PROJECT REPORT Financial analysis of STEEL AUTHORITY OF INDIA LTD (SAIL). Master of Business Administration Under the supervision of
Dr. Archana Singh BY: 1. Aditya Aggarwal (5) 2. Amandeep Kaur Kharbanda(8) 3. Parul Tandon (33) 4. Saurabh Marwah(51) 5. Sumit Gupta(53)
DELHI SCHOOL OF MANAGEMENT Delhi Technological University, New Delhi. SEPTEMBER - OCTOBER 2010
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ABSTRACT Financial statements are formal records of the financial activities of a business, person, or other entity and provide an overview of a business or person’s financial condition in both short and long term. They give an accurate picture of a company’s condition and operating results in a
condensed form. Financial statements are used as a management tool primarily by company executives and investor’s in assessing the overall position and operating results of the company. Analysis and interpretation of financial statements help in determining the liquidity position, long term solvency, financial viability and profitability of a firm. Ratio analysis shows whether the company is improving or deteriorating in past years. Moreover, Comparison of different aspects of all the firms can be done effectively with this. It helps the clients to decide in which firm the risk is less or in which one they should invest so that maximum benefit can be earned. Steel industries are capital intensive; hence a lot of money is invested in it. So before investing in such companies one has to carefully study its financial condition and worthiness. An attempt has been carried out in this project to analyze and interpret the financial statements of STEEL AUTHORITY OF INDIA LIMITED (SAIL).
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CONTENTS
S.NO CHAPTER 1
CHAPTER 2
TITLE INTRODUCTION 1.1 Sector introduction 1.2 About the company 1.3 SWOT analysis FINANCIAL STATEMENTS
2.1 2.1.1 2.1.2 2.2 2.2.1 2.2.2 2.3
CHAPTER 3
CHAPTER 4
CHAPTER 5
Balance Sheet Format of Balance Sheet Contents of Balance Sheet Profit and Loss account Format of Profit and Loss account Contents of Profit and Loss account Financial Ratios
2.3.1 Objectives 2.3.2 Financial Ratios and their Interpretation BALANCE SHEETS AND PROFIT AND LOSS ACCOUNT 3.1 Balance sheet (FY ’06 to FY ’10) 3.2 Profit and Loss Account (FY ’06 to FY ’10) 3.3 Trend Analysis FINANCIAL RATIO ANALYSIS 4.1 Activity Ratio 4.2 Liquidity Ratio 4.3 Profitability Ratio 4.4 Leverage Ratio THEORY
5.1 Operating Vs. Non operating income. 5.2 Composition of Assets 5.3 Depreciation policy 3
CHAPTER 6
COMPETITOR ANALYSIS 6.1 Competitors balance sheet 6.2 Competitors profit and loss statements 6.3 Competitors ratio analysis 6.4 Interpretation
CHAPTER 7
CASH FLOW ANALYSIS
CHAPTER 8
RECOMMENDATIONS AND SUGGESTIONS
CHAPTER 9
BIBLIOGRAPHY
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CHAPTER- 1 INTRODUCTION
1.1 AN OVERVIEW OF STEEL SECTOR Global Scenario
In 2007 the World Crude Steel output reached 1343.5 million metric tons and showed a growth of 7.5% over the previous year. It is the fifth consecutive year that world crude steel production grew by more than 7%.(Source: IISI) China remained the world’s largest Crude Steel producer in 2007 also (489.00 million
metric tons) followed by Japan (112.47 million metric tons) and USA (97.20 million metric tons). India occupied the 5 th position (53.10 million metric tons) for the second consecutive year.(Source: IISI) The International Iron & Steel Institute (IISI) in its forecast for 2008 has predicted that 2008 will be another strong year for the steel industry with apparent steel use rising from 1,202 million metric tonnes in 2007 to 1,282 million metric tonnes in 2008 i.e. by 6.7%. Further, the BRIC (Brazil, Russia, India and China) countries will continue to lead the growth with an expected increase in production by over 11% compared to 2007. Domestic Scenario
The Indian steel industry have entered into a new development stage from 2005-06, riding high on the resurgent economy and rising demand for steel. Rapid rise in production has resulted in India becoming the 5th largest producer of steel. It has been estimated by certain major investment houses, such as Credit Suisse that, India’s steel consumption will continue to grow at nearly 16% rate annually, till 2012,
fuelled by demand for construction projects worth US$ 1 trillion. The scope for raising the total consumption of steel is huge, given that per capita steel consumption is only 40 kg– compared to 150 kg across the world and 250 kg in China. The National Steel Policy has envisaged steel production to reach 110 million tonnes by 2019-20. However, based on the assessment of the current ongoing projects, both in Greenfield and Brownfield, Ministry of Steel has projected that the steel capacity in the county is likely to be 124.06 million tonnes by 2011-12. Further, based on the status of MOUs signed by the private producers with the various State Governments, it is expected that India’s steel capacity would be nearly 293 million tons by 2020.
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Production
Steel industry was delicensed and decontrolled in 1991 & 1992 respectively. Today, India is the 7th largest crude steel producer of steel in the world. In 2008-09, production of Finished (Carbon) Steel was 59.02 million tonnes. Production of Pig Iron in 2008-09 was 5.299 Million Tonnes. Last 5 year’s production of pig iron and finished (carbon) steel is given below: (in million tonnes) Category
2004-05 2005-06 2006-07 2007-08 2008-09
Pig Iron
3.228
4.695
4.993
5.314
5.289
Finished Carbon Steel
40.055
44.544
55.416
58.233
59.02
(Source: Joint Plant Committee) Demand - Availability Projection
Demand – Availability of iron and steel in the country is projected by Ministry of Steel annually. Gaps in Availability are met mostly through imports. Interface with consumers by way of a Steel Consumer Council exists, which is conducted on regular basis. Interface helps in redressing availability problems, complaints related to quality. Steel Prices
Price regulation of iron & steel was abolished on 16.1.1992. Since then steel prices are determined by the interplay of market forces. There has been an up-trend in the domestic steel prices since 2006-07 and the trend accentuated since January this year. Rise in raw material prices, strong demand in the international and domestic market and up-trend in the global steel prices have been some of the reasons cited by the industry for increase in the steel prices in the domestic market. The mismatch in demand and supply is considered to be the main reason on the demand side forall the rise in steel prices. Honorable Steel Minister has heldTata discussion with major steel investors including Arcellor-Mittal, POSCO, Steel, Essar, Ispat and also SAIL, RINL to explore the possibility of expediting the
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ongoing as well as envisaged steel projects. The Government also took various fiscal and other measures for stabilizing the steel prices like exempting pig iron, non alloy steel and steel making inputs like zinc, Ferro-alloys and met coke from customs duty; withdrawing DEPB benefits on export of various categories of steel products and bringing back railway freight on iron ore from classification 180 to 170 for domestic steel producers. In May 2008, the Government imposed 15% export duty on semi-finished products, and hot rolled coils/sheet, 10% export duty on cold rolled coils/sheets and pipes and tubes and 5% export duty on galvanized steel in coil/sheet form in order to further curtail rising prices and increase supply of steel in the domestic market. Imports of Iron & Steel
Iron & Steel are freely importable as per the extant policy. Last five years import of Finished (Carbon) Steel is given below:Year
Qty. (In Million Tonnes)
2004-2005
2.109
2005-2006 2006-2007 (Partly estimated)
3.850 4.436
2007-08
6.581
2008-2009 (Partly estimated)
5149
(Source: Joint Plant Committee)
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Exports of Iron & Steel
Iron & Steel are freely exportable. Advance Licensing Scheme allows duty free import of raw materials for exports. Duty Entitlement Pass Book Scheme (DEPB) introduced to facilitate exports. Under this scheme exporters on the basis of notified entitlement rates, are granted due credits which would entitle them to import duty free goods. The DEPB benefit on export of various categories of steel items scheme has been th
temporarily withdrawn from 27 March 2008, to increase availability in the domestic market. Exports of finished carbon steel and pig iron during the last five years and the current year is as : Exports (Qty. in Million Tonnes) Year
Finished (Carbon) Steel Pig Iron
2004-2005
4.381
0.393
2005-2006
4.478
0.440
2006-2007 (Prov.estimated)
4.750
0.350
2007-2008
4.627
0.560
2008-2009 (Prov.estimated)
3.482
0.350
(Source: Joint Plant Committee) Opportunities for growth of Iron and Steel in Private Sector The New Industrial Policy Regime
The New Industrial policy has opened up the iron and steel sector for private investment by (a) removing it from the list of industries reserved for public sector and (b) exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct investment are freely permitted up to certain limits under an automatic route. Ministry of Steel plays the role of facilitator, providing broad directions and assistance to new and existing steel plants, in the liberalized scenario.
