The document is an annual report of Vodafone Idea Limited that includes information such as:
- An acknowledgement section thanking various individuals for their support.
- Overviews of the company's vision, mission, and chairman.
- Financial statements like the balance sheet and statement of profit and loss.
- Details of strategic initiatives to improve revenue and financial position.
- Explanations of the company's liquidity ratio and current ratio calculation.
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Vodafone Idea Limited annual report analysis
1. Submitted to:-
Ms. PRIYA DWIVEDI
(Asst. Prof.)
Submitted by:
AJAY VERMA
B.Com(SF) Sem- III Section- A
Roll no. 190012015619
2. ACKNOWLEDGEMENT
I would like to express my special thanks of
gratitude to a great many people who helped
and supported me during the writing of this
project. My deepest thanks to our Lecturer
Ms. PRIYA DWIVEDI(Asstt. Prof.) for their
able guidance, support and correcting
various documents of mine with attention
and care.
My deep sense of gratitude to my friends for
their support and guidance. I would also
thanks my institution and my faculty
members without whom this project would
have been a distant reality.
I also owe my heartful thanks to my family
and my well wishers for their encouragement
and cooperation AJAY VERMA
3. Overview
Vodafone Idea Limited is an Aditya Birla Group and Vodafone Group partnership. The Company provides pan India Voice and Data
services across 2G, 3G and 4G platform. With the large spectrum portfolio to support the growing demand for data and voice, the
company is committed to deliver delightful customer experiences and contribute towards creating a truly ‘Digital India’ by enabling
millions of citizens to connect and build a better tomorrow. The Company is developing infrastructure to introduce newer and
smarter technologies, making both retail and enterprise customers future ready with innovative offerings, conveniently accessible
through an ecosystem of digital channels as well as extensive on-ground presence. The Company is listed on National Stock
Exchange (NSE) and BSE in India.
Our Vision
Create world class digital experiences to connect and inspire every Indian to build a better tomorrow
4. Our Mission
Customers Team Shareholders Community
Be the most loved brand
by continuously raising
the bar in delivering
simple, delightful
experience and
meaningful innovations,
through new age
technologies
Be an inspirational, agile and
exciting organization that
challenges the status quo, and
champions a diverse team
that has a winning attitude
and thrives on delivering
customer excellence
Be the most valued company
through smart leadership
committed to delivering
sustainable growth, while
adhering to the highest
standards of governance and
compliance
Be the most respected
company by leveraging
technology and
purposeful innovation to
catalyze social prosperity,
digital literacy and
inclusivity
5. From the desk of Chairman:
As the world emerges from the current crisis, the next few years are likely to be marked by lack of buoyancy in growth,
subdued commodity prices and inflation, a cautious trend in project investments, heightened risks of de-globalisation and
political uncertainty; and increased dependence of financial systems on ultra-loose monetary policy conditions.
Through the course of FY20, the operating environment continued to remain challenging due to unsustainable pricing and
hyper competition. The verdict on the long pending industry issue of Adjusted Gross Revenue (AGR) also added to the
financial woes of telecom operators.
The Company’s primary focus in FY20 has been rapid acceleration of integration, which is now in final stages of
completion. The Company has fully realized the guided annualised merger related opex synergies of ` 84 Bn in the last
quarter of the financial year ending March 31, 2020.
Mr. KUMAR MANGALAM BIRLA
9. Various Strategic Initiatives to improve Company’s Revenue and position in the market or
Financial Goals:
1. Rapid Integration –The Company has made significant progress in integration since merger and is now in final stages of
completion. The Company has already consolidated spectrum and radio access network in 18 out of the 22 service areas and
92% of total districts have been consolidated. The Company has fully realized the guided opex synergy of ` 84 Bn as of March
31, 2020. While the integration progressed well in Financial Year 2019-20, due to the nationwide COVID-19 induced lockdown,
remaining consolidation is expected to take longer than initially expected.
2. Focus on network investments –The Company continues to focus on expanding 4G coverage and data capacity, especially in
its major markets. With the focused approach in its profitable areas, the Company has optimized its capital expenditure, while it
continues to offer a superior customer experience. The integration along with other network initiatives such as spectrum
consolidation and refarming, deployment of TDD sites, small cells and massive MIMO have delivered a significant capacity
uplift. Our overall capacity has more than doubled since merger. With aggressive albeit focused rollout, the Company’s 4G
coverage is nearly a billion Indians.
