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Comment for Current Year:
Debt/Equity ratio inMaruti Suzuki Ltd is 0.01 and in Tata Motors Ltd is 1.18. Therefore, in
case of Maruti Suzuki Ltd the ratio is too much low compared to general norms though there
are no hard and first rules for debt-equity ratio. As a result of this low debt in capital structure
return to Equity share holders will low because company is taking no risk and will not be able
to avail the benefits of trading on equity. On the other hand, in Tata Motors Ltd as it bearing
the high risk of debt its share holder will get the benefits of trading on equity and maximize
their returns as a fruits of bearing risk of debt capital because of tax benefits on cost of debt
capital which is absent in equity.
So far above chart is concern it can be easily understood that, Debt-Equity ratio in Maruti
Suzuki Ltd is very low throughout the five years and also it is in declining trend. On the other
hand, in case of Tata Motors Ltd there is much more debt capital in its capital structure and
such ratio was in increasing trend in 1
st
three years and falls in 4
th
year to 1.15 and again it
increase little bit in the last year. Therefore, by summing up we can say that the ratio in
Maruti Suzuki Ltd is very negligible and it is tending towards zero which signifies that the
company is avoiding debt capital. On the other hand, Tata Motors Ltds ratio is increasing
which implies it its dependency on debt capital in order to avail the benefits of trading on
equity.
7.2 Interest Coverage Ratio: This ratio reflects the relative claims of creditors and share
holders against the assets of the firm, debt equity ratios establish relationship between
borrowed funds and owner capital to measure the long term financial solvency of the firm. The
ratio indicates the relative proportions of debt and equity in financing the assets of the firm. A
high ratio shows a large share of financing by creditors of the firm; a low ratio implies a
smaller claim of creditors i.e. it indicates the margin of safety to the creditors. Lower the debt
equity ratio, the higher the degree of protection enjoyed by the creditors. Because, in case of
firm having high D/E ratio owners are putting up relatively less money of their own and if the
project fails in future creditors would lose heavily.
Interext Cuuerage Rat|u =
EBIT
Interest
Where, EBIT stands for Earnings Before Interest and Taxes.
0.06 0.07
0.03
0.02 0.01
0.72
1.88
2.06
1.15
1.18
0
0.5
1
1.5
2
2.5
Mar,2008 Mar,2009 Mar,2010 Mar,2011 Mar,2012
Debt-Equity Ratio
Muruti Suzuki
Tata Motors
The coverage ratios measure the relationship between what is normally available from
operation of the firms and the claims of outsiders. Interest coverage ratio assesses the debt
serving capacity of a firm insofar as fixed interest on long-term loan is concerned. From the
point of view of creditors, the larger is the coverage, the greater is the ability of firm to handle
fixed-charged liabilities and the more assured is the payment of interest to the creditors.
However, too high ratio may imply unused debt capacity. In contrast, a low ratio is a danger
signal that the firm is using excessive debt and does not have the ability to offer assured
payment of interest to the creditors.
Comment for Current Year:
Interest coverage ratio in Maruti Suzuki Ltd is 35.82 and in Tata Motors Ltd it is only 5.82.
Both the companies are not in a satisfactory zone rather they stay in two opposite extreme side
i.e. former one is too high and later is too low. Because, in general higher is the interest
coverage ratio better is the companys debt serving capacity. However, too high ratio may
imply unused debt capacity and low ratio indicate the weak debt serving capacity of the firm
neither of which is desirable in the company.
From the above chart it is clear that in case of Tata Motors Ltd the ratio is too low
throughout the five years and it is again almost in declining trend except 2
nd
and last year in
which it shows slight improvement. On the other hand, in Maruti Suzuki Ltd the same is too
high in comparison to Tata Motors Ltd. But it also shows huge ups and down in its life line,
because in 2
nd
year it shows huge improvement and decreases in subsequent two years and
eventually it increases in last year. Therefore, it can be conclude that in Maruti Suzuki Ltd is a
35.82
126.99
108.48
34.75 42.13
5.82
5.87 1.91 0.56
4.83
0
20
40
60
80
100
120
140
1 2 3 4 5
Interest Coverage Ratio
Muruti Suzuki
Tata Motors
little portion of debt capital in its capital structure(i.e. low geared capital structure) and Tata
Motors Ltd is using much more debt capital in its capital structure(i.e. high geared capital
structure). So, obviously the EPS of Tata Motors Ltd will greater than the Maruti Suzuki Ltd
because of absence of gearing facility.
