Chapter 6

Financial Statements Analysis

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 FINANCIAL STATEMENTS
ANALYSIS

Ratio Analysis

Common Size Statements

Importance and Limitations of

Ratio Analysis

Mini Case

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 Ratio Analysis

ret the financial statements so that the strengths and w

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 Basis of Comparison

are compared with past ratios for the same firm. It indicates the directi

hose of others in the same lines of business or for the industry as a w

3) Comparison with standards or industry average.

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 Types of Ratios

Liquidity Ratios
Capital Structure Ratios
Profitability Ratios
Efficiency ratios
Integrated Analysis Ratios
Growth Ratios

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 Net Working Capital
Net working capital is a measure of liquidity calculated by
subtracting current liabilities from current assets.

Table 1: Net Working Capital

Particulars Company A Company B
Total current assets Rs 1,80,000 Rs 30,000
Total current liabilities 1,20,000 10,000
NWC 60,000 20,000

Table 2: Change in Net Working Capital

Particulars Company A Company B
Current assets Rs 1,00,000 Rs 2,00,000
Current liabilities 25,000 1,00,000
NWC 75,000 1,00,000

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 Liquidity Ratios

ios measure the ability of a firm to meet its short-term o

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 Current Ratio

Ratio is a measure of liquidity calculated dividing the current assets by the current li

Current Assets
Current Ratio =
Current Liabilities

Particulars Firm A Firm B

Current Assets Rs 1,80,000 Rs 30,000
Current Liabilities Rs 1,20,000 Rs 10,000
Current Ratio = 3:2 (1.5:1) 3:1

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 Acid-Test Ratio

o takes into consideration the differences in the liquidity of the compo

Quick Assets
Acid-test Ratio =
Current Liabilities

Quick Assets = Current assets – Stock –

Pre-paid expenses

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 Example 1: Acid-Test Ratio

Cash Rs 2,000
Debtors 2,000
Inventory 12,000
Total current assets 16,000
Total current liabilities 8,000
(1) Current Ratio 2:1
(2) Acid-test Ratio 0.5 : 1

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 Supplementary Ratios for
Liquidity

Inventory Turnover Ratio

Debtors Turnover Ratio
Creditors Turnover Ratio

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 Inventory Turnover Ratio

ow fast inventory is sold. A high ratio is good from the viewpoint of liquidity and vice
ventory does not sell fast and stays on the shelf or in the warehouse for a long time.

Cost of goods sold

Inventory turnover ratio =
Average inventory

The cost of goods sold means sales minus gross profit.

The average inventory refers to the simple average of the opening

and closing inventory.

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 Example 2: Inventory Turnover Ratio

f 20 per cent. The stock at the beginning and the end of the year was Rs 35,0

(Rs 3,00,000 – Rs 60,000)

nventory turnover ratio
= (Rs 35,000 + Rs 45,000) ÷ 2 6=(times per year)

12 months
nventory holding period
= Inventory turnover ratio, (6) = 2 months

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 Debtors Turnover Ratio

h ratio is indicative of shorter time-lag between credit sales and cash collecti

Net credit sales

Debtors turnover ratio =
Average debtors

Net credit sales consist of gross credit sales minus returns, if any,
from customers.

Average debtors is the simple average of debtors (including

bills receivable) at the beginning and at the end of year.

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 Example 3: Debtors Turnover Ratio

g amount of debtors at the beginning and at the end of the year respe

Rs 2,40,000
Debtors turnover ratio
= (Rs 27,500 + Rs 32,500) ÷ 2 8=(times per year)

12 Months
Debtors collection period
= Debtors turnover ratio, (8) = 1.5 Months

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 Creditors Turnover Ratio

ccounts are to be settled rapidly. The creditors turnover ratio is an important

Net credit purchases

Creditors turnover ratio = Average creditors

Net credit purchases = Gross credit purchases - Returns to

suppliers.

Average creditors = Average of creditors (including bills payable)

outstanding at the beginning and at the end of the year.

