed with which the debtors turnover on an average each year. in general a high ratio indicates the shorter period, which implies from payment by debtors and a law ratio indicates a longer collection period which implies delayed payment by debtors. however too high ratio and too law ratio may be the result of a restrictive creditors and collection policy which may curtail the sales and consequently profits,


Here, in the year 2005-06 the ratio is 28.08 times which is decreased 27.79 times in the 2006-07 year and increased 36.25 times in the year 2007-08.

DEBT-EQUITY RATIO / DEBTOR’S RATIO :

MEANING: This ratio shows average collection period for credit sales. in other words, it can be said that the period of time given to debtors to pay their payments can be known from this ratio,

DEBTORS RATIO = DEBTORS + B/R * 365 CREDIT SALES OR

DEBTORS RATIO = 365 DAYS OR 52 WEEKS 0R 12 MTHS DEBTOR TURNOVER RATIO

2005-06 = 539.40 15139.39 = 13 days

2006-07 = 631.63 17552.02 = 13 days

2007-08 = 543.4819693.28 = 10 days

Year 2005-06 2006-07 2007-08

Debtors 539.40 631.63 543.48

Credit sales 15139.39 17552.02 19693.28

Debtors ratio 13 13 10


INTERPRITATION:

Here, in the year 2005-06 the ratio is 13 days which is same 13 days in the 2006-07 year and decreased 10 days in the year 2007-08.

CREDITORS TURNOVER RATIO / PAYABLE TURN OVER RATIO:

MEANING: This ratio establishes the relationship between net credit purchase and

average trade ratio.

OBJECTIVE: The objective of computing this ratio is to determine the efficiency with

which are manage.

COMPONENTS: 1. Average trade creditors (including b/p)

which is calculated as under,


AVERAGE TRADE CREDITORS = OPENING BALANCE OF CREADITORS + CLOSINGBALANCE OF CREDITORS

2

2. Net credit purchases which mean GROSS PURCHASES – PURCHASES RETURN.

CALCULATION: This ratio is calculated by dividing the net credit purchases by average trade creditors. this ratio is usually express as number of times. In the form of a formula this ratio may be expressed as under.

CREDITOR’S TURNOVER RATIO = NET CREDIT PURCHASES AVERAGE TRADE CREDITORS

2005-06 = 365386.32 = 0.94 times

2006-07 = 365423.16 = 0.86 times

2007-08 = 365159.94 = 2.28 times

Year 2005-06 2006-07 2007-08No. of days in a year

365 365 365

Creditors ratio 386.32 423.16 159.94Creditors turnover ratio

0.94 0.86 2.28


INTERPRITATION:

This ratio indicates the speed with which the creditors turnover on an average each year. in general, a high ratio indicates shorter period which implies either the availability of loss credit or earlier payment an a law rate indicates a larger payment period which implies either the availability of more credit or delayed payments.

Here, Creditors turnover ratio is increasing in all three year’s. it compare to 2005-06 to 2007-08 the creditors turnover ratio is 0.94 to 2.28.

CREADITORS RATIO / CREDITORS VELOCITY / DEBT PAYMENT PERIOD:

MEANING:This ratio shows an average time period for which the credit purchase remains out standing or the average credit period allowed by the creditors.

CREDITORS VELOCITY = CREDITORS + B/P * 365


NET CREDIT PURCHASE OR CREDITORS VELOCITY = 365 DAYS / 52 WEEKS / 12MNTH CREDITORS TURN OVER RATIO

2005-06 = 2534.03 2394.16 = 386 days

2006-07 = 3145.94 2713.61 = 423 days

2007-08 = 25695.8458640.75 = 159.days

Year 2005-06 2006-07 2007-08Creditors 814.88 1093.10 25695.84Credit purchase

1710.35 2263.01 2353.80

Creditors ratio

386 423 159

INTERPRITATION:The creditors’ ratio is decreasing in

2005-06 to 2007-08. The ratio is 386 days to 159 Days.

