Ratio analysis

RATIO ANALYSIS

Maruti Suzuki India Limited

Ratio analysis

• It’s 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

Introduction

• Financial analysis is a starting point for making plans because understanding the past is a perquisite for anticipating the future.

• Management should be particularly interested in knowing financial strengths of the firm to make their best use and to be able to spot out financial weaknesses of the firm to take suitable corrective actions.

• It us management’s overall responsibility to see that the resources of the firm are used most effectively and efficiently, and that the firm’s financial condition is sound.

• A ratio is used as a benchmark for evaluating the financial position and performance of a firm.

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

• 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.

• 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.

• In order to judge the overall performance of the firm a group of ratios, as opposed to just one or two should be used. In order to identify trends at least three years of ratios are normally required.

LIQUIDITY IS A MEASURE OF THE AMOUNT OF FUNDS A COMPANY CAN QUICKLY USE TO SETTLE ITS DEBTS.

LIQUIDITY RATIO

*CURRENT RATIO*QUICK RATIO

LIQUIDITY RATIOS

CURRENT RATIO

Current ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009

Maruti Suzuki India Limited 1.6 1.69 1.55 1.05 1.3

2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8



CURRENT RATIO

What?• This ratio indicates the ability of a business to meet its short-term

liabilities from its current assets.• The norm is 2:1.• If the ratio is too high, the company may be holding too many idle

short-term assets. (They may be used in a more profitable way.)• If the ratio is too low, the company may not have sufficient funds to

meet its short-term liabilities.

How?Current ratio = Both the above figures can be obtained from the balance sheet of the business.

Useful for:-This ratio is more useful for creditors . a creditor, who is expecting to be paid in the next 12 months, would consider a high current ratio to be better than a low current ratio, because a high current ratio means that the company is more likely to meet its liabilities which fall due in the next 12 months.

Remark:-The decline in current ratio from 2011-2012 to 2012-2013 is because of outflow of cash and bank balances, similar trend can be observed for past years.

QUICK RATIO

Quick ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.2

0.4

0.6

0.8

1

1.2Maruti Suzuki India Limited


QUICK RATIOWhat?the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book value. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities.

How? Quick ratio = Inventory is excluded from the sum of assets in the Quick Ratio, but included in the Current Ratio.

Useful for:-It is especially useful for manufacturing firms and for retailers because both of these types of firms tend to have a lot of their cash tied up in inventories.

Remark :-I believe the level of quick ratio is satisfactory and for a company like MSIL we cannot take inventory out the picture to measure liquidity.

CURRENT RATIO AND QUICK RATIO

YEARS 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009

Current ratio 1.6 1.69 1.55 1.05 1.3

Quick ratio 0.54 0.79 0.98 1.03 1.07

2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.5

1

1.5

2

2.5

3

Quick ratioCurrent ratio

The reason for the change in trend is the change in inventory and advances.

*DEBT RATIO*DEBT EQUITY RATIO

LEVERAGE RATIOS

DEBT RATIO

Debt-Ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1



DEBT RATIO

What?Debt ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt.

How?Debt ratio= It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').

Useful for:-this ratio is useful for company to know how much it relies on debt to finance assets. The debt ratio gives users a quick measure of the amount of debt that the company has on its balance sheets compared to its assets.

Remark:-The debt ratio has been between 9 to 16 % for the past 5years, debt shows increase in trend from past two years.

DEBT- EQUITY RATIO

Debt-equity ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1



DEBT-EQUITY RATIOWhat?The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial leverage.For most companies the maximum acceptable debt-to-equity ratio is 1.5-2 and less. For large public companies the debt-to-equity ratio may be much more than 2, but for most small and medium companies it is not acceptable.

How?Debt-Equity Ratio=

A debt-to-equity ratio is calculated by taking the total Debt and dividing it by the shareholders' equity. Both variables are shown on the balance sheet (statement of financial position).

Useful for:-It is useful for creditors, lenders, Investors of the company. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending capital.

Remark:-The debt-equity ratio has been between 9to 74% for the past 5 years; this range I believe is satisfactory and shows a clear policy of debt in the organization. It is lowest in FY 2010-2011 and Highest FY 2011-2012

ACTIVITY RATIO*They are employed to evaluate the efficiency with which the firm manages and utilizes its assets. *These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turned over into sales. *Several activity ratios can be calculated to judge the effectiveness of asset utilization.

