Illustration
Some Financial ratios of different categories of Tata Steel for 1998-2007 are given below.
|
Particulars
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
Current ratio
|
1.99
|
1.79
|
1.65
|
1.55
|
1.54
|
1.36
|
1.03
|
1.10
|
1.11
|
2.51
|
|
Debt to Equity
|
1.19
|
1.45
|
1.45
|
1.31
|
2.78
|
1.84
|
0.95
|
0.54
|
0.26
|
0.69
|
|
Return on Average Networth (%)
|
8.63
|
7.65
|
11.51
|
14.38
|
6.38
|
35.88
|
46.28
|
62.01
|
42.90
|
36.09
|
|
Interest cover
|
2.40
|
2.05
|
2.32
|
2.60
|
1.68
|
5.14
|
22.82
|
29.36
|
43.08
|
37.01
|
|
PBT/Turnover (%)
|
6.27
|
5.49
|
7.75
|
8.74
|
3.70
|
14.39
|
24.59
|
36.17
|
33.87
|
34.81
|
|
Asset Turnover (%)
|
59.02
|
55.44
|
58.47
|
63.59
|
63.28
|
78.16
|
100.7
|
110.1
|
108.52
|
71.38
|
|
Average Debtors to Turnover (%)
|
20.14
|
20.14
|
17.81
|
15.86
|
15.48
|
10.38
|
6.75
|
3.88
|
3.27
|
2.96
|
|
Average Inventory to Turnover (%)
|
12.12
|
12.39
|
10.73
|
9.01
|
8.95
|
7.72
|
7.37
|
7.70
|
9.49
|
9.01
|
Solution
Index = 100 x Index Year Amount/Base Year Amount
Base year 1998=100
|
Particulars
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
Current ratio
|
100
|
90
|
83
|
78
|
77
|
68
|
52
|
55
|
56
|
126
|
|
Debt to Equity
|
100
|
122
|
122
|
110
|
234
|
155
|
80
|
45
|
22
|
58
|
|
Return on Average Networth (%)
|
100
|
89
|
133
|
167
|
74
|
416
|
536
|
719
|
497
|
418
|
|
Interest cover
|
100
|
85
|
97
|
108
|
70
|
214
|
951
|
1223
|
1795
|
1542
|
|
PBT/Turnover (%)
|
100
|
88
|
124
|
139
|
59
|
230
|
392
|
577
|
540
|
555
|
|
Asset Turnover (%)
|
100
|
94
|
99
|
108
|
107
|
132
|
171
|
187
|
184
|
121
|
|
Average Debtors to Turnover (%)
|
100
|
100
|
88
|
79
|
77
|
52
|
34
|
19
|
16
|
15
|
|
Average Inventory to Turnover (%)
|
100
|
102
|
86
|
74
|
74
|
64
|
61
|
64
|
78
|
74
|
Interpretation
Current Ratio
It has shown a decreasing trend except in the year 2006 and 2007 where there was an increase. This increase of Current ratio was on account of Increase in the Deposit accounts with Scheduled Banks and Increase in advances.
Debt Equity Ratio
The company increased its debt capital by 134% over a period of five years. Thereafter, it changed its capital structure policy to reduce the financial risk. During the last four years it reduced its debt capital by 78% on account of tight fund management and progressive retiring of high cost borrowings, in the form of prepayment of some of the existing loans; however, in 2007, it has increased the debt capital. The Management Discussion and Analysis section clearly states that the Secured and unsecured loans increased by Rs.7,129.18 crore from Rs.2,516.15 crore as on 31st March, 2006 to Rs.9,645.33 crore as on 31st March, 2007 due to new syndicate foreign currency loans drawn for funding the acquisition of Corus Group plc.
Interest Coverage Ratio
It shows an increasing trend, which is a good sign. But during 2006-07 it has reduced by 253%. This indicates an increasing insecurity among creditors. A detailed study of Management Discussion & Analysis reveals that the net interest charges increased by 40% to Rs.173.90 crore as compared to Rs.124.51 crore in the previous year, mainly due to an increase in interest on Forex loans, swap charges for hedging currency and interest rate risks and higher working capital loans.
Return On Average Networth
It shows an increasing trend except in year 2002. It increased by 232% over a period of ten years. This was mainly on account of increase in profit after tax over the years which is mainly on account of increase in sales and other income.
PBT/Turnover
It shows an increasing trend except in year 2002, which is a good sign. This ratio increased by 455% over a period of ten years. It shows the extent to which profitability objective is being achieved.
Asset Turnover
This ratio has increased by 84% over a period of nine years showing an increasing trend except in year 2007. This implies an efficient use of the assets, which was mainly on account of increase in sales and Net fixed assets over the years.
Average Debtors to Turnover
This ratio has declined by 85%, showing a decreasing trend over a period of ten years. There is tremendous improvement in this ratio, on account of reduction of debtors over the years due to better collection drive, and Stringent Credit Management policies. Such decreasing trend also indicates stable receivable policies of the company.
Average Inventory to Turnover
Inventory turnover was reduced by 39% over the first seven years, so the company's inventory holding was high during that period. During the last three years, inventory turnover ratio has witnessed a reduction of 36% to 26%
(a fluctuation tendency). Such fluctuating trends indicate unstable inventory policies of the company.
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