Detailed Financial Analysis using Key Ratios:

Profitability Ratios:

Year 2009-10 2008-09

Gross Profit Margin 19.08% 58.65%

Net Profit Margin 11.9% 36.47%

Asset turnover 22.23% 7.32%

Return on equity 2.64% 2.75%

Earning Power 4.08% 4.09%

Gross profit margin ratio shows the profits relative to sales after the direct production costs are
deducted. It shows the relation between production costs and selling price. The gross profit
margin of GAMMON INFRASTRUCTURE PROJECTS LIMITED has fallen from 58.65% in
2008 to 19.08% in 2009. This is due to the increase in the cost of goods sold from Rs.23.3 in
2008 to Rs.97.6 in 2009. This signifies that there is a decline in the efficiency of the production
operation or lack of suitable technological advancements in order to cope up with the intense
competition in the market.

The net profit margin ratio shows the earnings left for shareholders, as a percentage of net
sales. It measures the overall efficiency of production, administration, selling, financing, pricing
and tax management. The net profit margin has fallen from 36.47% in 2008 to 11.9% in 2009.
This again indicates the inefficiency of the production processes.

Asset turnover ratio indicates the amount of assets used by the firm to generate its total sales.
A firm which is able to generate a large volume of sales on a small asset base, is a profitable
firm. By achieving a high asset turnover, a firm reduces its costs and increases the profits to its
owners.

The company’s asset turnover ratio has increased from 7.32% in 2008-09 to 22.23% in
2009-10. An asset turnover ratio of 22.23% indicates that the firm with an asset base of 1 unit
could produce 22.23 units of sales. This is a healthy sign.
Return on equity is an important profit indicator to shareholders of the firm. It measures the
profitability of equity funds invested in the firm. It reflects the productivity of capital employed
in the firm. The ROE of the company has fallen from 2.75% in 2008 to 2.64% in 2009. This is an
indication that company has not employed its resources productively.

Earning power is a measure of operating profitability. It measures the operating business

performance by not considering the effects of interest charges and tax payments. The firm’s
earning power has decreased from 4.09% in 2008 to 4.08% in 2009.This indicates its operational
inefficiency.

Liquidity Ratios:

Year 2009-10 2008-09

Current Ratio 1.68 5.14

Quick ratio 1.67 5.13

Account receivable turnover ratio 9.88 4.72

Average collection period 36.44 76.31

Inventory turnover ratio 344 160

Current ratio is the ratio of current assets and current liabilities. It measures the company’s
ability to meet its current obligations. Current ratio of 1.68 means that the firm ahs current assets
which are 1.68 times the current liabilities. The current ratio has declined from 5.14 in 2008 to
1.68 in 2009,which is not a healthy indication, because the ideal current ratio is 2:1 Higher the
current ratio, higher is the short term liquidity. So, decrease in the current ratio leads to
decrement in the liquidity of the firm. The current ratio of the industry in 2009 is 11.61. So, as
the current ratio of the firm in comparison to the industry average is very low, it implies very
poor liquidity of the firm.

Quick ratio measures liquidity by excluding inventories,which is the least liquid of current
assets. It gives ability to the firm to pay its liabilities without relying on the sale and recovery of
its inventories. We can see that quick ratio has declined from 5.13% in 2008 to 1.67% in 2009.

The quick ratio for the industry is 113.06 in 2009. So, as the quick ratio is far below the industry
average, it implies that the liquidity position of the firm is very poor.

Accounts receivable turnover ratio indicates how many times on an average the receivables are
generated and collected during the year. A ratio of 9.88 indicates that on an average, receivables
are revolved 10times a year. The ratio has increased from 4.72% in 2008 to 9.88 in 2009. This
signifies that the firm’s liquidity has increased.

Average collection period is the number of days required to collect the accounts receivable.
The collection period decreased from 76 days in 2008 to 36 days in 2009, which indicates
operational efficiency and proper utilization of resources.

Inventory turnover ratio measures how fast the inventory is moving through the firm and
generating sales. Higher the ratio, greater the efficiency of inventory management. It also helps
to measure whether the sufficient goods are available for sale in comparison to the actual sales
order. The firm’s inventory turnover ratio increased from 160 in 2008 to 344 in 2009. This
means that the firm has improved in its operational processes.
Capital structure ratios:

Year 2009-10 2008-09

Debt-equity ratio 0 0

Debt-assets ratio 0 0

 The capital structure ratios which includes debt-equity and debt-assets ratio is zero for the
firm, in both the years 2008 and 2009 since debt is zero. So, it is a debt free firm.

Coverage Ratios:

Year 2009-10 2008-09

Interest Coverage ratio 19.09 22.45

Interest coverage ratio tells how many times the firm can meet the interest payments associated
with debt. It measures a firm’s ability to handle financial burden.

Higher the ratio, higher is the firm’s ability to pay its interest expense. The ratio has increased
from22.45 in 2008-09 to 19.09 in 2009-10. The industry average is 5.45 in 2009. Since, the
firm’s ratio is much higher than the industry average, that means the firm is performing well.

Dividend Ratios:

Year 2009-10 2008-09

Dividend pay-out ratio 0 0

Dividend yield 0 0

The dividend ratios which include the dividend-payout ratio and the dividend yield is zero for the
firm in both the years 2008 and 2009, as the dividend declared is zero.

Conclusion:
Thus we can see that for Gammon Infra both the Gross and Net profit margins have come down
and the average accounts receivable collection time have increased. This combined signifies two
aspects. Either the company’s position in terms of productivity and effectiveness in execution of
collection and maintenance of profitability have reduced or it signifies that the sector has become
intensely competitive and as result there is a steep decline in the profit margins and the
customers have very high negotiating power in terms of payment time. Any conclusion in the
latter aspect can be further justified from the current and quick ratio figures which are also
consistently decreasing and way below the sector benchmark. This helps us to believe that
Gammon infra’s liquidity position in terms of the other players in the sector is also vulnerable.
The inventory turnover and the accounts receivable turnover ratios have increased and decreased
respectively, both of which signify a positive business attitude. However the lack liquidity and
the factors signifying the lack of effectiveness in the collection in conjunction with the moderate
decrease in the interest coverage ratio gives a direction towards a inherent growing crisis, no
matter even if the industry average for the interest coverage says the opposite.