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The Growth Profile (i) Steel
The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/Greenfield steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies. At present, total (crude) steelmaking capacity is over 34 million tonnes and India, the 8th largest producer of steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international quality standards. As per the ratings of the prestigious “World Steel Dynamics”, Indian HR Products are classified in the Tier II category quality products – a major reason behind their acceptance in the world market. EU, Japan has qualified for the top slot, while countries like South Korea, USA share the same class as India. (ii) Pig Iron
In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit in the secondary sector. Post liberalization, the AIFIs has sanctioned 21 new projects with a total capacity of approx 3.9 million tonnes. Of these, 16 units have already been commissioned. The production of pig iron has also increased from 1.6 million tonnes in 1991-92 to 5.28 million tonnes in 2002-03. During the year 2003-04, the production of Pig Iron was 5.221 million tonnes.
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1.2 STEEL AUTHORITY OF INDIA LIMITED (SAIL)
Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defense industries and for sale in export markets. Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanized sheets, electrical sheets, structural, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company’s iron ore, limestone and dolomite mines. The company has the distinction of being India’s second largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a
competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making. SAIL’s wide range of long and flat steel products are much in demand in the domestic as well as the international market. This vital responsibility is carried out by SAIL’s own Central Marketing Organization (CMO) that transacts business through its network of 37 Branch Sales Offices spread across the four regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Offices. CMO’s domestic marketing effort is supplemented by its ever widening network of rural dealers who meet the demands of the smallest customers in the remotest corners of the country. With the total number of dealers over 2000, SAIL’s wide marketing spread ensures availability of quality steel in virtually all the districts of the country. SAIL’s International Trade Division ( ITD), in New Delhi- an ISO 9001:2000 accredited unit of CMO, undertakes exports of Mild Steel products and Pig Iron from SAIL’s f ive integrated steel plants.
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With technical and managerial expertise and know-how in steel making gained over four decades, SAIL’s Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide. SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS) at Ranchi which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Centre for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organization at Ranchi. Our captive mines are under the control of the Raw Materials Division in Kolkata. The Environment Management Division and Growth Division of SAIL operate from their headquarters in Kolkata. Almost all our plants and major units are ISO Certified.
Major Units 1. Integrated Steel Plants
Bhilai Steel Plant (BSP) in Chhattisgarh Durgapur Steel Plant (DSP) in West Bengal Rourkela Steel Plant (RSP) in Orissa Bokaro Steel Plant (BSL) in Jharkhand IISCO Steel Plant (ISP) in West Bengal 2. Special Steel Plants
Alloy Steels Plants (ASP) in West Bengal Salem Steel Plant (SSP) in Tamil Nadu Visvesvaraya Iron and Steel Plant (VISL) in Karnataka 3. Subsidiary plants
Maharashtra Elektrosmelt Limited (MEL) in Maharashtra
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Ownership and Management The Government of India owns about 86% of SAIL’s equity and retains voting control of the Company. However, SAIL, by virtue of its ‘Maharatna’ status, enjoys significant operational and financial autonomy. Current endeavors
SAIL’s ascent in terms of productivity and performance, irrespective of unfavorable situations, is not a matter of chance. It’s a consequence of decades of deliberate action, geared towards instilling strength and flexibility in SAIL’s physical resources and human potential.
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1.3 SWOT ANALYSIS Strength The diversified product mix and multi location production units are an area of strength for the company. SAIL as a single source is able to cater to the entire steel requirement of any customer. Also, it has a nationwide distribution network with a presence in every district in India. This makes quality steel available throughout the length and breadth of the country.
SAIL has the largest captive iron ore operations in India, which takes care of its entire requirement. With plans in place to expand the mining operations, the company will continue to be self sufficient in iron ore after completion of the ongoing phase of expansion. SAIL's captive power plants take care of about 70% of its total power need. With augmentation of capacities of power plants operated under Joint Venture, the Company will continue to have security in this key input in future as well. SAIL's large skilled manpower base is a source of strength. There is emphasis on skill based training in the company. The expanded capacity will be operated with more or less similar number of employees in future. In fact, with selective recruitment and regular attrition on account of superannuation, the number of employees is likely to come down over time; while there will be improvement in overall skill set. The Company has one of the biggest in-house research and development centres in Asia. SAIL's RDCIS (Research & Development Centre for Iron & Steel) is a source of regular product and process innovation. Low overall borrowings lend strength to the company's balance sheet as it can mobilize resources while keeping the leveraging at manageable levels.
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Weakness SAIL is dependent on the market purchase for a key input– coking coal. As India does not have sufficient coking coal deposits, most of the supply is from external sources. As international practice in purchase of coking coal is through annual/quarterly price contract, it exposes the company to market risk if the steel prices crash but input prices remain unchanged.
A large manpower base results in higher manpower cost as a proportion of turnover for the company. Although there has been significant reduction in manpower through natural and other separations, the manpower strength in SAIL is still higher than the industry average. A part of the operations in the company continues to be from energy inefficient processes viz. open hearth and ingot route of production, which will be eliminated only after the completion of the current expansion program. At present around 20% of the products are in the form of semi-finished steel, resulting in lower value addition. This will continue till new rolling mills planned under expansion plan contribute to value addition as almost all semis will be converted to finished steel.
Opportunities India is likely to emerge as the fastest growing steel market globally. This will provide opportunities for steel companies to grow and acquire scale of global giants. SAIL being the dominant producer of steel in India is suitably poised to avail opportunities offered by the expanding market.
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Threats Global economic recovery is fragile. The developed economies are under pressure for reconstructing their financial sectors and achieving fiscal consolidation without impacting growth.
Emerging economies, on the other hand, have to contend with the threat of inflation. A slowdown in global economic recovery will impact overall steel demand adversely. With significant excess capacity in the global steel industry during 2009-10, cheap imports from China and CIS continue to pose threats for domestic suppliers. With growth in developed countries somewhat shaky, India could become the target for cheap steel exports. Delays in environmental clearances and renewal of mining leases could lead to uncertainty with regard to raw material linkages and delay fresh capacity becoming operational.
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CHAPTER -2 FINANCIAL STATEMENTS
Financial statements (or financial reports) are formal records of the financial activities of a business, person, or other entity. Financial statements provide an overview of a business or person’s financial condition in both short and long term. All the relevant financial of a business enterprise, in aThere structured manner and in a form easyinformation to understand is called the financialpresented statements. are three basic financial statements: 1. Balance sheet: It is also referred to as statement of financial position or condition, reports on a company’s assets, liabilities, and Ownership equity as of a given point in time. 2. Income statement: It is also referred to as Profit and Loss statement (or“P&L”), reports on a company’s income, expenses, and profits over a period of time. Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. 3. Cash Flow Statement: It reports on a company’s cash flow activities, particularly its operating, investing and financing activities.
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2.1
BALANCE SHEET In financial accounting, a balance sheet or statement of financial position is a summary of a person’s or organization’s balances. A balance sheet is often described as a snapshot of a company’s financial condition. It summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. Of
the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. A company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company. It’s called a balance sheet because the two sides balance out. A typical format of the balance sheet has been given in Table 2.1. It works on the following formula: Assets = Liabilities + Shareholders’ Equity
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2.1.1 FORMAT OF BALANCE SHEET
Balance Sheet of XYZ Company LIABILITIES
Share capital (1) Reserves and surplus (2) Secured Loans (3) Unsecured loans (4) Total Liabilities = (1) + (2) + (3) + (4)
ASSETS
Fixed Assets (5) Gross Block Less: Accelerated Depreciation Net Block Capital work in progress Investments Current Assets (6) Inventories Sundry Debtors Cash and Bank balances Loans and Advances Current Liabilities (7) Current liabilities Provisions Net Current Assets (6) – (7) = (8) Total Assets = (5) + (8)
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2.1.2 CONTENTS OF BALANCE SHEET (A) Assets In business and accounting, assets are economic resources owned by business or company. Any property or object of value that one possesses, usually considered as applicable to the payment of one’s debts is considered an asset. Simplistically stated, assets are things of value that can be readily converted into cash. The balance sheet of a firm records the monetary value of the assets owned by the firm. It is money and other valuables belonging to an individual or business. Types of Assets
Two major types: 1. Tangible assets 2. Intangible assets Tangible Assets
Tangible assets are those have a physical substance, such as equipment and real estate. Intangible Assets
Intangible assets lack physical substance and usually are very hard to evaluate. Assets that do not possess any material value. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. Types of Tangible Assets
1. Fixed assets. 2. Current assets. Fixed Assets
This group includes land, buildings, machinery, vehicles, furniture, tools, and certain wasting resources e.g., timberland and minerals. It is also referred to as PPE (property, plant, and equipment), these are purchased for continued and long-term use in earning profit in a business.
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Current Assets
Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets: Cash and Cash Equivalents It is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, and bank drafts). Short-term Investments It includes securities bought and held for sale in the near future to generate income on short term price differences (trading securities). Receivables It is usually reported as net of allowance for uncollectible accounts. Inventory The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business’s assets those are ready or will be ready for sale. Prepaid Expenses
These are expenses paid in cashisand recorded as phrase assets before they assets are used or consumed (a common example insurance). The net current (also called working capital) are often used and refer to the total of current assets less the total of current liabilities. I. Gross Block Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset. Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset is worth to the company. II. Capital Work in Progress Work that has not been completed but has already incurred a capital investment from the company. This is usually recorded as an asset on the balance sheet. Work in progress indicates any good that is not considered to be a final product, but must still be accounted for because funds have been invested toward its production.
