TATA STEEL

2009

FINANCIAL RATIO
ANALYSIS
ABHIJIT SAMANTA

INTERNATIONAL SCHOOL OF BUSINESS & MEDIA; KOLKATA

 Page |2

FINANCIAL RATIO ANALYSIS OF TATA STEEL

1. Liquidity Ratios:-
Liquidity Ratios measures the ability of the firm to meet its short term obligations.
They also reflect the firm’s ability to meet financial contingencies that might arise.

(A) Current Ratio: - This ratio indicates the firm’s ability to meet its current
liabilities. This ratio is of very high importance to the suppliers of short term funds
like the bankers and trade creditors.

It is measured by: - Current Ratio = Current Assets / Current Liabilities.

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Current Asset Current Liabilities Current Ratio

2008 3,613.70 3,855.26 0.94

2009 5,707.05 6,039.86 0.94

Analysis: - The industry norm value of current ratio is 2:1. However it does not
mean so that higher current ratio means good company profile. It may signify
higher unused cash, inventory which again may result in inventory carrying cost.

In both the years the Current ratio for Tata Steel is same. However it does not
mean any increase or decrease in current ratio of any company gives the growth
profile of the company.
 Page |3

(B) Quick Ratio:- This ratio is calculated on pre assumption that all the
current assets are of same level of liquidity. But this is not the reality. Cash in
Hand is more liquid that the same cash equivalent of inventory. So to get a real
picture of liquidity we calculate Liquid Ratio. It is calculated by (Current Asset-
Inventory – Prepaid Expense / Current Liability)

Quick Ratio = (Current Assets – Inventory- Prepaid Expense) / Current

Liability.

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year (Current Assets – Current Liabilities Current Ratio

Inventory- Prepaid
Expense)

2008 13,570.52 3,855.26 3.52

2009 3,442.72 6,039.86 0.57

Analysis:- As per the industry norms the Quick Ratio should be 1:1. There is a
huge difference between the Quick Ratios of the company. It also shows the
decreasing trend. In the year 2008 there was high unutilized cash. But for the
current year the situation is more balanced.

2. Profitability Ratio:-
This ratio shows a company’s effectiveness on generating profit. In other words the
profitability ratio reflects a company’s operating performance.
 Page |4

(A) Gross Profit Ratio:- Gross Profit is defined as Sales – Cost of Goods Sold.
Now the Gross Profit Ratio is a ratio of Gross Profit to the Sales. We express it in
terms of Gross Profit Margin. It is the amount of each rupee of sale that left over
after repaying the Cost of Goods Sold.

We calculate this ratio by the following formula.

Gross Profit Ratio = (Gross Profit / Sales)*100

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Gross Profit Sales Gross Profit Margin

2008 7515.05 19,933.83 37.70%

2009 8295.84 24,624.04 33.69%

Analysis: - It indicates the Gross Profit over sales of any company. This ratio can
be changed by 1. Change in Sales Volume. 2. Changes in sales price 3. Change in
cost of production.

According to the data of 2007 and 2008 there is a decrease of Tata Steel in earning
the Gross profit which we can find out form the above table.

(B) Operating Profit Margin: -

This ratio signifies the operational efficiency of any business entity. In this case a
lower ratio indicates the higher efficiency.

This ratio is calculated with the help of the following formula.

Operating profit ratio= (operating profit (EBIT)/sales)*100

 Page |5

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Operating Profit Sales Gross Profit Margin

(EBIT)

2008 8,360.25 19,933.83 41.94%

2009 9,278.34 24,624.04 37.68%

Analysis: - There is a decrease in Operating Profit Ratio for Tata Steel.

According to the sales figure the EBIT value in 2009 in comparatively less than
that of 2008. As we know a lower operating profit ratio indicates higher efficiency
of the firm. So, on the basis of the calculated data we can say that the operating
efficiency of Tata Steel has actually increased for the current year with a
comparison between 2008 and 2009.

(C ) Net Profit Ratio: - It relates the firms Net Profit and the firm’s Sales
level. It indicates what percentage of every rupee of sales the firm was able to
transform into the Net Profit. The net profit margin measures the profit that is
available from each rupee of sales after all expenses have been paid, including cost
of goods sold, selling, general and administrative expenses, depreciation, interest
and taxes

This ratio is calculated by the following formula.

Net Profit Margin = (Net Profit after Tax / Sales)*100

 Page |6

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Net Profit after Tax Sales Net Profit Margin

(PAT)

2008 4670.49 19,933.83 23.43%

2009 5193.21 24,624.04 21.09%

Analysis: - We can see that there is a decrease in the Net Profit Margin.
Actually it indicates the firm’s ability to transfer its sales into the net
profit. So, here analyzing the consecutive two years data we can see that
the profitability of Tata Steel has actually decreased in 2009 than of the
year 2008.

(D) Return on total assets: - It relates the profit of the firm to its
tangible assets. In other words it indicates the how much profit the firm
has gained by utilizing its resources.
It is calculated by the following formula.

Return of Total Asset = (Net Profit after Tax / Total Assets)*100

 Page |7

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Net Profit after Total Assets Return of Total

Tax (PAT) Asset
2008 4670.49 47,075.52 9.92%
2009 5193.21 58,741.77 8.84%

Analysis:- Again we can see that there is reduction in the return to total
asset ratio. The return Tata Steel earned over their Total Asset in 2008
the value reduced in the year 2009. It also means to achieve a certain
amount of revenue Tata Steel has used more amount of its capital.

