Financial ratios


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Financial ratios

  1. 1. Analyzing and Comparing FinancialRatios of automobile companies (Forcemotors, Swaraj-Mazda, Eicher-Volvo)A PROJECT REPORT BY:- Rahul Bhardwaj(12dcp-086), RahulJain(12dcp-087), Rahul Jain(12dcp-088), Raj Kumar Singh(12dcp-089):-FINANCIAL ANALYSIS OF INDIAN COMMERCIAL VEHICLEINDUSTRIES
  2. 2. Financial Analysis of Indian Commercial Vehicle Industries1An Overview of the Indian Automobile IndustryThe Indian automobile industry is a globally established industry . Some of the leadingnames echoing in the Indian automobile industry include Maruti Suzuki, Tata Motors,Mahindra and Mahindra, Hyundai Motors, Hero Honda and Hindustan Motors, Force,Swaraj Mazda, Eicher motors etc. The automobile sector of India is the seventh largest inthe world. Tata Motors is the leader in the Indian commercial vehicles market while itholds more than 60% share. Tata Motors also enjoys the credit of being the world’s fifthlargest manufacturer of medium and heavy commercial vehiclesFORCE MOTORS- AN INTRODUCTION (NSE: )Force Motors started production of the HANSEAT 3-Wheelers in collaborationwith Vidal & Sohn Tempo Werke Germany and went on to establish a strongpresence in the Light commercial vehicle (LCV) field with the MATADOR, theForce Motors has introduced new Light Commercial Vehicles, a new family ofUtility Vehicles, new state-of-the-art Tractors, and a new range of heavycommercial vehicles.SWARAJ MAZDA - AN INTRODUCTION (NSE:SWARAJMAZD; BSE: 505192)Swaraj Mazda is a joint venture of Swaraj Enterprise and Mazda . Swarajsymbolizes Indian technology and engineering, and Mazda has R&D at a globalscale. The company produces vehicles for goods and passenger applications, suchas Bus, Ambulance, Water Tanks, Trucks, etc. It is now known as SML ISUZULtd. since 1stOctober 2010.EICHER-VOLVO - AN INTRODUCTIONEicher Motors Limited, incorporated in 1982, is the flagship company of the Eicher Group in Indiaand a leading player in the Indian automobile industry. Its 50-50 joint venture with the Volvogroup, VE Commercial Vehicles Limited. . Eicher Motors manufactures and markets the iconicRoyal Enfield motorcycles. Eicher Motors recorded revenue of over USD 1 billion in 2010. Thecompany is known to make tractors, haullages and tippers.SECTION V: MARKET PERFORMANCE
  3. 3. Financial Analysis of Indian Commercial Vehicle Industries2The market performance of all the three companies vis-à-vis the S&P CNX NIFTY Index is illustrated inthe graph below:NiftyEicherSwarajForceSECTION IV: COMPUTATION OF FINANCIAL RATIOSPROFITABILITY ANALYSISa) Profit Margin: Definition:A ratio of profitability is calculated as net income divided by revenues, or net profits divided bysales. Significance:
  4. 4. Financial Analysis of Indian Commercial Vehicle Industries3Profit margin is very useful when comparing companies in similar industries. A higher profitmargin indicates a more profitable company that has better control over its costs compared to itscompetitors. Formula used:Here, we calculate after-tax profit margin, given by: Margin = PAT/Sales. Factors:Higher the PAT more is the margin. Lower the sales, higher the profit margin. Graph: Observations:Profit Margin for SML is near about same for both the years, and its comparatively on lower side.But for Force motor it have shoot up like anything compared to previous year to addition ofexceptional items. Eicher motor have gone okay. Conclusion:Profit Margin should not be the only factor considered when evaluating a company’sperformance. Other criteria must also be taken into account, including Company’s closing stocketc. by an investor, before making a decision.Swaraj Mazda Force Motors Eicher Volvo2010-11 4.02 3.9 6.982011-12 4.04 41.14 8.76051015202530354045PAT/SALES
  5. 5. Financial Analysis of Indian Commercial Vehicle Industries4b) Return on Capital Employed (ROCE): Definition:It is a ratio that indicates the efficiency and profitability of a companys capital investments. Significance:ROCE should always be higher than the rate at which the company borrows; otherwise anyincrease in borrowing will reduce shareholders earnings. It indicates efficiency and profitabilityof company’s capital investment. Formula used:It is calculated as follows:ROCE = (PAT + Interest – Tax Savings on Interest)/ (Owned Capital + Borrowed Capital) Graph: Observations:Highest ROCE for Eicher. Good and steady ROCE for Swaraj. Lowest for Force motor. Conclusion:A high ROCE for Eicher indicates that the company keeps high profitability and has very goodefficiency.c) Return on Equity (ROE): Definition:The amount of net income returned as a percentage of shareholders equity. Significance:Swaraj Mazda Force Motors Eicher Volvo2010-11 20.14 16.24 382011-12 14.47 4.02 4501020304050ROCE