*INVENTORY TURNOVER RATIO*DAYS OF INVENTORY HOLDING*RAW MATERIAL INVENTORY TURNOVER*DEBTORS TURNOVER RATIO*AVERAGE COLLECTION PERIOD*TOTAL ASSETS TURNOVER RATIO*FIXED ASSET TURNOVER RATIO*CURRENT ASSET TURNOVER RATIO*WORKING CAPITAL TURNOVER RATIO*DEPRECIATION RATIO*EMPLOYEE COST RATIO*PBT RATIO

ACTIVITY RATIOS

INVENTORY TURNOVER RATIO

Inventory turnover ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009

MSIL 17.87 16.63 25.44 24.32 19.61

2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

5

10

15

20

25

30



INVENTORY TURNOVER RATIO

What?The Inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period such as a year. Inventory turnover is also known as inventory turns, stockturn, stock turns, turns, and stock turnover.

How?Inventory turnover ratio=The equation for inventory turnover equals the Cost of goods sold divided by the average inventory.

Useful for:-Inventory ratio is useful for business for to its average inventory during a given accounting period. It is an activity ratio measuring the number of times per period, a business sells and replaces its entire batch of inventory again.

Remark:-i believe the management has done a good job. Although the slope shows declining trend but the level of inventory turnover should be maintained in future and proactive measures should be taken to continuously increase the demand or market share of the company.

DAYS OF INVENTORY HOLDING

Days of inventory holding 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

5

10

15

20

25



DAYS OF INVENTORY HOLDINGWhat?It measures the time for which the company holds it holds it inventory before turning into sales. As a conventional rule, it should be as low as possible.

How?Days of inventory holding = Days of inventory turnover holding is calculated by dividing 365 i.e days in a year to inventory turnover ratio.

Useful for:-days of inventory holding is useful for the management. It is important to work towards holding all things constant when comparing one company to the next, or even one year to the next.

Remark:-I believe management was doing good job by reducing the days of inventory holdings but from 2011-2012 here is increasing trend in the days of inventory holding.

DEBTORS TURNOVER RATIO

Debtors turnover ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

2

4

6

8

10

12

14

16



DEBTORS TURNOVER RATIOWhat?Debtors turnover ratio indicates the velocity of a company's debt collection, the number of times average receivables are turned over during a year. This ratio determines how quickly a company collects outstanding cash balances from its customers during an accounting period.

How?Debtors turnover ratio=Debtors turnover ratio is calculated by dividing net credit sales to average receivables.

Useful for:-Debtors turnover ratio is useful for management as well as other parties interested in knowing companies profile.It is useful to track accounts receivable turnover on a trend line in order to see if turnover is slowing down; if so, an increase in funding for the collections staff may be required, or at least a review is needed. Remark:-The debtors turnover has been increasing continuously for the past five years showing positive results in the favour of the company.

AVERAGE COLLECTION PERIOD

average collection period 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

2

4

6

8

10

12

14

16



AVERAGE COLLECTION PERIODWhat?It measures the time for which the debtors remain outstanding. As a conventional rule, it should be as low as possible.

How?Average collection period= average collection period is measured by dividing 365 i.e number of days in a year by the debtors turnover ratio.

Useful for:-average collection period is used to know in average numbers of days the business takes to collect its trade receivables after they have been created. It is an activity ratio and gives information about the efficiency of sales collection activities.

Remark:- In the past two years the average collection period shows upward slope. It is lowest in FY 2010-2011 and highest in FY 2012-2013.

TOTAL ASSET TURNOVER RATIO

Total asset turnover ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.5

1

1.5

2

2.5

3

3.5



TOTAL ASSET TURNOVER RATIOWhat?It measures , how much money is being generated through sales by investing capital into total assets. This ratio tells the amount of capital being generated by sales through one rupee investment in total assets. It should be high as possible.

How?Total asset turnover ratio= Total asset turnover ratio is the result of the fraction of net sales to total assets.

Useful for:-It is useful for management to know its efficiency and also for competitors along with other interested parties.The higher the number, the better. If there is a low turnover, it may be an indication that the business should either utilize its assets in a more efficient manner or sell them. Remark:-the total asset turnover has shown a instant decrease from 2011-2012 which is not favorable for the company.

FIXED ASSET TURNOVER RATIO

Fixed Assest turnover 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

1

2

3

4

5

6

7



FIXED ASSET TURNOVER RATIOWhat?It measures, how much money is being generated through sales by investing capital into fixed assets. This ratio tells the amount of capital being generated by sales through one rupee investment in fixed assets. It should be as high as possible.

How?Fixed asset turnover ratio= Fixed asset turnover ratio is the result of fraction of net sales to total fixed assets.

Useful for:-It is useful for comparing the company’s performance is improving or deteriorating over the years. It is also important to compare the asset turnover ratio of other companies in the same industry. This comparison will indicate whether the company is performing better or worse than others.

Remark:- Fixed assets turnover ratio of the past two years show declining trend.

CURRENT ASSET TURNOVER RATIO

Current asset turnover 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

1

2

3

4

5

6

7

8



CURRENT ASSET TURNOVER RATIOWhat?Ratio that indicates how efficiently a firm is using its current assets to generate revenue. It should be high as possible.

