tata coffee limited ratio analysis nirav khandhedia

Assignment on

Financial Ratio

Nirav Khandhedia

Executive MBA – 2012-15, No. 2012020342017November 16, 2013

Valuations, Acquisitions and Mergers – SCIT, Executive MBA – 2012-15

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> Pick up a company of your choice and analyze its annual financial reports to measure its performance based on the following financial ratios.

> Check how company is performing and provide suggestions wherever needed.

> Ratios to be evaluated are as below.Current Ratio Quick Ratio

Gross Profit Margin Net Profit Margin

Debt to Equity Ratio Return on Investment Ratio

Inventory Turnover Ratio Debtor’s Turnover Ratio

Interest Coverage Ratio Net Working Capital Ratio

Question

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> Company considered for performance evaluation based on ratios analysis is Tata Coffee Limited.

> The Annual Financial Report, 2011-12 is attached here.

> Following artifacts for each ratio are listed in next slides.> Significance of Ratio, Standard safe limits of Ratio

> Value for the company’s performance for said financial year

> Inferences from the Ratio value and Suggestions, if needed

> Overall performance of the company and suggestions are briefed as Conclusion.

Solution

Adobe Acrobat Document

Tata Coffee Limited

Nirav Khandhedia

Executive MBA – 2012-15, No. 2012020342017November 16, 2013

Annual Performance Evaluation based on Financial Ratio 2011-12

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Ltd`Liquidity Ratios

> Current Ratio

> Quick Ratio

> Net Working Capital Ratio

Profitability Ratios> Gross Profit Margin

> Net Profit Margin

> Return on Investment Ratio

Turnover Ratios> Inventory Turnover Ratio

> Debtor’s Turnover Ratio

> Total Assets Turnover Ratio

> A/c Payables’ Turnover Ratio

Solvency Ratios> Interest Coverage Ratio

> Debt to Equity Ratio

> Debt to Total Assets Ratio

Conclusion

Contents

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> “Current Ratio is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm.”

> Aka working capital ratio

> Current Ratio= Current Assets / Current Liabilities

> A ratio equal to or near 2 : 1 is considered as a standard or normal or satisfactory. The idea of having double the current assets as compared to current liabilities is to provide for the delays and losses in the realization of current assets.

Current Ratio

7 Nirav Khandhedia, SCIT Ex-MBA, 2012-15, Financial Ratio Analysis for Tata Coffee Ltd`

Current Ratio

Current Ratio

= Total Current Assets / Total Current Liabilities

= 23780.34/15071.7

= 1.58

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Current Ratio> Ratio is not significantly satisfactory. It shows company has more amount of short term

liabilities and it’s maturity to meet short term obligations is less. Hence, an alert flag for creditors.

> Inventory turnover ratio (being calculated in next slides) of 3.4 is a good indication for the company that it is able to convert its inventory into sales quite faster. Hence, degree of liquidity for current assets is really high, and makes the company a trusted choice for investors.

> Suggestion: Try to improve upon (minimize) the current liabilities and also look for improving (maximize) the current assets.

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> Quick meaning which can be easily liquidized. Hence, Quick Ratio is aka Liquidity Ratio or Acid Test Ratio.

> It measures the firm's capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio.

> It considers liquid assets i.e. current assets but not inventories and prepaid expenses.

> Reason for exclusion: Inventories cannot be termed as liquid assets because it cannot be converted into cash immediately without a loss of value and same way, prepaid expenses are also excluded from the list of liquid assets because they are not expected to be converted into cash.

> Quick Ratio = (Total Current Assets - Inventory)/Total Current Liabilities

Quick Ratio


Quick Ratio

Quick Ratio

= (Total Current Assets - Inventory) / Total Current Liabilities

= (23780.34-12,395.28)/15071.7

= 0.75539322

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Quick Ratio> Ratio is not significantly satisfactory as expected, because current ratio itself was not

quite high.

> Here, almost 52% of current assets is as inventory. As mentioned earlier, Inventory turnover ratio (being calculated in next slides) of 3.4 is a good indication for the company that it is able to convert its inventory into sales quite faster. Hence, degree of liquidity for current assets is really high, and hence again gives a reason for investors to trust in the company.

> Suggestion: Try to improve upon (minimize) the current liabilities and also look for improving (maximize) the current assets.

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> Net Working Capital (NWC) Ratio is one of the classic measures of a company's liquidity.

> It is an indication of short term financial health of a business

> A positive number as NWC ratio indicates that the company has enough liquid assets to pay off short term obligations.

> NWC Ratio = (Current Assets – Current Liabilities) / Net Assets

Net Working Capital Ratio


Net Working Capital Ratio

NWC Ratio

= (Current Assets – Current Liabilities) / Net Assets

= (23,780.34-15,071.70)/(65,666.25-4,868.83-15,071.70)

= 0.19 = 19%

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Net Working Capital Ratio> 19% of NWC Ratio is really a good number for the company.