  6. 6. Financial Analysis of Indian Commercial Vehicle Industries5Return on equity measures a corporations profitability by revealing how much profit a companygenerates with the money shareholders have invested. It is one of the important factors to beconsidered before investment. Formula used:It is calculated as: ROE = Profit Available to Equity Shareholders/Shareholders’ Fund Graph: Observations:Constant ROE for Swaraj. Highest ROE for Force motor.Eicher have bettered itself marginaly.• Conclusion:Force motor is becoming very good option for investments.d) Return on Total Assets (ROTA): Definition:It is a ratio that measures a companys net earnings against its total net assets. Significance:The ratio is considered an indicator of how effectively a company is using its assets to generateearnings before contractual obligations must be paid. Formula Used:ROTA = PAT/ (Total Assets - Capital work in progress - Intangible assets) Factors:Swaraj Mazda Force Motors Eicher Volvo2010-11 17.18 17.54 24.92011-12 17.36 72.1 33.3101020304050607080ROE
  7. 7. Financial Analysis of Indian Commercial Vehicle Industries61. Higher the pat, higher the ROTA.2. More the assets, lesser the ROTA. Graph: Observations:1.Force- lowest rota performance out of all.2. Eicher– better for rota.3. Ultratech – last two yrs were not so good Conclusion:Greater the earnings, more effective the company is. ROTA is an important factor for investingin a company.e) Return on Operating Assets (ROOA): Definition:An extension of ROTA, wherein the purpose is to identify the return generated only via thecompany’s core competency – its operations. Significance:We are considering assets that are used only in creating revenue. Numerically, the lesser the valueof assets, better the ROA. The company should maximize the use of operating assets to generatemore revenue. Assets that are not useful in generating revenue should be minimized. ROA is nota very important parameter in helping an investor to buy a stock of the company as it excludesother investments which could be non-productive.Swaraj Mazda Force Motors Eicher Volvo2010-11 11.47 7.82 15.472011-12 6.82 3.04 25.44051015202530ROTA
  8. 8. Financial Analysis of Indian Commercial Vehicle Industries7 Formula used: ROA = (PAT – Other Income + Exceptional Expenses) / (Total Assets –Assets under Development – Current Investments – Non Current Investments - IntangibleAsset) Graph: Observation and conclusion:Ranking based on ROA-1. Eicher2. Swaraj3. Force motorSForce motor needs to utilized it resources more efficiently.LEVERAGE RATIOSAny ratio used to calculate the financial leverage of a company to get an idea of the companysmethods of financing or to measure its ability to meet financial obligations are termed asLeverage ratios. There are several different ratios, but the main factors looked at include debt,equity, assets and interest expenses.a) Debt-Equity Ratio: Definition:It is a measure of a companys financial leverage calculated by dividing its total liabilities bystockholders equity. Significance:Swaraj Mazda Force Motors Eicher Volvo2010-11 6.56 5.36 122011-12 5.22 -9.64 22-15-10-50510152025AxisTitleROA
  9. 9. Financial Analysis of Indian Commercial Vehicle Industries8It indicates what proportion of equity and debt the company is using to finance its assets. An idealDebt/Equity ratio hovers around the 2.0 mark. A High ratio means a company has taken lot ofloans and interest payable is hence, more. A low Debt to Equity ratio is preferred but that can alsomean that the Company does not take any risks. This may lead to high earnings but we have tosee whether the earning is greater than interest expenses. Debt to Equity Ratios also depend onthe Industry. It is also called as the Risk Taking Ability of a Company. It is one of the mostimportant ratios to be taken into consideration before investing. Formula used:D/E = Long term Borrowings / Shareholders’ Fund Graph:Observations and conclusion:Both Swaraj and Eicher are very risk savvy companies it seem from the above data. Less Debtequity ratio means less risk but also less profit. The case different with Force motor though.LIQUIDITY RATIOSThese are a class of financial metrics that is used to determine a companys ability to pay off itsshort-terms debts & obligations. Generally, the higher the value of the ratio, the larger the marginof safety that the company possesses to cover short-term debts.a) Current Ratio Definition:Swaraj Mazda Force Motors Eicher Volvo2010-11 0 2.13 02011-12 0 0.46 000.511.522.5Debt/Equity Ratio