3. Market initiatives to drive ARPU – After several years of pricing pressure due to intense competition, the Company as well as
all the operators increased the tariffs across all price plans. While the prices are still unsustainably low, this initiative provides
much needed ARPU improvement. The Company also continues to focus on driving UL/4G penetration to increase ARPU. The
Company has also started to consolidate its postpaid services under single brand of “Vodafone RED”. Your Company had also
launched “REDX” postpaid plan for postpaid customers which has excellent industry first features to attract high ARPU
customers.
10. 4. Focusing on Fast-Growing Revenue Streams and partnerships – The Company is well positioned in enterprise offerings
across the industry verticals. The strong relationship with customers over several years and global know how of Vodafone
Group provide strong platform for future growth in this segment. Vodafone Idea Business Services (VIBS) continues to
maintain leadership in IoT offerings which is an emerging segment and has potential to grow multi fold in the near future amid
government’s push towards ‘Digital India’ and ‘Smart Cities’. On content, your Company is following a partnership approach
tying with several regional and global content partners. Further, the tie-ups with e-commerce platforms, handset manufacturers,
financial institutions, NBFCs among many others will drive value not only for the customers, but also for the Company and its
partners.
5. Strengthening our Balance Sheet – The Company successfully concluded the Rights Issue of ` 250 Bn in Financial Year
2019-20, one of the largest in India, which was oversubscribed reflecting strong support from the investors. Further, the
Company has the option to monetize its 11.15% stake in Indus, on the completion of Indus-Infratel merger.
The Company has thus been making significant progress on various stratetgic initiatives and continues to strive towards
transforming from a pure play mobile operator to a truly integrated digital service provider.
Dividend
As the Company has incurred net loss during the Financial Year 2019-20, the Directors have not recommended any dividend for the
year.
Transfer to Reserves
During the financial year under review, the Board has not proposed to transfer any amount to Reserves.
11. Changes in Share Capital / Rights Issue
During the year under review, the Company allotted 19,999,830,911 Equity Shares of face value of ` 10/- each to the
eligible existing equity shareholders under Rights Issue at an issue price of ` 12.50 (including a premium of ` 2.50) per
equity share, thereby raising funds aggregating to ` 249,998 Mn. Consequent to the above, the issued, subscribed and paid-
up equity share capital of the Company as on March 31, 2020 stood at ` 287,354 Mn comprising of 28,735,389,240 Equity
Shares of ` 10/- each.
Finance
On a standalone basis, the Company had cash and cash equivalents of ` 3,223 Mn, Fixed Deposits with banks having
maturity of 3 to 12 months of ` 16,500 Mn and short-term investments of ` 4,548 Mn as on March 31, 2020. The
Company’s net debt as on March 31, 2020 decreased by ` 58,644 Mn to ` 1,126,904 Mn as compared to ` 1,185,548 Mn last
year.
12. Ratio Analysis
Absolute figures expressed in monetary terms in financial statements by themselves are meaningless. These
figures often do not convey much meaning unless expressed in relation to other figures.
Meaning of Ratio: Relationship between two figures, expressed in arithmetical terms is called a ‘ratio’.
In the words of R.N. Anthony: “A Ratio is simply one number expressed in terms of another. It is found by dividing one number
into the other. ”
Ratio may be expressed in the following four ways:
(1) ‘Proportion’ or Pure Ratio or Simple Ratio: It is expressed by the simple division of one number by another. For example,
if the current assets of a business are ₹200000 and its current liabilities are ₹100000, the ratio of current ratio of ‘Current assets
to current liabilities’ will be 2:1.
(2) ‘Rate’ or ‘So many times’: In this type, it is calculated how many times a figure is, in comparison to another figure. For
example, if a firm’s credit sales during the year are ₹200000 and its trade receivables at the end of the year are ₹ 40000, its Trade
Receivables Turnover Ratio =
200000
40000
= 5 𝑡𝑖𝑚𝑒𝑠. It shows that the credit sales are 5 times in comparison to trade receivables.
