FINANCIAL RATIO ANALYSIS OF

JINDAL STEEL WORKS AND TATA STEEL

Liquidity Ratios:
Liquidity ratio measures the ability of the firm to meet its short term maturing
obligations (i.e. current liabilities).in normal course of business these are meant to be
paid out of current assets.

Current Ratio:
It is defined as current assets divided by current liabilities. It is a measure of
short term financial liquidity of the firm.

Current Ratio = Current Assets/Current Liabilities

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 0.75 0.89 0.98 1.45 1.44
TATA STEEL 1.74 0.72 0.71 0.68 0.77

Analysis:
A current ratio of 2:1 is always considered as optimum means that there is a
50 % safety margin in terms of assets to cover its current liabilities. However this
doesn’t mean higher current ratio is good. It may signify higher unused cash,
inventory which again may result in inventory carrying cost. When we see the trend in
case of JSW there is decrease in trend of current ratio and in case of tata steel there is
an increasing trend. Both cannot be commented abruptly for good or bad. The current
ratio in case of jindal may be coming down because of the lesser inventory and highly
liquid cash used to settle obligations and in case of tata steel there may be stagnation
of inventory and cash or settlement of current liabilities through over draft etc.

Page 1 of 6
Quick ratio:
The current ratio is based on the assumption that all the constituent items of
current assets are homogenous in respect to liquidity. But in practice it is not true. A
rupee cash or bank balance is more liquid than a rupee inventory. To overcome this
more realistic form of liquid ratio is the quick ratio which is obtained as

Quick Ratio = Current Assets-Inventory-Prepaid Expenses/Current Liabilities

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 0.44 0.59 0.60 0.79 0.57
TATA STEEL 1.46 0.29 0.33 0.39 0.42

Analysis:
Historically quick ratio of 1:1 is considered satisfactory. When we see the
trend in case of JSW there is decrease in trend of quick ratio and in case of tata steel
there is an increasing trend. Both cannot be commented abruptly for good or bad. The
recent year quick ratio of tata steel may not be a good sign showing high unutilised
cash and less than .5 of jindal is also not a good sign because minimum of 0.5 is
preferred.

Debt/Equity Ratio:
Though it doesn’t signify anything related to meeting short term liability it is
often discussed under this topic. A firm has two options when going for expansion
one is raising debt and other going for public issue.generaly very high debt is not
preferred by the investors because it signifies the risk and high form of equity has
threat of hostile bid and acquisition.

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 0.84 1.07 1.43 4.15 8.59
TATA STEEL 0.69 0.25 0.38 0.74 1.33

Page 2 of 6
Analysis:
It’s a good sign that jindal is considerably reducing its debt which may be a
good sign however it may be a sign of no new expansion plans but that is not the case
with jindal.Tatas have decreasing trend till 2006 and it has gone up in the year 2007
shows it has borrowed some money for investments.

Interest Coverage Ratio:

It measures the firm’s ability to interest on its borrowings. It is determined as

Interest Coverage Ratio = EBIT/Interest

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 6.99 4.68 4.93 2.57 1.26
TATA STEEL 29.18 36.46 26.72 15.98 6.23

Interest coverage ratio of say 4 -times indicate that even if firms operating
income declines ¼ still have operating profits to meet its interest. In other words it
reflects the ability of the firm to pay its interest and risk taking ability and credit
worthiness of the firm for additional debts.

Analysis:
Both companies show an overall increasing trend in interest coverage ratio
however TATAs have more because of their size and more operating income.

Page 3 of 6
Profitability Ratios:
Profitability ratios are of crucial significance for investors .they are
determined based on sales or investments. Here we will see few ratios based on sales.

Operating Profit Margin:

Operating profit ratio=operating profit (EBIT)/sales

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 32.79 27.79 34.83 31.69 28.15
TATA STEEL 38.72 38.88 41.10 32.47 23.71

Analysis:
The trend shows there is an almost stagnant range for JSW and that indicates
that increase in sales is compensated by rising steel raw material cost over the past 5
years. In case of TATAs there was a steep increase in 2005 may be because of more
sales and cost cutting mechanisms.

Gross Profit Margin:

Gross Profit Ratio=Gross Profit/Sales

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 26.99 21.12 29.44 22.15 16.94
TATA STEEL 34.03 33.76 36.83 26.63 17.33

Analysis:
The trend shows there is an almost stagnant range for JSW and that indicates
that increase in sales is compensated by rising steel raw material cost over the past 5
years. From 2006 to 2007 there is a step increase which may be because of reduced
interest payments and costs. As for as TATAS are concerned, it is stagnant for the
past three consecutive years.

Page 4 of 6
Net Profit Margin:
It is calculated as

Net Profit Ratio=EAT/Net Sales

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 14.98 14.14 13.00 16.05 -4.41
TATA STEEL 23.42 22.78 23.72 16.00 11.52

Analysis:
JSW has made losses in the year 2003 and after that it has recovered from
huge costs and showed profits and maintains.tatas show a stagnant trend as well as
jindals in the past three years

Return on Net Worth:

This measures the rate of return on equity funds. It is calculated by

RONW = EAT-preference dividend/Average equity funds

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 23.10 10.88 32.25 12.68 42.93
TATA STEEL 30.71 36.44 50.27 43.76 29.51

Analysis:
As for as Jindal is concerned it is seen that there were two years when RONW
were very low may be because of more equity capital raised and decline in net profit
or issual of preferential dividends. As for as TATAs are concerned, they are
maintaining a good spirit and raising trend to please the investors.

Turnover Ratios:
These ratios determine how quickly certain assets are converted into cash. It
measures the ability of the firm to manage assets and convert into cash

Page 5 of 6
Fixed Assets Turnover Ratio:
It is calculated as

Fixed Assets Turnover Ratio=Sales/Fixed Assets

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 0.84 0.73 1.04 0.63 0.44
TATA STEEL 1.58 1.53 1.59 1.36 1.16

Analysis:
As for as jindal is concerned it shows the value of sales is declining as far as
fixed assets is concerned in the past two years. It shows its inability to convert its
fixed assets into sales however it is not a bad signal for a large company. It may take
some time sales equalise its fixed assets. But as for as tatas are concerned, it is always
greater than 1 and showing a good sign.

Sales to Current Assets:

It is computed using

Current Assets Turnover Ratio = Sales/Current Assets

COMPANY 2007/03 2006/03 2005/03 2004/03 2003/03

JSW 3.46 2.22 3.52 2.53 2.13
TATA STEEL 1.19 3.03 2.94 2.17 1.94

Analysis:
Both the companies almost show a decent turnover as for as current assets are
concerned and in the year 2007 jindal has made sales thrice of current assets shows it
management of lesser inventory and high utilisation of cash for the sales conversion.

Page 6 of 6