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Comparative analysis of financial converted
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EOMRAflATIVE ANALYNIN OF FINANEIAL NTATEMENT OF NAIL WITH
OTHEfl NTEEL EOMRANIEN IN INDIA
PROJECT REPORT
MAY 2010 − JULY 2010
Submitted in partial fulfillment of the requirements for the award of
two year full time, Post Graduate Diploma Wanagement
In
Finance &Control
By
Kumar Wayank
(Institute of Wanagement & Information Sciences Bhubaneswar)
Under the guidance of
Prof. S.S. Ahmed P.S PAL
Assistant Professor (finance) AGM (Finance)
Institute of Management & Information science Steel Authority Of India Limited
Bhubaneswar . Ranchi.
Institute of Management & Information Science
Swagat Vihar
Bhubaneswar Orissa – 751002
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Declaration
I hereby declare that the project entitled “Financial Analysis” is submitted in partial fulfillment of my
PGDM (FC) “2009-2011” was carried out with sincere intention of benefiting the organization. The
project duration was from 10th
May 2010 to 3rd July 2010. To the best of my knowledge it is an
original piece of work done by me and it has neither been submitted to any other organization nor
published at anywhere before.
Signature
Name: Kumar Mayank
Date: 3rd July 2010
Place: Steel Authority of India Limited (Ranchi)
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Acknowledgement
Whatever I did and whatever I achieved during the course of my limited life is just not done only by
my own efforts, but by the efforts contributed by other people associated with me indirectly or
directly. I thank all those people who contributed to this from the very beginning till its successful
end.
I sincerely thank Mr. Shibaji Dey (Dy. Manager Personnel), Person of amiable personality,
for assigning such a challenging project work which has enriched my work experience and getting me
acclimatized in a fit and final working ambience in the premises of Centre for Engineering &
Technology (SAIL).
I acknowledge my gratitude to Mr. S.S Ahmed (Assistance Professor Finance, Institute of
Management & Information Science), for his extended guidance, encouragement, support and
reviews without whom this project would not have been a success.
Last but not the least I would like to extend my thanks to all the employees at Centre for
Engineering & Technology (SAIL) for their cooperation, valuable information and feedback during
my project.
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ABSTRACT
The project on comparison of financial statement of SAIL with other steel sectors in INDIA
has been a very good experience. Every manufacturing company faces the problem of
Financial Management in their day to day processes. An organization’s cost can be reduced
and the profit can be increased only if it is able to manage the financial position of its firm.
At the same time the company can provide customer satisfaction and hence can improve
their overall productivity and profitability.
This project is a sincere effort to study and analyze the
Financial Management of SAIL. The project work was divided into two phases. The first
phase was focused on making a financial overview of the company by conducting a Time
series analysis of SAIL for the years 2003 to 2009 and the second phase was conducted on a
Comparative analysis of SAIL with its domestic competitors − TATA, ISPAT, JINDAL & ESSAR
for the year 2009 taking Balance sheet, Profit & Loss account and ratios showing a
comparative analysis between these firms with SAIL.
The internship is a bridge between the institute and the
organization. This made me to be involved in a project that helped me to employ my
theoretical knowledge about how the Analysis of Financial Statement is done by the firm.
And in the process I could contribute substantially to the organization’s growth.
The experience that I gathered over the past two months has
certainly provided the orientation, which I believe will help me in shoulder ing any
responsibility in future.
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TABLE OF CONTENTS
1.ABOUT THE COMPANY 6-11
2.INTRODUCTION TO CET SAIL 12-19
3.INTRODUCTION TO THE STUDY 20-22
4. LITERATURE REVIEW 23-35
5.DATA ANALYSIS AND INTERPRETATION 36-66
6.COMPETITOR ANALYSIS 67-70
7. RECOMMENDATION AND SUGGESTIONS 71
8.CONCLUSION 72
9.BIBLIOGRAPHY 73
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1. ABOUT THE COMPANY
Company Profile
Established in January 24, 1973 with an authorized capital of Rs. 2000 crores, SteelAuthority
of India Limited (SAIL) is the leading steel-making company in India. SAIL is a fully
integrated iron and steel maker company, producing both basic and special steels for
domestic construction, engineering, power, railway, automotive and defense industries and it
also produce steel for sale in export markets.
Steel Authority of India Limited is ranked amongst the top ten companies in public sector
companies in India in terms of its turnover. SAIL produces iron and steel at five integrated
plants and three special steel plants, located principally in the eastern and central regions of
India and situated close to domestic sources of raw materials, including the Company's iron
ore, limestone and dolomite mines.
SAIL have a Central Marketing Organization (CMO) whose job is to transact business
through its network of 37 Branch Sales Offices spread across the four regions, 25
Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Offices all
over India. CMO’s domestic marketing job is to meet the demands of the smallest customers
in the remotest corners of the country. SAIL has a Consultancy Division (SAILCON) located
at New Delhi whose job is to offer services and consultancy to clients world-wide. SAIL has
a well-equipped Research and Development Centre for Iron and Steel (RDCIS) at Ranchi
which helps the industries of SAIL to produce quality steel and it also give ideas to develop
new technologies for the steel industry. SAIL has its own in-house Centre for Engineering
and Technology (CET), Management Training Institute (MTI) and Safety Organization at
Ranchi. SAIL captive mines are control by the Raw Materials Division in Kolkata. Almost
all of the plants and major units of SAIL are ISO Certified.
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Sail Today
SAIL today is one of the largest industrial entities in India. Its st rength has been the
diversified range of quality steel products catering to the domestic, as well as the export
markets and a large pool of technicaland professionalexpertise. Today, the accent in SAIL is
to continuously adapt to the competitive business environment and excel as a business
organization, both within and outside India.
Type of Organization:
Steel Authority of India' - a Government of India Enterprise and one of the largest and profit
making public sector steel products manufacturing company. Steel Authority of India
produces for both basic and special steels for construction, engineering, power, railway,
automotive and defense industries and caters to Indian and International markets. Steel
Authority of India has five steel plants, one subsidiary, three special steel plants, multi
marketing units at all regions and nine other specialized units to support growth and
development of the Steel Industry in India. It produces Blooms, Billets, Slabs, Crane Rails,
Bars, Rods & Re-bars, Wire Rods, HR Coils, Sheets, Plates, CR Coils & Sheets, GC Sheets,
GP Sheets and Coils, Tinplates, Electrical Steel, Tubular Products, Pipes, Railway Products,
Rails, Wheels, Axles, Wheel Sets.
Activities: Steel Authority of India production lines are –
• Hot Rolled Coils, Sheets
• Cold Rolled Products.
• Bars and Rods.
• Semi-Finished Products.
• Railway Products.
• Plates.
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Moreover, SteelAuthority ofIndia offers technological services in the following
Domains –
• Know-how transfer of technologies developed by its R&D wing.
• Consultancy services.
• Specialized testing services.
• Contract research.
• Training.
Integrated Steel Plants
• Bhilai Steel Plant (BSP) in Chhattisgarh
• Durgapur Steel Plant (DSP) in West Bengal
• Rourkela Steel Plant (RSP) in Orissa
• Bokaro Steel Plant (BSL) in Jharkhand
• IISCO Steel Plant (ISP) in West Bengal
Special Steel Plants
• Alloy Steels P in West Bengal plants (ASP)
• Salem Steel Plant (SSP) in Tamil Nadu
• Visvesvaraya Iron and Steel Plant (VISL) in Karnataka
Subsidiary
• Maharashtra Elektrosmelt Limited (MEL) in Maharashtra
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Position of Steel Authority of India Limited (SAIL)
India is ranked as the 5th largest steel producing country in the world, while SAIL is ranked
as the 21st largest steel producer in the world during2008 (Source: WSA) SAIL continues
to be the largest steel producer of finished steel in India with around 1/5th of the market
share.
SWOT ANALYSIS
STRENGTHS
• The diversified product mix and multi location production units are an area of
strength for the company.
• SAIL as a single source is able to cater to the entire steel requirement of any
customer. Also it has a nation wide distribution network with a presence in every
district in India. This makes quality steel available throughout the length and breadth
of the country.
• SAIL has the largest captive iron ore operations in India, which takes care of its
entire requirement. With plans in place to expand the mining operations, the
company will continue to be self sufficient in iron ore after completion of the
present phase of expansion.
• SAIL's large skilled manpower base is a source of strength. There is emphasis on
skill based training in the company.
