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LIQUIDITY RATIO
A measure of the companys ability to pay its short-term debts when due.
Defined as current assets divided by current liabilities. Important Ratios:
Current Ratio = Current Assets/ Current Liabilities = 3630.90/2980.84 = 1.218 ( Recommended value is between 1.5 to 2) Quick Ratio = Current Assets Inventory / Current Liability = 3630.90-1253.22 / 2980.84 = 0.797 (Recommended value is between 1 to 2)
LEVERAGE RATIOS
These are an indication of the companys overall debt burden. Important Ratios:
Debt-to-total assets ratio = = = Times earned interest = = = Fixed charge coverage = Total debt / Total Assets 2459.43/7476.66 32.89% EBIT / Interest charges 1051.99/ (210.19+448.09) 1.598 Income for meeting fixed charges / Fixed charges = 586.60/(210.10+448.09+1047.91) (miscellaneous + Minority Interest + Interest) = 0.3438
Ratios
Formula
Calculated
Recommended
32.89%
30-35%
1.598
7-8 times
0.3438
5.5 times
ACTIVITY RATIOS
A measure of how effectively a company manages its assets
Inventory Turnover = Sales / Inventory = 8146.21/1253.22 = 6.50 Average Collection Period = Receivables / Sales per day = 1485.83/(8146.21/365) = 66.57 days Fixed assets Turnover = Sales / Fixed assets = 8146.21/(3221.04-719.82) =3.65 Total Assets Turnover = Sales / Total Assets = 8146.21/7476.66 = 1.089
Ratios
Formula
Calculated
Recommended
Inventory Turnover
Sales / Inventory
6.50
7 times
66.57 days
45-60 days
3.65
2-3 times
1.089
1-2 times
PROFITABILITY RATIOS
Gross Profit Margin = (Net sales-cost of goods sold)/Sales(Revenue)
=(7987.28-5319.33-685.22-239.75)/8146.21 =0.2139=21.39%
Return on Equity Ratio (Net Worth)= Net profit after taxes/net worth
=586.60/6417.99=9.139%
Ratios
Formula
Calculated
Recommended
21.39%
Varies
12.9%
Varies
7.2%
5-8%
4.578%
10%
9.139%
15%
Z SCORE
= 1.2 *( 650.06/7476.66) + 1.4*(331.84/7476.66) + 3.3 * (1051.99/7476.66)+ 0.6 *(5017.23/7476.66) + ( 8146.21/7476.66) = 0.104+0.062+0.464+0.402+1.09 = 2.123
CONCLUSION
After computing the financial ratios for Tata Chemicals and comparing with the recommended averages, we can draw the following conclusions:
From the liquidity ratios, the company will manage to pay its short-term debts when due. From the leverage ratio, the fixed charge coverage and Times earned Interest is very low. The debt-to-asset ratio is reasonable. The company needs to reduce the fixed or increase profit or income by a large amount. The activity ratios are average for the company and the company manages its assets effectively. The profitability ratios are around average.
The Altman Z score is 2.123. Scores in between 1.8 and 3 lie in a gray area. So the companys health is uncertain.