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 16

 Example 4: Creditors Turnover Ratio

ples has made credit purchases of Rs 1,80,000. The amount payable to the c
is Rs 42,500 and Rs 47,500 respectively. Find out the creditors turnover ratio

(Rs 1,80,000)
Creditors turnover ratio
= (Rs 42,500 Rs 47,500) ÷ 2 4=(times per year)

12 months
reditor’s payment period
= Creditors turnover ratio, (4) = 3 months

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s a bearing on the liquidity of a firm. The cash cycle captures the inter

The combined effect of the three turnover ratios

is summarised below:

2 months
Inventory holding period
+ 1.5 months
Add: Debtor’s collection period
– 3 months
Less: Creditor’s payment period
0.5 months

horter is the cash cycle, the better are the liquidity ratios as measured above

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 DEFENSIVE INTERVAL RATIO

Defensive interval ratio is the ratio between quick

assets and projected daily cash requirement.

Liquid assets
Defensive-interval ratio
=
Projected daily cash requirement

Projected cash operating expenditure

jected daily cash requirement
= Number of days in a year (365)

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 Example 5: Defensive Interval Ratio

om the next year is Rs 1,82,500. It has liquid current assets amounting

Rs 1,82,500
Projected daily cash requirement = = Rs 500
365
Rs 40,000
Defensive-interval ratio = = 80 days
Rs 500

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 Cash-flow From Operations Ratio

Cash-flow from operation ratio measures liquidity of a

firm by comparing actual cash flows from operations
(in lieu of current and potential cash inflows from
current assets such as inventory and debtors)
with current liability.

Cash-flow from operations

ash-flow from operations ratio
=
Current liabilities

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 21

 Leverage Capital Structure Ratio
There are two aspects of the long-term solvency of a firm:
(ii) Ability to repay the principal when due, and
• Regular payment of the interest .
Capital structure or leverage ratios throw light on the
long-term solvency of a firm.

Accordingly, there are two different types of leverage ratios.

These ratios are computed

Secondfrom
type:
theThese
balance
ratios
sheet
are computed from the Incom

• Debt-equity ratio
• Interest coverage ratio
• Debt-assets ratio
• Dividend coverage ratio
• Equity-assets ratio

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 I. Debt-equity ratio
Debt-equity ratio measures the ratio of long-term or total
debt to shareholders equity.

Long-term Debt + Short

Debt-equity ratio measures
Totalthe ratio of long-term debt + Other Current
Debt
Debt-equity ratiode3bt
term or total = to shareholders equity Liabilities = Total external
Shareholders’ equity Obligations

If the D/E ratio is high, the owners are putting up relatively less
money of their own. It is danger signal for the lenders and
creditors. If the project should fail financially, the creditors would
lose heavily.

A low D/E ratio has just the opposite implications. To the creditors, a
relatively high stake of the owners implies sufficient safety
margin and substantial protection against shrinkage in assets.

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 23

ntly its credit standing is not adversely affected, its ope

of low debt-equity ratio is that the shareholders of the

benefits of trading on

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 Trading on Equity
Trading on equity (leverage) is the use of borrowed funds in
expectation of higher return to equity-holders.

Trading on Equity (Amount in Rs thousand)

Particular A B C D
(a) Total assets 1,000 1,000 1,000 1,000
Financing pattern:
Equity capital 1,000 800 600 200
15% Debt — 200 400 800
(b)Operating profit (EBIT) 300 300 300 300
Less: Interest — 30 60 120
Earnings before taxes 300 270 240 180
Less: Taxes (0.35) 105 94.5 84 63
Earnings after taxes 195 175.5 156 117
Return on equity (per cent) 19.5 21.9 26 58.5
© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 25
 II. Debt to Total Capital

n creditors’ funds and owner’s capital can also be expressed using D

Total debt
Debt to total capital ratio =
Permanent capital

Permanent Capital = Shareholders’ equity +

Long-term debt.

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 III. Debt to total assets ratio
Total debt
Debt to total assets ratio =
Total assets
Proprietary Ratio
Proprietary ratio indicates the extent to which assets
are financed by owners funds.

