fsa report final
TRANSCRIPT
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
credits . This amount has been treated as miscellaneous income during
our analysis since there is no indication of how sustainable this income will
be in the future.
The annual report of 2007 talks about launching a Clean Development
Mechanism (CDM) Project , the details of which is reproduced verbatim
below:
As a part of Clean Development Mechanism (CDM) initiatives, your
Company has developed a
100 MW Captive Power Plant using waste gases as a Clean Development
Mechanism (CDM) Project,
which was commissioned in April, 2005. This project has been registered
by CDM Executive Board
of UNFCCC on 12th January, 2007. As per the registered project design
document, the company is
eligible for a total 7673254 Certified Emission Reductions (CERs) from
April 2005 to March 2015.
The CERs will be issued after examination by the CDM Executive Board.
Apart from this there were no other significant changes in the accounting
policies.
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
FINANCIAL ANALYSIS:
DuPont Analysis:
As per the DuPont analysis, the Return on Investment is broken down into
Profit Margin and Asset Turnover Ratio to understand better the
performance of the company.
RATIOS:
Ratios 2008 2007 2006
Net Profit Margin (PAT/Sales)
13.81
%
13.84
% 12.77%Asset Turnover Ratio (Sales/Average Total
Assets)
0.7484
8
0.7754
94
0.6848
38Return on Investment (PAT/Average Total
Assets)
10.33
%
10.73
% 8.75%
The profit margin increases every year because of increasing PAT every
year except 2008 where there was pressure on margins due to increase in
input costs as raw material costs increased. In 2008, the Company had to
absorb a part of the un-precedented increase in cost of inputs namely; iron
ore, coking coal, coke, ferro alloys and transportation cost squeezing the
margins of the Company.
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Return on investment(ROI)
Net Profit Margin
(PAT / Sales)
Asset Turnover Ratio(Sales/Average Total
Assets)
PAT SALES SALESAVERAGE TOTAL
ASSETS
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
Asset turnover ratio increases from 2006 to 2007 due to increase in sales
but in 2008 it falls because fixed assets rose due to commissioning of 1.3
MTPA capacity expansion project.
In 2007, PAT increases for 49.49%, so ROI increases .In 2008, ROI falls as
the average total assets increases as mentioned earlier but increase in
PAT is not proportional.
Ratios 2008 2007 2006Return on Equity (PAT/Avg Shareholder's
funds)
27.63
%
29.06
%
27.47
%
The ROE jumped in 2007 because PAT increased by almost 49.5% but in
2008 it comes down to 27.63% due to increase in shareholders funds.
Shareholders funds increased in 2008 due to increase in general reserves
due to amalgamation of SISCOL and owing to high profits last year.
Ratios 2008 2007 2006Current ratio
(Current Assets/Current Liabilities)
0.7762
7
0.9582
83
0.9818
08Quick ratio
( (Current Assets-Inventory)/Current
Liabilities)
0.4121
08
0.5710
36
0.6518
73
2005-06 2006-07 2007-08
Current Ratio 0.77627 0.95828 0.9818
Quick Ratio 0.4121 0.571 0.6519
0
0.2
0.4
0.6
0.81
1.2
Liquidity Ratios
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
The current ratio keeps decreasing YoY as the current liabilities increase
due to increase in sundry creditors and acceptances. This indicates that
JSW is financing its long term assets with current liabilities. In order to get
a better idea of the liquidity condition, we studied the quick ratio. The
quick ratio also falls but is much lesser than the current ratio. This shows
that a large portion of the current assets consist of the inventory and
hence are not readily liquid. The quick ratio is only 0.41 in 2008 indicating
that inventory forms a dominant part of the current assets of the company
(over 46% in 2008) and hence, the liquidity is even lesser than what the
current ratio indicates. The bulk of current liabilities are comprised of
creditors and short term borrowings. JSW needs to take a hard look at its
liquidity position.
Ratios 2008 2007 2006Debt Turnover ratio ( Sales/Average
receivables)
42.975
88
39.368
99
27.294
18Inventory Turnover ratio (sales/Avg
inventory)
7.7808
64
7.3649
97
6.5812
65
The debt turnover ratio rises sharply from 2006 to 2007 because JSW
implemented new terms of trades oriented towards reducing the debt
collection cycle. Domestic customers were generally dispatched finished
products only on receiving funds and international customers were
serviced through export agents against sight L/cs, minimising receivables
risk. This helped in reducing the debt turnover ratio from 13 in 2006 to 9
days in 2007 as shown below.