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III. Investments Shares and Securities, such as bonds, common stock, or long-term notes Associate Companies Fixed deposits with banks/finance companies Investments in special funds (e.g., sinking funds or pension funds). Investments in fixed assets not used in operations (e.g., land held for sale). Remark: While fixed deposits with banks are considered as fixed assets, the investments in associate concerns are treated as noncurrent assets.
IV. Loans and Advances include House building advance Car, scooter, computer etc. advance Multipurpose advance Transfer traveling allowance advance Tour traveling allowance advance DRS payment. V. Reserves Subsidy Received From the Govt. Development Rebate reserve Issue of Shares at Premium General Reserves
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(B) Liability A liability is a debt assumed by a business entity as a result of its borrowing activities or other fiscal obligations (such as funding pension plans for its employees). Liabilities are debts and obligations of the business they represent creditors claim on business assets. Types of Liabilities Current Liabilities
Current liabilities are short-term financial obligations that are paid off within one year or one current operating cycle. These liabilities are reasonably expected to be liquidated within a year. It includes: Accrued expenses as wages, taxes, and interest payments not yet paid Accounts payable Short-term notes Cash dividends and Revenues collected in advance of actual delivery of goods or services.
Long-Term Liabilities
Liabilities that are not paid off within a year, or within a business’s operating cycle, are known as long-term or non-current liabilities. Such liabilities often involve large sums of money necessary to undertake opening of a business, major expansion of a business, replace assets, or make a purchase of significant assets. These liabilities are reasonably expected not to be liquidated within a year. It includes: Notes payable- debt issued to a single investor. Bonds payable – debt issued to general public or group of investors. Mortgages payable. Capital lease obligations – contract to pay rent for the use of plant, property or equipments. Deferred income taxes payable, and Pensions and other post-retirement benefits.
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Contingent Liabilities
A third kind of liability accrued by companies is known as a contingent liability. The term refers to instances in which a company reports that there is a possible liability for an event, transaction, or incident that has already taken place; the company, however, does not yet know whether a financial drain on its resources will result. It also is often uncertain of the size of the financial obligation or the exact time that the obligation might have to be paid. Fixed Liability The liability which is to be paid off at the time of dissolution of firm is called fixed liability.
Examples are Capital, Reserve and Surplus. Secured Loans
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. Unsecured Loans
An unsecured loan is a loan that is not backed by collateral. Also known as signature loan or personal loan. Unsecured loans are based solely upon the borrower’s credit rating. An unsecured loan is considered much cheaper and carries less risk to the borrower.
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2.2
PROFIT & LOSS STATEMENT Income statement, also called profit and loss statement (P&L) and Statement of Operations is financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. The important thing to
remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. A typical format of the Profit & Loss Statement has been given in Table 2.2.
2.2.1
FORMAT OF PROFIT & LOSS STATEMENT
Profit & Loss Statement of XYZ Company
Turnover Cost of sales Gross Profit Distribution cost Administration Expenses Other income Operating Profit Income from other investments Profit before interest Net interest Profit before Tax Tax Payable Profit after tax Dividend Retained profit
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2.2.2 CONTENTS OF PROFIT & LOSS STATEMENT (a) Revenue - Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major operations. (b) Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major operations. (c) Turnover The main source of income for a company is its turnover, primarily comprised of sales of its products and services to third-party customers. (d) Sales Sales are normally accounted for when goods or services are delivered and invoiced, and accepted by the customer, even if payment is not received until sometime later, even in a subsequent trading period. of Sales (COS)costs of goods sold plus any manufacturing expenses relating (e) Cost The sum of direct
to the sales (or turnover) is termed cost of sales, or production cost of sales, or cost of goods sold. These costs include: Costs of raw materials stocks Costs of inward-bound freight paid by the company Packaging costs Direct production salaries and wages Production expenses, including depreciation of trading-related fixed assets. (f) Other Operating Expenses These are not directly related to the production process, but contributing to the activity of the company, there are further costs that are termed ‘other operating expenses’.
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These comprises of costs like: Distribution costs and selling costs, Administration costs, and Research and development costs (unless they relate to specific projects and the costs may be deferred to future periods). (g) Other Operating Income Other operating income includes all other revenues that have not been included in other parts of the profit and loss account. It does not include sales of goods or services, reported turnover, or any sort of interest receivable, reported within the net interest category. (h) Gross Margin (or Gross Profit) The difference between turnover, or sales, and COS is gross profit or gross margin. It needs to be positive and large enough to at least cover all other expenses. (i) Operating Profit (OP) The operating profit is the net of all operating revenues and costs, regardless of the financial structure of the company and whatever exceptional events occurred during the period that resulted in exceptional costs. The profit earned from a firm’s normal core business operations. Also known as Earnings before Interest and Tax (EBIT). OP = Turnover - COS - other Operating Expenses + Other Operating Income
(j) Profit before Tax (PBT) A profitability measure that looks at a company’s profits before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax. (k) Profit after Tax (PAT) PAT, or net profit, is the profit on ordinary activities after tax. The final charge that a company has to suffer, provided it has made sufficient profits, is therefore corporate taxation. PAT = PBT - Corporation Tax
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(l) Retained Profit The retained profit for the year is what is left on the profit and loss account after deducting dividends for the year. The balance on the profit and loss account forms part of the capital (or equity, or shareholders’ funds) of the
company.
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2.3
FINANCIAL RATIOS
2.3.1 OBJECTIVES The importance of ratio analysis lies in the fact that it presents data on a comparative basis and enables the drawing of inferences regarding the performance of the firm. Ratio analysis helps in concluding the following aspects: Liquidity Position:
Ratio analysis helps in determining the liquidity position of the firm. A firm can be said to have the ability to meet its current obligations when they become due. It is measured with the help of liquidity ratios. Long- Term Solvency:
Ratio analysis helps in assessing the long term financial viability of a firm. Longterm solvency measured by leverage/capital structure and profitability ratios. Operating Efficiency:
Ratio analysis determines the degree of efficiency of management and utilization of assets. It is measured by the activity ratios. Over-All Profitability:
The management of the firm is concerned about the overall profitability of the firm which ensures a reasonable return to its owners and optimum utilization of its assets. This is possible if an integrated view is taken and all the ratios are considered together. Inter- firm Comparison:
Ratio analysis helps in comparing the various aspects of one firm with the other.
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Different Financial Ratios CATEGORY TYPES OF RATIO INTERPRETATION 1.
Liquidity ratios Net Working Capital = Current assets-current liabilities It measures the liquidity of a firm. Current ratio =Current Assets/ Current Liabilities It measures the short term liquidity of a firm. A firm with a higher ratio has better liquidity.
A ratio of 2:1 is considered safe. Acid test or Quick ratio = Quick assets/ Current Liabilities
It measures the liquidity position of a firm. A ratio of 1:1 is considered safe.
2.
Turnover ratios Inventory Turnover ratio =Costs of goods sold/ Average inventory
This ratio indicates how fast inventory is sold. A firm with a higher ratio has better liquidity. Debtor Turnover ratio =Net credit sales/ Average debtors
This ratio measures how fast debts are collected. A high ratio indicates shorter time lag between credit sales and cash collection. Creditor’s Turnover ratio = Net credit purchases/ Average Creditors
A high ratio shows that accounts are to be settled rapidly.
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3.
Capital Structure Ratios Debt-Equity ratio = Long term debt/shareholder’s Equity
This ratio indicates the relative proportions of debt and equity in financing the assets of a firm. A ratio of 1:1 is considered safe. Debt to Total capital ratio = Long term debt/ Permanent Capital Or Total debt/ Permanent capital + Current liabilities Or Total Shareholder’s Equity/ Total Assets It indicates what proportion of the permanent capital of a firm consists of long-term debt.
A ratio 1:2 is considered safe. It measures the share of the total assets financed by outside funds. A low ratio is desirable for creditors. It shows what portion of the total assets is financed by the owners’ capital.
A firm should neither have a high ratio nor a low ratio. 4.
Coverage ratios Interest Coverage = Earning before Interests and Tax interest
A ratio used to determine how easily a company can pay on outstanding debt. A ratio of more than 1.5 is satisfactory. Dividend Coverage = Earnings after tax/ Preference Dividend
It measures the ability of firm to pay dividend on preference shares. A high ratio is better for creditors. Total Coverage ratio = Earning before interests and tax/Total fixed charges
It shows the overall ability of the firm to fulfill the liabilities. A high ratio indicates better ability.
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5.
Profitability ratios Gross Profit margin = Gross profit ∗ 100/ Sales
It measures the profit in relation to sales. A firm should neither have a high ratio nor a low ratio. Net Or Profit margin =Net Profit after tax before interest/ Sales Net Profit after Tax and Interest/ Sales It measures the net profit of a firm with respect to sale. A firm should neither have a high ratio nor a low ratio.
