2. 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
3. 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.
4. 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.
5. LIQUIDITY IS A MEASURE OF THE AMOUNT OF FUNDS A COMPANY CAN
QUICKLY USE TO SETTLE ITS DEBTS.
LIQUIDITY RATIO
9. 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.
10. QUICK RATIO
Quick ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 0.59 0.79 0.98 1.03 1.07
0
0.2
0.4
0.6
0.8
1
1.2
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
12. 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.
13. 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
0
0.5
1
1.5
2
2.5
3
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Quick ratio
Current ratio
The reason for the change in trend is
the change in inventory and advances.
17. 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.
18. DEBT- EQUITY RATIO
Debt-equity ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 0.074 0.071 0.04 0.07 0.09
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
20. 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
21. 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.
22. *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
23. 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
0
5
10
15
20
25
30
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
25. 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.
26. DAYS OF INVENTORY HOLDING
Days of inventory holding 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 20.42 21.94 14.15 14.8 18.36
0
5
10
15
20
25
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
28. 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.
29. DEBTORS TURNOVER RATIO
Debtors turnover ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 26.46 39.39 47.46 36.4 28.98
0
2
4
6
8
10
12
14
16
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
31. 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.
32. AVERAGE COLLECTION PERIOD
average collection period 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 13.79 9.27 7.58 9.89 12.42
0
2
4
6
8
10
12
14
16
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
34. 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.
35. TOTAL ASSET TURNOVER RATIO
Total asset turnover ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 1.59 1.55 3.21 2.9 2.32
0
0.5
1
1.5
2
2.5
3
3.5
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
37. 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.
40. 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.
41. CURRENT ASSET TURNOVER RATIO
Current asset turnover 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 3.9 3.13 5.68 7.6 4.73
0
1
2
3
4
5
6
7
8
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
45. 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.
46. 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%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
48. 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.
49. PBT RATIO
PBT Ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 6.18% 7.01% 8.60% 12.41% 8.23%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
51. 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.
52. MATERIAL COST RATIO
Material cost ratio 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 71.64% 76.95% 79.70% 77.40% 79.78%
66.00%
68.00%
70.00%
72.00%
74.00%
76.00%
78.00%
80.00%
82.00%
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
54. 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.
58. 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.
59. 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%
0
0.05
0.1
0.15
0.2
0.25
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
60. RETURN ON INVESTMENT
What?
Return on investment (ROI) is performance measure used to evaluate the
efficiency of investment. It compares the magnitude and timing of gains
from investment directly to the magnitude and timing of investment
costs.
It is one of most commonly used approaches for evaluating the
financial consequences of business investments, decisions, or actions.
If an investment has a positive ROI and there are no other opportunities
with a higher ROI, then the investment should be undertaken. A higher ROI
means that investment gains compare favorably to investment costs.
How?
Return on investment= Earning after interest and taxes/ Total Assets.
61. 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.
62. RETURN ON EQUITY
Return on equity 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 12.87% 10.76% 17.81% 23.58% 13.72%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
64. 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.
65. EARNING PER SHARE
Earning per share 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 79.19 56.6 79.21 86.45 42.18
0
10
20
30
40
50
60
70
80
90
100
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
67. 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.
68. 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
70. 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
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
71. DEGREE OF OPERATING LEVERAGE
What?
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 other
factors 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 of
income 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.
72. 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 .
73. DEGREE OF FINANCING LEVERAGE
Degree of Financial leverage 2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited 1.01 0.37 0.62 0.95 0.91
0
0.2
0.4
0.6
0.8
1
1.2
2012-2013 2011-2012 2010-2011 2009-2010 2008-2009
Maruti Suzuki India Limited
Maruti Suzuki India Limited
74. DEGREE OF FINANCING LEVERAGE
What?
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
75. 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.
