Financial Ratio Analysis of Indus Motor Company Ltd

[

]CENTER FOR ADVANCE STUDIES IN ENGINEERING

2009

UMAR IFTIKHAR KIYANI (SP-08-CE-125)

SULEMAN AHMAD AWAN (SP-09-CE-118)

ACKNOWLEDGEMENT

In the name of “Allah”, the most beneficent and merciful who

gave us strength and knowledge to complete this report. This

report is a part of our course “Finance for Technical Managers”.

This has proved to be a great experience.

We would like to express our gratitude to our teacher Mr.

Mazhar Hussain who gave us this opportunity to fulfill this

report.

CASE 2

VISION OF INDUS MOTOR COMPANY LTD.

"IMC’s Vision is to be the most respected and successful enterprise, delighting customers with a wide range of products and solutions in the automobile industry with the best people and the best technology".

CASE 3

MISSION OF INDUS MOTOR COMPANY LTD.

IMC’s mission is reflected in company’s slogan

ACT # 1

Action, Commitment and Teamwork to become #1 in Pakistan.

The Indus team is committed to ACT so that it achieves #1 position in the auto industry in

Respect & Corporate Image Quality & Safety Customer Satisfaction Production & Sales Profitability Best Employer

CASE 4

COMPANY PROFILEINDUS MOTOR COMPANY LTD has been selected for financial analysis as project. Financial

report of yr 2007-2008 has been picked for analysis purpose. A brief history of the company is

stated below.

Indus Motor Company (IMC) is a joint venture between the House of Habib, Toyota Motor

Corporation Japan (TMC) , and Toyota Tsusho Corporation Japan (TTC) for assembling,

progressive manufacturing and marketing of Toyota vehicles in Pakistan since July 01, 1990.

IMC is engaged in sole distributorship of Toyota and Daihatsu Motor Company Ltd vehicles in

Pakistan through its dealership network.

The company was incorporated in Pakistan as a public limited company in December 1989 and

started commercial production in May 1993. The shares of company are quoted on the stock

exchanges of Pakistan i.e. Karachi, Lahore and Islamabad stock exchanges. The stock code for

dealer in equity shares of Indus Motor Company Limited at KSE, LSE and ISE is INDU. Toyota

Motor Corporation and Toyota Tsusho Corporation have 25 % stake in the company equity. The

majority shareholder is the House of Habib.

IMC's production facilities are located at Port Bin Qasim Industrial Zone near Karachi in an area

measuring over 105 acres.

Indus Motor Company’s plant is the only manufacturing site in the world where both Toyota

and Daihatsu brands are being manufactured.

Heavy investment was made to build its production facilities based on state of art technologies.

To ensure highest level of productivity world-renowned Toyota Production Systems are

implemented.

IMC's Product line includes 6 variants of the newly introduced Toyota Corolla, Toyota Hilux

Single Cabin 4x2 and 4 versions of Daihatsu Cuore.

CASE 5

RATIO ANALYSIS

A statistic has little value in isolation. Hence, a profit figure of Rs.100 million is meaningless

unless it is related to either the firm’s turnover (sales revenue) or the value of its assets.

Accounting ratios attempt to highlight the relationships between significant items in the

accounts of a firm. Financial ratios are the analyst’s microscope; they allow them to get a better

view of the firm’s financial health than just looking at the raw financial statements.

Ratios are used by both internal and external analysts

Internal uses Planning Evaluation of management

External uses Credit granting Performance monitoring Investment decisions Making of policies

CASE 6

CATEGORIES OF FINANCIAL RATIOS

The accounting ratios can be grouped in to five categories:

1. Liquidity Ratios shows the extent to which the firm can meet its financial obligations.2. Asset Management Ratios shows that how effectively the firm is managing its assets.3. Debt Management Ratios shows the extent to which a firm uses debt financing or

financial leverages.4. Profitability Ratios relates profits to sales and assets.5. Market Value Ratios are a measure of the return on investment.

CASE 7

LIQUIDITY ANALYSIS RATIOS

CASE 8

NET WORKING CAPITAL RATIO

Ratio Formula Calculation Value ‘08 Calculation Value ‘07Net Working Capital Ratio

Working Capital / Total Assets (Rs in ‘000)

5,885,153 / 13,748,109

0.428 6,125,156/ 15,665,050

0.391

Analysis:

There is an increase in the net working capital in 2008 as compared to in 2007. The company can easily utilize the amount for other profit related activities after paying off its debts. Also we can see that it is due to decrease in total assets in 2008, thus meaning that company is effectively utilizing its inventories.