6.
Expenses ratios Operating ratio = Cost of Goods sold + other expenses/ Sales
Operating ratio shows the operational efficiency of the business. Lower operating ratio shows higher operating profit and vice versa . Cost of Goods sold ratio = Cost of Goods sold/ Sales
It measures the cost of goods sold per sale. Specific Expenses ratio = Specific Expenses/ Sales
It measures the specific expenses per sale. 7.
Return on Investments Return on Assets (ROA) =
Net Profit after Taxes ∗ 100/ Total Assets Or (Net Profit after Taxes + Interest) ∗ 100 /total Assets It measures the profitability of the total funds per investment of a firm.
31
Return on Capital Employed (ROCE) = (Net Profit after Taxes) ∗ 100 /total capital employed
Or (Net Profit after Taxes + Interest) ∗ 100/ Total Capital Employed Or (Net Profit after Taxes + Interest) ∗ 100/ Total Capital Employed − Intangible assets It measures profitability of the firm with respect to the total capital employed. The higher the ratio, the more efficient use of capital employed. Return on Total Shareholders’ Equity = Net Profit after Taxes ∗ 100/ Total shareholders’ equity
It reveals how profitably the owner’s fund has been utilized by the firm. Return on Ordinary shareholders equity = Net profit after taxes and Pref.
dividend ∗ 100 /Ordinary Shareholders’ Equity It determines whether the firm has earned satisfactory return for its equity holders or not.
8.
Shareholder’s ratios Earnings per Share (EPS) = Net Profit of Equity holders/ Number of Ordinary Shares
It measures the profit available to the equity holders on a per share basis. Dividend per Share (DPS) = Net profits after interest and preference Dividend paid to ordinary shareholders/ Number of ordinary shares outstanding It is the net distributed profit belonging to the shareholders divided by the number of ordinary shares.
32
Dividend Payout ratio (D/P) = Total Dividend to Equity holders/ Total net profit of equity holders
Or Dividend per Ordinary Share/ Earnings per Share It shows what percentage share of the net profit after taxes and preference dividend is paid to the equity holders. A high D/P ratio is preferred from investor’s point of view. Earnings per Yield = Earnings per Share/ Market Value per Share It shows the percentage of each rupee invested in the stock that was earned by the company. Dividend Yield = Dividend per share/ Market Value per share
It shows how much a company pays out in dividends each year relative to its share price. Price- Earnings ratio (P/E) = Market value per Share/ Earnings per Share
It reflects the price currently paid by the market for each rupee of EPS. Higher the ratio better it is for owners. Earning Power = Net profit after Taxes/ Total Assets
It measures the overall profitability and operational efficiency of a firm. 9.
Activity Ratios Inventory turnover = Sales/ Closing Inventory
It measures how quickly inventory is sold. A firm should neither have a high ratio nor a low ratio. Raw Material turnover = Cost of Raw Material used / Average Raw Material Inventory Work in Progress turnover = Cost of Goods manufactured/ Average Work in
process inventory
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Debtors turnover = Cost of Goods manufactured/ Average Work in Process Inventory
It shows how quickly current assets i.e receivables or debtors are converted to cash. A firm should neither have a high ratio nor a low ratio.
10.
Assets Turnover Ratios Total Assets turnover = Cost of Goods Sold/ Total Assets
It measures the efficiency of a firm in managing and utilizing its assets. Higher the ratio, more efficient is the firm in utilizing its assets. Fixed Assets turnover = Cost of Goods Sold/ Fixed Assets Capital turnover =Cost of Goods Sold/ Capital Employed Current Assets turnover =Cost of Goods Sold/ Current Assets
34
CHAPTER 3 BALANCE SHEETS AND PROFIT AND LOSS ACCOUNT STATEMENTS 3.1 BALANCE SHEETS Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Sources Of Funds
Total Share Capital
4,130.40
4,130.40
4,130.40
4,130.40
4,130.40
Equity Share Capital Share Application Money
4,130.40 0
4,130.40 0
4,130.40 0
4,130.40 0
4,130.40 0
Preference Share Capital
0
0
0
0
0
8,471.01
13,182.75
18,933.17
23,853.70
29,186.30
0 12,601.41 1,122.16
0 17,313.15 1,556.39
0 23,063.57 925.31
0 27,984.10 1,473.60
3,175.46 4,297.62
2,624.13 4,180.52
2,119.93 3,045.24
6,065.19 7,538.79
16,899.03
21,493.67
26,108.81
35,522.89
Gross Block
29,360.46
29,912.71
30,922.73
32,728.69
Less: Accum. Depreciation Net Block
17,198.32 12,162.14
18,315.00 11,597.71
19,351.42 11,571.31
20,459.86 21,780.91 12,268.83 13,601.58
757.94 292 6,210.06 1,881.73 341.83 8,433.62
1,236.04 513.79 6,651.47 2,314.75 437.36 9,403.58
4,524.37 5,830.81 18,788.80 0
3,097.70 9,172.47 21,673.75 0
3,644.22 13,289.27 27,309.01 0
4,292.50 17,880.59 35,666.84 0
5,155.32 22,205.61 40,113.05 0
8,081.23 7,236.44
8,105.99 5,550.78
8,960.91 6,797.83
10,201.51 9,408.21
13,383.67 6,211.67
Total CL & Provisions Net Current Assets
15,317.67 3,471.13
13,656.77 8,016.98
15,758.74 11,550.27
19,609.72 16,057.12
19,595.34 20,517.71
Miscellaneous Expenses Total Assets
215.82 16,899.03
129.15 21,493.67
59.48 26,108.81
0 35,522.89
Reserves Revaluation Reserves Net worth Secured Loans Unsecured Loans Total Debt Total Liabilities
0 33,316.70 7,755.90 8,755.35 16,511.25 49,827.95
Application Of Funds
Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions
35,382.49
2,389.55 6,544.24 15,039.83 538.2 652.7 668.83 6,857.23 10,121.45 9,027.46 3,048.12 3,024.36 3,493.90 470.17 347.94 230.76 10,375.52 13,493.75 12,752.12
0 49,827.95
35
Interpretation: Long Term Financial Position:
The comparative Balance Sheet of the company reveals that during the financial year 2008– 2009 there has been a large increase in fixed assets (34.76%) compared to 2007-2008(9.09%) while the long term liabilities which contains shareholders funds and long term loans also show growth. Loans show an increase which means that most of the fixed assets are financed by long term loans. Increase in Fixed assets can be attributed to increase in plant and machinery which means that SAIL has increased its production capacity over the years. The company has sufficient control over its depreciation which shows an increase of only 0.04% in 2009 over 2008. Current Financial position and liquidity position:
The company has increased its current assets over the years by increasing the level of inventories at Rs.10121 crores in 2009 compared to Rs.6857 crores in 2008, though a fall in inventory was seen in 2010. The current liabilities highly fluctuate and show continuous increase in 2007-08 (20.5%) and 2008-09 (29.3%). The Net Working Capital was in peak by the continuous increase after the year 2006. The company got good liquidity position due increase in Current assets but it may affect the profitability of the company. The overall financial position of the company is very good.
36
3.2 PROFIT AND LOSS ACCOUNT STATEMENT Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Income
Sales Turnover Excise Duty
32,805.96 4,605.48
39,722.59 5,393.82
46,175.85 6,217.18
49,331.47 5,532.89
44,059.72 3,463.82
Net Sales
28,200.48
34,328.77
39,958.67
43,798.58
40,595.90
937.94
1,408.71
1,701.59
2,002.77
2,557.00
Stock Adjustments Total Income Expenditure
1,131.31 30,269.73
289.15 36,026.63
436.28 42,096.54
1,872.87 47,674.22
-1,157.45 41,995.45
Raw Materials Power & Fuel Cost
15,034.54 2,489.74
16,252.28 2,578.84
17,257.67 2,825.56
23,915.45 3,119.42
18,611.12 3,364.30
Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses
4,156.97 303.71 1,619.20 524.91 -1,352.05 22,777.02
5,087.76 346.59 1,602.31 528.71 -1,423.08 24,973.41
7,919.28 492.18 1,727.55 737.79 -1,832.22 29,127.81
8,401.73 643.35 1,701.52 878.94 -1,930.40 36,730.01
5,417.00 870.35 1,754.02 206.62 0 30,223.41
6,554.77 7,492.71
9,644.51 11,053.22
11,267.14 12,968.73
8,941.44 10,944.21
9,215.04 11,772.04
467.76
332.13
250.94
253.24
402.01
PBDT Depreciation
7,024.95 1,207.30
10,721.09 1,211.48
12,717.79 1,235.48
10,690.97 1,285.12
11,370.03 1,337.24
Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit
181.44 5,636.21 71.12 5,707.33 1,694.36 4,012.97
128.59 9,381.02 60.57 9,441.59 3,253.80 6,202.29
75.49 11,406.82 64.61 11,471.43 3,934.65 7,536.78
Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised)
7,742.48 0 826.08 115.86
8,721.13 0 1,280.42 197.98
11,870.14 0 1,528.25 258.91
12,814.56 0 1,073.90 181.26
11,612.29 0 1,363.03 227.52
Shares in issue (lakhs)
41,304.01
41,304.01
41,304.01
41,304.01
41,304.01
Earning Per Share (Rs) Equity Dividend (%)
9.72 20 30.51
15.02 31 41.92
18.25 37 55.84
14.95 26 67.75
16.35 33 80.66
Other Income
Operating Profit
PBDIT Interest
Book Value (Rs)
128.02 10.33 9,277.83 10,022.46 181.26 184.8 9,459.09 10,207.26 3,284.28 3,452.89 6,174.81 6,754.37
37
Interpretation The Net Sales figure shows an increasing trend. After the year 2006 it shows an increasing trend which will help to increase in Net Profit.