Chapter-8
PROFITABILITY RATIOS
Profitability ratios: This ratio measures the profit earnings capacity of the firms on their
turnover and investments etc.
8.1 Gross Profit Ratio: This ratio measures the relationship between net sales and gross
profit. Since gross profit is the difference between selling price and cost of goods sold the
higher be the profit, better will be the financial performance. This ratio indicates the relation
between production cost and sales and the efficiency with which goods are produced or
purchased. It is highly significant and important since the earning capacity of business can be
ascertain by taking the margin between the sales and cost of goods sold. If it has a very high
gross profit ratio it may indicate that the organization is able to produce or purchase at a
relatively lower cost.
6ruxx Pru|t rat|u =
Cruss PruItt
Net Sales
100
Net sales = Gross sales - Return inward - cash discount allowed.
Comment for Current Year:
In case of Maruti Suzuki Ltd the Gross profit is 3.77 and in Tata Motors Ltd it is 10.07.
Both companies Gross profit ratio is very low which indicate that margin between sales and
cost of goods sold is low and same may be the result of high cost of production or low price of
sales. Therefore, the firms should scrutinize about their production technique in order to
reduce the cost of production, otherwise after deducting the selling and distribution expenses
there will remain very low amount for cost of long-term capital or may be net loss also.
9.64
4.27
8.93
4.90
3.77
9.13
1.51
3.14
9.88
10.07
0
2
4
6
8
10
12
Mar,2008 Mar,2009 Mar,2010 Mar,2011 Mar,2012
Gross Profit Ratio
Muruti Suzuki
Tata Motors
From the above chart it can be understand that G/P Ratio in Maruti Suzuki Ltd has fluctuating
trend because in the 1
st
time it was decreased than increases than again decreases. But if we
observe throughout the years it is reported that the ratio has reduced more or less by 60%. On
the other hand in case of Tata Motors Ltd in the 2
nd
year it falls to 1.51 from 9.13 which was
the first year position, therefore it was a huge fall no doubt. However, in the subsequent years
the same has increases instantaneously and recovered its past situation itself.
8.2 Net Profit Ratio: This ratio reflects the net profit margin on the sales after deducting
all expenses but before deducting interest and taxes. This ratio measures the efficiency of
operation of the organization. This ratio is very significant as if it is found be very low, many
problems may arise such as dividend may not be paid and on the other hand high ratio ensure
adequate return to the owners as well as enable firm to withstand adverse economic condition
selling price is declining and cost of production is increasing.
Moreover, Gross profit margin and Net profit margin should be jointly evaluated. The
need for joint analysis arises because the two ratios may show different trends. For example,
the gross margin may show a substantial increase over a period of time but Net profit margin
may remain constant or may actually have decline or may not have increase as fast as gross
margin. It may be due to the fact that the increase in the operating expenses individually may
behave abnormally. On the other hand, if either as a whole or individual items of operating
expenses decline subsequently, a decrease in gross margin may be associated with an
improvement in the net profit margin.
Net Pru|t rat|u =
Earntng BeIure Interest and Taxes(EBIT)
Net Sales
100
Comment for Current Year:
The Net profit ratio of Maruti Suzuki Ltd and Tata Motors Ltd are 4.55 and 8.13
respectively i.e. in case of Maruti Suzuki Ltd there remain little portion of money as EBIT
after adjusting all expenses other than interest on long-term loan and taxes for which company
may face the problems of net loss if the financial charges increases by little amount.
From the above chart it is visible that in the year 2008 the ratio for Maruti was 9.60 and for
Tata it was 6.06 and in the second year it was reduces for both companies in case of Tata it was
-3.49 and in case of Maruti it was 5.68. In the 3
rd
year it starts to increase and for Tata Motors it
remains increasing up to last year, but in case of Maruti Suzuki it is again falling from 4
th
year.