• The company has one of the biggest in-house research and development centres in
Asia. SAIL's RDCIS (Research &Development Centre for Iron & Steel) is a source
of regular product and process innovation.
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WEAKNESSES
• SAIL is dependent on the market purchase for a key input – coking coal. As India
does not have sufficient coking coal deposits, most of the supply is from external
sources.
• A large manpower base results in higher manpower cost as a proportion of turnover
for the company. Although there has been significant reduction in manpower
through natural and voluntary separations, the manpower strength in SAIL is still
higher than the industry average.
• At present around 20% of the products are in the form of semi -finished steel,
resulting in lower value addition.
• SAIL being a Public Sector unit has to follow set procedures in conducting its
business. On occasions, it slows down the decision making with attendant fallout.
OPPORTUNITIES
• The current per capita finished steel consumption in the country is approx. 44 kg as
compared to the likely world average of around 190kg. There is a substantial scope
for increase in domestic steel consumption.
• Although during 2008-09, steel consumption contracted by 1.2% in the country,
steel demand in India is poised to grow at a modest pace with thrust on
infrastructure in the 11th Plan period.
• Approvalto 37 infrastructure projects worth Rs.70, 000 crores between August 2008
and January 2009 is likely to trigger steel demand.
• The size range and quality makes SAIL'S long products a preferred choice for
project customers.
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THREATS
• International prices of steel dropped by over 60% from their peak level in July,
2008. With import duty at 5%, and poor demand from developed countries, cheap
imports are on an increase into the country putting pressure on realization of the
domestic steel producers.
• With significant excess capacity in the global steel industry during 2009 there is a
threat of dumping cheap steel to India which is likely to be the only major steel
consuming nation with a positive growth.
• Clearance and renewal of mining lease, which involve multiple agencies at the State
and Central levels, are an area of concern.
• Delay in opening new mines, and / or expanding existing mines may constrain raw
materials availability, thereby impacting growth in saleable steel production, and
overall economics of operation.
• Law and order situation in mining areas in some of the states is also a cause of
concern for smooth operations in remote areas.
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2. INTRODUCTION TO CET SAIL
Centre for Engineering & Technology (CET) was formed in 1982 in pursuance of
decision taken by SAIL Board in its 83rd meeting held on 28th January 1982. CET is the
in-house design, engineering and consultancy unit of SAIL. It is also the nodal agency for
acquisition and lateral transfer of technologies pertaining to Iron & Steel within SAIL
plants and units. The range of services provided by CET includes conceptualization,
project reports, project evaluation & appraisal, project consultancy, design & engineering
and project management. CET has been providing its services in all the areas of iron and
steel making including in the related areas like mine planning and development,
infrastructure development, industrial piping, industrial warehousing, material handling
system, industrial pollution control and environment management systems, water supply
and sanitation, town planning, small power projects, etc.
PURPOSE OF FORMING THE CET
CET was formed in 1982 as an in-house consultancy organization of SAIL. Previously all
the consultancy work was outsourced to various organizations which could be either
govt. organizations like MECON or private organizations. This led to huge expenditures
for SAIL in payment of fees and other expenditures. So it was decided that an in-house
consultancy should be developed to save costs for SAIL. Thus CET was formed with
headquarters in Ranchi and sub centers in various steel plants across India for better
coordination. Though CET was formed for the purpose of providing consultancy services
only to the plants of SAIL but it also provides consultancy services to the other
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organizations but only on specific requests to earn additional revenues.
CET has six subcentres at following locations:
1. CET Sub centre Bhilai
2. CET Sub centre Bokaro
3. CET Sub centre Durgapur
4. CET Sub centre Rourkela
5. CET Sub centre Burnpur
6. CET Sub centre Bhadrawati
Besides, CEThas only two unit offices at following locations to coordinate CET’s
activities
1. CET, Delhi Unit Office
2. CET, Kolkata Unit Office
It is an ISO 9001:2000 certified organization. It is planning to get certified against ISO
9001:2008. The objectives and functions of CET are mainly categorized under following
headings as under:
• Consultancy for Design, Engineering and Techno-economics
• Technology improvement
• Other Services
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Technology Improvement
Identification of technology improvement measures in consultation with R&D Centre in
the various processes and plan for adoption of the same in the various plants by acquiring
design and know-how capability.
Assisting R&D center in identification of various process routes, production facilities,
indicating the order of investment involved to match with the corporate production
targets on short term/long term basis.
Guiding principles of CET working:
Following guiding principles are followed for working of CET:
For Technical Matters: Guidelines/Procedure described in Quality Manual.
For Personnel Matters: Personnel Manual issued by SAIL Corporate Office
For Contract Commercial Matters: Guidelines described in Purchase Procedure 2009.
For Financial Matters: Guidelines given in Accounts Manuals
CET-SAIL(FINANCE DEPATRMENT)
Duties of Officers and employees in Finance Section:
• Preparation of employee’s remunerations & benefits and payments thereof.
• Statutory recoveries from employees salary like income tax, PF, SCSBF, EPF etc and
their remittances to the respective funds.
• Assessment of Income Tax of employees. Provisional estimate for recoveries & final
calculations for issuing certificates.
• Passing of contractors / parties bills and payments thereof including recoveries of
income tax from their bills.
• Passing of employee’s bills and advances and payment thereof.
• Accounting of all transactions, maintenance and scrutiny thereof.
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• Closing of accounts and audit thereof.
• Dealing with Govt. and Internal Audits
• Preparation of budgets – Revenue and Capital after considering the requirement of
various departments/ Sub-centres/ Unit Offices.
• Preparation of employees HBA, Conveyance Advance budget in consultation with
P&A.
• Periodic monitoring and control of all types of budgets
• Issue of TDS certificates to employees and contractors.
• Filing of ETDS return
Fixed and Variable Costs for Finance Department
It can be seen from the role and responsibilities of finance department that most of the
work done by the finance department involves preparation of remuneration of employees.
Even during the preparation of the budget about 85% of the costs are attributed to
employee remuneration which contains both executive pay and non executive pay. It
comes under fixed costs while other expenses like travelling expenses, stationary
expenses and other miscellaneous expenses which come under variable costs.
CALCULATION OF ENGINEERING HOURS RATE
.In accounts booking of expenditure should be done accordance with their accruals.
When CET is renewing services to companies, plants and units it is necessary to allocate
the expenditure incurred by SAIL among the plants and units to whom services where
rendered consultancy wise or project wise. This is an accounting requirement. In this way
the projects of the plants of the units gets the share of expenditure incurred by CET
which in turn are accumulated in the capital cost of the project
During 1994-95, 1995-96 CET adopted valuation of its assignment of the project ,on the
basis of fixed percentage of total cost of the project for which services where rendered.
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This system could not be continued because of the following reasons:
1. CET not being a profit center it cannot consider earning which is hypothetical in
any case, as a basis for allocation of its expenditure on assignments / projects.
2. Since the value of the assignments under this method has no relation with the
expenditure, practicaldifficulties where experienced in restricting the valuation to
the total expenditure of the CET.
Therefore in 96 -97 engineering hours was found to be more appropriate basis for the
allocation expenditure of CET over the assignment/projects. Engineers working in
assignment record their hours in the assignment they work. In this way all the assignment
of CET in execution get engineering hours spent on them. Engineering hours rate is
calculated every year on an estimated basis in march every year (detail calculation given
below). Rate is applied hours of the individualassignment/project to find or to determine
the value of CET services for the assignment/projects. Plants and units are being debited
on the value of the assignment
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CALCULATION OF ENGINEERING HOURS RATE FOR 2009-2010
1. Total no.of executives 299
2. HOD and above 29
3.Executives working in finance,Personnel
,Admn.,Personnel staff etc.ipss,Projects
58
ED sectt,MTT's
4. Net Executives whose Engg. Hours
are clockable
212
5.No. of days in a year 365
6. Sundays and closed Saturdays 76
7.CLs, Closed &RH 36
8. EL @3% of 253(Sl.No.5,6,7) 8
9.Average No. of Engineering days 245
Available
10. Avg.No. of Engg. hours available hrs.
available per man a year
1960
(Sl. No.9 *8hrs.)