(3 ) Percentage: In this type, the relation between two figures is expressed in hundredth. For example, if a firm’s capital is
₹1000000 and its profit is ₹200000, the ratio of profit to capital, in terms of percentage, is 𝑥 =
200000
1000000
⨯ 100 =20%.
(4) Fraction: Say, net profit is one-fifth of the capital. While calculating a ratio, it should be understood that it is desirable to
divide the “more favourable figure” by the “less favourable figure”.
13. Objectives of Ratio Analysis:
(i) To locate the weak spots of business which need more attention.
(ii) To provide deeper analysis of the liquidity, solvency, activity and profitability of the business.
(iii) To provide information for making cross-sectional analysis, i.e., for making comparison with that of some
selected firms in the same industry.
(iv) To provide information for making time-series analysis, i.e., for making comparison of firm’s present ratios with
its past ratios.
(v) To provide information useful for making estimates and preparing the plans for the future.
Advantages or uses of Accounting Ratios:
Ratio analysis is the most important tool of analysing these financial statement. It helps reader in giving tongue to the mute
heaps of the figures given in financial statement. The figures then speak of liquidity, solvency, profitability etc. of the
business enterprise. Some important advantages derived by a firm by the use of accounting ratios are:
(1) Helpful in Analysis of Financial Statements
Ratio Analysis helps the bankers, trade payables, investors, shareholders etc. in acquiring enough knowledge about the
profitability and financial health of the business.
14. (2) Simplification of Accounting Data
Accounting ratio simplifies and summarizes a long array of accounting data and makes them understandable. It discloses the
relationship between two such figures which have a cause and effect relationship with each other.
(3) Helpful in Comparative Study
With the help of ratio analysis comparison of the profitability and financial soundness can be made between one firm and
another in the same industry.
(4) Helpful in locating the Weak Spots of the Business
Current year’s ratios are compared with those of the previous year and if some weak spots are thus located ,remedial measures
are taken to correct them.
(5) Helpful in Forecasting
Accounting ratios are very helpful in forecasting and preparing the plans for the future.
(6) Estimate about the trend of the business
If accounting ratios are prepared for a number of years, they will reveal trends of cost, revenue from operations, profits and other
important facts.
(7) Fixation of ideal Standards
Ratios helps us in establishing ideal standards of the different items of the business. By comparing the actual ratios calculated at
the end of the year with the ideal ratios, the efficiency of business can be easily measured.
(8) Effective Control
Ratio analysis enables management to assess the changes that have taken place over a period of time in the financial activities of
the business.
(9) Study of Financial soundness
Ratio analysis discloses position of business with the liquidity point of view, solvency point of view, profitability point of view,
etc. With the help of such study we can draw conclusion regarding the financial health of the business enterprise.
15. Liquidity Ratio
“Liquidity” refers to the ability of the firm to meet its current liabilities. The liquidity ratios, therefore, are also called ‘Short Term
Solvency Ratios’. These ratios are used to assess the short-term financial position of the concern. They indicate the firm’s ability
to meet its current obligations out of current resources.
In the words of Saloman J. Flink, “Liquidity I the ability of the firm to meet its current obligations as they fall due.”
In the words of Herbert B. Mayo, “Liquidity is the ease with assets may be converted into cash without loss.”
Short term payables of the firm are primarily interested in the liquidity ratios of the firm as they want to know how promptly or
readily the firm can meet its current liabilities . If the firm want to take a short-term loan from bank, the bankers also study the
liquidity ratio s of the firm in order to assess the margin between current assets and current liabilities.
Liquidity ratios include two ratios:
(i) Current Ratio or Working Capital Ratio
(ii) Quick Ratio or Acid test Ratio or Liquid Ratio
16. (i)Current Ratio or Working Capital Ratio:
This ratio explains the relationship between current assets and current liabilities of a business. The formula for calculating the
ratio is:
Current Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
‘Current Ratio’ includes those assets which can be converted into cash within a year’s time and ‘Current liabilities’ include
those liabilities which are repayable in a year’s time.