The company has considerable change in Interest Charges and rather the latter has decreased in recent years. The company has been able to increase its net Profit over the years but a decrease can be seen after 2008 which can be attributed to global economic downturn. It may conclude that there is a sufficient progress in the company and the overall profitability of the concern is very good.
38
3.3 Trend Analysis
Trend analysis reveals the pattern in data over a period of time. It involves determining the trend percent for a series of financial numbers. Let us take the following numbers from the P & L Account of SAIL and understand the trend analysis.
Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Total Income
30,269.73 36,026.63 42,096.54 47,674.22 41,995.45
Total Expenses Reported Net Profit
22,777.02 24,973.41 29,127.81 36,730.01 30,223.41 4,012.97 6,202.29 7,536.78 6,174.81 6,754.37
Following steps are required to determine the trend percentage: 1. Select a base year: Let FY’06 be the base year 2. Express the financial items of the succeeding years as a percentage of the base year number Trend Percent =
Current year value – Base year value Base year value
Mar '06 Total Income
Total Expenses Reported Net Profit
100.00 100.00 100.00
* 100
Mar '07
Mar '08
Mar '09
Mar '10
19.01 9.64 54.58
39.07 27.87 87.83
57.50 61.25 53.88
38.73 32.69 68.34
This shows that except for year 2008 when reported net profit increased highly, over the given years net profit is increasing which is a good sign for the company’s
performance over these years.
39
Trend Analysis 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Mar '06 Total Income
Mar '07
Mar '08
Total Expenses
Mar '09
Mar '10
Reported Net Profit
The same can be seen from the graph. Income and expenses decreased tremendously in the year 2007 whereby the net profit of the company also declined. For next two years incomes increased and even the expenses grew to a small extent. The reported net profit was the highest for the year 2008, decreased a little in 2009 and then further increased for year 2010. Net profits are a respectable value and hence company’s position in the market is good.
40
CHAPTER 4 FINANCIAL RATIO ANALYSIS I.
ACTIVITY RATIOS
These ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These are also called as turnover ratios because they indicate the speed with which assets are being turned over into sales. Hence this ratio helps in finding out how the funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets, the larger is the amount of sales.
Inventory T.O. Ratio No. of days, Inventory Debtor T.O. Ratio Average collection period Asset T.O. Ratio Working Capital T.O. Ratio Fixed Asset T.O. Ratio Current
Mar ‘06 5.19
Mar ‘07 5.9
Mar ‘08 6.64
Mar ‘09 4.8
Mar ‘10 4.86
70
62
55
75
74
17.16
16.9
14.9
16.09
12.57
21
22
24
23
29
1.75
1.71
1.64
1.32
0.84
3.48
2.82
2.7
2.18
1.57
1.09
1.31
1.47
1.48
1.24
1.85
1.92
1.73
1.41
1.12
Asset T.O. Ratio
41
1. INVENTORY TURNOVER RATIO
INVENTORY TURNOVER RATIO 7 6 5 o i t a r . .O T y r o t n e v n I
4 3 2 1 0 INVENTORY TURNOVER RATIO
Mar '06
Mar '07
5.19
5.9
Mar '08 6.64
Mar '09 4.8
Mar '10 4.86
Interpretation:
The Inventory Turnover ratio tells us how many times a company has gone through or “turned over”, its inventory during a specif ied time period, usually a year. It gives us an indication of how fast a company can sell its products. After Financial year 08 SAIL’s efficiency in turning its inventories is continuously deteriorating. Since
Inventory T.O. is a test of effective inventory management, so the company’s utilisation of inventories in generating sales is getting poorer.
42
2. NO. OF DAYS
Inventory (No of Days) 80
75
70
70
74
62 55
60 50 Days 40
30 20 10 0 Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Interpretation: No. of Days, Inventory gives the average inventory holdings. SAIL holds average
inventory of 74 in Financial Year 2010. When many companies are following JIT, large value of inventory holdings can pose a problem for the company.
43
4. DEBTOR TURNOVER RATIO
Debtors Turnover Ratio 20 18
S Y A D
16 14 12 10 8 6 4 2 0
Series1
Mar'06
Mar'07
17.16
16.9
Mar'08 14.9
Mar'09 16.09
Mar'10 12.57
Interpretation:
The liquidity position of the firm depends on the quality of the debtors to a great extent. Debtors T.O. indicates the number of times debtors turnover each year. Debtors T.O. of SAIL is showing an alternating trend since FY07. This is determining the collectibles of debtors. Thus the credits are not easily realized from the debtors. Although the provision for bad debts has decreased, but the similar trends of debtor T.O. can result into more bad debts in the future.
44
4. AVERAGE COLLECTION PERIOD
average collection period Mar '10 Mar '09 r a e Y
Mar '08 average collection period
Mar '07 Mar '06 0
10
20
30
40
No. of days
Interpretation:
Average collection period gives the average number of days for which debtors remain outstanding. The increasing trend of average collection period shows that there is some sort of laxity in accounts receivable by the management.
45
5. ASSET TURNOVER RATIO
asset turnover ratio 2 1.8
e lu a V
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0
asset turnover ratio
Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Year
Interpretation: This ratio shows the firm’s ability in generating sales from all financial resources
committed to total assets. Asset T.O. curve is declining with each financial year. This implies that the firm is not able to generate sales from its total assets. Hence it can be analysed that SAIL holds unutilised assets.
46
6. WORKING CAPITAL TURNOVER RATIO
Working capital turnover ratio 4 3.5 3 e lu a V
2.5 2 1.5
Working capital turnover ratio
1 0.5 0 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Year
Interpretation:
Working Capital T.O. ratio shows that the firm has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. The ratio for SAIL has reduced from 3.48 in FY06 to 1.57 in FY10. In this case current liabilities of the company are rising which has caused the ratio to decrease.
47
7. FIXED ASSET TURNOVER RATIO
Fixed asset Turnover ratio 1.6 1.4 1.2 e lu a V
1 0.8 0.6 0.4 0.2 0 Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Year
Interpretation:
The firm can know its efficiency of utilising fixed assets with the help of this ratio. During Financial years 06, 07, and 08 SAIL is turning over its fixed assets faster than current assets. Fixed asset T.O. ratio is increasing till financial year 09 after which it declined to 1.24 in year 2010.
48
8. CURRENT ASSET TURNOVER
current asset turnover ratio 2.5 2 e u l a V
1.5 1
current asset turnover ratio
0.5 0 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Year
Interpretation: This ratio gives the firm’s ability in generating sales from its current assets. So the decline in SAIL’s asset T.O. can be attributed to the decline in its current asset T.O. A firm’s ability to produce a large volume of sales for a given amount of n et assets is
the most important aspect of its operating performance. Under-utilised current assets can increase the firm’s need for costly financing as well as expenses for
maintenance and upkeep.
49
II.
LIQUIDITY RATIOS Liquidity Ratios measure the firm’s ability to meet current obligations. The
failure of a company to meet its obligations due to lack of sufficient liquidity will result in poor credit worthiness, loss of creditor’s confidence.
Current Ratio Quick Ratio Cash Ratio
Mar ‘06 2.14 0.90 0.79
Mar ‘07 3.14 1.26 1.55
Mar ‘08 2.79 1.47 1.51
Mar ‘09 2.8 1.42 1.54
Mar ‘10 3.52 1.75 2.08
50
1. CURRENT RATIO
Current Ratios 4
3.52 3.14
3.5
2.79
3 2.5
2.8
2.14
2 current ratio
1.5 1 0.5 0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Interpretation: Current ratio represents a margin of safety for creditors. So from creditors,
viewpoint current ratio of the company is all time high. A large value can also be analyzed as idling of assets. The major portion of the ratio is being contributed by inventories. Since Inventory T.O. is declining, so firm have slowmoving inventories. In FY08 it declined from 3.14 to 2.79 due to an increase in current liabilities. It again increased in FY10 to 3.52.
51
2. QUICK RATIO
Quick Ratio 1.8 1.6 1.4
1.53
VALUE
1.01
1 0.8 0.6
1.24
1.23
1.2
0.72
0.4 0.2 0 Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Interpretation:
Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately. Liquid asset means those assets, which will yield cash very shortly. All current assets except stock and prepaid expenses are included in liquid assets. Quick Ratio is continuously increasing. Also the provision for bad debts has reduced. This implies that debtors of the firm are not doubtful. Acid test ratio of 1.53 shows that even if SAIL’s inventories do not sell it can easily meet its current obligations as it has liquid assets 1.53 times than its current liabilities.
