Financial Ratio analysis – Suzlon Energy limited Introduction: It is a fascinating topic to study because it can teach us so much about account and business. When we use ration analysis we can know about how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy!! Ration analysis can also help us to check whether a business is doing better this year that it was last year; and it can tell us if our business is doing better or worse that other businesses doing and selling the same thing.
What does ration analysis will tell us?? We can use ration analysis to tell us whether the business 1. Is profitable 2. Has enough money to pay its bill 3. Could be paying its employees higher wages 4. Is paying its share of tax 5. Is using its assets efficiently 6. Has a gearing problem 7. Is a candidate for being bought by another company or investor Here in the above section we have talked about profits, having enough cash, efficiently using assets etc; we can put these ratios in the categories that are designed exactly to help us to answer many questions.
The categories are 1. Profitability: Has the business made a good profit compared to its turnover? 2. Return Ratios: Compared to its assets and capital employed, has the business made a good profit? 3. Liquidity: Does the business has enough money to pay its bills? 4. Asset usage: How has the business used its fixed and current assets? 5. Gearing ratios: Does the company has lot of debt or is it financed mainly by shares? 6. Earnings per share: Measure of profitability.
Used for comparing performance over time. Users of Accounting Information As we have already specified the ratios in to the groups, we should put reader of accounting information in to convenient groups. The list of the categories of readers and user of accounts includes the following people and group of people * Investors * Lenders * Managers of the organization * Employees * Suppliers and other trade creditors * Customers * Governments and their agencies Public * Financial analysts * Environmental groups * Researchers : both academic and professionals The users of accounts that we have listed will want to know the sorts of things we can see in the table below: Investors| To help them determine whether they should by the shares of the business, hold on to the shares they already own or sell the shares they already own. They also want to assess the ability of the business to pay dividends. Lenders| To determine whether their loans and interest will be paid when due| Managers| Might need segmental and total information to see how they fit into the overall picture| Employees| Information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities| Suppliers and other trade creditors| Business supplying good and material to other business will read their accounts to see that they don’t have problems: after all, any supplier wants to know it his customers are going to pay their bills! Customers| The continuance of a business, especially when they have a long term involvement with the business| Government and their agencies| The allocation of resources and therefore, the activity of business.
To regulate the business, determine taxation policies and as the basis for national income and similar statistics| Local community| Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area| Financial analysts| They need to know, for example the accounting concepts employed for inventories, depreciation, bad debts and so on| Environmental groups| Many organizations now publish reports specifically aimed at informing us about how they are working to keep environment clean. Which ratio will be associated with these groups Interested group| Ratio to watch| Investors| Return on capital employed| Lenders| Gearing ratios| Managers| Profitability ratio| Employees| Return on capital employed| Supplier and other trade creditors| Liquidity ratio| Customer| Profitability ratio| Government and their agencies| Profitability ratio| Financial Analysts| All ratios| Environmental groups| Expenditures on anti-pollution measures| Researchers| Depends on the nature of their study| Financial ratios calculation
Sr No| Performance are| Year ended on 31st March| Trend| | | 2007| 2008| 2009| 2010| | 1| Profitability ratios | | Gross profit margin| 40. 89 %| 40. 06%| 38. 70%| 32. 54%| Profitability is decreasing year by year | | Profit Margin(Profit after tax/Sales)| 19. 72%| 20. 46%| -6. 49%| -40. 5%| Drastic reduction in the profit margin, it shows that company has more expenditures than revenues. There is no cushion available to the company in the event of drop of sales price. | | Asset turnover(sales/(Avg total asset)| 1. 34| 0. 69| 0. 52| 0. 7| It is observed that during the year 2006-2007 the assest turnover ratio is pretty good but in the successive years it is becoming lower. There is a decrease in sales per rupees of investment. Hence company’s assets are underutilized. | | Return on Asset or Return on investment (Profit after tax/Avg total Asset in %)| 27%| 14%| -3%| -21%| Profitability from a given level of investment is reducing from 2007 to 2010. Infact it indicates on negative side.
That indicated that company is no more profitable for its investments. | | | | | | | | Return on Equity (Profit After tax/Avg Shareholder’s equity| 32%| 20%| -7%| -50%| It is observed that during the year 2006-07 & 08, return on equity is higher than return on asset that means company has earned more per rupees of shareholder’s fund. But in the year 2009 and 2010, the company has made huge loss to the shareholders. | | Earnings per Share (Profit after tax/Weighted Avg number of Equity shares)| Rs 0. 369| Rs. 0. 095| Rs. 0. 03(Loss)| Rs. 0. 90(Loss)| EPS is also decreasing from 2007 to 2010. Hence shareholder is losing his fund on the investment done. 2| Liquidity Ratios | | Current ratio (Current Asset / Current liabilities)| 3. 32| 2. 69| 2. 46| 2. 17| It is an indicator of a company’s ability to pay its debts in the short term. Here there a decrease in the ratio hence there is reduction in current assets to meet the current liabilities. | | Quick ratio (Quick asset/Current liabilities)| 2. 41| 2. 11| 2. 08| 1. 96| Decrease in the quick ratio shows that company has invested lot money in inventories. Also company has less cash in their hand to pay the bills. | | Debtor Turnover ratio (sales/Avg debtors)| 3. 2| 2. 094| 1. 52| 2. 33| It is a measure of the efficiency of a firm’s credit and collection policy. Also it shows the number of times each year the debtors turn in to cash.
It provides information about quality of firm’s debtors and collection of efforts. Higher debtor turnover ratio in 2007 indicated better mgmt. of receivables. But next successive two year it was reduced and again increasing in 2010 year. | | Debtor turnover ratio(no of days)| 119. 2 days| 171. 91 days| 236. 84 days| 154. 50 days| It shows that suzlon’s debtors were outstanding during the year 2009. | Inventory turnover ratio(Cost of goods sold/Avg inventories)| 2. 60| 2. 84| 3. 28| 1. 51| This ratio shows the number of times a suzlon’s inventory is turned in to sales. During the year 2009 higher the inventory turnover shows better management of inventories. Whereas during year 2009-10, poor management of inventories| | | | | | | | | | | | | | | 3| Leverage or Solvency or Capital structure ratio | | Debt to equity ratio(based on Long term debt) [Long term debt/Shareholder’s liabilities)| 0. 21| 0. 38| 1. 00| 1. 9| The trend shows that D/E ratio is increasing year by year and shows large share of financing by creditor of the firm. Firm is taking too much loan from the banks or creditors. It’s a danger signal for the firm. High ratio lead to inflexibility in operation of firm. | |
Debt to total capital ratio(Long term debt/Permanent capital)| 0. 18| 0. 27| 0. 50| 0. 56| The Ration trend shows that it’s increasing year by year. | | Interest coverage ratio(Profit before interest and tax/interest expenses)| 12. 03 times| 11. 79 times| -0. 245 times| -0. 0 times| This ration shows weather company has sufficient income to cover its interest requirements by a wide margin. The ration trend for Suzlon shows that it has very low safety for payment of interest. | 4| Management Ratio| | Inventory Turnover ratio(Net Sales/Avg. Inventory)| 2. 16 times| 2. 42 times| 2. 52 times| 1. 60 times| The ration for each year shows very less times conversion of inventories in sales. Also it is decreasing in the year 2010. It shows poor quality of inventory management| | Account receivables turnover ratio(days/debtors turnover)| 120 days| 174 days| 239 days| 156 days| |