Current Assets = Current Investments+Inventories+Trade Receivables(less provision)+Cash&Cash Equivalent+Short-term
loans and advances+other Current Assests(prepaid expenses+accrued income+advance tax)
Current Liabilities = Short-term borrowings(including bank overdraft)+Trade payables+Other Current Liabilities(Unpaid
Dividends+Interest Accrued on borrowings+Income received in advance+Outstanding exp.)+Short-term Provisions(Provisions
for tax+Proposed Dividend)
Significance: This ratio is used to assess the firm’s ability to meet its short-term liabilities on time. According to accounting
principles, a current ratio of 2:1 is supposed to be an ideal ratio. It means that current assets of a business should, at least, be
twice of its current liabilities. The higher the ratio, the better it is, because the firm will be able to pay its current liabilities
more easily. The reason of assuming 2:1 as the ideal ratio is that the current assets include such assets as inventory, trade
receivables etc., from which full amount cannot be realised in case of need.
If current ratio is less than 2:1, it indicates lack of liquidity and shortage of working capital. But a much higher ratio, even
though it is beneficial to the short-term payables, is not necessarily good for the company.
17. Calculation of Current Ratio Of Vodafone Idea:
Current ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Current Assets = Current Investment + trade receivables + Cash and cash equivalent + Bank balance other
than cash and cash equivalent + Loans to Subsidiaries, Joint ventures and others + Other
current financial assets + Other current assets
= 4548 + 29191 + 3223 + 22115 + 8421 + 69628 + 81076
= ₹ 218202 m.
Current liabilities = Short-term borrowing + Trade payables(total outstanding dues of micro and small
enterprises + total outstanding dues of creditors other than micro and small enterprises )
+ Other current financial liabilities + Other current liabilities + Short-term provisions
= 1542 + 102 + 114702 + 373696 + 460464 + 463
= ₹ 950969 m.
Current ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
218202
950969
= 0.2295:1
(Above mentioned figures are in ₹ million)
18. Comments: An ideal ratio should be 2:1, which denotes that the current assets of a business should at
least be twice of its current liabilities. Current ratio of this company is 0.2295:1. therefore, it can be said that
the short-term financial position of the company is not good. This company is not in a position to pay its
current liabilities in time.
(ii)QuickRatioorAcidTestRatioorLiquid
Quick ratio indicates whether the firm is in a position to pay its its current liabilities within a month or immediately. As
such, the quick ratio is calculated by dividing liquid assets (Quick current assets) by current liabilities:
Quick Ratio or Acid Test Ratio = 𝑥 =
𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
‘Liquid Assets’ means those assets which will yield cash very shortly. All current assets except inventory and prepaid
expense are included in liquid assets. Inventory is excluded from liquid assets because it has to be sold before it can be
converted into cash. Prepaid expenses too are excluded from the list if liquid assets because they are not expected to be
converted into cash. Liquid assets thus include cash, trade receivables and short-term securities.
19. Significance:An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better. The idea is that for every rupee of
current liabilities, there should be at least one rupee of liquid assets. This ratio is better to test of short-term financial position of the
company than the current ratio, as it considers only those assets which can be easily and readily converted into cash. Inventory is not
included in liquid assets as it may take a lot of time before it is converted into cash.
Quick ratio thus is a more rigorous test of liquidity than the current ratio and, when used together with current ratio, it gives a better
picture of the short-term financial position of the firm.
CalculationofQuickratioorAcidTestRatioofVodafone
Quick Ratio =
𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Quick Assets = Current Assets – Inventories – Prepaid expenses – Advance taxes
= 218202 – NA – NA – NA
= ₹ 218202
Current liabilities = Short-term borrowing + Trade payables(total outstanding dues of micro and small
enterprises + total outstanding dues of creditors other than micro and small enterprises )
+ Other current financial liabilities + Other current liabilities + Short-term provisions
= 1542 + 102 + 114702 + 373696 + 460464 + 463
= ₹ 950969 m.
Quick Ratio =
𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
218202
950969
= 0.2295:1
20. Solvency Ratio
These ratios are calculated to assess the ability of the firm to meet its long-term liabilities as and when they become due. These ratio
reveals as to how much amount in a business has been invested by proprietors and how much amount has been raised from outside
sources. Solvency ratios disclose the firm’s ability to meet the interest costs regularly and long-term indebtedness at maturity.