52
3. CASH RATIOS
Cash Ratios 2.5 2 io t a r h s a C
1.5 1 CASH RATIO 0.5 0 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Year
Interpretation:
Cash ratio gives the measure of the most liquid asset of a firm. Initially the cash ratio was low but gradually it gained momentum and raised to 2.08 in FY10. Although the cash ratio is increasing but cash in hand of the company is not increasing at the same rate. Here the increase in cash ratio is due to increase in term deposits by the company.
53
III.
PROFITABILITY RATIOS
The profitability ratio measures the profitability or the operational efficiency of the firm. There are two groups of person who are specifically interested in the analysis of profitability of the firm which are:The management which is interested in the overall profitability and operational efficiency of the firm Equity shareholders which are interested in ultimate returns available to them
Mar '06
Mar '07
Mar '07
Mar '09
Mar '10
Net Profit Ratio
0.124
0.158
0.165
0.126
0.153
Gross Profit Ratio
0.176
0.24
0.193
0.23
Return on Asset
0.218
0.27
0.27
0.27
0.131
Return on average equity %
35.84
41.95
37.51
24.13
21.98
Return on average capital employed %
27.27
39.88
42.54
29.77
26.56
Earnings per share
9.72
15.02
18.25
18.25
16.35
Dividend per share
2
3.1
3.7
2.6
3.3
Price earnings ratio(P/E)
8.56
10.12
6.45
15.44
Earning power
0.31
0.255
0.2
7.59 0.31
54
1. NET PROFIT RATIO
net profit ratio 0.18 0.16 0.14 0.12 e lu a V
0.1 0.08 0.06 0.04 0.02 0
net profit ratio
Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Year
Interpretation:
This ratio shows the earning left for shareholders as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management. Net profit ratio for SAIL is not varying much. In FY10 net profit is 15.3% of the sales.
55
2. RETURN ON ASSET
Return on Asset 0.27 0.27 0.218
0.167
Mar'06
Mar'07
Mar'08
Mar'09
0.131
Mar'10
return on asset
Interpretation It measures the profitability of the total funds per investment of a firm. Return on asset increased a bit in earlier years from 2007 to 2008 and then decreased gradually in years 2009 to 2010. This is primarily on account of the fact that total assets have increased by a very large extent in the last two years
56
3. RETURN ON AVERAGE EQUITY
Return on Average Equity % 45 40 35
41.95 35.84
37.51
30 24.13
25
21.98
20 15
return on average equity %
10 5 0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Interpretation: A return on shareholder’s equity is calculated to see the profitability of owner’s investment. ROE indicates how well the firm has used the resources of the owners. This reveals the relative performance and strength of the company in attracting future investments. Returns on equity are reducing gradually in following years (41.95 in FY’07 to 21.98 in FY’10) which is a bad prospect for future investments by shareholders.
57
4. RETURN ON AVERAGE CAPITAL EMPLOYED
Return on Average Capital Employed % 50 40 e u l a V
30 20
return on average capital employed %
10 0 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Year
Interpretation:
It measures profitability the efficient firm withuse respect to the total capital employed. The higher the ratio, the of more of capital employed. ROCE increases initially showing more efficient use of capital and then decreases for years 2009 and 2010 which is a bad sign. The company needs to increase the efficiency of how and where to employ its capital.
58
5. EARNINGS PER SHARE
Earnings per Share 18.25 15.02
14.94
16.35
9.72
Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Year
earning per share
Interpretation:
This number profit of the company split among share of the stock. Itrepresents shows thethe profitability of the firm onequally per share basis. EPS each has the highest value of 18.25 in FY08. This is due to 18% increase in PAT in FY08.
59
6. DIVIDEND PER SHARE
dividend per share dividend per share 3.7 3.3 3.1 2.6 2
Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Interpretation:
Profit remaining after payment of tax and preference dividends is available to equity shareholders. Out of these profits a portion is retained in the business and the remaining is distributed among equity shareholders as dividend. The difference between EPS and DPS is retained in the business. The DPS of SAIL was on growth trajectory from 200-06to 2007-08. But the Dividend per share of the company decreased by 30 percent from Rs 3.7 in 2007-08 to Rs 2.6 in 2008-09 due to decrease in total profit distributed to equity shareholders.
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7. PRICE EARNING RATIO
price earning ratio(P/E) 15.44 10.12
8.56 7.59
Mar'06
Mar'07
6.45
Mar'08
Mar'09
Mar'10
Year
price earning ratio(P/E)
Interpretation:
PE ratio establishes the relation between market price of the share and EPS. It indicates the expectation of equity investor about the earnings of the firm. The PE ratio increased tremendously in 2009-10 from 6.45 percent in 2008-98 to 15.44 in 2009-10 which is good for the company as it indicates high growth prospects of the company. It indicates that the share of SAIL has low risk and therefore the investor are content with low prospective return or the investor expect high dividend growth and are ready to pay a higher price for the share at present.
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IV.
LEVERAGE RATIOS
Long term creditors are more interested in firm’s long term financial strength
and leverage ratios or capital structure ratios. These ratios are calculated for the very same reason. These ratios indicate composition of funds provided by owners and lenders. The debt will be advantageous if the firm earns a rate of return on the total capital employed higher than the interest rate on the borrowed funds whereas disadvantageous the other way.
Debt
Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
0.35
0.24
0.13
0.27
0.5
0.25
0.194
0.11
0.212
0.33
13.20
29.37
46.70
38.13
26.20
1.45
1.32
1.2
1.31
1.53
Equity Ratio Debt Asset Ratio Interest Coverage Ratio Capital Equity Ratio
62
1. DEBT EQUITY RATIO
debt equity ratio 0.5 0.35 0.27
0.24 0.13
Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Year
debt equity ratio
Interpretation The relationship between borrowed funds and owner’s capital is shown by the debt -
equity ratio. A high debt equity ratio is the danger signal for the long-term lenders.
The ratio of SAIL is on safe side till FY09 as it is 0.27 in FY09. In FY10 the shareholder’s funds is just double the amount of long term loans. So the firm must take careful measures so as to bring down the amount of long-term loans.
63
2. DEBT ASSET RATIO
debt asset ratio 0.33 0.25 0.212 0.194 0.11
Mar'06
Mar'07
Mar'08
Mar'09
Mar'10
Year
debt asset ratio
Interpretation: The ratio shows the proportion of proprietors’ funds to the total assets employed.
Debt Asset Ratio of SAIL is continuously increasing since FY08. This implies that the firm is improving in its policies of acquiring assets wit h the help of proprietors’ funds. In FY10 the ratio is just 33%. Therefore SAIL needs to improve this ratio so that it is less dependent on outside funds and thus does not create any outside liabilities.
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3. INTEREST COVERAGE RATIO
interest coverage ratio 46.7
50
38.13
40 e lu a V
29.37
26.2
30 20
13.2 interest coverage ratio
10 0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Year
Interpretation:
This ratio is used to determine how easily a company can pay interest on outstanding debt. The ratio for SAIL increased drastically in FY08 due to 17.8% increase in EBIT and after that the ratio is continuously decreasing over the years. The interest coverage ratio of SAIL in FY10 is 26.2 which indicates that the firm will be able to pay the interest on long term loans regularly and for the lenders the firm is less risky.
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4. CAPITAL EQUITY RATIO
CAPITAL EQUITY RATIO 1.53
1.45 1.2 1.32
Mar'06
Mar'07
1.31
Mar'08
Mar'09
Mar'10
CAPITAL EQUITY RATIO
Interpretation:
This shows how much funds are being contributed together by lenders and owners for each rupee of the owner’s contribution.
This ratio has a near constant value over the given years as shown by the graph.
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CHARTER 5 5.1 OPERATING Vs. NON OPERATING INCOME
Operating income
Income resulting from a firm's primary business operations, excluding extraordinary income and expenses. Unusual nonrecurring items, such as gains from selling a subsidiary or losses from closing a plant, are not included in the calculation of operating income. Also called earnings before interest and taxes, operating profit. It gives a more accurate picture of a firm's profitability than gross income. Non operating income
Income received by a business that is not derived from operations, such as manufacturing. Non-operating income usually does not occur on an ongoing basis, and is examined separately from operating income. An example of non-operating income is income generated through the sale a subsidiary or division, since the company won't be able to resell that division again and the income is a one-time occurrence. Most (though not all) non operating income is non-repetitive, and, as such, is excluded from many measures of profit. Table showing composition of total incomes generated by SAIL for years 2005-2010 under two heads operating and non operating income is shown below: 2005-2006 Operating Income Non Operating Income Total % Operating Income
2006-2007
2007-2008
2008-2009
2009-2010
27837.57
33923.12
39508.45
43176.76
40551.38
1554.6
2000.95
2382.46
3133.1
3383.32
29392.17
35924.07
41890.91
46248.61
43934.7
94.71%
94.43%
94.31%
93.36%
92.29%
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It can be seen that % composition of operating income to the total income is a very high percentage which is a good sign for the company. Also the percentage is consistent over the years and tends to decrease a bit over the years. This is not of much significance till date because the decrease is still negligible. But the company needs to take care that this decrease remains restrained over the years for its successful working.
