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RATIO ANALYSIS

THERMAX LTD.
F.Y. 2010-2011
Department of Management Sciences (PUMBA) Executive MBA 2010-12 Presented by Jitendra Patil (00539) Sachin Kaldate (00526) Santosh Junnarkar (00525) Arun Shinde (00556)

RATIO ANALYSIS
Ratio analysis has assumed important role as a tool for appraising the real worth of an enterprise, its performance during a period of time and its pit falls.

Ratio analysis is a vital apparatus for the interpretation of financial statements. It also helps to find out any cross-sectional and time series linkages between various ratios.

RATIO ANALYSIS
Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements.

They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.

WHY FINANCIAL ANALYSIS


Lenders/Investors need it for carrying out

Technical Appraisal Commercial Appraisal Financial Appraisal Economic Appraisal Management Appraisal

RATIO ANALYSIS
Its a tool which enables the banker or lender to arrive at the following factors : Liquidity position Profitability Solvency Financial Stability Quality of the Management Safety & Security of the loans & advances to be or already been provided

Before looking at the ratios there are a number of cautionary points concerning their use that need to be identified :

a. The dates and duration of the financial statements being compared should be the same. If not, the effects of seasonality may cause erroneous conclusions to be drawn. b. The accounts to be compared should have been prepared on the same bases. Different treatment of stocks or depreciations or asset valuations will distort the results. c. In order to judge the overall performance of the firm, a group of ratios, rather than just one or two should be used. In order to identify trends at least three years of ratios are normally required.

CLASSIFICATION OF RATIOS
Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio Balance Sheet and Profit & Loss Ratio

Financial Ratio Current Ratio Quick Ratio Debt Equity Ratio

Operating Ratio Gross Profit Ratio Operating Ratio Expense Ratio Net profit Ratio Stock Turnover Ratio

Composite Ratio Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors Turnover Ratio,

DEBT EQUITY RATIO


Description:

Debt equity ratio shows the relationship between long-term debts and shareholders funds. It is also known as ExternalInternal equity ratio. Formula: Debt Equity Ratio = Debt/Equity
Thermax Value: Total Debt 48 Cr & Equity + Reserves 1292.34 Cr Debt Equity Ratio = 0.037 : 1 Objective and Significance: This ratio is a measure of owners

stock in the business. Proprietors are always keen to have more funds from borrowings because, Their stake in the business is reduced and subsequently their risk too. Interest on loans or borrowings is a deductible expenditure while computing taxable profits. Dividend on shares is not so allowed by Income Tax Authorities. The normally acceptable debt-equity ratio is 2:1.

INTEREST COVERAGE RATIO


Description:

Interest Coverage Ratio is a ratio between net profit before interest and tax and interest on long-term loans.
Formula: Interest Coverage Ratio = Earnings before Int. & Tax / Interest on Long-term Loans Thermax Value:

EBIT 579.97 Cr & Interest 2.18 Cr Interest Coverage Ratio = 262.83


Objective and Significance: This ratio expresses the satisfaction

to the lenders of the concern whether the business will be able to earn sufficient profits to pay interest on long-term loans. This ratio indicates that how many times the profit covers the interest. It measures the margin of safety for the lenders. The higher the number, more secure the lender is in respect of periodical interest.

DEBT SERVICE COVERAGE RATIO


Description:

The DSCR ratio measures debts servicing capacity of a business so far as interest on long-term loans is concerned.
Formula: DSCR = Net Operating Income / Total Debt Service

DSCR = (Annual Net Income + Interest Expense + Depreciation + Other discretionary and non-cash items like non contractual provided by the management) / (Principal Repayment + Interest Payments + Lease Payments)
Thermax Value: Net Op. Income 382.42+2.18+43.19 Cr & Debt Service 2.18 Cr DSC Ratio = 196.23 Objective and Significance: A debt service coverage ratio which is

below 1 indicates a negative cash flow. For example, a debt service coverage ratio of 0.92 indicates that the companys net operating income is enough to cover only 92% of its annual debt payments.