Ratios 2008 2007 2006
Debt Collection Period
8.4931
36
9.2712
57
13.372
82
Inventory Holding Period
46.909
96
49.558
75
55.460
47
Operating Cycle
55.403
09 58.83
68.833
28
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
Even though the inventory rises from 2006 to 2008, the inventory turnover
ratio increases and the inventory holding period decreases because JSW
implemented better inventory management systems. Because of
reduction in inventory holding periods and improved debt collection
mechanisms, the operating cycle reduces from 68 to 55 days. This means
that the companys funds were stuck up in receivables and inventory for a
shorter period which resulted in saving in interest, storage and other
expenses.
Ratios 2008 2007 2006Debt Equity Ratio
((Secured + Unsecured)/Shareholders
fund) 1.021 0.815 1.086Liabilities Equity Ratio
((Debt + Liabilities)/Shareholders funds) 1.909 1.515 2.128
Both the debt equity ratio and the liabilities equity ratio follow similar
trends. There is a fall from 2006 to 2007 followed by a rise in 2008. The
fall in 2007 is due to a rise in the Shareholders funds which is due to the
increased PAT, both of the current year as well as from the previous year
coming through the reserves and surplus. However, both the ratios fall
again in 2008 as the company raised money through term loans and
foreign currency loans (Foreign Currency Convertible Bonds of worth Rs.
1,295.83 crore ) in order to fund its capital expansion.
RatiInterest Coverage r
expe
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1.021
0.815
1.086
0
0.2
0.4
0.6
0.8
1
1.2
2005-06 2006-07 2007-08
Debt-Equity Ratio
Debt-Equity Ratio
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
The interest coverage ratio has improved steadily with rising EBIT from2006 to 2008.
EXCEPTIONAL ITEM:
We observed that in the year 2006, the sales of JSW dropped. In order to
cover up the fall in sales, JSW sold 44,99,400 equity shares of Rs. 10 each
of JSW Energy Ltd. (JSWEL) to
Samarth Holdings Pvt. Ltd., an associate company for a consideration of
Rs. 513.70 crores based on an independent valuers report. The profit on
sale of these shares amounting to Rs. 369.20 crores is included in Other
income. This has been classified as Exceptional Income in our analysis
and the other ratios were calculated.
COMPARISON WITH ISPAT:
Comparing the ratios of JSW with ISPAT:
JSW and ISPAT are both steel companies which have sales in the similar
range. However we see that ISPAT is not financially very sound. A look at
the debt equity ratio of ISPAT shows that it is highly leveraged and has lot
of debt on its books. This would make it very risk prone since with therising input costs the profitability will be affected. IPSAT though has its
liquidity current ratios comparable to that of JSW, with JSW being slightly
better off in many years. The return on investment for ISPAT is dismal
since a large chunk of the profits goes towards interest payments. The
sales of both the companies follow a trend in which there is a dip in 2006,
which can be attributed to the steel industry being affected.
On the whole ISPAT does not seem to be an attractive option for an
investor, though it is managing to clock good sales revenue.
JSW ISPATLiquidity Ratios 2008 2007 2006 2008 2007 2006Current ratio (Current Assets/Current
Liabilities)0.78 0.96 0.98 0.69 0.81 0.84
Quick ratio 0.41 0.57 0.65 0.34 0.50 0.51
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
((Current Assets-Inventory)/CurrentLiabilities)Earnings Per Share 95.26 80.86 55.57 -0.36 -0.81 -7.93Return on Investment (PAT/Average 10.33 10.73 8.75% 0.29 - -PAT/Sales 13.81 13.84 12.77 0.42 - 16.39Asset Turnover Ratio (Sales/Average
Total Assets)0.75 0.78 0.68 0.69 0.61 0.46
Debt to Equity Ratio 0.98 0.75 0.94 10.66 13.17 12.69Fixed Asset Turnover ratio ( Sales/AvgNet asset)
1.31 1.27 1.07 1.00 0.87 0.69
Debt Turnover ratio ( Sales/Averagereceivables)
42.98 39.37 27.29 13.53 12.08 5.96
Inventory Turnover ratio (sales/Avginventory)
7.78 7.36 6.58 6.39 6.47 6.53
CONCLUSIONS:
The financial analysis provides a lot of useful information. The financial
data available from the annual report is available as raw data which can
be converted into meaningful information through structured analysis
which reveals different patterns in the data. For example, techniques like
common sizing helps in comparing the financial information across
companies in the same sector in order to compare the allocation of
resources and the sources of revenue which in turn helps in monitoring the
health of company with reference to its competitors. For example, a
company whose income is basically due to non-operating income may not
have a sustainable profit.
Sometimes financial statements themselves give a lot of information. For
example a simple analysis of cash flow shows that JSW is on an expansion
mode where in YOY the outflow of investment activity is increasing and
shows that is on an expansion mode.
Also, financial analysis of financial statements across years helps in finding
the hidden truths and facts concealed willingly or unwillingly by the
company in its annual report.