The composition can also be shown in the form of a graph as:
Operating vs Non Operating Income
CRORES
50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 20052006
Non operating Income Operating Income
20062007
20072008
20082009
20092010
1554.6
2000.95
2382.46
3133.1
3383.32
27837.57
33923.12
39508.45
43176.76
40551.38
Major portion of the company’s income comes from its core business which is a
good sign for the company.
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5.2 COMPOSITION OF ASSETS FIXED ASSETS: Fixed asset, also known as a non-current asset or as property, plant, and equipment (PP&E), is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets. In most cases,
only tangible assets are referred to as fixed. Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a firm's consumers/end-users. As an example, a baking firm's current assets would be its inventory (in this case, flour, yeast, etc.), the value of sales owed to the firm via credit (i.e. debtors or accounts receivable), cash held in the bank, etc. Its non-current assets would be the oven used to bake bread, motor vehicles used to transport deliveries, cash registers used to handle cash payments, etc. Each aforementioned non-current asset is not sold directly to consumers. These are items of value which the organization has bought and will use for an extended period of time; fixed assets normally include items such as land and buildings, motor furniture, office equipment, computers, and fittings, and plantvehicles, and machinery. These often receive favorable taxfixtures treatment (depreciation allowance) over short-term assets. According to International Accounting Standard (IAS) 16, Fixed Assets are assets whose future economic benefit is probable to flow into the entity, whose cost can be measured reliably. It is pertinent to note that the cost of a fixed asset is its purchase price, including import duties and other deductible trade discounts and rebates. In addition, cost attributable to bringing and installing the asset in its needed location and the initial estimate of dismantling and removing the item if they are eventually no longer needed on the location. The primary objective of a business entity is to make profit and increase the wealth of its owners. In the attainment of this objective it is required that the management will exercise due care and diligence in applying the basic accounting concept of “Matching Concept”. Matching concept is simply matching the
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expenses of a period against the revenues of the same period. The use of assets in the generation of revenue is usually more than a year- that is long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period. Net book value of an asset is basically the difference between the historical cost of that asset and it associated depreciation. From the foregoing, it is apparent that in order to report a true and fair position of the financial jurisprudence of an entity it is relatable to record and report the value of fixed assets at its net book value. Apart from the fact that it is enshrined in Standard Accounting Statement (SAS) 3 and IAS 16 that value of asset should be carried at the net book value, it is the best way of consciously presenting the value of assets to the owners of the business and potential investor. FIXED ASSETS OF SAIL ARE LISTED BELOW: A. PLANTS, MINES, OTHERS
Land (including cost of development) -Freehold Land -Leasehold Land Buildings Railway Lines & Sidings Plant & Machinery -Steel Plant -Others Furniture & Fittings Vehicles Roads, Bridges & Culverts Mining Rights (Intangible) Miscellaneous Articles
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B. SOCIAL FACILITIES
Land (including cost of development) -Freehold Land -Leasehold Land Buildings Plant & Machinery-Others Water Supply & Sewerage EDP Equipment's Software (Intangible) Miscellaneous Articles Sub-total 'B' Figures for the previous year C. ASSETS RETIRED FROM ACTIVE USE Unserviceable / Obsolete Assets D. CAPITAL EXPENDITURE NOT REPRESENTED BY ASSETS Total ('A'+'B'+'C'+'D')
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CURRENT ASSETS
In accounting, a current asset is an asset on the balance sheet which is expected to be sold or otherwise used up in the near future, usually within one year, or one operating cycle whichever is longer. Typical current assets include cash, cash equivalents, accounts receivable, inventory, the portion of prepaid accounts which will be used within a year, and short-term investments. Operating cycle is the average time that is required to go from cash to cash in producing revenues. On the balance sheet, assets will typically be classified into current assets and long-term assets. The current ratio is calculated by dividing total current assets by total current liabilities. It is frequently used as an indicator of a company's liquidity, its ability to meet short-term obligations. Current Assets = Cash +Bank + Debtors + Bills Receivable + Short Term Investment + Inventory + Prepaid Expenses.
CURRENT ASSETS FOR SAIL ARE LISTED BELOW:
Semi-finished/Finished Products Stores & Spares Raw Materials Total Inventories Sundry Debtors Gross Debtors Less: Provision for Doubtful debts Net Debtors Cash & Bank Balances Other Current Assets Loans & Advances
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Following is a table showing composition of total asset under two heads “current asset” and “fixed assets”:
2006
2007
2008
2009
Current asset
17384
20379
26318
34676
39081
Fixed asset
12162 29546
11598 31977
11571 37889
12305 46780
13615 52696
%current asset
58.84
63.73
69.46
73.77
74.16
%fixed asset
41.16
36.27
30.54
26.22
25.83
Total asset
2010
Graph showing total assets under two heads of fixed and current assets is shown as:
Fixed Assets vs Current Assets
60000 50000 40000 30000 20000 10000
0 2006
2007
2008
2009
2010
Fixed asset
12162
11598
11571
12305
13615
Current asset
17384
20379
26318
34676
39081
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Current assets comprise a huge composition of total assets which shows that company’s ability to repay all current liabilities is large. Current assets can be easily converted to cash and hence can be used for day to day transactions. Whereas Fixed assets cannot be converted into cash easily and hence do not contribute to working capital of a firm. For SAIL the value of current assets is tremendously high and its percentage to total assets is also very high which is a good sign for the company. Also since the trend is increasing over the years, this is also favourable towards the relaibility of the company.
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5.3 DEPRECIATION POLICY Depreciation refers to two very different but related concepts:
1. Decline in value of assets, and 2. Allocation of the cost of tangible assets to periods in which the assets are used. The former affects values of businesses and entities. The latter affects net income. Generally the cost is allocated, as depreciation among periods infor which the asset is expected to be used. Such expenseexpense, is recognized bythe businesses financial reporting and tax purposes. Methods of computing depreciation may vary by asset for the same business. Methods and lives may be specified in accounting and/or tax rules in a country. Several standard methods of computing depreciation expense may be used, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service. Example: a depreciation expense of 100 per year for 5 years may be recognized for an asset costing 500. In economics, depreciation is the decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question. If capital stock is C0 at the beginning of a period, investment is I and depreciation D, the capital stock at the end of the period, C1, is C0 + I - D. Depreciation is an important item on the profit and loss account; its nature is often not properly understood by non-finance managers. This article clarifies what deprecation is, explains the manner in which the depreciation schedule is prepared, presents information on the methods and rates of depreciation under the Companies Act and the Income Tax Act, and dispels some of the myths surrounding depreciation. Nature of Depreciation: A fixed asset is used over a number accounting periods. So it is necessary to allocate its costs to various accounting periods that benefit from its use. Such an allocation is
called depreciation. Accountants normally allocate the cost of an asset over its useful life using a well-defined procedure.
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Depreciation Schedule:
Three steps are involved in calculating the depreciation schedule. 1. Determine the depreciable base. 2. Estimate the useful life of the asset 3. Choose the depreciation method Depreciation method: There are several methods of depreciation. The two most commonly used depreciation methods in India are: 1. STRAIGHT LINE METHOD 2. WRITTEN DOWN VALUE METHOD.
SAIL uses straight line method. Its depreciation policy is written below:
Depreciation is provided on straight-line method at the rates specified in Schedule XIV to the Companies Act, 1956. However, where the historical cost of a depreciable asset undergoes a change, the depreciation on the revised unamortized depreciable amount is provided the residual useful life of theisasset. and machinery into over continuous and non continuous madeClassification on the basis of of plant technical opinion and depreciation provided accordingly. Depreciation on addition/deletion during the year is provided on pro-rata basis with reference to the month of addition/deletion.