Proprietary funds
Proprietary ratio = X 100
Total assets

Capital Gearing Ratio

Capital gearing ratio is used to know the relationship between equity
funds (net worth) and fixed income bearing funds (Preference
shares, debentures and other borrowed funds.

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 Coverage Ratio
Interest Coverage Ratio
Interest Coverage Ratio measures the firm’s ability to make
contractual interest payments.

EBIT (Earning before interest and taxes)

Interest coverage ratio =
Interest

Dividend Coverage Ratio

Dividend Coverage Ratio measures the firm’s ability to pay dividend
on preference share which carry a stated rate of return.

EAT (Earning after taxes)

Dividend coverage ratio =
Preference dividend

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Total fixed charge coverage ratio
Total fixed charge coverage ratio measures the firm’s ability to meet all fixed
payment obligations.

Total fixed charge EBIT + Lease Payment

coverage ratio = Interest + Lease payments + (Preference dividend
+ Instalment of Principal)/(1-t)

Total Cashflow Coverage Ratio

However, coverage ratios mentioned above, suffer from one major
limitation, that is, they relate the firm’s ability to meet its various
financial obligations to its earnings. Accordingly, it would be
more appropriate to relate cash resources of a firm to its
various fixed financial obligations.

EBIT + Lease Payments + Depreciation + Non-cash expenses

Total cashflow
=
coverage ratio (Principal repayment) (Preference dividend)
Lease payment +
+
+ Interest (1– t) (1 - t)

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 Debt Service Coverage Ratio
Debt-service coverage ratio (DSCR) is considered a more
comprehensive and apt measure to compute debt service capacity
of a business firm.

n
∑ EATt + Interestt + Depreciationt + OAt
t=1
DSCR = n
∑ Instalmentt
t=1

DEBT SERVICE CAPACITY

Debt service capacity is the ability of a firm to make the
contractual payments required on a scheduled basis over the life
of the debt.
© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 30
 Example 6: Debt-Service Coverage Ratio
Agro Industries Ltd has submitted the following projections. You are
required to work out yearly debt service coverage ratio (DSCR)
and the average DSCR.
(Figures in Rs lakh)
Interest on term loan Repayment of term
Year Net profit for the year
during the year loan in the year
1 21.67 19.14 10.70
2 34.77 17.64 18.00
3 36.01 15.12 18.00
4 19.20 12.60 18.00
5 18.61 10.08 18.00
6 18.40 7.56 18.00
7 18.33 5.04 18.00
8 16.41 Nil 18.00

he net profit has been arrived after charging depreciation of Rs 17.68 lakh every year

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Solution
Table 3: Determination of Debt Service Coverage Ratio
(Amount in lakh of rupees)
Cash Debt DSCR [col. 5
Principal
YearNet profit Depreciation Interest available obligation ÷ col. 7
instalment
(col. 2+3+4) (col. 4 + col. 6) (No. of times)]

1 2 3 4 5 6 7 8
1 21.67 17.68 19.14 58.49 10.70 29.84 1.96
2 34.77 17.68 17.64 70.09 18.00 35.64 1.97
3 36.01 17.68 15.12 68.81 18.00 33.12 2.08
4 19.20 17.68 12.60 49.48 18.00 30.60 1.62
5 18.61 17.68 10.08 46.37 18.00 28.08 1.65
6 18.40 17.68 7.56 43.64 18.00 25.56 1.71
7 18.33 17.68 5.04 41.05 18.00 23.04 1.78
8 16.41 17.68 Nil 34.09 18.00 18.00 1.89

Average DSCR (DSCR ÷ 8) 1.83

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 Profitability Ratio
Profitability ratios can be computed either from
sales or investment.

Profitability Ratios Profitability Ratios

Related to Sales Related to Investments

• Profit Margin • Return on Investments

• Expenses Ratio • Return on Shareholders’ Equity

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 33

 Profit Margin

Gross Profit Margin

Gross profit margin measures the percentage of each sales

rupee remaining after the firm has paid for its goods.