CASE 9

WORKING CAPITAL

Ratio Formula Calculation Value ‘08 Calculation Value ‘07Working Capital Current Assets - Current Liabilities

(Rs in ‘000)9,664,784 - 3,779,631

5885153 13,536,082 - 7,410,926

6125156

Analysis:

There is a decrease in the working capital in 2008 as compared to in 2007. The company current assets have decreased in 2008 as well as its current liabilities. Although company still has enough working capital after paying off its debts in 2008, it also means that company is effectively utilizing its inventory.

CASE 10

CURRENT RATIO

Ratio Formula Calculation Value ‘08 Calculation Value ‘07Current Ratio Current Assets / Current

Liabilities (Rs in ‘000)9,664,784 / 3,779,631

2.557 13,536,082 / 7,410,926

1.826

Analysis:

There is an increase in the current ratio in 2008 as compared to in 2007. The company can easily pay off its debts. Moreover company current liabilities have also decreased from 2007.

ACID TEST / QUICK RATIO

CASE 11

Ratio Formula Calculation Value ‘08 Calculation Value ‘07Acid Test/ Quick Ratio

Quick Assets / Current Liabilities (Rs in ‘000)

8,406,562 / 3,779,631

2.224 12,304,238 / 7,410,926

1.660

Analysis:

There is an increase in the quick ratio/ acid test in 2008 as compared to in 2007. The company can easily meet its current liabilities with its most liquid current assets.

QUICK ASSETS

CASE 12

Ratio Formula Calculation Value ‘08 Calculation Value ‘07Quick Assets Current Assets –

Inventories (Rs in ‘000)9,664,784 - 1,258,222

8406562 13,536,082 - 1,231,844

12304238

Analysis:

There is a decrease in the quick assets in 2008 as compared to in 2007. This is due to decrease in the current assets from 2007 to 2008.

CASE 13

ACTIVITY ANALYSIS / TURNOVER RATIOS

CASE 14

INVENTORY TURNOVER RATIO

Ratio Formula Calculation Value ‘08 Calculation Value ‘07Inventory Turnover Cost of Goods Sold /

Average Inventories (Rs in ‘000)

37,575,356 / 1,245,033

30.18 34,620,632 / 1,849,648

18.717

Analysis:

There is an increase in the inventory turnover ratio in 2008 as compared to in 2007. It means that company changed inventory 30.18 times during the year which is a very good sign and sold more cars as compared to in 2007.

CASE 15

ASSET TURNOVER RATIO

Ratio Formula Calculation Value ‘08 Calculation Value ‘07Asset Turnover Sales / Average Total Assets

(Rs in ‘000)41,423,843/ 14,706,580

2.816 39,061,226/ 15,743,759

2.481

Analysis:

There is an increase in the asset turnover ratio in 2008 as compared to in 2007. The company has increased sales as compared to in 2007 thus it has sold more services to customer and in this case it is the company product cars.

CASE 16

ACCOUNT RECEIVABLE TURNOVER RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07A/R Turnover

Sales / Average Account Receivables (Rs in ‘000)

41,423,843 / 340,043

121.81 39,061,226 / 927,971

42.093

Analysis:

There is an increase in the account receivable turnover ratio in 2008 as compared to in 2007. The company has less account receivables as compared to in 2007 and is getting more cash.

CASE 17

PROFITIABILITY RATIOS

CASE 18

RETURN ON ASSETS

Ratio Formula Calculation Value’08 Calculation Value‘07Return on Assets

Net Income / Average Total Assets ( Rs in ‘000)

2,290,845 / 14,706,580

0.155 2,745,701 / 15,743,759

0.174

Analysis:

There is a decrease in the return on asset in 2008 as compared to in 2007. The company total assets have decreased in 2008 as compared to in 2007 and are due to fewer inventories.

RETURN ON EQUITY

CASE 19

Ratio Formula Calculation Value’08 Calculation Value‘07Return on Equity Net Income / Average

Stockholder's Equity (Rs in ‘000)

2,290,845 / 8,740,158

0.262 2,745,701 / 7,150,927

0.383

Analysis:

There is a decrease in the return on equity in 2008 as compared to in 2007. The company average total equity has increased from 2007 and has resulted in decrease.

RETURN ON COMMON EQUITY

CASE 20

Ratio Formula Calculation Value’08 Calculation Value‘07Return on Common Equity

Net Income / Average Common Stockholder's Equity (Rs in ‘000)

2,290,845 / 786,000

2.914 2,745,701 / 786,000

3.493

Analysis:

There is a decrease in the return on common equity in 2008 as compared to in 2007. The company net income has increased from 2007 and has resulted in decrease.

EARNINGS PER SHARE

CASE 21

Ratio Formula Calculation Value’08 Calculation Value‘07Earnings Per Share

Net Income / No of Shares Outstanding (in Rs)

2,290,845,000 / 78,600,000

29.14 2,745,701,000/ 78,600,000

34.93

Analysis:

There is a decrease in the earnings per share in 2008 as compared to in 2007. The company earning per share is Rs 29.14 as compared to Rs 34.93 and is due to fall of stock market.

