You are on page 1of 22

SML401

TERM PAPER

Ratio Analysis of 10yr data of Arvind Ltd. & their


correlation with share price

Sanchit Garg (2011TT10960)


Alok Singh (2011TT10900)

Abstract

We have studied the share price correlation with the ratios of the company Arvind Ltd. and
their analysis as a whole.

A high correlation between a ratio and share price in case specific to Arvind Ltd. indicates
that the investors have focussed mainly on this ratio and taken their decision per say to
buy/sell the share of the company. Correlation was mainly used as a tool here as it can
precisely predict the linear component b/w two quantities.

Contents
1. Introduction & Objectives

2. Methodology

3. Analysis

4. Share Price Correlation

12

5. Assumptions & Scope

15

6. Conclusion

16

7. Bibliography

17

Introduction & Objectives

Company Ratios act as a strong determinant of the progress of a company over its lifetime.
If we can predict how stock prices manipulate, than it would be extremely beneficial mainly
to the company but also for its shareholders, industry and investors.
Each ratio released every year provide a different dimension of the company. The stock price
too acts as an important factor determining the state of affairs of a company.

In order to deliver a positive image on the investors , company managers generally perform
comprehensive planning and try to create effective strategies in order to increase value of the
stocks of the company.

An economic market is that market where the share price of all the companies is at par. Here,
there current price of a share has turned stable after a long period of time. In such a situation,
the flow of the share price is generally an exact function of predetermined factors and there is
no incentive for investors. However such a situation is far from being true in the practical
world.(An analysis of financial ratios for the Oslo Stock Exchange)

We have chosen company financial ratios as the determining factor for the share price of the
company and the correlations should be predictable from the papers theory.

Methodology

We have downloaded the last 10 years daily share prices for Arvind Ltd. from Yahoo!
Finance.

We have obtained few important ratios for Arvind Ltd. based on our understanding of
the ratios that should act as a strong determinant for the share price.

Company ratios are declared at the end of the fiscal year but share prices fluctuate and
change every second. Hence to solve this problem, as an alternative we have taken
average value of share price. That is opening value and closing value to arrive at a
single figure.

This approach can be worked out as company ratio should predict the general flow of
the share price.

Now that we have gathered a set of ratios and share prices, we run the MS EXCEL inbuilt function correlation which returns the correlation between the ratios and the
share price flow.

Finally we are in a position to remark about the denim market of Arvind Ltd. as to
how it reacts to changes in ratios.

Analysis

The various relevant ratios for our analysis on Arvind Ltd. are obtained and plotted in the
table below.
Mar-

Mar-

Mar-

Mar-

Mar-

Mar-

Mar-

Mar-

Mar-

Mar-

13

12

11

10

09

08

07

06

05

04

0.85

0.79

1.22

1.4

1.79

1.37

1.5

1.29

1.44

1.28

0.41

0.35

0.7

0.82

1.13

0.9

1.06

0.88

0.98

0.99

Quick Ratio

0.75

0.67

1.12

0.98

1.10

1.36

1.56

1.71

1.69

1.66

Current Ratio

0.94

0.95

1.23

1.18

1.29

1.5

1.76

1.94

1.95

1.79

Total Assets TR

0.89

0.97

0.81

0.72

0.82

0.74

0.62

0.47

0.56

0.55

Fixed Assets TR

0.99

0.85

0.78

0.86

0.85

1.16

1.11

1.12

0.9

Inventory TR

4.32

4.82

3.99

5.84

4.22

4.13

2.88

3.34

3.28

3.69

Debtors TR

8.92

7.21

5.39

5.98

7.66

9.49

6.38

4.62

6.02

5.92

1.97

1.87

1.33

1.09

0.88

0.65

1.03

2.11

1.28

ROCE (%)

12.42

13.97

8.66

7.25

5.85

3.46

5.27

7.91

8.37

6.92

RONW (%)

11.35

9.06

4.74

1.43

-2.66

-4.83

-0.07

8.15

10.24

2.32

1.012

17.05

5.3

2.21

-2.26

1.14

1.06

5.89

6.31

4.53

11.67

9.41

7.8

3.45

-2.06

-2.44

1.86

9.17

10.59

8.39

Key Ratios
Debt-Equity
Ratio
Long Term DebtEquity Ratio

Interest Cover
Ratio

Price Earning
(P/E)
ROE(%)

*TR=Turnover Ratio

The key ratios shown above are obtained from moneycontrol.com out of the various other
ratios mentioned there relevant to our study.
By using these ratios, the graphs for Liquidity, Solvency, Turnover and Profitability ratios are
plotted using MS-Excel.