11. Maximum Engg. Hrs. clockable in a
year(Sl.no.4*Sl. No. 10)
415520
12.Engineering hrs.utilised for development 120474
activities,ISO 9001,other administrative jobs
@30% of max.egg. Hrs. clockable in a year
13.Engg. Hrs. available for assignments (Sl.no.11- 295046
Sl.no.12)
14.Likely expenditure of CET FOR 2009-10 (In Rs.) 492900000
15.Engineering hours rate (In Rs.) 1670.050
16.Engineering hours rate to be adopted (In Rs.) 1670
IMPROVEMENTS SUGGESTED IN CALCULATION OF ENGINEERING HOURS
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RATES
The above method is more suitable method for CET being an inhouse consultancy
organization.This system can still be improved on the following account:
• Single rate of engineering hours doesn’t take into account expenditure of variable
nature.For example expenditure on tools design and drafting expenditure on these
heads varies on the basis of level of activities
• It is presumed that expenditure accrues uniformly over the assignments. But there
are certain assignments which need services of senior engineers whose hourly
expenditure may be higher than the avg. rate adopted.
OTHER THINGS LEARNED AT CET SAIL (FINANCE DEPARTMENT)
• To prepare engineering hour rate for CET SAIL employee.
• Preparation of vouchers
• Preparation of T.A.BILLS (Travelling allowance)
• Preparation of revenue budget for CET- SAIL.
• Preparation of renumeration for employees’ remuneration & benefits budget.
PERFORMANCE HIGHLIGHTS OF CET2009-2010
HIGHLIGTS OF PHYSICAL PERFORMANCE
• Total sanctioned projects 137 nos. against 135 nos. in corresponding period last
year. Quantum of sanctioned projects being handled valued at Rs. 10782 crores.
• Highest nos. of assignment handled at 327 in a year, up by 7 nos. over previous
year.
OTHER HIGHLIGHTS
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• During the fiscal 2009-2010, a lot of emphasis was put in the RMD projects and
along with RMD new strategies where formulated for faster execution of projects.
• Expression of interest for acquisition of technology for up gradation of blast
furnaces has been floated.
• Video conferencing facility which connects Ranchi and sub centers at Bhilai ,
Durgapur , Bokaro and Rourkela is being used extensively for quarterly projec
reviews , designed reviews , knowledge sharing , technical discussion with vendors
and plant engineers . It has resulted in faster communication, wider coverage and
saving in expenditure.
• CET has taken measures for working in a paperless environment. All movements of
papers/ documents are being done through email system.
3.INTRODUCTION TO THE STUDY:
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Finance is one of the most primary requisites of a business and the modern management
obviously depends largely on the efficient management of the finance. Financial statements
are prepared primarily for decision making. They play a dominant role in setting the frame
work of managerial decisions. The finance manager has to adhere to the five R’s with regard
to money. Whether owned or borrowed funds. At the right time to preserve solvency from the
right sources and at the right cost of capital. The term financial analysis is also known as
‘analysis and interpretation of financial statements’ refers to the process of determining
financial strength and weakness of the firm by establishing strategic relationship between the
items of the Balance Sheet, Profit and Loss account and other operative data. The purpose of
financial analysis is to diagnose the information contained in financial statements so as to
judge the profitability and financial soundness of the firm.
OBJECTIVES OF THE STUDY
1. To study the financial position of the company.
2. To analyze the financial stability and overall performance of SAIL in general.
3. To analyze and interpret the trends as revealed by various ratios of the company in particular.
4. To analyze the profitability and solvency position of the unit with the existing tools of financial
analysis.
5. To study the changes in the assets, liabilities structure of the company during the period of study.
IMPORTANCE OF THE STUDY
1. By “FINANCIAL PERFORMANCE ANALYSIS OF SAIL” we would be able to get a fair
picture of the financial position of SAIL.
2. By showing the financial performance to various lenders and creditors it is possible to get credit
in easy terms if good financialcondition is maintained in the company with assets outweighing the
liabilities.
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3. Protecting the property of the business.
4. Compliances with legal requirement.
LIMITATIONS OF THE STUDY
1. The analysis and interpretation are based on secondary data contained in the published annual
reports of SAIL for the study period.
2. Due to the limited time available at the disposable of the researcher the study has been confined
for a period of 7 years (2003-2009).
3. Ratio itself will not completely show the company’s good or bad financial position.
4. The study of financial performance can be only a means to know about the financial condition of
the company and cannot show a through picture of the activities of the company.
RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. It may be understood as
a science of studying how research is done scientifically. So, the research methodology not only talks
about the research methods but also considers the logic behind the method used in the context of the
research study.
RESEARCH DESIGN
Descriptive research is used in this study because it will ensure the minimization of bias and
maximization of reliability of data collected. The researcher had to use fact and information already
available through financial statements of earlier years and analyze these to make critical evaluation of
the available material. Hence by making the type of the research conducted to be both Descriptive and
Analytical in nature.
From the study, the type of data to be collected and the procedure to be used for this purpose were
decided.
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DATA COLLECTION
The required data for the study are basically secondary in nature and the data are collected from the
audited reports of the company.
SOURCES OF DATA
The sources of data are from the annual reports of the company from the year 2003 to 2009.
METHODS OF DATA ANALYSIS
The data collected were edited, classified and tabulated for analysis. The analytical tools used in this
study are:
ANALYTICAL TOOLS APPLIED
The study employs the following analytical tools:
1. Comparative statement.
2. Common Size Statement.
3. Trend Percentage.
4. Ratio Analysis.
5. Cash Flow Analysis
ANALYSIS AND INTERPRETATION
Financial statement is an organized collection of data according to logical and consistent accounting
procedures. It purposes is to convey an understanding of some financial aspects of a business firm. It
may show a position at a moment of time as in the case of a balance sheet, or may reveal a series of
activities over a given period of time, as in the case of an Income Statement. Thus the term “Financial
Statement “generally refers to two basic statements: (i) the Income Statement and (ii) the Balance
sheet.
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4. LITERATURE REVIEW
FINANCIAL STATEMENTS ANALYSIS
The financial statements are indicators of the two significant factors:
1. Profitability and
2. Financial soundness
Analysis and interpretation of financial statement therefore, refers to such a treatment of the
information contained in the Income Statement and Balance Sheet so as to afford full diagnosis of the
profitability and financial soundness of the business.
Balance Sheet
A balance sheet is the basic financial statement. It presents data on a company’s financial conditions
on a particular date, based on conventions and generally accepted principles of accounting. The
amount shown in the statements on the balances, at the time it was prepared in the various accounts
listed in the company’s accounting records, is considered to be a fundamental accounting statements.
The income statement summarizes the business operations during the specific period and shows the
results of such operations in the form of net income or net loss. By comparing the income statements
of successive periods, it is possible to determine the progress of a business. A statement is
supplemented by a comparative statement of the cost of goods manufactured and sold. It is prepared at
regular intervals and shows what a business enterprise owns and what it owes. It provides information
which helps in the assessment of the three main aspects of an enterprises position – its profitability,
liquidity and solvency. Of these, the later two are concerned with an enterprises ability to meet its
liabilities, while profitability is most useful overall measure of its financial conditions, the balance
sheet is a statements of assets, liabilities capital on specified date. It is therefore a static statement,
indicating resources and the allocation of these resources to various categories of asset. It is so to say
financial photography finance. Liabilities show the claims against its assets.
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The shareholders equity comprises the totalowner ship claims in a firm. This claim includes net worth
of shareholders equity and preferred stock. The traditional company balance sheet statement of assets
valued on the basis of their original cost and the means by which they have been financed by its
shareholders, lenders, suppliers and by the retention of income.
This tool suffers from the following limitations:
1. A balance sheet gives only a limited picture of state of affairs of a company, because it
includes only those items which can be expressed in monetary terms.
2. The values shown on the balance sheet for some of the assets are never accurate
3. A balance sheet assumes that the real value of money remain constant.
4. On the basis of balance sheet, it is not possible to arrive at any conclusion about the success of an
enterprise in the future.
5. It is a detailed statement of the financial structure of a business.
Income statement
The results of operations of a business for a period of time are presented in the income statement.
From the accounting point of view, an income statement is subordinate to the balance sheet because
the former simply presents the details of the changes in the retained earnings in balance sheet accounts.
However, if vital source of financial information an income statement summarizes the results of
business operations during specific period and shows in the form of net income or net loss by
comparing income statements for successive periods, it is possible to observe the progress of the
business the statement is supplemented by a comparative statement of cost of goods manufactured and
sold. It summarizes firms operating results for the past period.