Gross profit margin = Gross Profit

X 100
Sales

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 Net Profit Margin
Net profit margin measures the percentage of each sales rupee
remaining after all costs and expense including interest
and taxes have been deducted.

Net profit margin can be computed in three ways

Earning before interest and taxes

i. Operating Profit Ratio =
Net sales

Earnings before taxes

ii. Pre-tax Profit Ratio =
Net sales

Earning after interest and taxes

iii. Net Profit Ratio = Net sales

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owing information of a firm, determine (i) Gross profit margin

1. Sales Rs 2,00,000
2. Cost of goods sold 1,00,000
3. Other operating expenses 50,000

Rs 1,00,000
(1) Gross profit margin = = 50 per cent
Rs 2,00,000

Rs 50,000
(2) Net profit margin = = 25 per cent
Rs 2,00,000

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 Expenses Ratio
Cost of goods sold
i. Cost of goods sold = X 100
Net sales
Administrative exp. + Selling exp.
ii. Operating expenses = X 100
Net sales
Administrative expenses
iii. Administrative expenses = X 100
Net sales
Selling expenses
iv. Selling expenses ratio = X 100
Net sales
Cost of goods sold + Operating expenses
v. Operating ratio = X 100
Net sales
Financial expenses
vi. Financial expenses = X 100
Net sales
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 Return on Investment
Return on Investments measures the overall effectiveness
of management in generating profits with its available
assets.

i. Return on Assets (ROA)

EAT + (Interest – Tax advantage on interest)
ROA =
Average total assets

ii. Return on Capital Employed (ROCE)

EAT + (Interest – Tax advantage on interest)
ROCE =
Average total capital employed

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 Return on Shareholders’ Equity
Return on shareholders equity measures the return on the
owners (both preference and equity shareholders)
investment in the firm.

Return on total shareholders’ equity =

Net profit after taxes
X 100
Average total shareholders’ equity

Return on ordinary shareholders’ equity (Net worth) =

Net profit after taxes – Preference dividend
X 100
Average ordinary shareholders’ equity

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 Efficiency Ratio
Activity ratios measure the speed with which various
accounts/assets are converted into sales or cash.
Inventory turnover measures the efficiency of various types
of inventories.

i. Inventory Turnover Cost

measures theof goods sold
activity/liquidity of
Inventory Turnover Ratio =
Average
inventory of a firm; the speed with whichinventory
inventory is sold

i. Inventory Turnover Cost

measures theofactivity/liquidity
raw materials used
of
Raw materials turnover =
inventory of a firm; the speed with which
Average inventory
raw material is sold
inventory

i. Inventory Turnover measuresCost of goods manufactured

the activity/liquidity of
Work-in-progress turnover =
Average
inventory of a firm; the speed work-in-progress
with which inventory isinventory
sold
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 Debtors Turnover Ratio
Liquidity of a firm’s receivables can be examined
in two ways.

i. Debtors
Inventoryturnover
Turnover Credit sales
i. = measures the activity/liquidity of inventory of
a firm; the speed with whichdebtors
Average inventory is sold bills receivable (B/R)
+ Average

Months (days) in a year

2. Average collection period =
Debtors turnover

i. Inventory Months (days)

Turnover in a year
measures the (x) (Average Debtors
activity/liquidity of + Average
inventory of (B/R)
a
Alternatively =
firm; the speed with which inventoryTotal
is credit
sold sales

Ageing Schedule enables analysis to identify

slow paying debtors.
© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 41
 Assets Turnover Ratio
Assets turnover indicates the efficiency with which firm
uses all its assets to generate sales.

i. Inventory Turnover measures Cost

the of goods sold of inventory of
activity/liquidity
i. Total assets turnover =
a firm; the speed with which inventory
Average total
is sold
assets
Cost of goods sold
ii. Fixed assets turnover =
Average fixed assets
Cost of goods sold
i. Inventory Turnover
iii. Capital turnover = measures the activity/liquidity of inventory of
Average is
a firm; the speed with which inventory capital
sold employed
Cost of goods sold
iv. Current assets turnover =
Average current assets

i. Inventory Turnover measures Cost

the of goods sold of inventory of
activity/liquidity
v. Working capital turnover =
Net working
a firm; the speed with which inventory capital
is sold

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 42

1) Return on shareholders’ equity = EAT/Average total shareholders’ equity.

