ASSIGNMENT ON

“Ratio Analysis of Ashok

Leyland”

BY

Mr. RAVINDRA R. GAIKWAD (9538)

EMBA (Marketing)
Advanced Financial Management
 Table of Contents
1. Introduction............................................................................... 3
2. Abstract....................................................................................3
3. Liquidity Ratio...........................................................................4
3.1 Current Ratio..........................................................................................4

3.2 Quick Ratio..............................................................................................4

4. Activity Ratios...........................................................................6
4.1 Fixed Assets Turnover Ratio...................................................................6

4.2 Inventory Turnover.................................................................................6

4.3 Debtors Turnover ................................................................................6

4.4 Creditors Turnover..................................................................................7

4.5 Net Operating Cycle (NOC)....................................................................7

5. Leverage Ratio..........................................................................9
5.1 Debt-Equity Ratio....................................................................................9

6. Coverage Ratios........................................................................9
6.1 Interest Coverage Ratio..........................................................................9

7. Profitability Ratios...................................................................10
7.1 Gross Profit Ratio..................................................................................10

7.2 Operating Profit Ratio...........................................................................10

7.3 Net Profit Ratio......................................................................................10

7.4 Return on Investment...........................................................................10

7.5 EPS (Earnings per Share)......................................................................11

7.6 Price Earnings (PE) Ratio.......................................................................11

8. Annexure: Balance Sheet as on 31-03-2010 and PL A/C

statement...................................................................................13

Ratio Analysis 2
1. Introduction
Financial data of Ashok Leyland Company is used for Ratio Analysis. All
values are in Lacs Rs.

Ratios are classified differently on different bases. The mostly used one is
the financial classification under which the ratios are broadly divided into the
following five classes:
• Liquidity ratios concerned with the short term solvency of the
concern or its ability to meet financial obligation on their due dates.
• Activity ratios concerning efficiency of management of various assets
by the concern.
• Leverage ratios concerning stake of the owners in the business in
relation to outside borrowings or long term solvency.
• Coverage ratios concerned with the ability of the company to meet
fixed commitments such as interest on term loans and dividend on
preference shares and
• Profitability ratios concerned with the profitability of the concern.

2. Abstract
The various financial ratios are calculated and summarized as following:

Refere Valu
nce Ratio es
3 Liquidity Ratio
3.1 Current Ratio 1.4
3.2 Quick Ratio 0.59
4 Activity Ratios
Fixed Assets Turnover
4.1 1.89
Ratio
4.2 Inventory Turnover 4.88
4.3 Debtors Turnover 7.31
4.4 Creditors Turnover 1.73
Net Operating Cycle
4.5 -83
(NOC) Days
5 Leverage Ratio
5.1 Debt-Equity Ratio 0.6
6 Coverage Ratio
6.1 Interest Coverage Ratio 7.7
7 Profitability Ratios
0.10
7.1
Gross Profit Ratio 5
0.07
7.2
Operating Profit Ratio 7

Ratio Analysis 3
 0.05
7.3
Net Profit Ratio 8
0.10
7.4
Return on Investment 7
7.5 EPS (Earnings per Share) 3.18
23.4
7.6
Price Earnings (PE) Ratio 3

3. Liquidity Ratio

3.1 Current Ratio

The ratio is worked out by dividing the current assets of the concern by its
current liabilities.

Current Ratio = Current Assets = 413968 / 296075

Current Liability
= 1.4

Current ratios indicate the relation between current assets and current
liabilities. Current liabilities represent the immediate financial obligations of
the company. Current assets are the sources of repayment of current
liabilities. Therefore, the ratio measures the capacity of the company to meet
financial obligation as and when they arise. Ratio of 1.5 to 2 is ideal; but in
practice this is rarely achieved. This ratio is also known as working capital
ratio.

3.2 Quick Ratio

Quick Ratio = Quick Assets = Current Assets – Inventory –

loan /Advances
Current Liability Current Liability – Provisions
= (413968 – 163824 – 96046) / (296075 – 36869)
= 0.59

Quick assets represent current assets excluding stock and prepaid expenses.
Stock is excluded because it is not immediately realizable in cash. Prepaid
expenses are excluded because they cannot be realized in cash.

One of the defects of current ratio is that it does not measure accurately to
meet financial commitments as and when they arise. This is because the
current assets include also items that are not easily realizable, such as stock.
The Quick Ratio (acid test ratio) is a refinement of current ratio and is
calculated to measure the ability of the company to meet the liquidity
requirements in the immediate future. A minimum of 1: 1 is expected which

Ratio Analysis 4
indicates that the concern can fully meet its financial obligations. This also
called as Liquid ratio or Quick ratio or Acid Test ratio.