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Comparative balance sheet
Financial statements are sometimes recast for facility of scrutiny. The effects of the conductor
businesses are reflected in its balance sheet by changes in assets and liabilities and in its net worth.
The comparative income statement presents a review of operating activities in business. A comparative
balance sheet shows effect of the operations on the assets and liabilities. The practice of presenting
comparative statement in the annual report is now becoming wide spread because it is a connection
between balance sheet and income statement. Considerations like price levels and accounting methods
are given due weight at the time of comparison.
Common-size statements
The percentage balance sheet is often known as the common size balance sheet. Such balance
sheet are, in a broad sense ratio analysis general items in the profit and loss accounts and in the
balance sheet are expressed in analytical percentages when expressed in the form, the balance
sheet and profit and loss account are referred to as a common size statement. Such statements
are useful in comparative analysis of the financial position in operating results of the business.
Cash flow statement
A cash flow statement is the financial analysis of the net income or profit after including book expense
items which currently do not use cash; for example, depreciation, depletion and amortization. Revenue
items, which do not currently provide funds, are to be deducted. A gross cash flow is net profit after
tax plus provision for depreciation. A net cash flow is arrived after deducting dividends from the gross
cash flow. The cash flow is very significant because it represents the actual amount of cash available to
the business.
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Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the
information in a company's financial statements. The level and historical trends of these ratios
can be used to make inferences about a company’s financial condition, its operations and
attractiveness as an investment.
Financialratios are calculated from one or more pieces of information from company’s financial
statements. For example, the "gross margin" is the gross profit from operations divided by the
total sales or revenues of a company, expressed in percentage terms. In isolation, a financial
ratio is a useless piece of information. In context, however, a financialratio can give a financial
analyst an excellent picture of a company's situation band the trends that are developing.
A ratio gains utility by comparison to other data and standards. Taking our example, a gross
profit margin for a company of 25% is meaningless by itself. If we know that this company's
competitors have profit margins of 10%, we know that it is more profita ble than its industry
peers which are quite favorable. If we also know that the historical trend is upwards, for
example has been increasing steadily for the last few years, this would also be a favorable sign
that management is implementing effective Business, policies and strategies.
Classification of Ratios
Financial ratio analysis involves the calculation and comparison of ratios which are derived
from the information given in the company's financial statements. The historical trends of these
ratios can be used to make inferences about a company’s financial condition, its operations and
its investment attractiveness.
Financial ratio analysis groups the ratios into categories that tell us about the different facets of
a company's financial state of affairs. Some of the categories of ratios are described below:
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• Liquidity Ratios give a picture of a company's short term financial situation or
solvency
• Turnover Ratios show how efficient a company's operations and how well it is using
its assets.
• Solvency Ratios show the long term profitability of the company.
Liquidity Ratios
Liquidity Ratios are ratios that come off the Balance Sheet and hence measure the Liquidity of
the company as on a particular day i.e. the day that the Balance Sheet was prepared. These
ratios are important in measuring the ability of a company to meet both its short term and long
term obligations.
1. Current Ratio
2. Liquid Ratio
3. Net working capital ratio
1. Current Ratio:
An indication of a company's ability to meet short-term debt obligations; the higher the ratio,
the more liquid the company is. Current ratio is equal to current assets divided by current
liabilities. If the current assets of a company are more than twice the current liabilities, then
that company is generally considered to have good short-term financial strength. If current
liabilities exceed current assets, then the company may have problems meeting its short-term
obligations.
Current Ratio = Current assets / Current liability
28. Page | 28
2. Quick Ratio:
Liquid ratio is also known as ‘quick’ or ‘Acid test ‘ratio. Liquid assets refer to assets which
are quickly convertible into cash. Current Assets other stock and prepaid expenses are
considered as quick assets. The ideal liquid ratio accepted ‘norm’ for liquid ratio ‘1’.
Quick Ratio = Total Quick Assets/ Total Current Liabilities
Quick Assets = Total Current Assets (minus) Inventory
3. Net Working Capital Ratio
Working Capital is more a measure of cash flow than a ratio. The result of this calculation
must be a positive number. Companies look at Net Working Capital over time to determine a
company's ability to weather financial crises. Loans are often tied to minimum working
capital requirements.
Net working capital ratio = Net Working Capital / Capital Employed
Turnover Ratios
The turnover ratio is also known as activity or efficiency ratios. They indicates the efficiency
with which the capital employed is rotated in the business (i.e.) the speed at which capital
employed in the business rotates. Higher the rate of rotation, the greater will be the
profitability. Turnover ratios indicate the number of times the capital has been rotated in the
process of doing business.
1. Fixed Asset TurnoverRatio
2. Working Capital Turnover Ratio
3. Debtor Turnover Ratio
4 Stock Turnover Ratio
29. Page | 29
1. Fixed Assets Turnover Ratio
Fixed asset turnover is the ratio of sales (on your Profit and loss account) to the value of your
fixed assets (on your balance sheet). It indicates how well your business is using its fixed
assets to generate sales.
Generally speaking, the higher the ratio, the better, because a high ratio indicates the business
has less money tied up in fixed assets for each dollar of sales revenue. A declining ratio may
indicate that you've over-invested in plant, equipment, or other fixed assets.
Fixed Assets Turnover Ratio = Gross Sales / Net Fixed Assets
2. Working Capital Turnover Ratio
Working capital refers to investment in current assets. This is also known as gross concept of
working capital. There is another concept of working capital known as net working capital.
Net working capital is the difference between current assets and current liabilities. Analysts
intend to establish a relationship between working capital and salsas the two are closely
related. Through this ratio we are attempting to see that one rupee blocked by the
organization in net working capital is generating how much sales. Higher the ratio better it
is.So, the working capital can be defined either as a gross working capital, which inc lude
funds invested in all current assets, or as net working capital, which denotes the difference
between the current assets current liabilities of an organization.
Working Capital Turnover Ratio = Net Sales / Net Working Capital
3. Debtors Turnover Ratio
Debtor’s turnover ratio measures the efficiency with which the debtors are converted into
cash. This ratio indicates both the quality of debtors and the collection efforts of the business
enterprise. This ratio is calculated as follows:
30. Page | 30
I. Debtors’ turnover ratio
II. Debt collection period.
The numerator of this ratio should preferably be credit sales. This is so because the
denominator is logically related to credit sales as it arises from credit sales only. Cash sales
do not generate debtors. However, as the information related to credit sa les is not separately
available in corporate accounts, so total sales could be taken in the numerator. Average
debtors are calculated by dividing the sum of beginning-of-year and end-of-year balance of
debtors by 2.
Debtor’s Turnover Ratio = Credit sales /Average accounts receivables
Debt collection period:
The ratio indicates the extent to which the debt has been collected in time. It gives the
average debt collection period. The ratio is very helpful to lenders because it explains to them
whether their borrowers are collecting money within a reasonable time. An increase in the
period will result in greater blockage of funds in debtors.
Debt collection period = Months/Days in a year/ Debtor’s turnover ratio
4. Stock Turnover Ratio:
This ratio indicates whether investment in inventory is efficiently used or not. It is therefore
explains whether investment in inventories is within proper limits or not. The Inventory
turnover ratio signifies the liquidity of the Inventory. A high inventory turnover ratio
indicates brisk sales. The ratio is, therefore a measure to discover the possible trouble in the
form of over stocking or over valuation.
31. Page | 31
It is difficult to establish a standard ratio of inventory because it will differ from industry to
industry.
Stock Turnover Ratio = Sales / Average Inventory
ProfitabilityRatios
Profitability is an indication of the efficiency with which the operation of the business is
carried on. Poor operational performance may indicate poor sales and hence poor profits. A
lower profitability may arise due to lack of control over the expenses. Bankers, financial
institutions and other creditors look at the profitability ratios as an indicator whether or not
the firm earns substantially more than it pays interest for the use of borrowed funds.
1. Return on Investment
2. Return on Shareholders’ fund
3. Return on total asset
4. Earnings per Share
5. Net profit Ratio
6. Operating ratio
7. Payout ratio
8. Dividend yield ratio
1. Return on Investment:
32. Page | 32
It is also called as “Return on Capital Employed”. It indicates the percentage of return on the
total capital employed in the business.