TOTAL ASSETS TURNOVER RATIO:


MEANING:

The ratio measures the overall performance or activity of the business enterprise.

OBJECTIVE: The objective of calculating this ratio is to point out efficiency or in efficiecy in or in efficiency in the use of total assets.

COMPONENTS: There are two components of these ratio which are as under.

Net sales Total assets

CALCULATION: These ratio is calculated by dividing net sales by total assets in the form of a formula. These ratio can be expressed as under.

TOTAL ASSETS TURNOVER RATIO = NET SALES TOTAL SALES

2005-06 = 15139.39 9865.05 = 1.53 times

2006-07 = 17552.0211040.56 = 1.59 times

2007-08 = 19693.2812623.56 = 1.56 times

Year 2005-06 2006-07 2007-08


Sales 15139.39 17552.02 19693.28Fixed assets 9865.05 11040.56 12623.56Fixed assets turn over ratio

1.53 1.59 1.56

INTERPRITATION:An idle total assets turnover ratio is 2:1

i.e. sales are twice the value of total assets. a lower ratio then his will signify that the assets aren’t utilized properly, while a higher ratio may lead to over trading.

Here, in the year 2005-06 the ratio is 1.53 times which is increased 1.59 times the year 2006-07 and decreased 1.56 times ratio in the 2007-08 year.

BOOK VALUE PER SHARE:

MEANING :This ratio establishes a relationship between share capital and reserve andreserve and surplus with no. of shares.

OBJECTIVE :


The objective for calculating this ratio is to measure the preparation of share capital and reserve and surplus with no. of equity shares.

COMPONENTS : There are two components of this ratio which are as under:- Share capital and reserve and surplus No. of equity shares.

CALCULATION :This ratio calculated is always express as an absolute figure in the firm of formula this ratio can be expressed as under:-

BOOK VALUE PER SHARE =

EQUITY SHARE CAPITAL + RESERVE AND SURPLUS NO OF EQUITY SHARE

2005-06 = 9755.3 = 176.26 55.347

2006-07 = 14096.15 = 242.84 58.047

2007-08 = 27300.73 = 360.79 75.67

Year 2005-06 2006-07 2007-08Eq.share capital +Res & surplus

9755.3 14096.15 27300.73

No. of eq.share 55.347 58.047 75.67Book value perShare ratio

176.26 242.82 360.79


INTERPRETATION :

In general higher the ratio better it is because this ratio measures a relationship between share capital and reserve and surplus with no. of equity share in most os the firm the amount of equity share capital remains constant and the value of reserves and surplus changes. Whenever firm has high amount of profit, the value of reserves and surplus will increase that means Higher book value per share, higher will be the amount of profit.


5.COVERAGE RATIO :

DEBT-SERVICE COVERAGE RATIO:-

MEANING :This ratio measures the firms ability to pay back the amount of debt.

OBJECTIVE :This is useful ratio to money lenders, banks financial. Institutions to know the capability of the firm pay installments inclusive of interest out of its profits.

COMPONENTS :There are two components of this ratio profit available to pay debts. Interest + Installment of principle amount for the current year.

CALCULATION :

DEBT SERVICE COVERAGE RATIO= PROFIT AVAILABLE TO PAY DEBTS, INTEREST + PRINCIPLE AMT FOR CURRENT YEAR


INTEREST COVERAGE RATIO:-

MEANING :This is ratio useful to know if the firm has sufficient profit to pay its liabilities of interest payment.

OBJECTIVE :This ratio shows that how many time the interest payable is covered by the amount of profit as a result, It will be easy for a firm to decide whether more capital should be borrowed to get the benefit of trading on equity.