3. Turnover Ratios:- These ratios determine how quickly certain assets

are converted into cash. It measures the ability of the firm to manage assets and
convert into cash. High turnover ratios are usually associated with good asset
management and low turnover ratios with poor asset management.

(A) Fixed assets turnover ratio: - It indicates the efficiency of utilization of

fixed assets. The fixed assets turnover ratio is the sales turnover divided by the
fixed assets.

It is calculated by the following formula.

Fixed Assets Turnover Ratio= Sales / Fixed Assets.

 Page |8

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Sales Fixed Assets. Fixed Asset

Turnover Ratio

2008 19,933.83 12,623.56 1.57

2009 24,624.04 14,482.22 1.70

Analysis: - For both of the years 2008 and 2009 the fixed asset turnover ratio of
Tata Steel is more than 1. As we know this ratio shows the company’s ability to
turn its fixed assets into the turnover. The turnover has actually increased here. But
the turnover is also very good in the year 2008.

(B)Total assets turnover ratio:- It measures the overall efficiency and

performance of the assets employed in business. Total assets turnover ratio is
defined as sales turnover divided by the total assets. It is measure of firm’s total
assets management.

This ratio is calculated by the following formula.

Total Asset Turnover Ratio= Sales Turnover / Total Assets.

 Page |9

As per Balance Sheet 31st March 2008 & 2009. (All figures are in crore.)

Year Sales Turnover Total Assets. Total Asset

Turnover Ratio

2008 19,933.83 47,075.52 0.42

2009 24,624.04 58,741.77 0.42

Analysis: - Here for both the years the value of Total Asset Turnover Ratio is
same it is showing that overall turnover of assets to sales remained same for both
the years.

(C ) Debtors Turnover ratio/Average collection period:-

This ratio indicates the efficiency of the firm in collecting its receivables from its
customers to whom the firm has sold on credit. It indicates the effectiveness of the
collection policy adopted by the firm.

It is calculated by the following formula.

Debtors Turnover Ratio= (Debtors / Credit Sells)*365

As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)

Year Debtors Turnover Ratio

2008 11.00
2009 9.00
 P a g e | 10

Analysis: - As it shows the company’s ability to recover the amount that is

market due or in other words the company has sold on credit. It is very important
for any company to calculate this ratio as depending on that the company can
decide about its current position to recover the receivables.

For both the years the value is good.

(4) Leverages Ratios:- Leverage ratios indicate the extent

to which the firm has financed its assets by borrowing. The use
of debt financing increases the risk of the firm. The leverage
ratios reflect the financial risk posture of the firm. The more
extensive the use of debt, the higher would the firm’s leverage
ratios and more risk present in the firm. Some of the leverages
ratios are explained below.

(4) Debt Equity Ratio:- Though it doesn’t signify anything related to meeting
short term liability it is often discussed under this topic. A firm has two options
when going for expansion one is raising debt and other going for public issue.
Generally very high debt is not preferred by the investors because it signifies the
risk and high form of equity has threat of hostile bid and acquisition.

The above ratio is calculated by the following formula.

Debtors Equity Ratio= (Total Debt / Equity)

 P a g e | 11

As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)

Year Debt Equity Ratio Long Term Debt Equity Ratio

2008 1.08 1.07
2009 1.34 1.31

Analysis: - Here we can see that in both Debt Equity Ratio and in Long Term Debt
Equity Ratio has increase for both of the years. Logically speaking that when this
ratio for any company increase it does not show good performance of the
company.

(B) Interest coverage ratio:- This ratio is the sum of the net earnings before
taxes and interest charge divided by the interest expenditure.

The above ratio is calculated by the following formula.

Interest coverage ratio = EBIT/Interest

As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)

Year Interest coverage ratio

2008 8.35
2009 5.71

Analysis: -

It actually measures the firm’s ability to meet the interest obligations. Here in this
case we can see that the interest coverage ratio is decreasing, it means the firm’s
ability is reducing.
 P a g e | 12

( 5) Market value ratios:-

(A) Price Earnings Ratio: - This ratio highlights the relationship between the
market price of a share and the current earnings per share. The market value, on the
other hand is the value of equity as perceived by investors.

Price earnings ratio = Market Price per share / earnings per share.

As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)

Year Price Earnings Ratio: -

2008 10.38
2009 2.97

Analysis: - It actually denotes the company’s future prospect. As here

we can see that there is decrease in the price earnings ratio it show’s a
decrease in company’s growth profile.

(B) Earnings per share:- The shareholders invest their money with the
expectation of getting dividends and capital appreciation on the shares. . Since the
earnings form the basis for dividend payments as well as a basis for any future
increase in the market price of the shares, investors are always extremely interested
in knowing the earnings per share.
 P a g e | 13

Earnings per share: (Net profit after taxes – Preference

dividends) / Number of ordinary shares

As per Balance Sheet &P&L 31st March 2008 & 2009. (All figures are in crore.)

Year Earnings per share

2008 60.45
2009 66.80

Analysis: -Here it shows that for Tata Steel the earning per share increasing. It is
good symbol form the company prospective as well as from the Share Holder’s
prospective also. Seeing more earning there is a chance for share holders to invest
on the company.