The term ‘operating profit ‘ means ‘profit before interest and tax’ and the term ‘capital
employed ‘ means sum-total of long term funds employed in the business. i.e. Share capital +
Reserve and surplus + long term loans – [non business assets +fictitious assets]
Return on investment = Operating profit/ Capital employed *100
2. Return on Shareholder’s Fund:
In case it is desired to work out the productivity of the company from the shareholder’s point
of view, it should be computed as follows:
Return on shareholder’s fund = Net profit after Interest and Tax/Shareholders’ fund*100
The term profit here means ‘Net Income after the deduction of interest and tax’. It is different
from the “Net operating profit” which is used for computing the ‘Return on total capital
employed’ in the business. This is because the shareholders are interested in Total Income
after tax including Net non-operating Income (i.e. Non- Operating Income -Non-Operating
expenses).
3. Return on Total Assets:
This ratio is computed to know the productivity of the total assets.The term ‘Total Assets’
includes the fixed asset, current asset and capitalwork in progress of the company. The above
table clearly reveals the relationship between the net profit and Total Assets employed in the
business.
Return on Total Assets = Net profit after Tax/Total Assets* 100
33. Page | 33
4. Earnings per Share:
In order to avoid confusion on account of the varied meanings of the term capitalemployed,
the overall profitability can also be judged by calculating earnings per share with the help of
the following formula:
Earning Per Equity Share = Net Profit after Tax / Number of Equity Shares X 100
The earnings per share of the company helps in determining the market price of the equity
shares of the company. A comparison of earning per share of the company with another will
also help in deciding whether the equity share capital is being effectively used or not. It also
helps in estimating the company’s capacity to pay dividend to its equity shareholders.
Earning Per Equity Share = Net Profit after Tax / Number of Equity Shares X 100
5. Net Profit Ratio:
This ratio indicates the Net margin on a sale of Rs.100.This ratio helps in determining the
efficiency with which affairs of the business are being managed. An increase in the ratio over
the previous period indicates improvement in the operational efficiency of the business. The
ratio is thus on effective measure to check the profitability of business. However, constant
increase in the above ratio after year is a definite indication of improving conditions of the
business.
Net Profit Ratio =Net Operating Profit/Net Sales*100
6. Operating Ratio:
This ratio is a complementary of Net Profit ratio. In case the net profit ratio is20%. It means
that the operating profit ratio is 80%.It is calculated as follows:
34. Page | 34
Operating Ratio =Operating Cost/Net Sales*100
The operating cost include the cost of direct materials, direct labor and other overheads, viz.,
factory, office or selling.
Direct Material cost to sales =Direct Material/Net Sales*100
This ratio is the test of the operational efficiency with which the business is being carried.
The operating ratio should be low enough to leave a portion of sales to give a fair to the
investors.
7. Payout Ratio:
This ratio indicates what proportion of earning per share has been used for paying dividend.
The payout ratio is the indicator of the amount of earnings that have been ploughed back in
the business. The lower the payout ratio, the higher will be the amount of earnings ploughed
back in the business and vice versa.
Payout Ratio =Dividend per equity share/Earning per equity share*100
8. Dividend Yield Ratio
This ratio is particularly useful for those investors who are interested only in dividend
income. The ratio is calculated by comparing the ratio of dividend per share with its market
value.
Dividend yield=Dividend perShare/Market price pershare*100
And Dividend per share = Dividend paid/ Number of shares.
Long Term Financial Positionor Solvency Ratios
35. Page | 35
The term ‘solvency’ refers to the ability of a concern to meet its long term obligations. The
long term indebtedness of a firm includes debenture holders, financial institutions providing
medium and long term loans and other creditors selling goods on installment basis. So, the
long term Solvency ratios indicate a firm’s ability to meet the fixed interest and costs and
repayment schedules associated with its long term borrowings. Two types of ratios are there:
1. Capital structure ratios-ex. Debt equity ratio
2. Coverage ratios-ex. Debt service ratio or Interest coverage ratio
1. Debt-Equity Ratio
Debt –Equity ratio also known as External- Internal Equity Ratio is calculated to measure the
relative claims of outsiders and the owners against the firm’s assets.
The ratio is calculated as:
Debt equity ratio = Outsider’s funds / Shareholder’s funds
Outsiders fund includes all debts/liabilities to outsiders, whether long term or short term or
whatever in the form of debentures bonds, mortgages or bills. The shareholders fund consist
of equity share capital, preference share capital , capital reserves, revenue reserves, and
reserves representing accumulated profits and surpluses.
2. Interest Coverage Ratio
This ratio is used to test the debt servicing capacity of a firm. The ratio is calculated as:
Interest coverage ratio = EBIT/Fixed interest charge
38. Page | 38
Interpretation:
Long Term Financial Position:
• The comparative Balance Sheet of the company reveals that during the financial year 2008– 2009
there has been a large increase in fixed assets (34.76%) compared to 2007-2008(9.09%) while the
long term liabilities which contains shareholders funds and long term loans also show growth.
Long term loans show an increase of 147.6% in 2008-09 which means that most of the fixed
assets are financed by long term loans.
• There has been an increase in plant and machinery in 2009 compared to 2008 which means that it
will increase production capacity of the concern.
Current Financial position and liquidity position:
• The company has increased its current assets by increasing the level of inventories at Rs.10121
crores in 2009 compared to Rs.6857 crores in 2008. The current liabilities highly fluctuate and
show continuous increase in 2007-08 (20.5%) and 2008-09 (29.3%).
• The Net Working Capital was in peak by the continuous increase after the year 2005. The
company got good liquidity position due increase in Current assets but it may affect the
profitability of the company.
• The overall financial position of the company is very good.
39. Page | 39
5. Income Statement
Table No.3
Classification of Income Statement of Steel Authority of India Limited from 2003 to
2009
(Rs. in crores)
PARTICULARS 2003 2004 2005 2006 2007 2008 2009
Sales 19207 24178 31805 32280 39189 45555 48681
EBIDTA 2165 4652 11097 7381 10966 12955 10941
Less: 1147 1123 1127 1207 1211 1235 1285
Depreciation
EBIT 1018 3529 9970 6174 9755 11720 9656
Less: Interest 1334 901 605 468 322 251 253
Charges
PBT (316) 2628 9365 5706 9423 11469 9403
Less : Tax (12) 116 2548 1693 3221 3932 3229
PAT (Net Profit) (304) 2512 6817 4013 6202 7537 6174
40. Page | 40
6. Comparative Income Statement
Table No.4
Comparative Income Statement of Steel Authority of India Limited from 2003-2004 to 2008- 2009
( Rs.in Crores)
PARTIC
ULARS
2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009
change % of
change
change % of
change
change % of
change
change % of
chang
e
change % of
change
change % of
Change
Sales 4971 25.9 7627 31.5 475 1.49 6909 21.4 6367 16.2 3126 6.86
EBIDT 2487 114.8 6445 138.5 (3716) (33.4) 3585 48.5 1989 18.1 (2014) (15)
Less: (24) (2.1) 4 0.35 80 7.09 4 0.3 24 1.98 50 0.04
Depreci
ation
EBIT 2511 246.6 6441 182.5 (3769) (38) 3581 58 1965 20.1 (2064) (17.6)
Less: (433) (32.4 (296) (32.7) (137) 22.64 (146) (31) (71) (22) 2 0.7
Interest )
Charges
PBT 2312 731.6 6737 256.3 (3659) (39) 3717 65.1 2046 21.7 (2066) (18)
Less : 104 866.6 2432 2096 (855) (33.5) 1528 90.2 711 22 (703) (17.8)
Tax
PAT
(Net
Profit)
2208 726 4305 171.3 (2804) (41.1) 2189 54.5 1335 21.5 (1363) (18)
Interpretation
• The Net Sales figure shows an increasing trend. After the year 2003 it shows an
increasing trend which will help to increase in NetProfit.
• The company has sufficient control over its depreciation which shows an increase of
only 0.04% in 2009 over 2008.
41. Page | 41
• The company has considerable change in Interest Charges and rather the latter has
decreased in recent years.
• The company has able to attain Profit after Tax of Rs.6174 crores in the year 2009
compare to 7536 crores in 2008 which can be attributed to increase in cost of goods
sold.
• It may conclude that there is a sufficient progress in the company and the overall
profitability of the concern is very good.