How?Current asset turnover ratio=

Useful for:-Current asset ratio is useful for management to know its productivity of current assets. And for interested parties.

Remark:-The current asset turnover shown positive signs by reaching to 7.13 from 4.73 in 2011 but it has shown decreasing trend in past two years.

WORKING CAPITAL TURNOVER RATIO

Working capital turnover 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

1

2

3

4

5

6

7

8



WORKING CAPITAL TURNOVER RATIO

What?Ratio that shows the number of times the working capital is converted into revenue in an accounting period, or how efficient the management is in using its working capital to generate sales revenue.

How?Working capital turnover ratio=

working capital = current assets – current liabilities Working capital turnover ratio is the result of the fraction of the net sale sto working capital.

Useful for:-working capital turnover is useful to tell the amount of capital being generated by sales through one rupee investment in net current assets.

Remark:-it is visible that there is instant decline in the working capital ratio of the company.

DEPRECIATION RATIO

Depreciation ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009

Maruti Suzuki India Limited 3.28% 4.36% 2.81% 2.85% 3.47%

2012-2013 2011-2012 2010-2011 2009-2010 2008-20090.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%



DEPRECIATION RATIOWhat?It measures the percentage of depreciation cost to net sales. As a conventional rule, it should be as low as possible. But one should be cautious while interpreting this ratio because firm’s follow different depreciation methods.

How?Depreciation ratio= Depreciation ratio is calculated by fraction of net sales to depreciation.

Useful for:-depreciation ratio is useful for management to have efficient control on the resources of the company.

Remark:-It is believed the depreciation ratio may be high because maruti is one of t he old company among other automobiles companies, but still it need to be monitored closely to control the depreciating resources of the company.

PBT RATIO

PBT Ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%



PBT RATIO

What?It measures the percentage of profit before tax to net sales. It should be as high as possible.

How?PBT Ratio=100 profit before tax is the percentage of profit before tax to net sales.

Useful for:PBT ratio is useful for company for making strategies which helps in improving the earning of the business.

Remark:-I believe this is a very serious situation and the company needs to work out a strategy to come out of it.

MATERIAL COST RATIO

Material cost ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-200966.00%

68.00%

70.00%

72.00%

74.00%

76.00%

78.00%

80.00%

82.00%



MATERIAL COST RATIOWhat?It measure the percentage of material cost to net sales. As a conventional rule, it should be as law as possible.

How?Material cost ratio= 100

Useful for:-Material cost ratio is useful for company to know how much cost is incurred on the material and for making strategies thereafter.

Remark:-The material cost ratio trend shows downfall which is good as the material cost should be as low as possible.

PROFITABILITY RATIOS*It is calculated to measure the operating efficiency of the company.*Profit is the difference between revenues and expenses over a period of time and is the ultimate output of the company, and it will have no future if it fails to make sufficient profits.*A company should earn profits to survive and grow for a long period of time. Profit are essential, but it would be wrong to assume that every action initiated by the management of the company should be aimed at maximizing the profits, irrespective of concerns for customers, employees, suppliers or social consequences.

*NET PROFIT MARGIN*RETURN ON INVESTMENT*RETURN ON EQUITY*EARNING PER SHARE

PROFITABILITY RATIOS

NET PROFIT MARGIN

Net profit margin 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%



NET PROFIT MARGINWhat?*It reflects the management’s efficiency in manufacturing, administration and selling the products. *As a conventional rule, it should be as high as possible. It also indicates the firm’s capacity to withstand adverse economic conditions or exploit favorable conditions. *It is very important to analyze the gross and net profit margin jointly.

How?Net profit margin= Net profit margin is the percentage of net profit to net sales.

Useful for:-*It is useful for all the interested parties to know the profit margin as it shows he adverse and favorable conditions. *The profit margin is mostly used for internal comparison.

Remark:-I believe in the last few years the management has lost their path and needs to take drastic steps to get on the right track. The company has all the resources and potential to do the right things and the things right.

RETURN ON INVESTMENT

Return on equity 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009

Maruti Suzuki India Limited 8.9% 7% 15% 19.5% 9.5%

2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.05

0.1

0.15

0.2

0.25



RETURN ON INVESTMENTWhat?Return on investment (ROI) is performance measure used to evaluate theefficiency of investment. It compares the magnitude and timing of gainsfrom investment directly to the magnitude and timing of investmentcosts. It is one of most commonly used approaches for evaluating thefinancial consequences of business investments, decisions, or actions.If an investment has a positive ROI and there are no other opportunitieswith a higher ROI, then the investment should be undertaken. A higher ROImeans that investment gains compare favorably to investment costs.

How?Return on investment= Earning after interest and taxes/ Total Assets.