> It indicates company has enough amount of Liquid cash which can pay off the short term obligations.

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> Gross Profit Margin is “A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold.”

> Gross profit margin serves as the source for paying additional expenses and future savings.

> This metric can be used to compare a company with its competitors

> Gross Profit Margin = (Sales – Cost of Goods Sold ) / Sales * 100

Gross Profit Margin


Gross Profit Margin

Gross Profit Margin

= (Sales – Cost of Goods Sold ) / Sales * 100

= (50851.78 - 42080.03) / 50851.78 * 100

= 17.25 %

*Cost of Goods Sold, aka COGS includes all the direct and indirect expenses occurred to make the product.

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Gross Profit Margin> Gross Profit Margin of 17.25 is better than the same margin in earlier year by almost

3%, hence a positive indicator.

> Gross Profit Margin of company is also higher than that of Hindustan Unilever Limited by almost 3.5%, shows a good position of company in market.

> Suggestion: Currently, 29% of COGS contributes to “Other Expenses”. company can dig in details of this expense and may try to reduce on it wherever possible, which will make its position even better.

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> The net profit margin provides an indication of how well a company is controlling its costs. A high net profit margin demonstrates effectiveness at converting sales into actual profit.

> This metric can be used to compare a company with its competitors

> It differs from Gross Profit Margin a bit because, while calculating this matric, we consider Net Profit, i.e. Profit after Tax (PAT).

> Profit after Tax / Sales*100

Net Profit Margin


Net Profit Margin

Net Profit Margin

= Profit after Tax / Sales*100

= 7885.28 / 50851.78 * 100

= 15.51 %

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Net Profit Margin> Net Profit Margin of 17.25 is better than the same margin in earlier year by almost

2.7%, hence a positive indicator.

> Net Profit Margin of company is also higher than that of Hindustan Unilever Limited by almost 3%, shows a good position of company in market.

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> Return on Investment Ratio is used to evaluate the efficiency of an investment

> RoI = EBIT / Assets (either total or net)

> EBIT = Earning Before Interest and Tax

Return on Investment Ratio




= EBIT / Assets (total) | = EBIT / Assets (Net)

= (10415.74-732.02)/65666.25 | = (10415.74-732.02)/(65666.25-4868.83-15071.70)

= 0.1474 = 14.74% | = 0.2117 = 21.17%

EBIT is not directly available in Balance Sheet. However, EBIT by meaning is Profit without consideration of Interest and Tax. Balance sheet provides PBT i.e. Profit Before Tax, which has considered expenses incurred on Interest Payment. PBT = Profit (Earning) Before Interest and Tax - Expenses on Interest Payment

Hence, adding back such expenses to PBT will give us EBIT. Therefore, EBIT = PBT + Interest Payment Expenses. *Interest charges are part of Cash Flow statement.

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Return on Investment Ratio> Return on Investment Ratio are the positive Indicators for Tata Coffee.

> Both RoI – Total Assets and RoI – Net Assets holds considerable percentage value.

> It indicates that for each unit invested, company earns almost around 15% or more returns.

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> Inventory Turnover Ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period.

> It is expressed in number of times. Inventory turn over ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.

> Aka Stock turn over ratio

> Usually a high inventory turnover/stock velocity indicates efficient management of inventory because more frequently the stocks are sold, the lesser amount of money is required to finance the inventory.

> Inventory Turnover Ratio = COGS/Inventory

Inventory Turnover Ratio




= COGS/Inventory

= 42080.03/12,395.28

= 3.3948 ~ 4 Times

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Inventory Turnover Ratio> Inventory Turnover Ratio as “4 Times” signifies, company is well efficient to manage its

inventory i.e. company is able to convert its inventory to sale very efficiently.

> It signifies that, as inventory is easily converted to sale, there would be less amount of extra money required for further generation of inventories.

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> Debtor’s Turnover Ratio indicates the number of times the debtors are turned over a year.

> The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are.

> Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm.

> Aka Accounts Receivable Turnover Ratio.

> Debtor’s Turnover Ratio = Sales / Debtors

Debtor's Turnover Ratio




= Sales / Debtors

= 50851.78/ 4434.72

= 11.47 ~ 11.5 Times

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Debtor's Turnover Ratio> Debtor’s Turnover Ratio being approximately 11.5 times is quite a big and appreciable

figure for the company.

> It clearly indicates the debts of company are being liquidized very easily and hence company is efficiently managing its debtors.

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> Total Assets Turnover Ratio indicates how efficiently your business generates revenues on each dollar of assets.

> An increasing ratio indicates that company is using its assets more productively..