Some important ratios are:
(i) Debt Equity Ratio
(ii) Total Assets to Debt Ratio
(iii) Proprietary Ratio
(iv) Interest Coverage Ratio
(i) Debt Equity Ratio:
This ratio expresses the relationship between Long term debts and Shareholder’s funds. It indicates the proportion of funds which
are acquired by long-term borrowings in comparison to shareholder’s funds. This ratio is calculated to ascertain the soundness of the
long-term financial policies of the firm.
Debt Equity Ratio =
𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
or
𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡𝑠
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠 𝑓𝑢𝑛𝑑 𝑜𝑟 𝑛𝑒𝑡𝑤𝑜𝑟𝑡ℎ
21. Long Term Debt: These include ‘long term borrowings’ and ‘Long term provisions’ which mature after one year. For example,
Debentures, Mortgage loan, Bank loan, Loan from financial institutions and public deposits etc.
Shareholder’s funds Include Share capital and Reserves & Surplus.
Share Capital Include Equity Share Capital and Preference Share Capital
Reserves & Capital Include Capital Reserves, Securities premium, General Reserves and Balance in
in Statement in profit & loss.
Significance:This ratio is calculated to assess the ability of the firm to meet its long-term liabilities. Generally, debt-equity ratio
of 2:1 is considered safe. If the debt-equity ratio is more than that, it shows a rather risky financial position from the long-term point
of view, as it indicates that more and more funds invested in the business are provided by long-term lenders. A high debt-equity ratio
is a danger-signal for long term lenders.
The lower the ratio, the better it is for long term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio
provides sufficient protection to long term lenders.
22. Calculate Debt Equity Ratio from the following particulars:-
₹
Share Capital 250000
Reserves and Surplus 110000
Long term borrowings 120000
Long term provisions 50000
Current Liabilities 70000
Non Current Assets 380000
Current Assets 220000
What conclusions do you draw about company on the basis of this ratio?
Solution:
Debt-Equity Ratio =
𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
or
𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡𝑠
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠 𝑓𝑢𝑛𝑑𝑠
23. Long term debt = Long term borrowings + Long term provisions
= ₹ 120000 + ₹ 50000 = ₹ 170000
Calculation of Shareholder’s funds(Equity Side Approach:
Shareholder’s fund = Share capital + Reserves & Surplus
= ₹ 250000 + ₹ 110000 = ₹ 360000
Debt Equity Ratio =
170000
360000
= 0.47:1
Conclusion: This ratio indicates the extent of funds provided by long term lenders in comparison to the funds
provided by the owners, i.e., shareholders. The normally acceptable debt-equity ratio is 2:1. If this ratio is
higher than 2:1, it means that the long term borrowings are more than twice in comparison to funds provided by
owners and it will indicate risky financial position. In this question, long-term loans are only 0.47 in
comparison to shareholder’s funds. It shows that the long-term financial position of the company is sound.
24. (ii)Total Assets to Debt Ratio:
This ratio is a variation of the Debt –Equity Ratio and gives the same indication as the debt-equity ratio. In this ratio, total assets are
expressed in relation to long- term debts. It is calculated as under:
Total Assets to Debt Ratio =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐷𝑒𝑏𝑡
or
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
This ratio is usually expressed as a pure ratio, i.e., 1:1 or 2:1.
Total assets = Non-Current Assets(Tangible Assets + Intangible assets + Non- Current Investments +
Long Term Loans & Advances) + Current Assets
Debt = Long term Borrowings + Long term Provisions
Examples of debts are Debentures, Mortgage loan, Bank Loan, Loans from Financial Institutions and Public Deposits etc.
Significance: A higher proprietary ratio is generally treated as an indicator of sound financial position from long-term point of view,
it means that a large proportion of total assets is provided by equity and hence the firm is less dependent on external sources of
funds. On the contrary, a low proprietary ratio a danger-signal for long term lenders as it indicates a lower margin of safety available
to them. The lower the ratio, the less secured are the long term loans and they face the risk of losing their money.