Liquidity ratios
Quick Ratio

Current Ratio

2.5

Ratio

2
1.5
1
0.5
0
Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Liquidity Ratios:
Liquidity ratios attempt to measure a company's ability to pay off its short-term debt
obligations. This is done by comparing a company's most liquid assets (or, those that can be
easily converted to cash), its short-term liabilities. (investopia.com)
The ratios that we have looked into in the plot are the Quick ratio and Current ratio. From this
graph of 10yr data of Arvind Ltd. it can be seen that the Quick ratio and Current ratio has
continuously decreased more or less over the period and that too below 1. The difference
between Quick ratio and Current ratio is only due to Inventory and Prepaid Expenses that is
taken into consideration in current ratio.
5

It is indicating that the company is having difficulty meeting expenses incurred in running its
operations, as well as meeting its obligations. However, in order to get a better sense of
liquidity, an investor should also notice a companys operating cash flow. Hence, it may raise
a red flag for some of the investors.

Turnover/efficiency
Total Assets

Fixed Assets

Inventory

Debtors

10
9
8
Turnover

7
6
5
4
3
2
1
0
Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Turnover/Efficiency Ratio:

The asset turnover ratio is an efficiency ratio that measures a company's ability to
generate sales from its assets by comparing net sales with average total assets.
(myaccountingcourse.com)
Fixed asset and total asset turnover ratios are almost remaining constant and equal to
1. A ratio of 1 implies that the net sales of a company equal to the average total assets
for the year. In other words, the company is generating 1 Rupee of sales for every
Rupee invested in assets.

But from the asset turnover ratio, a clear picture cant be obtained until and unless it is
compared with other companies in the same industry.

Inventory Turnover ratio shows how many times a company's inventory is sold and
replaced over a period of operation. A low inventory turnover ratio implies poor sales
and, therefore, excess inventory. A high inventory turnover ratio implies either strong
sales or an ineffective buying. (investopia.com)

From the graph, we can see that this turnover ratio is remaining close to 4 over the
period. For this particular industry, clearly speaking it is an average ratio.
High inventory levels are usually unhealthy as they represent an investment with a
rate of return (ROR) equating to zero. It also sometimes opens the company up to
trouble generation if the prices begin to fall.

Debtors Turnover ratio shows the numbers of times per year the Debtors will
turnover/pay back the money. (myvce.com)

From the graph, we can see an increasing and decreasing curve for the 10yr financial
data. But then too, it is much higher than 1.
A higher ratio is better as the business would be collecting money fastly and hence its
liquidity position will try to become stronger.
On the other hand, a low debtors turnover ratio is not good as it indicates that the
business have not managed debtors in a more better and efficient way.

Debt/Solvency
Debt-Equity Ratio

Long Term Debt-Equity Ratio

Interest Cover Ratio

2.5
2

Ratio

1.5
1

0.5
0
Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Debt/Solvency Ratios:
Solvency ratios are one of the various ratios used to measure the ability of a company to
meet its long term debts. Moreover, the solvency ratio quantifies the size of a companys
after tax income, not counting non-cash depreciation expenses, as contrasted to the total debt
obligations of the firm. Also, it provides an assessment of the likelihood of a company to
continue congregating its debt obligations. (readyratios.com)

Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity. It
is a leverage ratio and it measures the degree to which the assets of the business are financed
by the debts and the shareholders' equity of a business. (accountingexplained.com)
From the graph, we can see that the debt-equity ratio has decreased from more than 1 to less
than 1 in the corresponding years. Hence, risk on the business has decreased in the years
corresponding and percentage of the assets of the business which were financed by debts to
be decreasing.
8

Long Term Debt-to-Equity ratio is an indication of what portion of a companys total


assets are financed from long term debt. Long-term debt-to-equity ratio is an important
indicator that financial-market players rely on to gauge corporate solvency. (ehow.com)
From the graph, we can see that the Long term debt-equity ratio has decreased from 1 to less
than 0.5 in the corresponding years. This may show a figure to corporate financers that senior
leadership/managers of the business are too timid in risk-taking and may be missing
opportunities in the market.
Conversely, a high ratio could mean the firm is taking on too much debt relative to its equity
capital. Hence, this ratio should be around 1 for effective image build up in the market.