> Debtor’s Turnover Ratio = Revenue / Total Assets

Total Assets Turnover Ratio




= Revenue / Total Assets

= 51657.20 / 65666.25

= 0.7866 ~ 78.66 Times

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Total Assets Turnover Ratio> Total Assets turnover Ratio being approximately 79 times shows company is able to

use its all assets very effectively and efficiently.

> Similar ratio calculated for last year is 42713.61/62168.19 = 68.70 ~ 69%.

> The improvement of 10% in the ratio shows how company has made its assets more productive in last one year.

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> A/c Payables’ Turnover Ratio indicates the number of times the trade payables are turned over a year.

> The higher the value of A/c Payables’ turnover the shorter the period between the purchase and payments.

> A High turn over may indicate unfavorable supplier repayment terms.

> A Low turn over may indicate sign of cash flow problems.

> A/c Payables’ Turnover Ratio = Sales / Average A/c Payables

A/c Payables’ Turnover Ratio




= Sales / Average A/c Payables

= 50851.78/ 1237.80

= 41.08 ~ 41 Times

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A/c Payables’ Turnover Ratio> Debtor’s Turnover Ratio being approximately 41 times is quite a big and appreciable

figure for the company and its suppliers’ relationship of credit terms.

> It clearly indicates the company’s inventory is well funded by creditors.

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> Interest Coverage Ratio relates the fixed interest charges to the income earned by the business. It indicates whether the business has earned sufficient profits to pay periodically the interest charges.

> This matric is very important from the lender's point of view. It indicates the number of times interest is covered by the profits available to pay interest charges.

> A high debt service ratio or interest coverage ratio assures the lenders a regular and periodical interest income.

> Aka Debt Service Ratio or Debt Service Coverage Ratio.

> Interest Coverage Ratio = EBIT / Interest OR EBITDA / Interest

> EBIT = Earnings Before Interest and Taxes

> EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

Interest Coverage Ratio




= EBIT / Interest | EBITDA / Interest

= (10415.74-732.02)/732.02 | (10415.74-732.02-1324.11) / 732.02

= 13.22 | 11.419

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Interest Coverage Ratio> Interest Coverage Ratio for the company is not excellently well, but not bad too.

> It indicates company is earning profit which is at least more than 10 times the interest amount to be paid.

> Even though, this ratio not being excellently high, it surely gives a sense of security to the landers for their interest amount.

> Suggestion: Company can make out a strategy to increase its Profit which will, in turn, pull this ratio to still higher value.

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> Debt-to-Equity ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds.

> Aka external internal equity ratio or Gearing.

> It is determined to ascertain soundness of the long term financial policies of the company.

> A ratio of 1:1 is usually considered to be satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. Theoretically if the owners interests are greater than that of creditors, the financial position is highly solvent.

> Debt to Equity Ratio = Total Debt/Total Owner's Equity

Debt to Equity Ratio




= Total Debt/Total Owner's Equity

= (4,868.83+15,071.70)/45,725.72

= 0.436 : 1

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Debt to Equity Ratio> Debt to Equity Ratio is quite nice. It’s surely a positive indicator for the company.

> However, company can still borrow more money and use it for the business so long as it is in safe range i.e. till this ratio is less than or equal to 1. This step may help company to grow even more on GPM and NPM ratios.

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> Debt-to-Total Assets ratio indicates what proportion of total assets is provided by the creditors.

> A higher value of this ratio indicates company is taking more risky funds and if at all Risk event actually occurs, company has to forgo its good amount of assets to pay the debt.

> Debt to Total Assets Ratio = Total Debt / Total Assets

Debt to Total Assets Ratio




= Total Debt/Total Assets

= (4,868.83+15,071.70)/65,666.25

= 0.3036 ~ 30.36 times

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Debt to Total Assets Ratio> Debt to Total Assets Ratio of 30.36 times indicates company is levered.

> Company is having good amount of liquidity and hence this ratio doesn’t pose much of risk.

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Conclusion> Current Ratio and Quick Ratios are not much satisfactory and may convey a red flag to

the investors. But, Inventory Turnover Ratio being satisfactorily high and inventory being almost 50% of the Current Assets, it gives a positive message that maximum current assets is highly liquid. NWC Ratio of almost 19% indicates company is having enough amount of Liquid cash and is mature enough to pay off all the short term obligations.

> Gross Profit Margin and Net Profit Margin also indicate that company has performed better than previous year as well as better than its competitors in this year. Additionally, high value of Debt to Equity Ratio also signifies that company can still pull in the money from borrowers, easily, and may get a chance to yet increase its GPM and NPM.

> Yes, Return on Investment Ratio and Debtor’s Turnover Ratio and Interest Coverage Ratio being significantly higher, investors will also not hesitate investing here.

> Collectively, all ratios indicate company is performing well and still has capacity and situation favorable to make it better.

Thank You

tata coffee limited ratio analysis nirav khandhedia

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