FIXED ASSETS TURNOVER RATIO


Description:

Fixed Assets Turnover Ratio establishes a relationship between net sales and net fixed assets. This ratio indicates how well the fixed assets are being utilized. Formula: Fixed Assets Turnover Ratio = Net Sales/Net Fixed
Assets
If Net Sales are not given cost of goods sold may also be used in place of net sales. Net fixed assets are considered cost less depreciation.

Thermax Value: Net Sales 3739.83 Cr & Net Fixed Assets 486.61 Cr F.A. Turnover Ratio = 7.68 Objective and Significance: This ratio expresses the number to

times the fixed assets are being turned over in a stated period. It measures the efficiency with which fixed assets are employed. A high ratio means a high rate of efficiency of utilization of fixed asset and low ratio means improper use of the assets.

CURRENT RATIO
Description:

Current ratio is calculated in order to work out firms ability to pay off its short-term liabilities. This ratio is also called working capital ratio. Current assets are those assets which are either in the form of cash or easily convertible into cash within a year.
Formula: Current Ratio = Current Assets/Current Liabilities

Thermax Value: Current Assets 2672.08 Cr & Current Liabilities 2232.27 Current Ratio = 2672.08/2232.27= 1.19 : 1 Objective and Significance: Current ratio shows the short-term

financial position of the business. This ratio measures the ability of the business to pay its current liabilities. The ideal current ratio is suppose to be 2:1 In case it is less than 2:1, the short-term financial position is not supposed to be very sound and in case, it is more than 2:1, it indicates idleness of working capital.

QUICK RATIO
Description:

Quick Ratio shows short-term solvency of a business in a true manner. It is also called acid-test ratio or liquid ratio. It is calculated in order to know how quickly current liabilities can be paid with the help of quick assets. The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash.
Formula: Quick Ratio=(Current Assets-Inventory)/Current Liabilities Thermax Value: ( 2672.08 - 281.31 Cr) / 2232.27 Cr Quick Ratio = 1.07 : 1 Objective and Significance: : Quick ratio is calculated to work out the

liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal liquid ratio is suppose to be 1:1

STOCK TURNOVER RATIO


Description:

Stock turnover ratio is a ratio between cost of goods sold and average stock. This ratio is also known as stock velocity or inventory turnover ratio

Formula: Stock Turnover Ratio = Cost of Goods Sold/Average Stock

Where, Average Stock = [Opening Stock + Closing Stock]/2 Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses Closing Stock

Thermax Value:

Stock Turnover Ratio = 4363.52 / ((235.88+271.63)/2) = 17.20


Objective and Significance:

This ratio provides guidelines to the management while framing stock policy. It measures how fast the stock is moving through the firm and generating sales. It helps to maintain a proper amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes the business to earn a reasonable margin of profit.

DEBTORS TURNOVER RATIO


Description:

Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. This ratio is also known as Debtors Velocity.
Formula: Debtors Turnover Ratio = Net Credit Sales/Average Accounts Receivables

Where, Average Accounts Receivables = (Opening Debtors & Receivables + Closing Debtors & Receivables)/2 Net Credit Sales = Total Sales Cash Sales
Thermax Value:

Debtors Turnover Ratio = 1001.26 / ((190.92+167.32)/2) = 5.59


Objective and Significance:

This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed. Higher the ratio, better it is as it proves that the debts are being collected very quickly.

DEBT COLLECTION PERIOD


Description:

Debt collection period is the period over which the debtors are collected on an average basis. It indicates the rapidity or slowness with which the money is collected from debtors.
Formula: Debt Collection Period = 12 Months or 365 Days/Debtors Turnover Ratio

Thermax Value:

Debt Collection Period = 12 / 5.59 = 2.15 months OR


Debt Collection Period = 365 / 5.59 = 65.3 days (2.15 months) Objective and Significance: This ratio indicates how quickly and efficiently the debts are collected. The shorter the period the better it is and longer the period more the chances of bad debts. Although no standard period is prescribed anywhere, it depends on the nature of the industry.