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CHAPTER 6 COMPETITOR ANALYSIS 6.1 BALANCE SHEETS Tata Steel
SAIL
JSW Steel
Visa Steel
Steel Exchange
Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities
887.41 887.41 0 0 36,281.34 0 37,168.75 2,259.32 22,979.88 25,239.20 62,407.95
4,130.40 4,130.40 0 0 29,186.30 0 33,316.70 7,755.90 8,755.35 16,511.25 49,827.95
527.11 248.08 0 279.03 9,179.23 0 9,706.34 8,987.51 2,597.59 11,585.10 21,291.44
110 110 0 0 204.69 0 314.69 1,107.70 35.04 1,142.74 1,457.43
39.85 39.3 0 0.55 91.54 0 131.39 202.45 32.55 235 366.39
Application Of Funds Gross Block Less: Accum. Depreciation Net Block
22,306.07 10,143.63 12,162.44
35,382.49 21,780.91 13,601.58
21,795.58 4,929.44 16,866.14
926.56 112.93 813.63
150.36 17.66 132.7
Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets
3,843.59 44,979.67 3,077.75 434.83 500.3 4,012.88 6,678.55 2,733.84 13,425.27 0 8,699.34 3,303.68 12,003.02 1,422.25
15,039.83 668.83 9,027.46 3,493.90 230.76 12,752.12 5,155.32 22,205.61 40,113.05 0 13,383.67 6,211.67 19,595.34 20,517.71
6,684.27 1,768.35 2,585.77 563.25 117.4 3,266.42 2,216.05 169.71 5,652.18 0 9,415.28 264.22 9,679.50 -4,027.32
770.07 60.04 341.71 64.88 83.34 489.93 143.39 0 633.32 0 808.13 13.95 822.08 -188.76
18.36 0 119.88 93.38 27.18 240.44 186.35 0 426.79 0 203.62 9.14 212.76 214.03
Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)
0 62,407.95 13,184.61 418.94
0 49,827.95 28,382.46 80.66
0 21,291.44 6,990.48 504
2.46 1,457.44 273.18 28.61
1.32 366.41 1.91 33.29 77
Investments by Competitors of SAIL
Investments 50,000.00 45,000.00 40,000.00 c
35,000.00
r
30,000.00
Tata Steel
25,000.00
SAIL
20,000.00
JSW Steel
15,000.00
Visa Steel
10,000.00
Steel Exchange
o r e s
5,000.00 0.00 Tata Steel
SAIL
JSW Steel Visa Steel
Steel Exchange
Assets of Competitors
Total Assets 70,000.00 60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 TataSteel Total Assets
62,407.95
SAIL 49,827.95
JSWSteel 21,291.44
VisaSteel 1,457.44
Steel Exchange 366.41
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6.2 PROFIT AND LOSS ACCOUNT STATEMENTS Tata Steel Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses
SAIL
26,757.60 1,816.95 24,940.65 1,241.08 -134.97 26,046.76
44,059.72 3,463.82 40,595.90 2,557.00 -1,157.45 41,995.45
8,356.45 1,383.44 2,361.48
JSW Steel
19,456.64 1,289.18 18,167.46 474.25 64.74 18,706.45
Visa Steel
Steel Exchange
1,198.31 41.37 1,156.94 14.54 17.52 1,189.00
709.23 12.25 696.98 19.29 -7.12 709.15
18,611.12 11,415.86 3,364.30 1,014.82 5,417.00 365.2
852.77 16.12 32.79
619.56 4.92 6.24
2,419.89 417.9 1,287.04 -326.11 15,900.09
870.35 249.6 1,754.02 724.63 206.62 188.53 0 0 30,223.41 13,958.64
4.27 0 85.42 0 991.37
19.41 0 12.46 0 662.59
Operating Profit PBDIT
8,905.59 10,146.67
9,215.04 4,273.56 11,772.04 4,747.81
183.09 197.63
27.27 46.56
Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)
1,848.19 8,298.48 1,083.18 0 7,215.30 0 7,215.30 2,168.50 5,046.80 7,543.64 45.88 709.77 122.8
402.01 11,370.03 1,337.24 10.33 10,022.46 184.8 10,207.26 3,452.89 6,754.37 11,612.29 0 1,363.03 227.52
900.26 3,847.55 1,123.41 0 2,724.14 96.03 2,820.17 797.43 2,022.74 2,542.78 28.92 177.7 34.31
65.14 132.49 46.82 0 85.67 0 85.67 38.26 47.42 138.6 0 11 1.87
31.59 14.97 3.18 0 11.79 -0.01 11.78 6.81 4.96 43.03 0.06 0 0
8,872.14 56.37 80 418.94
41,304.01 16.35 33 80.66
1,870.49 106.59 95 504
1,100.00 4.31 10 28.61
393 1.25 0 33.29 79
Comparison of Market share
Visa Steel 1%
MARKET SHARE
Steel Exchange 1%
JSW Steel 21% SAIL 48% TATA Steel 29%
Market share allocations to various big firms in the steel sector show that SAIL occupies the highest market share in this sector which is a little less than half the total market i.e. 48%. Tata steel comes next with 29% share of the steel market. Operating and net profit earned by SAIL is also the largest even though that of Tata Steel is very close. In short SAIL and Tata Steel are the forerunners of the Indian steel sector.
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6.3 RATIO ANALYSIS RATIOS PROFITIBILITY RATIO GROSS PROFIT NET PROFIT
SAIL
TATA
JSW
VISA STEEL
STEEL EXCHANGE
0.23 0.153
0.27 0.19
0.17 0.11
0.12 .04
.04 .007
RETURN ON CAPITAL EMPLOYED (%) LIQUIDITY RATIOS QUICK RATIO CURRENT RATIO ACTIVITY RATIOS INVENTORY TURN OVER RATIO DEBTORS TURN OVER RATIO
26.56
14.25
15.08
10.34
14.96
2.7 3.52
1.08 1.12
0.31 0.58
0.35 0.77
0.98 0.73
4.86
10.9
8.95
3.51
7.18
12.57
61.5
37.79
15.71
7.93
ASSETS TURN OVER RATIO FIXED ASSETS TURN OVER RATIO LEVERAGE RATIOS DEBT EQUITY RATIO INTEREST COVERAGE RATIO
0.84
1.17
0.85
0.79
2.49
1.24
1.67
0.83
1.25
10.74
0.5
0.61
1.26
3.63
1.54
26.26
4.41
3.57
2.32
2.55
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Interpretation
Net Profit ratio of SAIL is better than most of the competitors except TATA Steel. This can be attributed to lower earnings of SAIL in comparison to their earnings. Return on Capital employed is greater for SAIL which shows that overall profitability and efficiency of the business is good. The current ratio for SAIL is more than TATA Steel which shows that it has enough liquidity in comparison to other competitors. The debt equity ratio is 0.5 which is lower than TATA Steel. This means that it is more traditionally financed in comparison to other competitors. It has lower debt so it can easily raise debt in future Interest coverage ratio is too high for SAIL which shows that debt is not being used as a source of finance to increase earnings per share. Inventory turnover ratio is lesser in SAIL compared to other competitors which indicates inefficient management of inventories. The debtors’ turnover ratio is lower for SAIL compared to TATA Steel which shows
that the debtors are less liquid implying inefficient management of debtors/sales.
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CHAPTER 7 CALCULATION AND INTERPRETATION OF CASH FLOW STATEMENT CASH FLOW STATEMENT (in Rs.crores)
PARTICULARS
2005-06
2006-07
2007-08
2008-09
2009-10
Profit before tax
5705.74
9422.62
11468.73
9403.45
10132.03
Net Cash Flow – Operating activity
3823.93
5632.91
8378.18
6124.26
4800.48
Net Cash used in investing activity Net Cash used in Fin. Activity
337.18
587.53
(139.89
4406.47
8021.15
3574.26
(608.19
3088.68
2751.30
7395.00
Net inc./dec. in cash or equivalent Cash and equivalent at beginning of the year Cash and equivalent at end of the year
87.51
3437.19
4149.61
4469.09
4174.33
6260.15
6172.64
9609.83
13759.44
18264.67
6172.64
9609.83
13759.44
18228.53
22439.00
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INTERPRETATION
Cash flow statement shows that the profit before tax increases continuously in 2006, 2007, 2008 and decreases in 2009 due to unstable economic conditions. Net cash flow from operating activities increases continuously in 2007 and 2008 due to increase in sales and earnings but it came down in 2009 and further reduced in 2010. Net cash outflows in investing activities have been growing in SAIL as cash is being used to purchase fixed assets like plants and machinery and higher development costs. Cash flows have been positive for financing activities in 2009 mainly due to increase in borrowings. Cash and cash equivalents have been increasing steadily from 2006 to 2010 showing good liquidity position of the firm
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CHAPTER 8 RECOMMENDATIOND AND SUGGESTIONS SAIL should always try to maintain an adequate quantum of net current assets in relation of current liabilities as to keep a good amount of liquidity throughout the year.
The company should tighten the debt collection efforts and should reduce the amount tied up in debtors. In order to improve the quality of debtors and also to bring down the amount tied-up in debtors, a periodical report of the overdue may be prepared and effective action may be taken by the management time to time to expedite the collections.
Inventory turnover ratio is lesser in SAIL compared to other competitors which indicates inefficient management of inventories. So it is advisable to keep less inventories to minimize costs and improve efficiency.
The company is more traditionally financed with low debt and more of equity financing, so in future debt should be preferred for financing to bring the ratio close to the ideal ratio of 1:1.
The management of SAIL should also try to maintain a definite proportion among various components of working capital in relation to overall current assets to keep an adequate quantum of liquidity all the times.
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CHAPTER 9
BIBLIOGRAPHY BOOKS:
Financial management by I M PANDEY Annual Report of SAIL Magazines of SAIL INTERNET WEB SITES:
www.google.co.in www.sail.co.in www.money control.com www.tata steel.co.in www.essar.com www.ispat.com www.jindal.com
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