COMPONENTS :There are two components of this ratio which are as under:-

1. Earning before tax and interest. 2. Interest

CALCULATION :

COVERAGE RATIO = EARNING BEFORE INTEREST AND TAX INTEREST2005-06 = 6139.57

124.51 = 49.31 times

2006-07 = 6212.05173.90 = 41.72 times

2007-08 = 8779.67878.70 = 10 times

Year 2005-06 2006-07 2007-08


EBIT 6139.57 6212.05 8779.67Interest 124.51 173.90 878.70Interest coverage ratio

49.31 41.72 10

INTERPRETATION : The interest coverage ratio is very important from lenders point of view, it gives an idea of the no. of covered by 6 to 7 times. A high ratio assures the lenders a regular interest income but the weakness of the ratio is that the financial manager may increase the funds from borrowed capital.

Here, interest coverage ratio shows fluctuating. It’s not good for company. The interest coverage ratio is decrease ratio decreases 2005-06 to 2007-08.

COMMON SIZE STATEMENTS


Financial statements when read with absolute figures are not easily understandable some times they even misleads. Therefore it is necessary that figures reported in the statement should be converted into percentage some common size base. In the Profit & Loss account net sales is assumed to be equal to 100 and other figures are expected as percentage of sales. Similarly in the balance sheet the total of assets or liabilities is to be taken as 100 and all the other figures are expected as percentage of these total. This type of analysis is also called vertical analyses thus statement prepared in the form of percentage is called as common size statement. There are two types of common size statement:

Common size profit & loss account

Common size balance sheet

COMMON SIZE BALANCE SHEET

Balance sheet cannot be said as account but it is said to be as a financial statement of the company. A business is interested in knowing financial position of the business, i.e. his liabilities and his assets as well as capital, on a particular day. Balance sheet is a statement showing the financial position of the business, which is prepared only once in a year. Balance sheet may be described as a statement which reports the financial condition of an entity as of one moment of time. Balance sheet is also known as a status report. Share holders and creditors can get an idea about the soundness or otherwise of the financial position of the business from time to time. In the balance sheet, the total assets are taken as 100 and all items presented of total assets. The common size balance sheet shows the percentage of each asset to the total assets as well as the percentage of each liabilities to the total liabilities and capital. Such percentage gives only the change in proportional of one item to one main item sales or total assets. But it fails to indicate whether the financial position or detracting COMMON SIZE BALANCE SHEET FOR THE YEAR

ENDED 31ST MARCH 2006-2007-2008


[RS. in CRORES]

PARTICULARS 2005-06 2006-07 2007-08AMOUNT

(%) AMOUNT

(%) AMOUNT

(%)

Funds employed share capital

553.67 3.79 727.73 2.84 6203.30 13.17

Reserve & surplus loans

9201.63 62.95 13368.42 52.23 21097.43 44.82

Deferred tax liability 2516.15 17.21 9645.33 37.68 18021.69 38.28Provision for employee separation

957.00 6.55 1107.08 2.93 681.80 1.45

Compensation total funds employed

14617.16 100 25597.50 100 1071.30 100

Application Of Funds Fixed assets

9865.05 67.49 11040.56 43.13 12623.56 26.82

Investment 4069.96 27.84 6106.18 23.86 4103.19 8.72Current Assets 442.66 3.03 505.44 1.97 557.67 1.18Store & spare parts stock

1732.09 11.85 1827.54 7.14 2247.31 4.77

Sundry debtors 539.09 3.69 631.63 2.47 543.48 1.15Interest accrued on investment

0.20 0.00 0.20 0.00 0.20 0.0

Cash & bank 288.39 1.97 7681.35 30 4231.63 8.99Loans & advances 1234.86 8.45 3055.73 11.93 33348.74 7.11Current liabilities ( 2835.99) (19.40

)( 3523.20) (13.76

)3555.26 7.55

Provision ( 972.73) (6.65) ( 930.46) (7.54) 2313.52 4.91Miscellaneous Exp. 253.27 1.73 202.53 0.80 155.11 0.33TOTAL 14617.16 100 25597.50 100 47075.52 100

COMMENTS


Common size statement is prepared & which all the items are compared with any common item which is significant for instance in balance sheet total assets may be taken as 100 and all other items in this statement is compared in total assets.