CREDITORS TURNOVER RATIO


Description:

This ratio establishes a relationship between net credit purchases and average creditors or payables. It determines the efficiency with which the Creditors are paid.

Formula: Creditors Turnover Ratio = Net Credit purchases/Average Accounts payables

Where, Average Accounts Payables = (Opening Creditors and Bills Payable + Closing Creditors and Bills Payable)/2 Net Credit Purchases = Total Purchases Cash Purchases

Thermax Value:

Creditors Turnover Ratio = 801.61 / ((85.53+98.57)/2) = 8.71


Objective and Significance:

It indicated the speed with which the creditors are paid. A higher ratio indicates a shorter payment period. In this case, the enterprise needs to have sufficient funds as working capital to meet its creditors. Lower ratio means credit allowed by the supplier is for a long period or it may reflect delayed payment to suppliers which is not a very good policy as it may affect the reputation of the business. Thus , an enterprise should neither have a very high nor a very low ratio

CREDIT COLLECTION PERIOD


Description:

This shows the average period for which the credit purchases remain outstanding or the average credit period availed of. It indicate how quickly cash is paid to the creditors.
Formula: Credit Collection Period = 12 Months or 365 Days / Creditors Turnover Ratio

Thermax Value:

Credit Collection Period = 12 / 8.71 = 1.37 months OR


Credit Collection Period = 365 / 8.71 = 41.91 days (1.37 months) Objective and Significance: This ratio indicates how quickly and efficiently the Credits are paid. Lower ratio means credit allowed by the supplier is for a long period or it may reflect delayed payment to suppliers which is not a very good policy as it may affect the reputation of the business. Thus , an enterprise should neither have a very high nor a very low ratio.

GROSS PROFIT TO NET SALES RATIO


Description:

Gross Profit Ratio shows the relationship between Gross Profit of the concern and its Net Sales.
Formula: Gross Profit Ratio = (Gross Profit / Net Sales ) x 100 Where, Gross Profit = Net Sales Cost of Goods Sold Net Sales = Total Sales Sales Return Thermax Value:

Gross Profit Ratio = (572.97 / 4788.17) X 100 = 11.97%


Objective and Significance: Gross Profit Ratio provides guidelines to the concern whether it is earning sufficient profit to cover administration and marketing expenses and is able to cover its fixed expenses. The gross profit ratio of current year is compared to previous years ratios or it is compared with the ratios of the other concerns. The minor change in the ratio from year to year may be ignored but in case there is big change, it must be investigated.

NET PROFIT TO NET SALES RATIO


Description:

Net Profit Ratio shows the relationship between Net Profit of the concern and Its Net Sales.
Formula: Net Profit Ratio = (Net Profit / Net Sales) x 100

Where, Net Profit = Gross Profit Selling and Distribution Expenses Office and Administration Expenses Financial Expenses Non Operating Expenses + Non Operating Incomes. Net Sales = Total Sales Sales Return
Thermax Value:

Net Profit Ratio = (382.42 / 4788.17) x 100 = 7.98%


Objective and Significance: In order to work out overall efficiency of the concern Net Profit ratio is calculated. This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years ratios, the increment shows the efficiency of the concern.

EBIT TO SALES RATIO


Description:

EBIT Ratio shows the relationship between Earning before Interest & Taxes of the concern and its total Sales.
Formula: EBIT Ratio = (EBIT / Total Sales) x 100

Where, EBIT = Gross Profit Selling and Distribution Expenses Office and Administration Expenses Financial Expenses Non Operating Expenses + Non Operating Incomes.
Thermax Value:

EBIT Ratio = (575.15 / 4788.17) x 100 = 12.01%


Objective and Significance: The EBIT to sales ratio determines whether the fixed costs are too high for the production volume.