By summing up, we can say that, in spite of negative figure Tata company has started
recovering from such worse situation and remain in increasing motion up to last year. In case of
Maruti Suzuki Ltd on the other hand has shows reducing trend for last two years
8.3 Return on Capital Employed Ratio: Return on Capital Employed (ROCE) ratio
indicates the relationship between profit before interest and taxes and long-term funds invested
in the business. This ratio is also called Return on Investment (ROI). It reflects the overall
efficiency with which capital is used. A measure of the return that a company is realizing from
its capital employed. The ratio can also be seen as representing the efficiency with which
capital is being utilized to generate revenue. It is commonly used as a measure for comparing
the performance between businesses and for assessing whether a business generates enough
returns to pay for its cost of capital.
Rerurn On Cap|ta| Fmp|uyed =
EBIT
Capttal empluyed
100
Capital Employed =Equity Capital +Preference Capital +Reserves and Surplus +Long
9.60
5.68
8.62
6.29
4.55
6.06
-3.49
2.76
7.48
8.13
-6
-4
-2
0
2
4
6
8
10
12
Mar,2008 Mar,2009 Mar,2010 Mar,2011 Mar,2012
Net Profit Ratio
Muruti Suzuki
Tata Motors
Term Debt- Fictitious Assets
Comment for Current Year:
In our example, Return on Capital Employed ratio of Maruti Suzuki Ltd is 13.02 and in Tata
Motors Ltd it is 24.29. Since ROCE ratio is the indicator of overall profitability of firm,
higher the ratio, better the firm producing the return from efficient utilisation of long-term
funds. Therefore, latter company has more profitability and generating return from long-term
funds than at what rate produced by former company.
The above Chart shows us that Return on Capital Employed Ratio for Maruti Suzuki Ltd in
the year 2008 was 26.35 and for Tata was 17.72; however, it was decreases in the 2
nd
year to
17.26 in Maruti and 2.70 in Tata. In the third year for both it is improved, in the subsequent
year ratio is increasing up to 4
th
year and fall in last year for Tata but in case of Maruti it is
reducing from the 4
th
year itself. Eventually the ratio for Maruti Suzuki Ltd it was reduces in
the last year from the initial year but in Tata Motors Ltd it was increase in the last year from
initial year.
26.35
17.26
27.94
21.19
13.02
17.72
2.70
9.37
25.24
24.29
0
5
10
15
20
25
30
Mar,2008 Mar,2009 Mar,2010 Mar,2011 Mar,2012
Return on capital employed
Muruti Suzuki Tata Motors
8.4 Operating Profit Ratio: This ratio establishes the relation between the net sales and
the operating net profit. The concept of operating net profit is different from the concept of net
profits; operating net profit is the profit arising out of business operations only. This is
calculated as follows:
Operat|ng pru|t rat|u =
Dperattng pruItt
Net sales
100
Operating net profit =Net Profit +Non-operating expenses non operating income.
Alternatively, this profit can also be calculated by deducting only operating expenses from the
gross profit.
This ratio reveals the margin remains after adjusting the cost of goods sold plus operating
expenses with the sales. Higher the ratio higher is the profitability and better is the efficiency
of management.
Comment for Current Year:
In Maruti Suzuki Ltd Operating profit ratio is 7 and in case of Tata Motors Ltd it is 13.47.
That is, from the given data it is clear that latter company has much better operating profit
ratio compared to former one. Therefore, Tata Motors Ltd has better profit earning and
efficient management capability than the Maruti Suzuki Ltd.
12.82
7.72
11.79
7.72
7.00
11.34
5.01
7.38
13.67
13.47
0
2
4
6
8
10
12
14
16
Mar,2008 Mar,2009 Mar,2010 Mar,2011 Mar,2012
Operating Profit Ratio
Muruti Suzuki
Tata Motors
From the above line chart it is visible that, operating profit ratio in the both companies has in a
fluctuating trend. However, in case of Maruti Suzuki Ltd it is eventually reduced to 7 in
2012 from 12.82 which was in 2008, on the other hand in case of Tata Motors Ltd it is
increases to 13.47 in the last year ( 2012) from 11.34 in the 1
st
year(2008).
8.5 Return on Equity Ratio: This ratio measures the return on the total equity funds of
ordinary share holders i.e. it indicates the productivity of the owned funds employed in the
firm. Probably, it is the single most important ratio to judge whether the firm has earned a
satisfactory returns for its real owners who bear all the risk and uncertainty involve in the
business. Its adequacy can be judge by comparing it with the past record of the same firm or
inter-firm comparison or comparison with the overall industry average. This ratio plays an
important role in making decision by equity share holder whether to continue with their
investment in the company or not.