2) Return on equity funds = (EAT – Preference dividend)/Average ordinary

shareholders’ equity (net worth).

3) Earnings per share (EPS) = Net profit available to equity shareholders’

(EAT – Dp)/Number of equity shares outstanding (N).

4) Dividends per share (DPS) = Dividend paid to ordinary

shareholders/Number of ordinary shares outstanding (N).

5) Earnings yield = EPS/Market price per share.

6) Dividend Yield = DPS/Market price per share.

7) Dividend payment/payout (D/P) ratio = DPS/EPS.

8) Price-earnings (P/E) ratio = Market price of a share/EPS.

9) Book value per share = Ordinary shareholders’ equity/Number of equity

shares outstanding.
© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 43
 Integrated Analysis Ratio

ratios provide better insight about financial and economic analysis o

(1) Rate of return on assets (ROA) can be decomposed in to

(i) Net profit margin (EAT/Sales)
(ii) Assets turnover (Sales/Total assets)
(2) Return on Equity (ROE) can be decomposed in to
(i) (EAT/Sales) x (Sales/Assets) x (Assets/Equity)

(ii) (EAT/EBT) x (EBT/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 44

 Rate of Return on Assets

EAT as percentage of Assets

sales turnover

EAT Divided by Sales Sales Divided by Total Assets

Fixed assets Plus Current assets

Gross profit = Sales less
cost of goods sold Alternatively

Minus Shareholder equity

Expenses: Selling Plus
Administrative Interest
Long-term borrowed
Minus funds

Income-tax Plus
Current liabilities

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 45

 Return on Assets
Earning Power
Earning power is the overall profitability of a firm; is computed
by multiplying net profit margin and assets turnover.

Earning power = Net profit margin × Assets turnover

Where, Net profit margin = Earning after taxes/Sales
Asset turnover = Sales/Total assets

i. Inventory Earning
Turnover after taxes
measures the Sales of inventory
activity/liquidity EAT of
Earning Power = x x
a firm; the speed with which
Sales inventory isTotal
sold Assets Total assets

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EXAMPLE: 8
Assume that there are two firms, A and B, each having total assets
amounting to Rs 4,00,000, and average net profits after
taxes of 10 per cent, that is, Rs 40,000, each.

Firm A has sales of Rs 4,00,000, whereas the sales of firm B aggregate

Rs 40,00,000. Determine the ROA of firms A and B. Table 4 shows
the ROA based on two components.

Table 4: Return on Assets (ROA) of Firms A and B

Particulars Firm A Firm B
1. Net sales Rs 4,00,000 Rs 40,00,000
2. Net profit 40,000 40,000
3. Total assets 4,00,000 4,00,000
4. Profit margin (2 ÷ 1) (per cent) 10 1
5. Assets turnover (1 ÷ 3) (times) 1 10
6. ROA ratio (4 × 5) (per cent) 10 10

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 47

 Return on Equity (ROE)
ROE is the product of the following three ratios: Net profit ratio (x)
Assets turnover (x) Financial leverage/Equity multiplier

Three-component model of ROE can be broadened further to

consider the effect of interest and tax payments.

EAT Turnover measures EBIT Net Profit

EBT the activity/liquidity
i. Inventory x x = of
Earnings
inventory before taxes
of a firm; SalesinventorySales
EBITwith which
the speed is sold
As a result of three sub-parts of net profit ratio, the ROE
is composed of the following 5 components.

EAT EBT EBIT Sales Assets

x x x x
EBT EBIT Sales Assets Equity
© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 48
A 5-way break-up of ROE enables the management of a firm to analyse the effect of interest
payments and tax payments separately from operating profitability. To illustrate further assume 8
per cent interest rate, 35 per cent tax rate and other operating expense of Rs 3,22,462 (Firm A) and
Rs 39,26,462 (Firm B) for the facts contained in Example 8. Table 5 shows the ROE (based on the
5 components) of Firms A and B.