EARNING PER SHARE


Description:

Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock

Formula:

Thermax Value:

With PAT of Rs 382.42 Cr and weighted Av.common Shares 11,91,56,300 NO the EPS is 32.09 for FY 2010-11.

Objective and Significance:

If you compare it to the EPS from a previous quarter or year it indicates the rate of growth a companies earnings are growing (on a per share basis).

P/E RATIO
Description:

Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock

Formula:

Thermax Value:

With Av. Price per share on NSE Rs 769.63/- and EPS 32.09, the P/E ratio is 23.98 for FY 2010-11.

Objective and Significance:

A P/E of 30 is high by historical stock market standards. This type of valuation is usually placed on only the fastest-growing companies by investors in the company's early stages of growth. Once a company becomes more mature, it will grow more slowly and the P/E tends to decline.

NET WORKING CAPITAL TO SALES RATIO


Description:

To calculate the sales to working capital ratio, compare annualized net sales to working capital, which is accounts receivable, plus inventory, minus Accounts Payable.
Annualized Net Sales

Formula:

-------------------------------------------------------------(Accounts Receivable + Inventory Accounts Payable)


Thermax Value:

4788.17/ (1001.26+282.31-184.1) = 4.35


Objective and Significance:

The best ways to determine changes in the overall usage of cash over time is the sales to working capital ratio. This ratio shows the amount of cash required to maintain a certain level of sales.

DIVIDEND PER SHARE


Description:

This is the amount of dividend declared by the company calculated on a rupees-per-share basis.

Formula: Equity Dividend Declared

-------------------------------------------------------Weighted Avg No of Equity Shares


Thermax Value:

With equity dividend of Rs 107.24 Cr, the the devidend per share is Rs 9/-

Objective and Significance: Dividends are a form of profit distribution to the shareholder. Having a growing dividend per share can be a sign that the company's management believes that the growth can be sustained.

CASH EARNING PER SHARE


Description: Formula:

Cash EPS is operating cash flow (not EBITDA) divided by diluted shares outstanding
operating cash flow ------------------------------------Diluted shares outstanding

Thermax Value: 572.97/11.91 = 48.10 Objective and Significance:

Cash EPS is better because operating cash flow cannot be manipulated as easily as net income and represents real cash earned, calculated by including changes in key asset categories, such as receivables and inventories. For example, a company with reported EPS of Rs 50 and cash EPS of Rs 100 is preferable to a firm with reported EPS of Rs 100 and cash EPS of Rs 50.

INVESTMENT TO NET WORTH RATIO


Description:

- States the return that shareholders could receive on their investment - Developed from the perspective of the shareholder
Formula: Profit after tax ------------------------------------------------ x 100 Shareholder capital + Retained earnings Thermax Value:

382.42 / ( 23.83+ 1268.51) = 29.59 %


Objective and Significance:

Indicator of how well a company is utilizing the shareholder investment to create returns for them, and can be used for comparison purposes with competitors in the same industry.

INVESTMENT / CAPITAL EMPLOYED


Description:

A ratio that indicates the efficiency and profitability of a company's capital investments.
Formula: EBIT -------------------------------------- x 100 Total Assets Current Liabilities Thermax Value:

572.97 / (3389.21 - 2232.27) x 100 = 49.52 %


Objective and Significance:

ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.

RETURN ON INVESTMENT - ROI


Description:

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.
Formula:

Net Profit before Interest, Tax and Dividend/Capital Employed


Thermax Value:

572.97 / 1292.34 = 0.4433 i.e. 44.33%


Objective and Significance:

This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used.

ROE ( PAT/EQUITY )
Description:

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
Formula: Net Income ------------------------Shareholder's Equity Thermax Value: 988.18 / 23.83 = 41.33 Objective and Significance

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

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