Return On Fqu|ty =
PruItt aIter tax-PreIerene dtvtdend
Net wurth
100
Net Worth =Equity capital +Reserve and surplus Accumulated loss
Comment for Current Year:
In Maruti Suzuki Ltd Return on equity ratio is 10.72 and in Tata Motors Ltd the same is
41.33 which signifies that former organization is generating rewards for its equity share
holders is 10.72% on their total investment including reserve and surplus and latter is 41.33%.
Therefore, Tata Motors Ltd generates return for its equity share holders by more than double
fold than what generates by Maruti Suzuki Ltd. So it is needless to say that investors of latter
one is more profitable than the investors of former company.
From the above chart it is visible that, in case of Tata Motors Ltd this ratio in the first year
(2008) was 25.01, but in the next year (2009) it becomes in negative i.e. -49.05 which implies
the loss suffered by the equity share holders and in the subsequent year it starts recovering in a
rapid speed and corresponding figure in 2010, 2011, and 2012 is 31.30, 48.74, and 41.33
respectively. So, we can say that although there was a huge fall in 2
nd
year the company has
produced good return in the subsequent year. On the other hand, in case of Maruti Suzuki
Ltd in the 1
st
year it was 20.74, in 2
nd
year it has reduced to 12.83 and in the 3
rd
year it
increases to 21.54 and again it starts decreasing and eventually it stood at 10.72 in last year.
Therefore, the return on equity capital in Maruti is in declining trend may be for the reason of
declining trend in Debt-Equity ratio throughout the years.
20.74
12.83
21.54
16.64
10.72
25.01
-49.05
31.3
48.74
41.33
-60
-40
-20
0
20
40
60
Mar,2008 Mar,2009 Mar,2010 Mar,2011 Mar,2012
Return on Equity Ratio
Muruti Suzuki
Tata Motors
Chapter-9
CONCLUSION
Analysis and interpretation of financial statements is an important tool in assessing companys
performance. It reveals the strengths and weaknesses of a firm. 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. It is known that investing in any company involves a lot of risk. So before putting up
money in any company one must have thorough knowledge about its past records and
performances. Based on the data available the trend of the company can be predicted in near
future. Even though, the volatility in the financial market is also a major concern. Investors
must take into account the business cycle for investment in any company, which is not
predictable.
FINDINGS:
From ratio analysis of Balance Sheet and Profit & Loss Statement it is found that Liquidity
Ratio (i.e. Current Ratio and Quick Ratio) in case of both the companies are not good enough.
Because, in most of the year it is found that they have not been able to maintain the standard
limit i.e. 2:1 in case of Current Ratio and 1:1 in case of Quick Ratio.
So far solvency position is concern, Debt-Equity ratio of Maruti Suzuki Ltd and Tata Motors
Ltd is too low, which signifies that they are not utilizing the cheapest sources of funds. On the
other hand, Interest Coverage Ratio in case of Maruti Suzuki Ltd is too high which imply
unused debt capacity, and in case of Tata Motors Ltd it is too low which indicates a danger
signal that the firm does not have the ability to offer assured payment of interest to the
creditors.
In case of Management efficiency Ratio both the companies are in a satisfactory position
except Fixed Assets Turnover Ratio is little bit low which signifies the firms inefficiency in
fixed assets utilization or over investment in Fixed Assets.
Gross Profit and Net Profit ratio for both the companies are not satisfactory. Return on capital
employed ratio is satisfactory in both the companies except in 2
nd
and 3
rd
year in Tata Motors
Ltd in those years the return was low. Return on equity ratio is also good except in 2
nd
year in
Tata Motors Ltd there was negative figure. And finally we can say that Operating ratio is also
good throughout the five years.
SUGGESTIONS:
From the above analysis it may be suggested to both the companies that to increase the
adequate investment in current assets so that they can maintain standard ratio as well as sound
liquidity position which will immensely help in profitability. Despite of the opposite relation
between profitability and liquidity, in practical business field initially up to a certain level
profitability and liquidity are complementary to each other.