Table 5: ROE (Five-way Basis) of Firms A and B

Particulars Firm A Firm B

Rs 4,00,000 Rs 40,00,000
Net sales
Less: Operating expenses 3,22,462 39,26,462
Earnings before interest and taxes (EBIT) 77,538 73,538
Less: Interest (8%) 16,000 12,000
Earnings before taxes (EBT) 61,538 61,538
Less: Taxes (35%) 21,538 21,538
Earnings after taxes (EAT) 40,000 40,000
Total assets 4,00,000 4,00,000
Debt 2,00,000 2,50,000
Equity 2,00,000 1,50,000
EAT/EBT (times) 0.65 0.65
EBT/EBIT (times) 0.79 0.84
EBIT/Sales (per cent) 19.4 1.84
Sales/Assets (times) 1 10
Assets/Equity (times) 2 1.6
ROE (per cent)
20 16

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 49

 Common Size Statements
Preparation of common-size financial statements is an extension
of ratio analysis. These statements convert absolute sums into
more easily understood percentages of some base amount. It is
sales in the case of income statement and totals of assets and
liabilities in the case of the balance sheet.

Limitations
Ratio analysis in view of its several limitations should be
considered only as a tool for analysis rather than as an end in
itself. The reliability and significance attached to ratios will largely
hinge upon the quality of data on which they are based. They are
as good or as bad as the data itself. Nevertheless, they are an
important tool of financial analysis.

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 50

 CASE STUDY

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 51

nancials of Reliance Industries Ltd (RIL) for the period 2001-2006, appraise its financial health from the point of view of liquidit

Selected financial data and ratios (Amount in Rs crore)

Particulars 2001 2002 2003 2004 2005 2006

(I) Related to Liquidity Analysis

9,844.48 28,988.62
Current assets 17,925.2523,245.88 24,591.03
13,025.31 536.80
3387.25 536.11
Marketable investments 536.19 536.11 16.58
2299.85 4976.07 7,412.88
Inventory 7510.14 7,231.22 10,119.82
1,134.17 2,722.46 3,927.81
Debtors 2,975.49 3,189.93 4,163.62
2,922.58 3,310.27 13,503.03
Advances 6,756.2212,064.38 8,144.85
100.63 1,760.71 3,608.79
Cash and bank balance 147.21 224.24 2,146.16
5,312.06 9,830.10 21,934.45 21,441.88
Current liabilities 18,160.3916,966.15
337.76 2,148.27 12,684.39 11,438.69
Short-term bank borrowings 7,193.77 9,145.14
3,754.50 5,847.20 366.95 310.42
Sundry creditors 8288.10 380.15 366.78
223.00 389.23 525.37 728.18
Interest accrued 717.48 676.45
104.72 175.16 3471.80 3,890.98
Creditors for capital goods 1580.89 2,670.75
892.08 1270.24 4,885.94 2,073.61
Other current liabilities & provisions 4,107.03
Other data and ratios
Net working capital -235.14 6,279.73 3,149.15
4,532.42 3,195.21 7,054.17
Credit sales 49,743.5456,247.03 89,124.16
22,886.51 45,073.88 73,164.10
Cost of goods sold 54,642.6041,657.92 65,535.84
21,290.91 45,957.85 53,345.03
Cost of raw material used 50,378.6534,721.39 58,342.31
18,155.98 41,023.35 45,931.87
Credit purchases 56,884.4960,246.91 68,516.87
21,608.85 45,083.06 70,014.80
Average debtors 2,848.97 3,094.02 4,045.71
988.31 1,928.31 3,558.87
Average creditors 7,067.65 9,413.58 12,688.31
3,170.68 4,800.85 11,515.6 1.49
Current ratio 0.99 1.75
1.85 1.33 1.66 .38
Acid test ratio 0.20 .26
0.87 0.51 .55 21.40
Debtors turnover 17 17.63
23 23 9 18.62 5.40
Creditors turnover 8 6.40
7 16 6.08 17
Debtors cycle (days) 21 21
16 39 20 67
Creditors cycle (days) 45 57
54 60

