Financial Management - I

FINANCIAL
RATIO

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ANALYSIS
[AIA Engineering Ltd.]
Submitted to – Prof. Jashoda Mulchandani

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 ABOUT AIA Engineering Ltd.--

AIA Engineering Ltd. (AIAE), a certified ISO 9000 company, specializes in design, development,
manufacture, installation and servicing of high chromium wear, corrosion and heat resistant parts used
in cement mining and thermal power generation industries.

CORE BUSINESS ABILITY--

AIAE's philosophy is to look for global solutions.

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This approach involves:

 Study of application
 Design of parts as tailor made solutions
 Manufacture of Wear, Corrosion and Heat Resistant parts.
 Supervision of installation
 Assistance in optimizing grinding systems

AIA, along with its subsidiaries, has a global presence in terms of sales and services. Sales outside
India are carried out by AIA’s wholly owned subsidiary companies in UAE (Vega Industries (Middle
East) F.Z.E.), UK (Vega Industries Limited - UK) and USA (Vega Industries Limited - USA). Vega
Industries (Middle East) F.Z.E. has a branch office in Australia and a representative office in
Philippines.

CLIENTS & SERVICES--

 AIAE has annual rate contracts for supplies with all the leading cement manufacturers in
India & establish track record of supplies to all major international cement groups.
 In addition to supplies of components, AIAE also offers technical services ranging from
inventory management, mill audits, and ball charge management & testing services.
 All major mines in India where hi-chromium solutions are viable are customers of AIAE.
 This is illustrated by annual supply of approximately 5,000 metric tons of hi-chromium liners
& balls including 30% chromium grade for magnetite iron ore grinding.
 AIAE also has established track record of supplying hi-chromium balls & alloy steel liners to
important international mining groups and OEMs.
 AIAE has offered global solutions & made supplies to all the major power plants & OEMs in
India.
 Internationally, established track record exists for supplying to OEMs.

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 BALANCE SHEET - AIA Engineering Ltd (Rs in Cr.)

PARTICULARS 2008 2007

SOURCES OF FUNDS :
Share Capital 18.8 18.8
Reserves Total 506.34 406.82
Equity Share Warrants 0 0
Equity Application Money 0 0
Total Shareholders Funds 525.14 425.62
Secured Loans 0 0
Unsecured Loans 0 0
Total Debt 0 0

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Total Liabilities 525.14 425.62

APPLICATION OF FUNDS :
Gross Block 171.29 64.53
Less : Accumulated Depreciation 25.48 17.34
Less: Impairment of Assets 0 0
Net Block 145.81 47.19
Lease Adjustment 0 0
Capital Work in Progress 29.55 59.57
Investments 116.01 164.33
Current Assets, Loans & Advances
Inventories 93.46 53.07
Sundry Debtors 138.72 105.15
Cash and Bank 13.57 24.65
Loans and Advances 168.66 101.11
Total Current Assets 414.41 283.98
Less : Current Liabilities and Provisions
Current Liabilities 43.7 37.55
Provisions 130.51 90.13
Total Current Liabilities 174.21 127.68
Net Current Assets 240.2 156.3
Miscellaneous Expenses not written off 0 0
Deferred Tax Assets 0.39 0.26
Deferred Tax Liability 6.82 2.03
Net Deferred Tax -6.43 -1.77
Total Assets 525.14 425.62

Contingent Liabilities 79.6 54.39

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 PROFIT AND LOSS - AIA Engineering Ltd (Rs in Cr.)

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 PARTICULARS 2008 2007
INCOME :
Sales Turnover 639.61 425.12
Excise Duty 46.97 25.89
Net Sales 592.64 399.23
Other Income 27.56 11.88
Stock Adjustments 10.55 17.01
Total Income 630.75 428.12

EXPENDITURE :
Raw Materials 279.21 202.02
Power & Fuel Cost 32.08 17.09
Employee Cost 15.24 10.69

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Other Manufacturing Expenses 109.77 71.49
Selling and Administration Expenses 32.8 24.27
Miscellaneous Expenses 2.08 1.65
Less: Pre-operative Expenses Capitalized 0 0
Total Expenditure 471.18 327.21