PROFIT MARGIN

CASE 22

Ratio Formula Calculation Value’08 Calculation Value‘07Profit Margin Net Income / Sales

(Rs in ‘000)2,290,845 / 41,423,843

0.055 2,745,701 / 39,061,226

0.070

Analysis:

There is a decrease in the profit margin in 2008 as compared to in 2007. This is due to increase in net income and sales of the company in 2008 and giving fewer margins for profit.

CASE 23

CAPITAL MARKET ANALYSIS RATIOS

CASE 24

PRICE EARNINGS RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07Price Earnings Ratio

Market Price of Common Stock / Earnings Per Share (in Rs)

200.1 / 29.14 6.866 305.5 / 34.93 8.746

Analysis:

There is a decrease in the price earning ratio in 2008 as compared to in 2007. The company market price of common stock has decreased considerably in 2008 and resulting in decrease of earning per share.

CASE 25

MARKET TO BOOK RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07Market to Book Ratio

Market Price of Common Stock / Book Value of Equity per Common Stock

200.1 / 12.01 16.66 305.5 / 10.23 29.86

Analysis:

There is a decrease in the market to book ratio in 2008 as compared to in 2007. Due to decrease in market price of share, the market to book ratio has decreased.

CASE 26

BOOK VALUE OF EQUITY PER COMMON STOCK

Ratio Formula Calculation Value’08 Calculation Value‘07Book Value of Equity per Common Stock

Common Equity / No of Shares Outstanding (Rs in ‘000)

9,436,340 / 786,000

12.00 8,043,975 / 786,000

10.23

Analysis:

There is an increase in the book value of equity per common stock in 2008 as compared to in 2007. This is due to increase in equity in 2008.

CASE 27

DIVIDEND YIELD RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07Dividend Yield Annual Dividends per

Common Share / Market Price of Common Stock (in Rs)

10.5 / 200.1 0.052 13 / 305.5 0.042

Analysis:

There is an increase in the dividend yield ratio in 2008 as compared to in 2007. The company paid fewer dividends in 2008 of Rs 10.5 per share only.

CASE 28

DIVIDEND PAYOUT RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07Dividend Payout Ratio

Cash Dividends / Net Income (Rs in ‘000)

940,118 / 2,290,845

0.410 939,844 / 2,745,701

0.342

Analysis:

There is an increase in the dividend payout ratio in 2008 as compared to in 2007. The company paid more cash dividends in 2008 as evident from the calculations.

CASE 29

CAPITAL STRUCTURE ANLYSIS RATIO

CASE 30

DEBT TO EQUITY RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07Debt to Equity Ratio

Total Liabilities / Total Stockholder's Equity (Rs in ‘000)

4,311,769 / 9,436,340

0.456 7,621,075 / 8,043,975

0.947

Analysis:

There is a decrease in the debt to equity ratio in 2008 as compared to in 2007. This is due to considerable decrease in the total liabilities of the company in 2008.

CASE 31

DEBT RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07Debt Ratio Long Term Debts / (Long

Term Debt + Stockholder's Equity) (Rs in ‘000)

532,138 / (532,138 + 9,436,340)

0.053 210,149 / (210,149 + 8,043,975)

0.025

Analysis:

There is an increase in the debt ratio in 2008 as compared to in 2007. The company long term debts have increased from 2007.

CASE 32

INTEREST COVERAGE RATIO

Ratio Formula Calculation Value’08 Calculation Value‘07Interest Coverage Ratio

Income before Interest and Income Tax Expenses / Interest Expense (Rs in ‘000)

3,545,138 / 3,427

1034.473 4,272,892 / 43,411

98.428

Analysis:

There is an increase in the interest coverage ratio in 2008 as compared to in 2007. The company paid more interest expense in 2007 as compared to in 2008.

INCOME BEFORE INTEREST AND INCOME TAX EXPENSES

CASE 33

Ratio Formula Calculation Value’08 Calculation Value‘07Income before Interest and Income Tax Expenses

Income before Income Taxes + Interest Expense (Rs in ‘000)

3,541,711 + 3,427 3545138 4,229,481 + 43,411

4272892

Analysis:

There is a decrease in the income before interest and income tax expenses in 2008 as compared to in 2007. This is due to less debt by the company in 2008 as compared to in 2007.

ROA

CASE 34

Ratio Formula Calculation Value’08 Calculation Value‘07ROA Profit Margin x Asset Turnover

Ratio0.0553 / 2.816 0.019 0.0702 / 2.656 0.026

Analysis:

There is a decrease in the ROA ratio in 2008 as compared to in 2007. This is due to fewer profit margins in 2008.

CASE 35

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REFERENCES

1. www.toyota-indus.com

2. Fundamentals of Financial Management by Brigham & Houston 10th edition.

CASE 40