Ratio Analysis 5
4. Activity Ratios

4.1 Fixed Assets Turnover Ratio

Fixed Assets Turnover ratio = Net Sales = 724471 / (424955 +

339911)/2
Avg. Net Fixed Assets
= 1.89

The ratio shows the efficiency of the concern in using its fixed assets. Higher
ratios indicate higher efficiency because every rupee invested in fixed assets
generates higher sales. A lower ratio may indicate inefficiency of assets. It
may also be indicative of under utilizations or non-utilization of certain
assets. Thus with the help of this ratio, it is possible to identify such
underlined or unutilized assets and arrange for their disposal.

4.2 Inventory Turnover

Inventory Turnover = Net Sales = 724471 / (163824 + 133001)/2
Avg. Inventory
= 4.88

Inventory Holding period = 360 / 4.88

IHP = 74 Days

The ratio is usually expressed as number of times the stock has turned over.
Inventory management forms the crucial part of working capital
management.
A higher ratio may mean (higher turnover or less holding periods):
• The stocks are moving well and there is efficient inventory
management ; or
• The stocks are purchased in small quantities. This may be harmful if
sufficient quantities are not available for production needs; secondly,
buying in small quantities may increase the cost.
Contrarily, a lower ratio (i.e., lower turnover of longer holding period may be
an index of
• Accumulation of large stocks not commensurate with production
requirements,
• A reflection of inefficient inventory management or over-valuation of
stocks for balance sheet purposes; or Stagnation in sales, if stocks
comprise mostly finished goods.

4.3 Debtors Turnover

Debtors Turnover = Net Sales = 724471 / (102206 + 95797)/2

Avg. Debt
= 7.31

Ratio Analysis 6
Average Collection Period = 360 / 7.31
ACP = 50 Days

The ratio obtained should be compared with that of other similar units. If the
ratio of the company being studied is greater (say, 10 weeks as against 6
weeks for the industry), it indicates that the company is allowing longer than
the usual credit periods. This may be justified in the case of new companies
or existing companies entering into new ventures because initially they may
have to extend longer credits to capture the market. In other cases, the
position needs a deeper study; it is possible that many unrealizable and long
pending items are included in debtors. The company’s collection machinery
may need gearing up. The chances of larger bad debts are imminent.

4.4 Creditors Turnover

Creditors Turnover = Credit Purchase = (648187 – 102206 – 96046) /

259206
Avg. Creditor
= 1.73
Credit Period = 360 / 1.73 = 207 Days

A high ratio as compared to that obtaining in the industry (e.g., 12 weeks as

compared to 8 weeks for the industry) may mean that:
• The company in unable to pay its debts and is therefore taking longer
than usual time to pay its creditors ; or
• The company is enjoying good reputation in the market and therefore
the suppliers are extending more credit ; or
• The company may be a near-monopoly consumer and the supplier is
agreeable to the credit terms dictated by the company.
Reversely, a lower ratio would mean any of the following:
• The company has a comfortable financial position and is paying off the
creditors promptly ; or
• The creditors may offer discount on early payments to avail of which
the company is paying early. The company may do so provided the
cost of borrowing is less than the discount offered ; or
• The company does not enjoy good reputation in the market and its
creditors have restricted credits ; or
• The suppliers may be monopolists dictating terms to the company.
The real reason should be found by going into the facts of individual cases.
This ratio should be studied along with the debtors turnover and current ratio
to judge the real situation.

4.5 Net Operating Cycle (NOC)

Gross Operating Cycle (GOC) = Inventory Holding Period + Avg. Collection
Period
GOC = 74 + 50 = 124 Days

Ratio Analysis 7
NOC = GOC - Credit Period = 124 – 207 = - 83 Days

Operating cycle refers to the number of days taken for the conversion of
cash to inventory through the conversion of accounts receivable to cash. It
indicates towards the time period for which cash is engaged in inventory and
accounts receivable. If an operating cycle is long, then there is lower
accessibility to cash for satisfying liabilities for the short term.

Ratio Analysis 8
5. Leverage Ratio

5.1 Debt-Equity Ratio

Debt-Equity Ratio = Debt = 220389 / 366875
Equity
= 0.6

Debt-Equity Ratio = Debt = 220389 / (220389 + 366875)

Debt + Equity
= 0.37

This is a measure of owners stake in the business. The proprietors may

desire more of funds to be from borrowings because it carries two main
advantages. First, their stake in the venture is reduced and correspondingly
their risk also. Secondly, interest on borrowings is allowed as expenditure in
computing taxable profits but not dividend shares. The tax is computed on
the profits before any dividend is declared. But a considerable contribution
from the proprietors is necessary from the creditors point of view to sustain
the interest of the proprietors in the venture and also as a margin of safety
of the creditors. Besides, excessive liabilities tend to cause insolvency.