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 52

 CONTD.
Particulars 2001 2002 2003 2004 2005 2006

(II) Related to Solvency Analysis

Free reserves 9,307.89 21,834.29 23,656.31 33,056.50 39,010.23 48,411.09
Paid up capital 1,053.49 1,395.85 1,395.92 1,395.95 1,393.09 1,393.17
Preference capital 0.00 0.00 0.00 0.00 0.00 0.00
Bonus equity capital 481.77 481.77 481.77 481.77 481.77 481.77
Total equity 10,843.15 23,711.91 25,534.00 34,934.22 40,885.09 50,286.03
Long-term borrowings 9,798.03 16,780.21 12,564.54 11,149.38 6,172.98 8,185.60
Current liabilities 5,312.06 9,830.10 18,160.39 12,955.22 17,131.52 16,454.48
Total debt 15,110.09 26,610.31 30,724.93 24,104.60 23,304.50 24,640.08
EBIT 4,032.37 6,307.71 6,551.17 7,735.86 10,537.34 11,581.10
Interest 1,215.56 1,827.85 1,555.40 1,434.72 1,468.66 877.04
Total debt-equity ratio 1.39 1.12 1.20 0.69 0.57 0.49
Long-term debt-equity ratio 0.90 0.71 0.49 .31 .15 .16
Interest coverage ratio 3.32 3.45 4.21 5.39 7.17 13.20

to Profitability Analysis
22886.51 45073.88 49,743.54 56,247.03 73.164.10 89,124.46
manufacturing)
21290.91 45957.85 54,642.60 41,657.92 53,345.03 65,535.84
goods sold
5,597.48 9,123.85 9,388.26 10,982.88 14,260.84 14,982.01
ncluding other earnings)
4,032.37 6,307.71 6,551.17 7,735.86 10,537.34 11,581.10
2,786.00 4,434.17 4,982.75 6,301.14 9,068.68 10,704.06
2,646.50 3,242.17 4,106.85 5,160.14 7,571.68 9,069.34
1,215.55 1,827.84 1,555.4 1,434.72 1,468.66 877.04
19235.95 27,053.32 34,388.04 50,030.24 54,560.80 61,738.85
total capital employed
29622.14 43,325.86 60,415.77 52,764.91 57,292.51 65,428.89
total assets
10715.17 17,277.53 24,622.96 1,396.38 1,394.94 1,393.51
equity funds
24.46 20.24 18.87 18.41 19.40 17.43
rofit %
17.62 13.99 13.17 13.75 14.40 12.99
ng profit ratio %
11.56 7.19 8.26 9.95 11.48 11.21
it ratio %
93.03 101.96 109.85 80.34 80.92 81.03
goods sold ratio %
20.07 18.74 16.47 13.18 16.56 16.11
return on capital employed (ROCE)1 ROR (Total assets)2
13.03 11.7 9.37 12.4 15.77 15.20
quity funds)
24.70 18.77 16.68 16.26 20.09 20.08

1. ROCE = (EAT©+ Tata McGraw-Hill

Interest)/ Publishing
Average capital Company Limited,
employed Financial
2. ROR (Total Management
assets) 6 assets
= (EAT + Interest)/ Average - 53
 Solution: The appraisal of financial health of RIL is presented below.
Liquidity Analysis:

ajor reason for the sharp difference in these two liquidity ratios may be ascribed to a sign
t liabilities during the 6 year period. The reliance on short-term bank borrowings, to such a

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 54

ays in 2004) seems to be at a very satisfactory level. In marked contrast, the creditors
(which have shown sharp decrease trend over the years). Such a step would help to

Solvency Analysis:

h its operating profits (EBIT) decline by more than nine-tenth (2006), it l would stil ha

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 55

 Profitability Analysis:

al employed. It fell from 20.07 per cent in 2001 to 16.11 per cent by 2006. However, it i

© Tata McGraw-Hill Publishing Company Limited, Financial Management 6 - 56