Operating Profit 159.57 100.91

Interest 0.7 1.41
Gross Profit 158.87 99.5
Depreciation 8.27 2.57
Profit Before Tax 150.6 96.93
Tax 37.28 29.35
Fringe Benefit tax 0.34 0.29
Deferred Tax 4.67 0.37
Reported Net Profit(PAT) 108.31 66.92
Extraordinary Items 0.12 0.01
Adjusted Net Profit 108.19 66.91
Adjust. below Net Profit 0 0
P & L Balance brought forward 107.52 54.99
Statutory Appropriations 0 0
Appropriations 19.62 14.39
P & L Balance carried down 196.21 107.52
Dividend 7.52 6.58
Preference Dividend 0 0
Equity Dividend % 40 35
Earnings Per Share(Adj)-Unit Curr 11.39 7
Earnings Per Share-Unit Curr 56.94 35
Earnings Per Share(Adj)-Unit Curr 11.39 7
Book Value-Unit Curr 279.33 226.39

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 FINANCIAL RATIOS - AIA Engineering Ltd (Year 2008 & 2007)

KEY RATIOS
Debt-Equity Ratio 0 0.02
Long Term Debt-Equity Ratio 0 0
Current Ratio 2.25 2.11
TURNOVER RATIOS
Fixed Assets 5.42 8.7
Inventory 8.73 11.53
Debtors 5.25 4
Interest Cover Ratio 216.14 69.74
Gross Profit Margin (%) 24.95 23.74

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Net Profit Margin (%) 23.66 23.13
ROCE (%) 31.83 28.79
RONW (%) 22.78 19.99

VALUATION RATIOS - AIA Engineering Ltd (Year 2008 & 2007)

Price Earning (P/E) 26.45 34.3

Price to Book Value ( P/BV) 5.39 5.3
Price/Cash EPS (P/CEPS) 24.56 33.01
EV/EBIDTA 17.66 22.12
Market Cap/Sales 4.43 5.31

DUPONT MODEL - AIA Engineering Ltd (Year 2008 & 2007)

PBIDT/Sales (%) 24.95 23.74

Sales/Net Assets 1.22 1
PBDIT/Net Assets 0.3 0.24
PAT/PBIDT (%) 67.88 66.32
Net Assets/Net Worth 1 1
ROE (%) 22.78 19.99

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 FINANCIAL OVERVIEW - AIA Engineering Ltd (Rs in Cr.)

Particulars 2008 2007

Equity Paid Up 18.8 18.8
Net worth 525.14 425.62
Capital Employed 525.14 425.62
Gross Block 171.29 64.53
Net Working Capital ( Incl. Def. Tax) 233.77 154.53
Current Assets ( Incl. Def. Tax) 414.8 284.24
Current Liabilities and Provisions ( Incl. Def. Tax) 181.03 129.71
Total Assets/Liabilities (excl Reval & W.off) 706.17 555.33
Gross Sales 639.61 425.12

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Net Sales 592.64 399.23
Other Income 27.56 11.88
Value Of Output 603.19 416.24
Cost of Production 435.16 287.83
Selling Cost 23.99 15.91
PBIDT 159.57 100.91
PBDT 158.87 99.5
PBIT 151.3 98.34
PBT 150.6 96.93
PAT 108.31 66.92
CP 116.58 69.49
Revenue earnings in forex 273.06 175.08
Revenue expenses in forex 37.65 19.33
Capital earnings in forex 0 0
Capital expenses in forex 6.72 7.29
Book Value (Unit Curr) 279.33 226.39
Market Capitalization 2831.75 2257.13
CEPS (annualized) (Unit Curr) 61.34 36.37
EPS (annualized) (Unit Curr) 56.94 35
Dividend (annualized %) 40 35
Payout (%) 7.03 10
Cash Flow From Operating Activities 5.66 41.69
Cash Flow From Investing Activities -8.96 -132.78
Cash Flow From Financing Activities -7.78 103.72

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 FINANCIAL OVERVIEW - AIA Engineering Ltd (Rs in Cr.)