Interest Coverage ratio is used to determine how easily a company can pay interest on
outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings
before interest and taxes (EBIT) of one period by the company's interest expenses of the same
period. (investopedia.com)

From the graph, we can see the conflicting nature of interest coverage ratio of the company. It
has increased, decreased and further increased to the same level. By increasing its ratio
above 1.5 it has overcome its debt expense.
When a company's interest coverage ratio (ICR) is around 1.5 or lower, its ability to meet
interest expenses may be questionable by the investors. An interest coverage ratio below 1
indicates that the company is not generating sufficient revenues to satisfy its interest
expenses.
A business that can barely manage to cover its interest costs may easily fall into bankruptcy if
its earnings suffer for even a single month of operation. (investopia.com)

Profitability Ratio
ROCE (%)

RONW (%)

Price Earning (P/E)

ROE(%)

20
15

Ratio

10
5
0
Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

-5
-10

Profitability Ratios:
A class of financial metrics that are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of time.
For most of these ratios, having a higher value relative to a competitor's ratio or the same
ratio from a previous period is indicative that the company is doing well. (investopedia.com)

Return on Capital Employed (ROCE) is the ratio of net operating profit of a company to its
capital employed. It measures the profitability of a company by expressing its operating profit
as a percentage of its capital employed.

(accountingexplained.com)

From the graph, we can see that ROCE has been seeing an increasing curve except a downfall
in few particular years. But, than too it is on a higher scale. A higher value of ROCE is
favourable indicating that the business is generating more earnings per Rupee of capital
employed. A lower value of ROCE indicates lower profitability. A company having fewer
assets but earning same profit as its competitors will have higher value of ROCE and thus
higher profitability.
10

Return on Net worth (RONW) reveals how much profit a business generates with the
money invested by the equity shareholders. Also called Return on Equity. It tells common
shareholders how effectively their money is being employed in the business. (investopia.com)
From the graph, we can see that RONW had a dip at one point of time and that too below 0
but after that it has been able to keep up and increasing. A rising RONW suggests that the
business is increasing its ability to generate profit without needing as much a capital. It also
indicates how well the business managers are deploying the shareholders capital. In other
words, the higher the RONW the better. Falling RONW is usually a problem for business.
However, it is important to also note that if the value of the shareholders equity goes down,
RONW goes up. Likewise, a high level of debt can artificially depict boosting RONW; after
all, the more debt a business has on itself, the fewer shareholders equity it has and the higher
its RONW is. (investopia.com)

Price Earning (P/E) ratio is a valuation ratio of a business current share price value
compared to its per-share earnings. The P/E is sometimes referred to as the "multiple", as it
shows how much the investors are willing to pay per Rupee of its earnings. (investopia.com)

From the graph, we can see the P/E ratio has drastic changes. It was positive in few years due
to exceptional performance and more often than usual it is either decreasing or close to 0.
In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to business with a lower P/E ratio.

It is important for the investors to avoid basing a decision on this measure alone as an
important problem may arise with the P/E measure. The denominator (earnings) is based on
an accounting measure of earnings that is susceptible to forms of manipulation by the
business.
Generally a high P/E ratio means that investors are anticipating higher growth in the future.

11

Share Price Correlation

Table: Share Price Graph for Arvind Ltd.

Correlation Coeff value


-0.59

Debt-Equity Ratio
Long Term Debt-Equity Ratio

-0.4063

Quick Ratio

0.1034

Current Ratio

0.1388

Turnover Ratios
Total Assets

-0.145

Fixed Assets

0.5083

Inventory

-0.2837

Debtors

-0.0646

Interest Cover Ratio

0.7598

ROCE (%)

0.5547

RONW (%)

0.7887

Price Earning (P/E)

0.3536

ROE(%)

0.8716
Table: Correlation Matrix for Arvind Ltd.
12

Correlation Coeff. value lies between -1 to +1 . A value close to +1 indicates a strong


correlation and a value close to -1 indicates a strong opposite correlation.