Useful for:-Return on investment is useful to know how much return on investment is expected and to know how well the firm has used all the resources. This helps in making comparision with others companies in the industry.

Remark:-the graph of ROI should be always increasing but in this case it is falling which reflects inefficient management of resources.

RETURN ON EQUITY

Return on equity 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090.00%

5.00%

10.00%

15.00%

20.00%

25.00%



RETURN ON EQUITY

What?Return on equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are generally considered good.

How?ROE=

Useful for:-ROE is best used to compare companies in the same industry. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. The benefit can also come as a dividend on common shares or as a combination of dividends and reinvestment in the company.

Remark:-I believe that the performance in not acceptable. The ROE is not following the standards set by the automobile industry and some serious strategies should be drawn to turn this thing around.

EARNING PER SHARE

Earning per share 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

10

20

30

40

50

60

70

80

90

100



EARNING PER SHAREWhat?Earnings per share (EPS) is the portion of the company’s distributable profit which is allocated to each outstanding equity share (common share). Earnings per share is a very good indicator of the profitability of any organization, and it is one of the most widely used measures of profitability.

How?Earning per share=

Useful for:-The earning per share is a useful measure of profitability, and when compared with EPS of other similar companies, it gives a view of the comparative earning power of the companies. EPS when calculated over a number of years indicates whether the earning power of the company has improved or deteriorated. Investors usually look for companies with steadily increasing earnings per share.

Remark:-I believe the management has been able to keep its promise of wealth maximization by maintaining a healthy rate of change of EPS.

The ratios used to determine about the companies’ financing methods, or the ability to meet the obligations. There are many ratios to calculate leverage but the important factors include debt, interest expenses, equity and assets.

LEVERAGES RATIO

*DEGREE OF OPERATING LEVERAGE*DEGREE OF FINANCING LEVERAGE

LEVERAGE RATIOS

DEGREE OF OPERATING LEVERAGE

Degree of aperating leverage 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009

Maruti Suzuki India Limited 0.019 -0.2 -0.55 0.84 -2.3

2012-2013 2011-2012 2010-2011 2009-2010 2008-2009

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5



DEGREE OF OPERATING LEVERAGEWhat?The Degree of Operating Leverage (DOL) is the leverage ratio that sums up the effect of an amount of operating leverage on the company’s earnings before interests and taxes (EBIT). Operating Leverage takes into account the proportion of fixed costs to variable costs in the operations of a business. If the degree of operating leverage is high, it means that the earnings before interest and taxes would be unpredictable for the company, even if all the otherfactors remain the same. If the operating leverage is high, then a smallest percentage change in sales can increase the net operating income. The net operating income is the amount ofincome that is left after payments of fixed cost are made, regardless of how

much sales has been made. Since the Degree of Operating Leverage or DOL helps in determining how the change in sales volume would affect the profits of the company, it is important to ascertain the value of degree of operating leverage in order to minimize the losses to the company.

How?Degree of operating leverage= %change in EBIT/ %change in Sales

Useful for:-degree of operating leverage is useful for the company itself to know the business risk of the company . This is useful for outsiders also to know the efficiency of the business and its profile. The Degree of Operating Leverage Ratio helps a company in understanding the effects of operating leverage on the company’s probable earnings. It is also important in determining a suitable level of operating leverage which can be used in order to get the most out of the company’s Earnings before interest and taxes or EBIT.

Remark:-The trend of degree of operating leverage (DOL) of past five years shows ups and downs it was negative in 2011-2012, 2010-2011 and 2008-2009 and positive in remaining two years .

DEGREE OF FINANCING LEVERAGE

Degree of Financial leverage 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009


2012-2013 2011-2012 2010-2011 2009-2010 2008-20090

0.2

0.4

0.6

0.8

1

1.2



DEGREE OF FINANCING LEVERAGEWhat?A leverage ratio summarizing the affect a particular amount of financial leverage has on a company’s earnings per share (EPS). Financial leverage involves using fixed costs to finance the firm, and will include higher expenses before interest and taxes (EBIT) .The higher the degree of financial leverage, the more volatile EPS will be, all other things remaining the same.

How?

Degree of financial leverage = % change in EPS / % change in EBIT

Useful for:-Most likely, the firm under evaluation will be trying to optimize EPS, and this ratio can be used to help determine the most appropriate level of financial leverage to use to achieve that goal.The degree of financial leverage is useful for figuring out the fate of net income in the future, which is based on the changes that take place in the interest rates, taxes, operating expenses and other financial factors. Debts added to a business would provide an interest expense to the company which is a fixed cost, and this is when the company’s business begins to turn to provide profit. It is important to balance the financial leverage according to the operating costs of the company as it would minimize the level of risks involved.

Remark:-The trend of DOL is healthy for company when it is more than one. Except 2012-13 DOL is below one.

THANK YOU

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