SOURCES OF FUNDS:

The share capital was 3.79% in 2005-06 which decreased in in2006-07 and reached to 2.84%. but in 2007-08 it increased and reached to 13.17%

The reserves and surplus was 62.95% in 2005-06 and decreased in 2006 and reached to 52.23%. then it further decreased to 44.82%

The tax liability was 17.21% in 2005 it increased in 20076 and reached to 37.68 where a sit further increased to 38.28% in 2007-08.

Provision for employee separation was 6.55% which decreased in 2006 and reached to 2.93%. where it further decreased in 2007-08.

APPLICATION OF FUNDS:

The Fixed assets is showing decreases trend year by year.

The investments is also decreases year by year.

the inventory is also decreases from 11.85% in 2005 to 4.77%

in year 2007-08

Cash and bank is increasing in 2006-07 but after that it is declining.

The plus point is that the current liabilities is declining in 2006-07 and reached to 19.40% and reached to 13.76%. in 2007-08 it is declining.The Provisions are in increasing trend.

The Miscellanies expenses is showing declining rate.


COMMON SIZE PROFIT & LOSS A/C

This method so far discussed does not provide any common base with which all items in each item are compared with one common item, which is significant. Profit and loss account is complete mirror of working of a business. Profit and loss accounts give a true and fair view the profit or loss of the company for the financial yield.

In the common size income statement the sales as 100 and all individual items of expenses and incomes are shown as percentage of sales. Such percentage of over 3 to 5 years will also suggest the change, if they, in the relative proportion of individual items or expenses of incomes as compared to sales.

The common size statement gives useful proportion of each component to the total. But they alone are not of much use, as they do not give information about the trends of individual items from year to year. They must be used as long with trend percentage and individual ratios based on these two statements. Profit and loss account shows either profit or loss made in the business during the year. It shows the changes in business which has taken place and clarifies the effects of such changes

COMMONSIZE PROFIT AND LOSS A/C FOR THE YEAR ENDED 31ST MARCH 2006-2007-2008

[RS.IN CRORES]


PARTICULARS 2005-06

(%) 2006-07

(%) 2007-08

(%)

Income:-Sales 17144.22 98.35 17552.02 97.59 19693.28 98.35Other income 254.76 1.65 433.67 2.41 335.00 1.67

15470.26 100 17985.69 100 20028.28 100Expenditure:-Manufacturing & other exp

9390.54 99.88 10814.77 100.53 11645.24 88.33

Exp. Transferred to capital & other a/c

( 112.62) ( 1.20)_ ( 236.02) ( 2.04) 175.50 1.33

Interest 124.51 1.22 173.90 1.51 878.70 6.6710177.53 100 11571.94 100 13183.05 100

Profit before tax:-PBT & exceptional items

5292.73 101.00 6413.75 102.43 6845.23 96.9

Employee separation compensation

( 52.77) (1.00) ( 152.10) ( 2.43) ( 226.18) 3.13

5239.96 100 6261.65 100 7066.36 100Taxes:-Current tax 1579.00 91.08 2076.01 101.79 2252.00 94.65Deferred tax 127.58 7.36 ( 52.51) ( 2.57) 108.33 4.55Fringe benefits tax 27.00 1.56 16.00 0.78 19.00 0.80

1733.58 100 2039.50 100 2379.33 100Profit tax: 3506.38 66.20 4222.15 58.65 4687.03 50.50Balance brought forward From last year

1790.21 33.80 2976.16 41.35 4593.98 49.50

5296.59 100 7198.31 100 9281.01 100Amount available for Appropriation:-Proposed dividend 719.51 31 943.91 36.24 1168.93 40.90Tax on dividend 100.92 4.35 160.42 6.16 202.43 6.99General reserve 1500 64.65 1500 57.60 1500.00 52.61

TOTAL 2320.43 100 2604.33 100 2893.55 100

COMMENTS


For the COMMON SIZE PROFIT & LOSS A/C we assume net sales to be 100% & on basis of this we further calculate the % of other items .