In case of Debt-Equity Ratio, it is having a moderate negative correlation value close to -1


with share price. Hence, it is negatively correlated with share price in case of Arvind Ltd.
This is as per our expectation as a decrease in debt percentage generally reduces interest
liabilities of the business and even in case of low or moderate profits ensures dividends to be
paid to the investors.
Same is the case with Long-Term Debt-Equity Ratio. It has a negative correlation too but
of somewhat less degree than Debt-Equity Ratio with share price.

In case of Quick Ratio and Current Ratio, both of them are having a low positive
correlation value close to 0. Hence a change in these two ratios doesnt have any such
considerable effect or correlation with the share price.

Same goes for Total Asset Turnover Ratio and Debtors Turnover Ratio. Both of them
have a negative correlation value close to 0 .Hence, doesnt have any such considerable effect
on the share price.

In case of Fixed Asset Turnover Ratio, the moderate positive correlation value is
considerable. Hence, on increasing nature of Fixed Asset Turnover ratio, the share price
would also have an increasing nature and vice-versa. From the Turnover graph of Arvind
Ltd., the Fixed Asset turnover ratio has almost remained constant close to 1 .Hence; it didnt
have any much effect on share price of Arvind Ltd.

13

In case of Inventory Turnover ratio, it is having an appreciable negative correlation value.


On increasing and decreasing trend of the ratio from Turnover graph we can see that the share
price has decreased and then increased for the same period. Having a large inventory than
sales usually have a degrading effect on efficiency of the business. Hence, no specific pattern
is observed with this.

Interest Coverage Ratio (ICR) has a high positive correlation value close to 1. Hence, on
increasing the ICR, the share prices will also increase and vice-versa. From the graph too we
can see that it has followed almost the same curve as share price. A reason for this can be that
as ICR increases, investors feel safe about their money invested in the business and hence a
high positive correlation.

In case of profitability ratios (ROCE, ROE, P/E, RONW) all have a high positive
correlation with share price. Hence the share prices of the shares are governed more by
investors rather than traders.
This is as per our expectation as an increase in these ratios indicate higher profitability. Due
to this demand for the share increases in the market, ultimately leading to increase in the
share price.

14

Assumptions & Scope

For a year we have taken the average of the daily share prices at a figure of annual
share price. In a true sense this may not depict the nature of the business

We have not considered any correlation between any two ratios but it may have been
possible to predict or determine share price using them as a whole.

We have also assumed other ratios while calculating correlation between a ratio and
share price to be constant.

By interpolating relation between share price and ratios ,we may be able to predict
future share prices.

A better estimation can be achieved if we are able to take live share prices to obtain a
dynamic correlation.

We can extend this study to other companies of the same industry and have a better
estimation per se.

15

Conclusion
We are now in a position to conclude how the investors and maybe investment banks study a
business before investing in it. A investor per se generally focuses on a business inherent
performance and a high correlation would ensure that certain external factors like trade
recessions, etc. to cause mild or less effect on the state of the business in the market.

By the correlation outcomes, we have seen that different ratios have entirely different effect
on the share prices. Some show a high correlation with share price while other dont or not at
all. Hence, investors should look each of them entirely different and cautiously for judging
the performance of the business before investing.

If given an opportunity and time, we would try to look into the different companies of the
same sector and then judge the performance and try to correlate on the same.

16

Bibliography

M.Thenmozhi, Market Value Added and Share Price Behaviour, Delhi Business
Review, 2000 , Vol.1, No.1

T Martikainen, Modelling Stock Price Behaviour by Financial Ratios ,Decisions in


Economics and Finance, 1989, Vol.12, No.1

Yahoo! Finance

Arvind Ltd. Annual Reports

http://moneycontrol.com

http://investopia.com

http://accountingexplained.com

http://capitaline.com

Rodiel C. Ferrer, The Impact of Merger and Acquisition, Financial Ratios on Stock
Price among the Industrial Firms in the Philippines

Ole-Christian Hillestad, An analysis of financial ratios for the Oslo Stock Exchange

Turk, A. and Chapman, The Effects of Financial Ratios and Market Hype on Short
Term Stock Prices. Illinois Wesleyan University, 2006

17

Results generated by Plagiarisma.Net


http://plagiarisma.net

Results

Query

Unique

SML401 TERM PAPER Ratio Analysis of 10yr data of Arvind Ltd

Unique

& their correlation with share price Sanchit Garg (2011TT10960) Alok Singh (2011TT10900) Abstract

Domains (cached links)