42. Page | 42
7. Trend Percentage
Table No.5
Trend Percentage of Steel Authority of India Limited from 2003-2004 to 2008 – 2009
Base Year 2003 Figure in
%
Particulars 2003 2004 2005 2006 2007 2008 2009
SALES 100 125.88 165.59 168.06 204.03 237.17 253.45
EBIT 100 346.66 979.37 606.48 958.25 1151.27 948.52
FIXED
ASSETS
100 94.00 89.15 89.63 88.77 96.85 130.51
CURRENT
ASSETS
100 112.77 196.02 213.75 283.57 359.91 471.97
CURRENT
LIABILITIES
100 122.96 139.05 146.01 149.76 180.52 234.19
WORKING
CAPITAL
100 81.83 302.55 370.29 554.05 673.81 889.54
CAPITAL
EMPLOYED
TOTAL
100 92.00 121.29 131.65 154.01 171.99 208.88
TOTAL
ASSETS
100 88.84 109.83 113.64 132.39 159.85 211.09
Interpretation:
• The sales of the product have continuously increased in all the years up to 2009.The
increase in sales is quite satisfactory.
• The EBIT grows continuously up to 2008 and decreases slightly in 2009 due to increase
in the cost of goods sold.
44. Page | 44
Interpretation:
• Out of the total investment the owners funds is more compare to outsider’s fund in the
company which shows that the company has depended more on its own funds. It
shows that the company is traditionally financed.
• The proportion of current assets to total assets has increased comparing to current
liabilities which serve as an evidence for good working capital position of the
company.
• Investments, Miscellaneous expenditure and deferred liabilities have their own limited
contribution to their respective side totals.
45. Page | 45
RATIO ANALYSIS
Liquidity ratios
1. Current Ratio:
Table No.7
Table showing Current ratio
(Rs. In Crores)
YEAR CURRENT
ASSETS
CURRENT
LIABILITIES
CURRENT RATIO
2003 7282 4777 1.524
2004 8075 6025 1.340
2005 14187 6608 2.146
2006 17384 8108 2.144
2007 20379 6500 2.917
2008 26317 9439 2.788
2009 34511 12228 2.822
An idealcurrent ratio is 2. The ratio of 2 is considered as a safe margin of solvency due to the
fact that if current assets are reduced to half (i.e.) 1 instead of 2, then also the creditors will be
able to get their payments in full.
Interpretation:
Here, the current ratio fluctuates from year to year but has maintained the ratio above 2 from
2005 onwards which is positive consideration.
46. Page | 46
CHART 1
2. Quick Ratio:
Table No.8
Table showing Quick ratio
(Rs. In Crores)
YEAR LIQUID ASSETS CURRENT
LIABILITIES
QUICK RATIO
2003 3537 4777 0.740
2004 4993 6025 0.828
2005 9966 6608 1.508
2006 11174 8108 1.378
2007 13728 6984 1.965
2008 19460 9439 2.061
2009 24389 12228 1.994
Interpretation:
The liquid ratio denotes the concern had achieved more than the ideal ratio of 1:1 in the years
2005 onwards.
40000
35000
30000
25000
20000
15000
current assets
current liabilities
10000
5000
0
2003 2004 2005 2006 2007 2008 2009
47. Page | 47
CHART 2
3. Net Working Capital Ratio:
Table No.9
Table showing Net Working Capital Ratio
YEAR Net Working
Capital
Capital Employed Net Working
Capital Ratio
2003 2505 16541 0.151
2004 2050 15218 0.134
2005 7579 20064 0.377
2006 9276 21438 0.432
2007 13879 24992 0.535
2008 16879 28450 0.593
2009 22283 34552 0.645
30000
25000
20000
15000 liquid assets
current liabilities
10000
5000
0
2003 2004 2005 2006 2007 2008 2009
48. Page | 48
CHART 3
Interpretation:
Net Working capital measures the firm’s potential reserve of funds. It can be related to net
assets. This ratio represents the availability of working capital in relation with capital
employed.
40000
35000
30000
25000
20000
15000
net working capital
capiotal employed
10000
5000
0
2003 2004 2005 2006 2007 2008 2009
49. Page | 49
Turnover Ratios
1. Fixed Assets Turnover Ratio:
Table No.10
Table showing fixed asset turnover ratio
YEAR GROSS SALES
(Rs IN
CRORES)
FIXED
ASSETS (Rs in
crores)
FIXED
TURNOVER
RATIO (In
Times)
2003 19207 14036 1.36
2004 24178 13168 1.83
2005 31805 12485 2.54
2006 32280 12162 2.65
2007 39189 11598 3.37
2008 45555 11571 3.93
2009 48681 12269 3.96
Interpretation:
Here, the value of fixed assets employed in the business shows a reducing trend which
implies that company didn’t add any more fixed asset during the period 2003 –2008. Only the
depreciation effect had been given to fixed asset. Fixed turnover ratio has been increasing
which is a good sign because the gross sales have increased considerably without increasing
the current assets.
50. Page | 50
CHART 4
2. Working Capital Turnover Ratio:
Table No.11
Table showing Working capital turnover ratio
YEAR GROSS SALES
(Rs IN
CRORES)
WORKING
CAPITAL (Rs in
Crores)
Working capital
turnover ratio
(in times)
2003 19207 2505 7.667
2004 24178 2050 11.79
2005 31805 7579 4.196
2006 32280 9276 3.479
2007 39189 13879 2.823
2008 45555 16879 2.698
2009 48681 22283 2.184
Interpretation:
Here, the Working Capital ratio shows a increasing trend from 2003 to 2004 and then slope
downwards due to holding high current assets in the form of cash, bank balances and
receivables in the year 2005 to 2009.
60000
50000
40000
30000
G SS SALES
FIXED ASSETS
20000
10000
0
2003 2004 2005 2006 2007 2008 2009
51. Page | 51
CHART 5
3. Debtors Turnover Ratio:
Table No.12
Table showing Debtors’ turnover ratio
YEAR CREDIT SALES
(Rs. In Crores)
DEBTORS
(Rs. In Crores)
Debtors’ turnover
ratio
(In times)
2003 19207 1660 11.570
2004 24178 1550 15.598
2005 31805 1908 16.669
2006 32280 1882 17.151
2007 39189 2315 16.928
2008 45555 3048 14.945
2009 48681 3024 16.098
Interpretation:
There has been increase in the turnover ratio from 2003-2006 and has stabilized thereafter
.As the ratio is sufficiently high it can be concluded that efficient management of the debtors
has taken place.
60000
50000
40000
30000 GROSS SALES
WORKING CAPITAL
20000
10000
0
2003 2004 2005 2006 2007 2008 2009
52. Page | 52
CHART 6
Debt collection period:
Table No.13
Table showing Debt collection period
(In Days)
YEAR COLLECTION PERIOD
2003 32
2004 23
2005 22
2006 21
2007 22
2008 24
2009 23
Debtors’ collection period measures the quality of debtors since it measures the rapidity or
slowness with which money is collected from them.
60000
50000
40000
30000
20000
CREDIT SALES
DEBTORS
10000
0
2003 2004 2005 2006 2007 2008 2009
53. Page | 53
CHART 7
INTERPRETATION;
Here, there has been decreasing trend in the debt collection period which is favorable for the
company. Because, the quicker the collection period the better is the quality of debtors as a
short collection period implies quick payment by debtors. Then more the utilization of cash
collected from debtors. It decreased from 32 days in 2003 to 23 days in 2009.
4. Stock Turnover Ratio:
Table No.14
YEAR SALES (Rs in
crores)
AVERAGE STOCK
(Rs in crores)
STOCK
TURNOVER
RATIO ( in times)
2003 19207 3745 5.128
2004 24178 3082 7.844
2005 31805 4221 7.534
2006 32280 6210 5.198
2007 39189 6651 5.892
2008 45555 6857 6.643
2009 48681 10121 4.809
COLLECTION PERIOD
35
30
25
20
15
10
5
0
COLLECTION PERIOD
2003 2004 2005 2006 2007 2008 2009
54. Page | 54
INTERPRETATION:
Here, there has been a lot of fluctuation in the Inventory turnover ratio. There has been an
increase in the ratio in 2004 and 2005 but it shows a decreasing trend in 2006 and 2007.In
2008 the ratio showed an increase due to a large increase in sales. But in 2009 there was a
large increase in average stock/inventory which contributed to a lower inventory turnover
ratio . This can be attributed to uncertain economic situation and weak demand of steel in the
market. The overall situation is still good enough.