We can view that other income & Increase in fixed goods were around 100% in 05-06 which around samein 06-07 & then further increased to 101% in 07-08.

Expenditure is increasing in 2006-07 but it further declining in 2007-08

Profit before interest and tax is around 101% which also increased in 2006-07 but it further declining in 2007-08.

The taxed are increasing in 2006-07 but decreases in2007-08. The balance carried forward & surplus of last year is increasing year by year .

Cash Flow Statement


A Cash Flow Statement provides information that enables users to evaluate the changes in the assets of an enterprise, its financial structure and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances. The Cash Flow Statement should report cash flows during the period classified by operating, investing and financial activities. Cash Flow Statement is concerned only with the change in cash and Fund Flow Statement is concerned with Changes in working capital.CASH FLOW STATEMENT FOR 2006-2007-2008 AS PER AS-3

31 st March,

2006

31 st March,

2007

31 st March,

2008

Cash inflow/(outflow) arising from

operating activities

3637.46 4896.00 6254.20


investing activities

-2464.59 -5429.50 -29318.58


financing activities

-1131.20 7926.46 15648.07

Net increase/(Decrease) in

cash/cash equivalents

41.67 7326.46 -7216.31

Add : Balance at the beginning

of the year

246.72 288.39 7681.35

Cash/Cash equivalents at the

close of the year

288.39 7681.35 465.04

CASH FLOW STATEMENT ANALYSIS


Cash flow statement is divided into three major parts.

1. Cash inflow or out flow from operating activities

In the year 05-06 the cash flow from operating activities is lowest and after that in the year 06-07 the company’s out flow is increasing & further increasing in 07-08 .

2. Cash inflow or out flow from investment activities

There is a high change in the year 06-07 compare to 05-06 and in the year 07-08 the cash flow is increasing compare to .that means the company invest it’s money in investment. It is good for company because through it company get interest.

3. Cash flow from financing activities

The cashflow from financing activities is increasing from 2005-06 to 7926.46 crores in 2006-07. but it continuous increasing in 2007-08 and increase up to 15648.07 crores .

4. Net increasing or decreasing in cash or cash equivalent

Here, there is increasing trend from 2005-06 to 2007-08. it was 288.39 crores in 2005-06 and reached to 465.04 crores in 2007-08.

CONCLUSION


The Indian motor sector is ready to leap forward. Since

the priority of STEEL industry is increasing day by day. TATA STEEL LTD. is ready to face its builder task.

companies profit and sales has also increased. Company has responded to an inner voice. A voice that has made

company a responsible citizen. Tata has its iron way to thank nature and society for its success.

So. on the basis of this financial analysis we can say that TATA STEEL. has very good prestige not in India but in world .

On the basis of financial reports of TATA STEEL any person can know the company’s position in the market Annual reports . Bright objective should be to fulfill the necessities of its shareholders. it should pay high dividend to its shareholders.

Though annual report of company, the creditors are influenced. Investors should also look at annual reports of the company and shold invest without hesitation.

ENCLOSURES


X-ROX COPY OF,

PROFIT AND LOSS A/C ‘S OF YEAR 2005-06, 2006-07,

2007-08.

BALANSE SHEET OF YEAR 2005-06, 2006-07, 2007-08.

CASHFLOW STATEMENT OF YEAR 2005-06, 2006-07,

2007-08.

BIBLIOGRAPHY


ANNUAL REPORTS OF TATA STEEL LTD. OF 2005-06, 2006-

07 AND 2007-08.

Introduction of finance from financial management, Khan & Jain

www.tatasteel.com


financial analysis of TATA STEEL

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