Generally a ratio of 2: 1 (i.e., 2 units of debt for 1 unit of equity) is

considered normal, but in certain cases relaxations are allowed.

6. Coverage Ratios

6.1 Interest Coverage Ratio

Interest Coverage Ratio = EBIT = (731515 – 648187 – 20410) / 8113

Interest
= 7.7

Higher the ratio, better is the coverage. The firm may not fail on its
commitments to pay interest even if profits fall substantially.

Ratio Analysis 9
7. Profitability Ratios

7.1 Gross Profit Ratio

Gross Profit Ratio = Sales - COGS = (724471 – 648187) / 724471
Sales
= 0.105 = 10.5 %

A comparison with the standard ratio for the industry will reveal a picture of
the profitability of the concern. Also the ratio may be worked out for a few
years and compared to verify if a steady ratio is maintained.

7.2 Operating Profit Ratio

Gross Profit Ratio = EBIT - Other = (731515 – 648187 – 20410 - 7044) /
724471
Sales
= 0.077 = 7.7 %

This ratio serves a similar purpose as, and is used in conjunction with, the
gross profit ratio.

7.3 Net Profit Ratio

Net Profit Ratio = Net Profit = 42367 / 731515

Total Sales
= 0.058 = 5.8 %

This ratio serves a similar purpose as, and is used in conjunction with, the
gross profit ratio.

7.4 Return on Investment

This ratio measures the profits of the concern as a percentage of the total
investment made. However, both the important terms involved, viz., profit
and investment, have been interpreted in various ways and hence the
formula used for this ratio also varies widely.

Return on Investments = EBIT = Operating Profit

D+E Assets
= (731515 – 648187 – 20410) / (220389 + 366875)

= 0.107 = 10.7 %

For the purpose of this ratio, the operating profit is calculated by adding back
to net profit: (1) Interest paid on the long term borrowings and debentures;
(2) Abnormal and non-recurring losses; (3) Intangible assets written off.

Ratio Analysis 10
Similarly, from the net profit abnormal and non-recurring gains are deducted.
The idea is to get profit generated out of total investments made.

The ratio of return on investment is an important ratio in computing the

profitability of the concern. It computes the profitability as against profits. A
company may maintain the profits at absolute value every year but its
efficiency lies in maintaining the same percentage of profit as compared to
the total investment made. When one wants to analyze an increase or
decrease in the rate of return, it can be done by further analysis of the ratio.
Profit is decided by the rapidity with which sales are made (turnover) and the
margin of profit on sales. Therefore the ratio can be calculated also as:

Return on Investments = Profit X 100 X Sales .

Sales Total Assets
(Margin) (Turnover)

Profit can be increased by increasing the margin or increasing the turnover.

Return on investment is also known as Return on Capital Employed. Capital
employed is used to mean the total investment in the unit, i.e., total assets.

7.5 EPS (Earnings per Share)

Earnings per share = Profit after tax and Preference dividend

No. of Equity Shares
= 4236700000 / 1330338317
= 3.18

The numerator indicates the funds available for distribution as dividend to

equity share holders. As the name indicates the ratio indicates the earnings
made by the company per equity share. A comparison with the ratio for
similar companies will indicate whether the company is using its capital
effectively or not.

7.6 Price Earnings (PE) Ratio

PE Ratio = Market Price per share = 79.2 / 3.38

EPS
= 23.43

A higher price earnings ratio as compared to that of other companies shows

higher confidence the company enjoys with the public. This ratio is also used
by the investors to know whether the shares of the company are
undervalued or overvalued. Based on this fact they would decide to purchase
the shares at the particular price or not. For instance, suppose the market
price of the shares of the Company A is Rs. 80 when it earnings per share is
Rs. 10. (The price earnings ratio of the company is 8.) The price earnings
ratio of other companies is 9. Based on the general price earnings ratio, the

Ratio Analysis 11
market price of the shares of Company A should be (Rs. 10 ) Rs. 90. The
shares of Company A are undervalued since they are quoted at Rs. 80.

Ratio Analysis 12
8. Annexure: Balance Sheet as on 31-03-2010 and
PL A/C statement

Ratio Analysis 13