  10. 10. Financial Analysis of Indian Commercial Vehicle Industries9It is a liquidity ratio that measures a companys ability to pay short-term obligations. Significance:Typically, a good Current ratio is preferred but if the Current Ratio is down it may because ofreasons such as scope expansion or company growth. Formula used:Current Ratio = Current Assets / Current Liabilities Graph: Observation and conclusion:Current Ratio assure the lender how safe and recoverable is their investment in near future.Here Force motor is in lead and again it have improve a lot from last year.b) Quick Ratio/Liquidity Ratio: Definition:It is an indicator of a companys short-term liquidity. Significance:Swaraj Mazda Force Motors Eicher Volvo2010-11 1.39 0.97 1.22011-12 1.9 2.6 0.7600.511.522.53Current Ratio
  11. 11. Financial Analysis of Indian Commercial Vehicle Industries10The quick ratio measures a companys ability to meet its short-term obligations with its mostliquid assets. The higher the quick ratio, the better the position of the company. Formula used:Quick/Liquidity Ratio = (Current Assets – Inventories)/ (Current Liabilities – WorkingCapital)Graph: Observation and conclusion:Higher the margin more the safety. When it comes to converting assets into liquidity in nearfuture Force motor seems more favorable compared to both others.EFFICIENCY RATIOSRatios that are typically used to analyze how well a company uses its assets and liabilitiesinternally are known as efficiency ratios. Efficiency Ratios can calculate the turnover ofreceivables, the repayment of liabilities, the quantity and usage of equity and the general use ofinventory and machinery.a) Inventory Turnover Ratio: Definition:Swaraj Mazda Force Motors Eicher Volvo2010-11 1.39 0.97 0.852011-12 1.9 2.6 0.4400.511.522.53Quick Ratio
  12. 12. Financial Analysis of Indian Commercial Vehicle Industries11A ratio showing how many times a companys inventory is sold and replaced over a period. It canbe done for raw material and for finished goods. Formula used:Raw material IT ratio = Raw material consumed / Average Raw Material InventoryFinished Goods IT ratio = Cost of Production / Average Inventory Significance:Higher Inventory Turnover Days is not good for the company. But we should also check theamount of stock a company buys and sells at a time. Company having low stock will obviouslysell the stock faster than a company having greater stock. Graph:Swaraj Mazda Force Motors Eicher Volvo2010-11 7.53 4.2 30.42011-12 6.82 4.43 31.4405101520253035Raw Material Turnover Ratio
  13. 13. Financial Analysis of Indian Commercial Vehicle Industries12 Observations and conclusion:Inventory Turnover ratio is a very important tool to predict how effetely the business is beingrum. ITR needs to kept balanced. If it’s value is high shelf cost will increase, if it is low there willbe chances of shortage. To avoid such conditions it need to be in balance mode. Above Eicherseems to be okay.b) Asset Turnover Ratio: Definition:It is a financial ratio of net sales to total assets. Significance:The asset turnover ratio measures a companys ability to generate net sales from asset investments- specifically property, plant and equipment (P&E) - net of depreciation. A higher asset turnoverratio shows that the company has been more effective in using the investment in assets togenerate revenues. Formula used:AT Ratio = Sales / (Total Assets - Assets under development – Intangible Assets) Graph:Swaraj Mazda Force Motors Eicher Volvo2010-11 9.95 5.95 35.262011-12 9.16 5.9 30.370510152025303540Finished Good Inventory TurnoverRatio
  14. 14. Financial Analysis of Indian Commercial Vehicle Industries13 Observations and conclusion:Here all the three companies are doing fairly ok. Eicher is leading though.c) Debtors’ Turnover Ratio: Definition:An accounting measure used to quantify a firms effectiveness in extending credit as well ascollecting debts. Significance:The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Formula used:Debtors’ Turnover = Net Credit Sales/Average Trade Receivables Graph:Swaraj Mazda Force Motors Eicher Volvo2010-11 1.69 1.44 2.142011-12 1.69 1.2 2.4200.511.522.53AxisTitleAsset Turnover Ratio
  15. 15. Financial Analysis of Indian Commercial Vehicle Industries14 Observation:Best Debtor Turnover Days is for Eicher i.e. its rotating cash very efficiently. And it is lowest forSwaraj mazda. Both Force motor and Swaraj need to improve their debtor’s ratios.DIVIDEND PAYOUTa) Dividend Payout Ratio: Definition:The percentage of earnings paid to shareholders in dividends. Formula used:Dividend payout ratio = Proposed Dividend / Net Income Significance:Higher Ratio companies should be preferred but it is not an important factor for buying of sharesof the company as it does not tell us where the company is going. If the company gives a hugedividend then obviously the investor gains.Swaraj Mazda Force Motors Eicher Volvo2010-11 1 9.56 42.12011-12 1.02 9.7 62010203040506070AxisTitleDebtors Turnover Ratio