CHART 8
60000
50000
40000
30000 CREDIT SALES
AVERAGEST C
20000
10000
0
2003 2004 2005 2006 2007 2008 2009
55. Page | 55
ProfitabilityRatios
1. Return onInvestment:
Table No.14
Table showing Return on Investment
YEAR OPERATING
PROFIT (Rs in
crores)
CAPITAL
EMPLOYED (Rs in
crores)
RETURN ON
INVESTMENT (In
%)
2003 1018 16541 6.154
2004 3530 15218 23.196
2005 9970 20064 49.690
2006 6174 21782 28.344
2007 9755 25476 38.290
2008 11720 28450 41.195
2009 9656 34552 27.946
Interpretation:
Return on investment shows an increasing trend from 2003 to 2008.However there are small
fluctuations in 2006 and 2009 due to lower operating profits. Average Capital employed
shows regular increase from 2003 to 2009.
56. Page | 56
CHART 9
2. Return on Shareholder’s Fund:
Table No.15
Table showing return on Shareholders’ Fund
YEAR NET PROFIT (Rs
in crores)
SHAREHOLDER’S
FUND (Rs in crores)
RETURN IN
SHAREHOLDER’S
FUND (IN %)
2003 -304 5290 -5.746
2004 2512 5038 49.861
2005 6817 10307 66.139
2006 4013 12601 31.846
2007 6202 17313 35.822
2008 7537 23063 32.680
2009 6174 27984 22.062
INTERPRETATION:
Here, the Net Profit (i.e.) Profit after Interest and Tax has been in negative in the year 2003
due to a net loss in the corresponding year because of very high interest and finance charges
of the company. But there was a huge jump in net profits in the year 2004-2005 compared the
shareholders funds which were responsible for increase in the return on investment. There has
40000
35000
30000
25000
20000
15000
OPERATING PROFIT
APITAL EMPLOYE
10000
5000
0
2003 2004 2005 2006 2007 2008 2009
57. Page | 57
been a considerable increase in shareholders funds from 2005 onwards which has resulted in
stabilizing return on investment.
CHART 10
3. Return on Total Assets:
Table No.16
Table showing return on Total Assets
YEAR NET PROFIT (Rs
in crores)
TOTAL ASSETS (
IN CRORES)
RETURN ON
TOTAL
ASSETS(IN %)
2003 -304 25570 -1.188
2004 2512 22717 11.057
2005 6817 28084 24.273
2006 4013 29058 13.810
2007 6202 33854 18.319
2008 7537 40874 18.439
2009 6174 53977 11.438
Interpretation:
There has been a considerable in increase in total assets from 2003 to 2009 but the net profit has
fluctuated which has resulted in the fluctuations in the return on total assets.
30000
25000
20000
15000 NE T PROFIT
10000 SHARE HOLDERSFUND
5000
0
2003 2004 2005 2006 2007 2008 2009
−5000
58. Page | 58
CHART 11
4. Earnings per Share:
Table No.17
Table showing Earning per Share
YEAR NET PROFIT (Rs
in crores)
NUMBER OF
EQUITY SHARES
( IN CRORES)
EARNING PER
SHARE (IN %)
2003 -304 413 -0.736
2004 2512 413 6.082
2005 6817 413 16.506
2006 4013 413 9.716
2007 6202 413 15.016
2008 7537 413 18.249
2009 6174 413 14.949
Interpretation:
Here the Earning per Share is the result of Net Profit after Tax. It shows the positive
correlation during the period of study. It shows an increasing trend except in the year 2004
and 2009 due to lower net profits than previous years.
60000
50000
40000
30000 NE T PROFIT
20000 TOTAL ASS ETS
10000
0
−10000 2003 2004 2005 2006 2007 2008 2009
59. Page | 59
CHART 12
5. Net Profit Ratio:
Table No.18
Table showing Net Profit Ratio
YEAR OPERATING
PROFIT (RS IN
CRORES)
SALES (IN
CRORES)
NET PROFIT
RATIO (IN %)
2003 1018 19207 5.300
2004 3530 24178 14.600
2005 9970 31805 31.347
2006 6174 32280 19.126
2007 9755 39189 24.892
2008 11720 45555 25.727
2009 9656 48681 19.835
8000
7000
6000
5000
4000
3000
NET PROFIT
NUMBER OF EQUITY SHARES
2000
1000
0
−1000
2003 2004 2005 2006 2007 2008 2009
60. Page | 60
Interpretation:
The operating profit and value of sales are the causes for the fluctuation in the Net Profit
ratio. While sales has constantly increased over the years operating profit has increased but
shows some fluctuations. In 2009 the ratio is lower than in 2008 due to lower operating
profits. The reason can be attributed to uncertain economic situation and higher cost of goods
sold as well as weak demand.
CHART 13
6. Operating Ratio:
Table No.19
Table showing Operating Ratio
YEAR OPERATING
COST(RS IN
CRORES)
SALES
(Rs. In crores)
OPERATING
RATIO
(In %)
2003 17940 19207 93.403
2004 19512 24178 80.701
2005 20339 31805 63.949
2006 23675 32280 73.342
2007 26483 39189 67.577
2008 30423 45555 66.783
2009 36848 48681 75.692
Interpretation:
60000
50000
40000
30000 E ATI G FIT
20000 SALES
10000
0
2003 2004 2005 2006 2007 2008 2009
61. Page | 61
A comparison of operating ratio or expenses ratio will indicate whether the cost components
is high or low in the figure of sales. The operating ratio shows a decrease in trend up to 2008
but shows a slight increase in 2009. Normally 75% to 85% is considered to be a good ratio
for manufacturing undertakings. So the ratio is good in case for SAIL.
CHART 14
7. Payout Ratio:
Table No.20
Table showing Payout Ratio
YEAR DIVIDEND PER
EQUITY
EPS Dividend pay out
ratio
2005 3.3 16.50 20
2006 2.0 9.71 20.59
2007 3.10 15.01 20.65
2008 3.7 18.25 20.27
2009 2.6 14.95 17.39
Interpretation:
60000
50000
40000
30000
20000
DIRECT MATERI AL
SALES
10000
0
2003 2004 2005 2006 2007 2008 2009
62. Page | 62
The pay out ratio for the year 2005 is 20%, 2006 is 20.59, 2007 is 20.65, 2008 is 20.27%
which implies that remaining 80% of earning per share is kept as retained earning by the
company. However in 2009 lesser amount of dividend is given so EPS is 14.95 and pay out
ratio is 17.39 this implies that the company keeps 82% of earning per share as retained
earnings.
CHART 15
NOTE: Here the company had paid dividend only after 2005 in the course of seven years
period from 2003 to 2009.
8. Dividend Yield Ratio:
Table No.21
Table showing Dividend yield
YEAR DIVIDEND PER
EQUITY
MARKET PRICE Dividend yield
2005 3.3 62.87 5.25
2006 2.0 83.30 2.40
2007 3.10 114.30 2.71
2008 3.7 185 2
2009 2.6 96 2.70
20
18
16
14
12
10
8
6
4
2
0
DIVIDENT PER EQUITY
EPS
2005 2006 2007 2008 2009
63. Page | 63
Interpretation:
This percentage implies that 5.25% of market price of the share was issued as dividend in the
year 2005 and later on it get decreases due to various economic changes in SAIL.
CHART 16
Long Term Financial Positionor Solvency R atios
1. Debt-Equity Ratio
TABLE NO: 21
Table showing Debt-Equity ratio
YEAR OUTSIDER’S
FUND
SHAREHOLDER’S
FUND
DEBT EQUITY
RATIO
2003 34385 5290 6.5
2004 9419 5037 1.87
2005 5977 10306 0.58
2006 4410 12601 0.35
2007 4155 17313 0.24
2008 2988 23063 0.13
2009 7555 27984 0.27
200
180
160
140
120
100
80
60
40
20
0
DIVIDEND PER EQUITY
MAR ET PRI E
2005 2006 2007 2008 2009
64. Page | 64
CHART 17
Interpretation
The debt-equity ratio is calculated to measure the extent to which debt financing has been
used in a business. From 2003 onwards there has been a decrease in outsiders fund and a
corresponding increase in shareholders funds. This indicates that the firm is traditionally
financed and it is considered to be favorable from a long term creditor’s point of view as a
high proportion of owner’s funds provide a larger margin of safety for them.