Different stakeholders use the analysis to find information of importance
to them. For example, As investors would be interested in the profitability
ratios of the company like Return on Investment (ROI), Return on Equity
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
(ROE), Profit Margin, Asset Turnover Ratio and EPS. These ratios measure
the degree of operating success of the company and hence will give the
information whether we would be able to get a reasonable return in the
form of capital gain and dividends. They would also look at the solvency
ratios like Debt-Equity Ratio and Liability equity ratio to get information
about the risk status of the company as debt is considered more riskier
than equity.
The financial analysis of the company reveals the following strengths and
weaknesses in the operations of the company:
Strong Areas:
1. The debt turnover ratio rises sharply from 2006 to 2007 because
JSW implemented new terms of trades oriented towards reducing the
debt collection cycle. Domestic customers were generally dispatched
finished products only on receiving funds and international
customers were serviced through export agents .This helped in
reducing the debt turnover ratio from 13 in 2006 to 9 days in 2007
as shown below.
2. They also have got into selling of Carbon credits. In 2008, they sold
Rs 111.11 worth od carbon credits. This is a promising avenue in
future also.
3. They have implemented better inventory management system
which has reduced the collection period steadily over the 3 years.
4. They have been increasing expanding their capacity over the past
three years.
Weak Areas:
The current ratio keeps decreasing YoY as the current liabilities increase
due to increase in sundry creditors and acceptances. This indicates that
JSW is financing its long term assets with current liabilities. Also, the quick
ratio also falls but is much lesser than the current ratio. This shows that a
large portion of the current assets consist of the inventory and hence are
not readily liquid. The quick ratio is only 0.41 in 2008 indicating that
inventory forms a dominant part of the current assets of the company.
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
Deferred Tax Liability 1,251.84 1,012.66 742.07 305.49
Total Sources of Funds20,577.9
912,870.6
011,210.
428,549.
16APPLICATION OF FUNDS :
FIXED ASSETS
Gross Block 13,952.32 10,512.768,368.4
37,520.3
0
Less : Accumulated Depreciation 2,996.83 2,323.661,850.4
51,443.9
1
Net Block 10,955.49 8,189.106,517.9
86,076.3
9
Net Fixed Assets10,955.4
9 8,189.106,517.9
86,076.
39
CURRENT ASSETSInventories 1,549.16 1,011.35 924.23 743.41Sundry Debtors 337.39 245.16 229.19 266.6Cash and Bank 339.22 337.8 98.87 122.49Loans and Advances 842.15 549.28 979.42 761.5Other Current Assets 18.62 342.04 513.7 0Short Term Investments 215.75 17.06 4.88 4.88
Total Current Assets 3,302.29 2,502.692,750.2
91,898.
88 OTHER ASSETS
Capital Work in Progress 5,612.43 2,002.931,861.9
5 349.30Long Term Investments 707.78 175.88 80.2 224.69
Total Other Assets 6,320.21 2,178.811,942.1
5 573.99
Total Application of Funds
20,577.9
9
12,870.6
0
11,210.
42
8,549.
26
Useful Ratios
Useful Calculations 2008 2007 2006
Average Net Assets 9572.295 7353.546297.1
85
Average Debtors (Receivables) 291.275 237.175247.89
5
Average Total Assets 16724.312040.5
19879.8
4
Average Inventory 1280.255 967.79 833.82Average Shareholder Funds 6254.235 4446.65 3146.6
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
1
Profitability Ratios 2008 2007 2006Profit Margin /Return on Sales ( PAT/Sale) 13.81% 13.84% 12.77%
Asset Turnover Ratio (Sales/Average TotalAssets) 0.748 0.775 0.685Return on Investment (PAT/Average TotalAssets) 10.33% 10.73% 8.75%Return on Equity (PAT/Avg Shareholder'sfunds) 27.63% 29.06% 27.47%Basic EPS 95.26 80.86 55.57Diluted EPS 94.18 79.62 55.57
Liquidity Ratios 2008 2007 2006Current ratio (Current Assets/CurrentLiabilities) 0.776 0.958 0.982Quick ratio ( (Current Assets-Inventory)/CurrentLiabilities) 0.412 0.571 0.652 Fixed Asset Turnover ratio ( Sales/Average Netasset) 1.308 1.270 1.074Debt Turnover ratio ( Sales/Averagereceivables) 42.976 39.369 27.294Inventory Turnover ratio (sales/Avg inventory) 7.781 7.365 6.581
Debt Collection Period 8.493 9.271 13.373Inventory Holding Period 46.910 49.559 55.460Operating Cycle 55.403 58.830 68.833
Solvency Ratios 2008 2007 2006Debt Equity Ratio( (Secured + Unsecured) / Shareholdersfunds ) 0.984 0.746 0.940Liabilities Equity Ratio( (Debt + Liabilities) / Shareholders funds ) 1.909 1.515 2.128Interest Coverage ratios(PBIT/Interest expense) 6.640 5.793 3.586
Cash Flow Statement - JSW
CASH FLOW STATEMENT for year ended 31 MarchParticulars 2008 2007 2006 2005
Cash and Cash Equivalents at Beginningof the year 265.55 49.08 43.23 45.69
Net Cash from Operating Activities3,552.7
02,822.2
61,574.9
61,998.4
0
Net Cash Used in Investing Activities
-5,636.3
6
-2,244.5
5
-1,304.1
1 -409.52
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
Net Cash Used in Financing Activities2,124.9
3 -384.39 -265
-1,594.5
9Net Inc/(Dec) in Cash and CashEquivalent 41.27 193.32 5.85 -5.71Cash and Cash Equivalents at End of theyear 306.82 242.40 49.08 39.98Op. Profit before Working CapitalChanges
3,338.84
2,793.69
1,669.28
1218.97
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
TREND ANALYSIS
Profit & Loss Statements of JSW 2008 2007 2006 2005 2008 2007 2006
Sales Turnover12,517.