  16. 16. Financial Analysis of Indian Commercial Vehicle Industries15 Graph: Observations and conclusion:Swaraj is very generous in giving Dividend compared to other two companies. But All of thecompanies have decreased their dividends from last year.b) Dividend Yield: Definition:A financial ratio that shows how much a company pays out in dividends each year relative to itsshare price. In the absence of any capital gains, the dividend yield is the return on investment fora stock. Formula used:Dividend Yield = Proposed Dividend / Market Capitalization of the Company. Significance:Higher the dividend yield, it is good for the company. Improves investor sentiments.It indicates ”bang for your buck.”Swaraj Mazda Force Motors Eicher Volvo2010-11 0.37 0.11 0.122011-12 0.32 0.02 0.1100. Payout Ratio
  17. 17. Financial Analysis of Indian Commercial Vehicle Industries16 Graph: Observations and conclusion:When it comes to giving dividend Swaraj Mazda is leading ahead of both Eicher and Forcemotor. Though investors do not earn much from the dividend a company pays, still it’s a factor tobe consider while investing.ECONOMIC VALUE ADDED Definition:A measure of a companys financial performance based on the residual wealth calculated bydeducting cost of capital from its operating profit (adjusted for taxes on a cash basis). It is alsoreferred to as "economic profit". Significance:Measures how much value is added to Company’s finances every year. It captures true EconomicProfit. Formula used:EVA = Net Operating Profit after Taxes (NOPAT) - (Capital * Cost of Capital) Graph:Swaraj Mazda Force Motors Eicher Volvo2010-11 2.43 1.16 0.0082011-12 2.44 2.34 0.00700.511.522.53AxisTitleDividend Yield
  18. 18. Financial Analysis of Indian Commercial Vehicle Industries17 Observations and conclusion:Eicher has got the highest value addition over the years. It have grown up from the previousconsiderably. Swaraj’s EVA have decreased substantially from the previous and force motor havedone the worst by going in negatives.SECTION VI: CONCLUSIONSeeing the data we have collected and processed it seems that Eicher motor is on very right track and it ispose to grow. So one can definitely invest into Eicher motor. Other two are not doing so well in theseterms. Force motor is improving but it’s still a long way to go.Swaraj mazda is relatively new to the sharemarket. So its need to take its own time to show results.Disclaimer: Our analysis & interpretation is limited to the ratios we have computed, and our ownintuition.SECTION VI: ROAD AHEAD FOR INDIAN COMMERCIAL VEHICLEINDUSTRY:-The Indian commercial vehicle market will double to 1.6 million units in next fiveyears thanks to the increase in infrastructure spend, rapid urbanisation and entry of major multinationalplayers in the country said Ernst & Young in its latest report on Mega trends shaping the Indiancommercial vehicle market.The country is likely to see the emergence of more than six cities (each with a total population ofover 10 million) and 63 cities with a projected population of more than1 million by 2025.Swaraj Mazda Force Motors Eicher Volvo2010-11 1433.3 3600 2327.22011-12 381.118 -1200 4156.5-2000-1000010002000300040005000AxisTitleEconomic Value Added
  19. 19. Financial Analysis of Indian Commercial Vehicle Industries18E&Y says the Indian market which has seen the entry of international majors like Daimler,Volvo, Beiqi Foton will see a CAGR growth of 15% till 2016-17.The overall commercial vehicle sales in India grew by 18.20% in 2011-12 at 8,09,532 untis Vs6,84,905 units in 2010-11. The sales of medium & heavy trucks posted a growth of 8.79% in2011-12 at 2,99,309 vs 2,75,121 units in 2010-11 & light commercial vehicles grew faster atalmost 30% with 4,11,460 units sold in the last fiscal.According to the report, the stakeholders across the Indian CV industry are likely to be impactedby rapidly changing events - right from the operating environment, fleet operator/ managerpreferences, competition, distribution channel and also supply chain.Urging the need of road infrastructure development to facilitate OEMs, Rakesh Batra, partner &national leader, automotive practice, Ernst & Young, said, "By 2012, one expects to have six-laning of 6,500 km and a development of 1000 km of expressways. Of the 66,590 km of NationalHighway, only 38% are single-lane, leading to logistics inefficiencies as trucks can cover only250 km per day vs. 600 km globally. Moreover, the development of road infrastructure enablesOEMs to introduce higher power vehicles. By 2012, the modernisation of roads under the NHDP( National Highway Development Program) is expected to involve a total investment of US$47.2billion."
  20. 20. Financial Analysis of Indian Commercial Vehicle Industries19THANK YOU