Interest Coverage Ratio
This ratio is used to test the debt servicing capacity of a firm The ratio is calculated as:
Interest coverage ratio = Ebit/Fixed interest charge
TABLE NO: 22
YEAR EBIT FIXED INTEREST
CHARGES
INTEREST
COVERAGE
RATIO
2003 1018 1339 0.76
2004 3529 910 3.88
40000
35000
30000
25000
20000
15000
OUTSIDER'S FUND
SHARE HOLDER'S FUND
10000
5000
0
2003 2004 2005 2006 2007 2008 2009
65. Page | 65
2005 9970 607 16.43
2006 6174 472 13.07
2007 9755 333 29.29
2008 11720 252 46.39
2009 9656 326 29.59
Interpretation:
There has been decreasing trend in the fixed interest charges and corresponding increase in
EBIT from 2003-2008.This has led to increase in interest coverage ratio which is a good sign
for the company. There has been a decrease in EBIT in 2009 and a slight increase in fixed
interest charges due to uncertainties in the market, higher raw material costs and lower steel
demand.
66. Page | 66
CHART 18
14000
12000
10000
8000
EBIT
6000 FI E I TE EST A GES
4000
2000
0
2003 2004 2005 2006 2007 2008 2009
67. Page | 67
CALCULATION AND INTERPRETATION OF CASH FLOW
STATEMENT
CASH FLOW STATEMENT (in Rs.crores)
PARTICULARS 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Profit before tax (315.87) 1246.70 9365.35 5705.74 9422.62 11468.73 9403.45
Net Cash Flow –
Operating activity
2667.74 7199.45 8899.47 3823.93 5632.91 8378.18 6124.26
Net Cash usedin
investing activity
(31.61) (235.76) (286.54) (337.18) (587.53) (1139.89) (4406.47)
Net Cash used in
Fin. Activity
(2,517.34) (5475.51) (4516.63) (3574.26) (1608.19) (3088.68) 2751.30
Netinc./decrease
in cash or
equivalent
118.79 1488.18 4096.30 (87.51) 3437.19 4149.61 4469.09
Cash and
equivalent at
beginning ofthe
year
416.37 717.31 2035.82 6260.15 6172.64 9609.83 13759.44
Cash and
equivalent atend
of the year
535.16 2205.49 6132.12 6172.64 9609.83 13759.44 18228.53
INTERPRETATION
1. Cash flow statement shows that the profit before tax increases continuously in 2004,
2005, 2006, 2007, 2008 and decreases in 2009 due to unstable economic conditions.
2. Net cash flow from operating activities increases continuously in 2007 and 2008 due
to increase in sales and earnings but it came down in 2009.
3. Net cash outflows in investing activities have been growing in SAIL ascash is being
used to purchase fixed assets like plants and machinery and higher development costs.
68. Page | 68
4. Cash flows have been positive for financing activities in 2009 mainly due to increase
in borrowings.
5. Cash and cash equivalents have been increasing steadily from 2003 to 2009 showing
good liquidity position of the firm
6.COMPETITOR ANALYSIS
BALANCE SHEET FOR 2009
(in crores)
PARTICULARS SAIL TATA ISPAT JINDAL ESSAR
ASSETS
NET BLOCK 12269 10995 8888 5745 9129
CAPITAL
WORK IN
PROGRESS
6544 3488 103 2318 550
INVESTEMENT 653 42372 233 1233 791
NET CURRENT
ASSETS
17389 (308) 160 1078 1580
TOTAL
ASSETS
36855 56651 9384 10378 12050
LIABILITIES
SHARE
HOLDERS
FUND
27985 29705 2032 5415 4738
TOTAL DEBT 7539 26946 7352 4963 7312
DEFFERED
LIABILITY
1331 - - - -
TOTAL
LIABILITIES
36855 56651 9384 10378 12050
70. Page | 70
COMPETITOR ANALYSIS
(as in2009)
RATIOS SAIL TATA ISPAT JINDAL ESSAR
PROFITIBILITY
RATIO
OPERATING
PROFIT
24.31 37.68 13.58 34.35 21.44
GROSS PROFIT 44.14 33.69 5.76 28.71 14.37
NET PROFIT 19.83 21.09 -8.04 19.50 1.56
RETURN ON
CAPITAL
EMPLOYED
27.94 15.01 6.69 23.16 15.01
LIQUIDITY &
SOLVENCY
RATIOS
CURRENT
RATIO
2.82 0.91 1.04 1.04 0.71
QUICK RATIO 1.99 0.57 0.42 0.95 0.62
DEBT EQUITY
RATIO
0.27 1.34 9.04 0.92 1.57
DEBT
COVERAGE
RATIO
INTREST
COVERAGE
RATIO
29.59 5.71 0.52 10.33 3.17
MANAGEMENT
EFFICIENCY
RATIOS
INVENTORY
TURN OVER
RATIO
4.80 9.36 7.59 9.08 8.69
DEBTORS TURN
OVER RATIO
16.09 41.29 14.50 22.62 30.35
FIXED ASSETS
TURN OVER
RATIO
3.96 1.22 0.61 1.04 0.76
CASH FLOW
INDICATOR
RATIO
DIVIDEND PAY
OUT RATIO
17.39 27.15 - 5.55 -
71. Page | 71
Interpretation
• Net Profit ratio of SAIL is better than most of the competitors except TATA Steel.
This can be attributed to lower earnings of SAIL in comparison to their earnings.
• Return on Capitalemployed is highest for SAIL which shows that overall profitability
and efficiency of the business is good.
• The current ratio for SAIL is more than other competitors which shows that it has
enough liquidity in comparison to other competitors.
• The debt equity ratio is 0.27 which is lower than the competitors. This means that it is
more traditionally financed in comparison to other competitors. It has lower debt so it
can easily raise debt in future
• Interest coverage ratio is too high for SAIL which shows that debt is not being used as
a source of finance to increase earnings pershare.
• Inventory turnover ratio is lesser in SAIL compared to other competitors which
indicates inefficient management of inventories.
• The debtors turnover ratio is lower for SAIL compared to its competitors which
shows that the debtors are less liquid implying inefficient management of
debtors/sales.
72. Page | 72
7.RECOMMENDATION AND SUGGESTION
• SAIL should always try to maintain an adequate quantum of net current assets in relation
of current liabilities as to keep a good amount of liquidity throughout the year.
• The company should tighten the debt collection efforts and should reduce the amount tied
up in debtors. In order to improve the quality of debtors and also to bring down the
amount tied-up in debtors, a periodical report of the overdue may be prepared and
effective action may be taken by the management time to time to expedite the collections.
• Inventory turnover ratio is lesser in SAIL compared to other competitors which indicates
inefficient management of inventories. So it is advisable to keep less inventories to
minimize costs and improve efficiency.
• The company is more traditionally financed with low debt and more of equity financing,
so in future debt should be preferred for financing to bring the ratio close to the idealratio
of 1:1.
• The management of SAIL should also try to maintain a definite proportion among various
components of working capital in relation to overall current assets to keep an adequate
quantum of liquidity all the times.
73. Page | 73
8. CONCLUSION
On the basis of analysis of financial statements of SAIL we may conc lude that the overall
working stability – soundness have improved over the years. Sales turnover of SAI L
increased by 6.86% i.e. Rs. 48681 crores in the FY 2008-09 from Rs. 45555 crores in the FY
2007-08 whereas profit before tax has decreased by 18% i.e. Rs. 2064 crores in the FY
2008-09 from Rs. 11469 crores in the FY 2007 -08 indicating increase in cost of goods sold.
The debtors’ turnover ratio is lower for SAIL compared to its competitors which shows that
the debtors are less liquid implying inefficient management of debtors/sales.
The proportion of current assets to total assets has increased comparing to current liabilities
which serve as an evidence for good working capital position of the company.
The current ratio for SAIL is more than other competitors which shows that it has enough
liquidity in comparison to other competitors.
The debt equity ratio is 0.27 which is lower than the competitors. This means that it is more
traditionally financed in comparison to other competitors. It has lower debt so it can easily
raise debt in future.
SAIL is more efficient and effective to utilize its fund.
74. Page | 74
9. BLIOGRAPHY
BOOKS:
• Financial management by R.K. SHARMA & SHASHI K
GUPTA
• Annual Report of SAIL
• Magazines of SAIL
INTERNET WEB SITES:
• www.google.co.in
• w
• w
• w
• w
• w
• w
ww.sail.co.in
ww.money control.com
ww.tata steel.co.in
ww.essar.com
ww.ispat.com
ww.jindal.com