809337.3
46766.0
9 7035.9 34.06% 38.00% -3.83%Total OperatingExpenses
9961.49
7127.77
5487.59
5109.07 39.76% 29.89% 7.41%
Operation Profit2,556.3
12,209.5
71,278.5
01,926.8
3 15.69% 72.83% -33.65%Add: Non operating
income 368.25 105.15 382.96 18.98250.21
%-
72.54%1917.70
%Profit before interestand tax
2,924.56
2,314.72
1,661.46
1,945.81 26.35% 39.32% -14.61%
Less: InterestCharges 440.44 399.54 360.32 469.87 10.24% 10.88% -23.31%
Profit Before Tax2,484.1
21,915.1
81,301.1
41,475.9
4 29.71% 47.19% -11.84%Less: Income Tax 755.93 623.18 436.85 602.5 21.30% 42.65% -27.49%Exceptional item 0 0 0 -3.33
Profit After Tax1,728.
191,292.
00 864.29 870.11 33.76% 49.49% -0.67%
Balance Sheet
Year (Rs in Crs) Mar-08 Mar-07 Mar-06Mar-
05 2008 2007 2006 SOURCES OF FUNDS : Share Capital 248.08 246.77 218.03 190.1 0.53% 13.18% 14.69%
Reserves Total7,140.2
44,873.3
83,555.1
22,329.9
7 46.52% 37.08% 52.58%Total ShareholdersFunds
7,388.32
5,120.15
3,773.15
2,520.07 44.30% 35.70% 49.72%
Total CurrentLiabilities
4,254.05
2,611.64
2,801.25
1,859.39 62.89% -6.77% 50.65%
Total Long TemLiabilities
7,683.78
4,126.15
3,893.95
3,864.21 86.22% 5.96% 0.77%
Deferred TaxLiability
1,251.84
1,012.66 742.07 305.49 23.62% 36.46% 142.91%
Total Sources of Funds
20,577.99
12,870.60
11,210.42
8,549.16 59.88% 14.81% 31.13%
APPLICATION OF FUNDS : FIXED ASSETS
Gross Block13,952.
3210,512.
768,368.4
37,520.3
0 32.72% 25.62% 11.28%Less : AccumulatedDepreciation
2,996.83
2,323.66
1,850.45
1,443.91 28.97% 25.57% 28.16%
Net Block10,955.
498,189.1
06,517.9
86,076.3
9 33.78% 25.64% 7.27%Net Fixed Assets 10,955 8,189. 6,517. 6,076. 33.78% 25.64% 7.27%
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Financial Accounting Financial Statement Analysis JSW vs. ISPAT
.49 10 98 39 CURRENT ASSETS
Inventories1,549.1
61,011.3
5 924.23 743.41 53.18% 9.43% 24.32%Sundry Debtors 337.39 245.16 229.19 266.6 37.62% 6.97% -14.03%
Cash and Bank 339.22 337.8 98.87 122.49 0.42%241.66
% -19.28%
Loans and Advances 842.15 549.28 979.42 761.5 53.32%-
43.92% 28.62%
Other Current Assets 18.62 342.04 513.7 0-
94.56%-
33.42%
Short Term Investments 215.75 17.06 4.88 4.881164.6
5%249.59
% 0.00%
Total Current Assets3,302.
292,502.
692,750.
291,898.
88 31.95% -9.00% 44.84%
OTHER ASSETS Capital Work inProgress
5,612.43
2,002.93
1,861.95 349.30
180.21% 7.57% 433.05%
Long Term Investments 707.78 175.88 80.2 224.69302.42
%119.30
% -64.31%
Total Other Assets6,320.
212,178.
811,942.
15 573.99190.08
% 12.19% 238.36% Total Application of Funds
20,577.99
12,870.60
11,210.42
8,549.26 59.88% 14.81% 31.13%
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