25. (iii) Proprietary Ratio:
This ratio indicates the proportion of total assets funded by owners or shareholders. It is calculated as under:
Proprietary Ratio =
𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
or =
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠 𝐹𝑢𝑛𝑑𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Significance: A higher proprietary ratio is generally treated as an indicator of sound financial position from long-term point of
view, because it means that a large proportion of total assets is provided by equity and hence the firm is less dependent on
external sources of finance. On the contrary a low proprietary ratio is a danger-signal for long term lenders as it indicates a
lower margin of safety available to them. The lower the ratio, the less secured are the long term loans and they face the risk of
losing their money.
26. Calculate Total Assets to Debt Ratio and Proprietary Ratio from the following particulars:
₹
Equity Share Capital 300000
Preference Share Capital 100000
General Reserves 60000
Profit & Loss Balance 40000
12% Mortgage Loan 180000
Current Liabilities 120000
Non Current Assets 450000
Current Assets 350000
What conclusions do you draw from the above ratios?
Solution:
Total Assets to Debt Ratio =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐷𝑒𝑏𝑡
27. Total Assets = Non Current Assets + Current Assets
= ₹ 450000 + 350000 = ₹ 800000
Long term Debts = 12% Mortgage Loan
= ₹ 180000
Total Assets to Debt Ratio =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐷𝑒𝑏𝑡
=
800000
180000
= 4.44:1.
Conclusion: Total assets of this company are 4.44 times in comparison to long-term debts of the company. The higher ratio
indicates the use of lower debts in financing the assets which means higher security to lenders.
Proprietary Ratio =
𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
or
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠 𝐹𝑢𝑛𝑑𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
=
500000
800000
= 0.625 or 62.5%
Conclusion: Shareholder’s Funds of this company are 62.5% in comparison to total assets of the company. In other words,
62.5% of the total assets of the company are funded by equity which indicates that the long term financial position of the
company is very sound.
28. (iv) Interest Coverage Ratio:
This ratio is termed as ‘Debt Service Ratio’. This ratio is calculated by dividing the ‘profit before charging interest and income tax’
by ‘fixed interest charges.’
Interest Coverage Ratio =
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑐ℎ𝑎𝑟𝑔𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥
𝐹𝑖𝑥𝑒𝑑 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶ℎ𝑎𝑟𝑔𝑒𝑠
Profit before Interest and Income Tax is to be taken for the calculation of this ratio because this is the amount of profit out of which
interest and income tax is to be paid out. Fixed interest charges include interest on fixed(long term) loans or debentures.
Significance: This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges. A
long term lender is interested in finding out whether the business will earn sufficient profits to pay the interest charges regularly. The
ratio measures the margin of safety for long-term lenders. The higher the ratio, more secure the lender is in respect of payment of
interest regularly. If profit just equals interest , it is an unsafe position for the lender as well as for the company also, as nothing will
be left for shareholders.
An Interest Coverage Ratio of 6 to 7 times is considered appropriate. It also indicates the extent to which profits can decline without
in any way affecting the firm’s ability to meet its fixed interest obligations.
29. Calculate Interest Coverage Ratio from the following information:
₹
Profits after Interest and Tax 198000
Rate of Income Tax 40%
15% Debentures 200000
What conclusions do you draw from the above ratios?
Solution:
Interest Coverage Ratio =
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥
𝐹𝑖𝑥𝑒𝑑 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶ℎ𝑎𝑟𝑔𝑒𝑠
In the above question profit after interest and tax is given, whereas profit before interest and tax
is required to calculate this ratio.
If profit after tax is 60, the profit before tax must be =100
If profit after tax is 198000, the profit before tax must be
=
100
60
× 198000 = ₹ 330000
30. Interest paid on ₹ 200000 debentures during the year at the rate of 15% amounts to ₹ 30000. Therefore, profit
before payment of interest and tax = ₹ 330000 + ₹ 30000(Interest) = ₹ 360000.
Interest Coverage Ratio =
360000
30000
= 12 times.
Conclusions: Normally acceptable interest-coverage ratio is 6 or 7 times, whereas the actual ratio for this
company is 12. It means that the profits of this company are 12 times in comparison to fixed interest charges.
This indicates that the firm will be able to pay the interest on long-term loans regularly. This ratio also
indicates that the long-term solvency position of the company is quite satisfactory.