We have studied the share price correlation with the ratios of the company Arvind Ltd
plosone.org nlp.stanford.edu
repositorium.sdum.uminho.pt

About 3 results

and their analysis as a whole

Unique

A high correlation between a ratio and share price in case specific to Arvind Ltd

Unique

indicates that the investors have focussed mainly on this ratio and taken their decision per say to
buy/sell the share of the company

Unique

Correlation was mainly used as a tool here as it can precisely predict the linear component b/w two
quantities

About 120,999,585
results

Contents

contentsmagazine.com en.wikipedia.org
en.wikipedia.org en.wikipedia.org
thefreedictionary.com api.jquery.com
plato.stanford.edu mediawiki.org twitter.com

About 53 results

Introduction & Objectives 2

circle-era.eu clickplayceu.com clickplayceu.com


clickplayceu.com clickplayceu.com
clickplayceu.com clickplayceu.com
clickplayceu.com clickplayceu.com
legacy.samsi.info

About 36,558 results

Methodology 3

unt.edu youtube.com swrcb.ca.gov


psychcentral.com cubicleninjas.com
gmm.fsksm.utm.my linkedin.com jobs.ac.uk
ncbi.nlm.nih.gov

About 252,902 results

Analysis 4

Unique

Share Price Correlation 12

Unique

Assumptions & Scope 15

About 13,843 results

Conclusion 16

Unique

Unique

msg.com msg.com msg.com msg.com msg.com


msg.com msg.com msg.com bbc.co.uk drf.com

youtube.com youtube.com youtube.com


math.le.ac.uk aerothai.co.th icao.int icao.int
enterthebible.org h20565.www2.hp.com
poker.about.com

Bibliography 17 1 Introduction & Objectives Company Ratios act as a strong determinant of the
progress of a company over its lifetime
If we can predict how stock prices manipulate, than it would be extremely beneficial mainly to the
company but also for its shareholders, industry and investors

Unique

Each ratio released every year provide a different dimension of the company

Unique

The stock price too acts as an important factor determining the state of affairs of a company

Unique

An economic market is that market where the share price of all the companies is at par

Unique

Here, there current price of a share has turned stable after a long period of time

Unique

In such a situation, the flow of the share price is generally an exact function of predetermined factors
and there is no incentive for investors

About 1 results

However such a situation is far from being true in the practical world

Unique

(An analysis of financial ratios for the Oslo Stock Exchange) We have chosen company financial ratios
as the determining factor for the share price of the company and the correla

cse.iitd.ernet.in

Unique

In order to deliver a positive image on the investors , company managers


generally perform comprehensive planning and try to create effective strategies in
order to increase value of the stocks

SML401 TERM PAPER Ratio Analysis of 10yr data of Arvind Ltd. & their correlation with share price Sanchit Garg
(2011TT10960) Alok Singh (2011TT10900) Abstract We have studied the share price correlation with the ratios of the
company Arvind Ltd. and their analysis as a whole. A high correlation between a ratio and share price in case specific to
Arvind Ltd. indicates that the investors have focussed mainly on this ratio and taken their decision per say to buy/sell the
share of the company. Correlation was mainly used as a tool here as it can precisely predict the linear component b/w two
quantities. Contents 1. Introduction & Objectives 2 2. Methodology 3 3. Analysis 4 4. Share Price Correlation 12 5.
Assumptions & Scope 15 6. Conclusion 16 7. Bibliography 17 1 Introduction & Objectives Company Ratios act as a strong
determinant of the progress of a company over its lifetime. If we can predict how stock prices manipulate, than it would be
extremely beneficial mainly to the company but also for its shareholders, industry and investors. Each ratio released every
year provide a different dimension of the company. The stock price too acts as an important factor determining the state of
affairs of a company. In order to deliver a positive image on the investors , company managers generally perform
comprehensive planning and try to create effective strategies in order to increase value of the stocks of the company. An
economic market is that market where the share price of all the companies is at par. Here, there current price of a share has
turned stable after a long period of time. In such a situation, the flow of the share price is generally an exact function of
predetermined factors and there is no incentive for investors. However such a situation is far from being true in the practical
world.(An analysis of financial ratios for the Oslo Stock Exchange) We have chosen company financial ratios as the
determining factor for the share price of the company and the correla

Total 18666 chars, 3120 words, unique sentences 92%, 90% originality