Rate of Growth (%):

ROG-Net Worth (%) 23.38 74.52
ROG-Capital Employed (%) 23.38 65.21
ROG-Gross Block (%) 165.44 94.54
ROG-Gross Sales (%) 50.45 40.88
ROG-Net Sales (%) 48.45 32.43
ROG-Cost of Production (%) 47.87 38.76
ROG-Total Assets (%) 27.16 59.59
ROG-PBIDT (%) 58.13 63.07

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ROG-PBDT (%) 59.67 70.35
ROG-PBIT (%) 53.85 64.01
ROG-PBT (%) 55.37 71.59
ROG-PAT (%) 61.85 79.51
ROG-CP (%) 67.77 77.27
ROG-Revenue earnings in forex (%) 55.96 29.07
ROG-Revenue expenses in forex (%) 94.77 61.22
ROG-Market Capitalization (%) 25.46 106.45

Key Ratios:
Debt-Equity Ratio 0 0.02
Long Term Debt-Equity Ratio 0 0
Current Ratio 2.25 2.11
Turnover Ratios:
Fixed Assets Ratio 5.42 8.7
Inventory Ratio 8.73 11.53
Debtors Ratio 5.25 4
Interest Cover Ratio 216.14 69.74
PBIDTM (%) 24.95 23.74
PBITM (%) 23.66 23.13
ROCE (%) 31.83 28.79
RONW (%) 22.78 19.99
Debtors Velocity (Days) 49 49
Creditors Velocity (Days) 19 18
Assets Utilization Ratio (times):
Value of Output/Total Assets 1.2 1.39
Value of Output/Gross Block 5.71 6.33
Financial ratios are classified into five major categories that
highlight as below--

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 LIQUIDITY--

 It is extremely essential for a firm to be able to meet its obligation as they become due.
Liquidity ratios measure the ability of the firm to meet its current obligations.
 A relationship between cash and other current assets to current obligations, provide a quick
measure of liquidity.
 A firm should ensure that it does not suffer from lack of liquidity, and also that it does not
have excess liquidity.
 Liquidity ratios provide an indication of a firm’s short term financial situation expressing the
extent to which a firm is able to pay off its debt as it comes due over the next year.

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CURRENT RATIO:

 This ratio establishes a relationship between current assets and current liabilities.
 The current ratio is a measure of firm's short term solvency.
 CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
 Generally high current ratio indicates financial strength of company.
 As the AIAE’s Current Ratio is 2.25:1, so it shows that it has strong financial strength.

DEBTOR TURNOVER:

 It measures how often the firm’s receivables turn over, that is how often they are collected.
 If the average collection period implies a fast turnover, it means that the firm gets the funds to
pay off its own liabilities on time.
 DEBTORS TURNOVER RATIO = NET CREDIT SALES / AVERAGE DEBTORS
 As the AIAE’s Debtor Turnover Ratio are 5.25. This is a good indication.
 It shows that company is recovering money faster from its debtors.

INVENTORY TURNOVER:

 It measures how many times a firm’s inventory is sold and replaced over a period.
 Inventory turnover ratio reflects the efficiency of inventory management.
 INVENTORY TURNOVER RATIO = COGS / AVERAGE INVENTORY
 Higher the ratio, more effective is the inventory management.
 The AIAE has turnover ratio of 8.73 which is very high.
 We can say that AIAE manage their inventories more effectively.

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 EFFICIENCY--

 Efficiency ratios provide an indication of a firm’s receivables and how efficiently it uses and
controls its assets, pays its suppliers, and uses its equity using borrowed funds.

FIXED ASSETS TURNOVER:

 It measures how effectively the firm uses its plant and equipment and other fixed assets.
 FIXED ASSETS TURNOVER RATIO = NET SALES / AVERAGE NET FA
 Higher the ratio, more effective is the fixed assets management.
 The AIAE has ratio of 5.42 which is high.

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 AIAE manages their fixed assets more effectively.

GROSS PROFIT MARGIN:

 It provides an indication of the basic cost structure of the firm.

 By analyzing gross profit margin over time relative to a comparable industry figure investors
can understand the firm’s relative cost-price position.
 GROSS PROFIT RATIO = GROSS PROFIT / NET SALES
 Higher the ratio is better.
 The AIAE has ratio of 24.95% which is pretty high.

RETURN ON CAPITAL EMPLOYED:

 It relates the firm’s earnings to all the capital involved such as debt, common stocks and
preferred stocks indicating the firm’s return on all the capital employed.
 RETURN ON CAPITAL EMPLOYED = PBIT(1-t) / AVERAGE TOTAL ASSETS
 For AIAE this ratio is 31.83% which is good.

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 FINANCIAL LEVERAGE--

 The second category of financial ratios is leverage or capital structure ratios.