So far Solvency Ratio is concerned, of both Tata Motors Ltd and Maruti Suzuki Ltd , it is
also to be recommend to Maruti Suzuki Ltd that to improve the leverage in the capital
structure in order to maximise the wealth of their share holders by reducing the overall cost of
capital. This is only because of tax advantage available on the interest on debt capital for
which effective cost of debt capital is always lower than its nominal costs.
Fixed assets turnover ratio is not satisfactory in case of both the companies. So it is advisable
to the management of these companies to take care of new investment on fixed assets and to
revise the existing policy as prevailed in both the companies.
Chapter-10
Bibliography
Books:
1) Banerjee, Bhabatosh. Financial Policy and Management Accounting. New Delhi: Prentice-Hall
India, 2005.
2) Basu, B. K. Management Accounting(Principles, System, and Practice). Kolkata: New Central
Book Agency Pvt. Ltd., J anuary, 2008.
3) Bodhanwala, Ruzbeh J . Understanding and Analysing Balancesheet with Eccel . New Delhi:
Prentice-Hall India, March, 2005.
4) Chandra, Prasanna. Financial Management(Theory and Practice). New Delhi: Tata McGraw-
Hill, 2004.
5) Foster, George. Financial Statement Analysis. New Delhi: Pearson Publication Ltd., 2005.
6) Khan, M. Y., and P. K. J ain. Financial Management(Text, Problems, and Cases). New Delhi:
Tata McGraw-Hill, 2004.
7) Khan, M. Y., and P. K. J ain.Management Accounting. New Delhi: Tata McGraw-Hill, 2000.
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2005.
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Global Vision Publishing House, 2010.
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1) http://www.eagletraders.com/.../financial_statements_analysis.htm.
2) http://www.financialexpress.com.
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ANNEXURE
LIST OF RATIOS
Sl.
No.
Name of Ratios
Name of
Organizations Mar,2008 Mar,2009 Mar,2010 Mar,2011 Mar,2012
1
Current ratio
Muruti Suzuki Ltd. 0.92 1.51 0.92 1.47 1.13
Tata Motors Ltd. 0.88 0.48 0.59 0.76 1.03
2
Acid-test ratio
Muruti Suzuki Ltd. 0.67 1.27 0.69 1.14 1.03
Tata Motors Ltd. 1.17 0.64 0.72 0.75 0.72
3
Inventory turnover
ratio
Muruti Suzuki Ltd. 22.94 30.47 30.61 33.35 21.79
Tata Motors Ltd. 12.79 8.25 8.6 9.21 9.37
4
Fixed assets turnover
ratio
Muruti Suzuki Ltd. 2.45 2.33 2.78 3.07 2.44
Tata Motors Ltd. 2.87 1.37 1.72 2.08 2.34
5
Debtors Turnover
ratio
Muruti Suzuki Ltd. 25.2 25.98 33.7 42.6 37.93
Tata Motors Ltd. 18.82 20.88 15.29 17.48 21.9
6
Gross Profit ratio
Muruti Suzuki Ltd. 9.64 4.27 8.93 4.9 93.37
Tata Motors Ltd. 9.13 1.51 3.14 9.88 63.72
7
Net Profit ratio
Muruti Suzuki Ltd. 9.6 5.68 8.62 6.29 4.55
Tata Motors Ltd. 6.06 -3.49 2.76 7.48 8.13
8
Operating Profit ratio
Muruti Suzuki Ltd. 12.82 7.72 11.79 7.72 7
Tata Motors Ltd. 11.34 5.01 7.38 13.67 13.47
9
Return On Equity
ratio
Muruti Suzuki Ltd. 20.74 12.83 21.54 16.64 10.72
Tata Motors Ltd. 25.01 -49.05 31.3 48.74 41.33
10
Return On Capital
Employed
Muruti Suzuki Ltd. 26.35 17.26 27.94 21.19 13.02
Tata Motors Ltd. 17.72 2.7 9.37 25.24 24.29
11
Debt-Equity ratio
Muruti Suzuki Ltd. 0.06 0.07 0.03 0.02 0.01
Tata Motors Ltd. 0.72 1.88 2.06 1.15 1.18
12
Interest Coverage
Ratio
Muruti Suzuki Ltd. 35.82 126.99 108.48 34.75 42.13
Tata Motors Ltd. 5.82 5.87 1.91 0.56 4.83