 The long-term creditors would judge the soundness of a firm on the basis of the long-term
financial strength measured in terms of its ability to pay the interest regularly as well as repay
the installment of the principal on due dates on in one lump sum at the time of maturity.
 The long-term solvency of a firm can be examined by using leverage ratios.
 These ratios are computed from the balance sheet.
 These ratios indicate mix of funds provided by owners and lenders.
 Financial leverage ratios provide an indication of a firm’s long-term solvency.

DEBT-EQUITY RATIO:

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 The relation ship between borrowed funds and owner’s capital is a popular measure of the
long term financial solvency of a firm.
 His relationship is shown by the debt-equity ratio.
 It measures the economic risk that a firm undertakes.
 A higher proportion of debt compared to equity implies higher economic risk, increasing the
probability of defaulting on the debt.
 It shows that out of total assets, Shareholders have 0% of the holdings.

CAPITAL EMPLOYED TO NETWORTH RATIO:

 How much funds are being contributed together by lenders and owners for each rupee of
owner's contribution.
 This can be found out by calculating the ratio of capital employed or net assets to net worth.
 For AIAE its 22.78% which is good.
 Capital employed comprises of Fixed assets & Net Working Capital
 Net worth = Equity shares + Reserves & Surplus – Fictitious assets

INTEREST COVERAGE RATIO:

 This ratio measures the debt servicing capacity of a firm in so far as interest on long-term loan
is concerned.
 It is also known as ‘time interest earned ratio’.
 INTEREST COVERAGE RATION = PBIT / INTEREST
 Higher this ratio, the company can easily meet its interest burden, even if earning before
interest and tax suffer a considerable decline.
 Here, it is 216.14, so very good for AIAE, we can say that company has good capacity to pay
interest charges from earnings.

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 PROFITABILITY--

 A company should earn profits to survive and grow over a long period of time.
 Profits are essential but it would be wrong to assume that every action initiated by
management of a company should be aimed at maximizing profits, irrespective of social
consequences.
 Profit is the difference between revenues and expenses over a period of time.
 Profit is the ultimate output of a company and it will have no future if it fails to make
sufficient profits.
 Therefore, the financial manager should continuously evaluate the efficiency of the company
in terms of profits.
 The profitability ratios are calculated to measure the operating efficiency of the company.
 Profitability ratios provide useful information about the joint effects of liquidity, operating
performance and debt management on operating results.

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PROFIT MARGIN ON SALES RATIO:

 It measures the profit per rupee on sales.

 In relative valuation, if two firms have same sales figures, operating costs and earnings before
income and taxes (EBIT), but one firm uses more debt than the other, it means that it has
higher interest charges that decrease net income and consequently lower profit margin on
sales.
 Therefore, profit margin on sales ratio is a very important financial ratio in relative valuation.
 NET PROFIT MARGIN RATIO = PBIT / NET SALES
 Higher the ratio is better.
 The AIAE has ratio of 23.66% which is high.

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 VALUE--

 Market value ratios relate a firm’s stock price to earnings, cash flow and book price per share
to provide an indication of what investors think about the firm’s past performance and future
prospects.

PRICE/EARNINGS (P/E) RATIO:

 It provides an indication of how much investors are willing to pay per rupee of a firm’s
reported profits.
 P/E RATIO = MARKET PRICE PER SHARE / EARNINGS PER SHARE
When a firm’s P/E ratio is lower than the industry average, the firm is considered as being

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
riskier than most firms in the industry, for having relatively poor growth prospects.
 Lesser is better for future investor but at the same time higher is better for existing investors.
 In this AIAE’s case its 26.45 which is lower then previous year but it’s good as per industry
standards are concern.

MARKET/ BOOK (M/B) RATIO:

 It provides an indication of how much investors are willing to pay for a rupee of a firm’s book
value.
 P/BV RATIO = MARKET VALUE PER SHARE / BOOK VALUE PER SHARE
 For AIAE its 5.39 which is good.

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 STRENGTH--

 By seeing the ratios given above with interpretation of each, we can say that company has
good liquidity ratio and have a strong earning power in the market.
 Current ratio indicates that it has strength in the market.
 Profitability is not that higher as it may be expected. It’s just 23.66%, but may be they have to
improve on that by having various strategies implementation and applying Operation
excellence.

WEAKNESS--

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 Solvency is the weakness of the company.
 We can see that most of the company’s money is in either fixed asset or in goods i.e. stock
and therefore, it has not good acid test ratio, but company can improve on that ratio by
recovering late from debtors.
 They should try to lessen this time frame.

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