Tata Steel

Financial Ratios Calculation

Tata Steel Balance Sheet 2017-18
Tata Steel Income Statement 2017-18
Liquidity Ratios
● Current Ratio = Current Assets / Current Liabilities

Current Assets = 67,774.69 Current Liabilities = 55,661.30

Current ratio = 1.22

● Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

Quick assets = 67,774.69- 28,331.04 - 0 / 55661.30

Quick Ratio = 0.7086

 Importance of Liquidity Ratios
1. Current Ratio
● The ideal value for current ratio is 1.2-2.
● Current ratio below 1: company doesn't have enough liquid assets to cover its short-term liabilities.
● Low current ratio can often be supported by a strong operating cash flow.
● A ratio equal to 1: current assets are equal to current liabilities and that a company is just able to cover all
of its short-term obligations.
● Current ratio above 2: Company may not be using its current assets or its short-term financing facilities
efficiently. Also an indicator of problems in working capital management.

2. Quick Ratio
● Useful in measuring the liquidity position of a firm.
● Measures the firm's capacity to pay off current obligations immediately and is a more rigorous test of
liquidity than the current ratio.
● A quick ratio of 1+ means that a company has sufficient liquid assets to meet its short-term financial
obligations.
● A low quick ratio below 1 means that a company has more current liabilities than assets and it might be an
indicator that the company is in financial distress.
Leverage Ratios
● Debt-to-Equity = Total Debt/ Shareholders Equity

Total Debt = 47678.77 Shareholder’s Equity = 115723.85

Debt-to-Equity = 47678.77 / 115723.85

Debt-to-Equity = 0.412

● Interest Coverage Ratio = EBIT / Total Interest Charges

EBIT = 16083.34 Total Interest Charges= 5,501.79

Interest Coverage Ratio = 2.92 times

 Importance of Leverage Ratios
1. Debt to Equity Ratio

● Optimal debt to equity ratio is considered as 1 i.e. liabilities = equity

● However, the ideal debt to equity ratio will vary depending on the industry because some
industries use more debt financing and is dependent on current and non-current assets
● A debt to equity ratio of 1 would mean that investors and creditors have an equal stake in the
business assets.
● A lower debt to equity ratio usually implies a more financially stable business.

2. Interest Coverage Ratio

● Also known as Interest earned ratio

● A bad interest coverage ratio is any number below 1: company's current earnings being
insufficient to service its outstanding debt. Early warning sign of impending bankruptcy
● Interest coverage ratio of at least two is considered the minimum acceptable amount for a
company that has solid, consistent revenues
Profitability Ratios
● Gross Profit Margin = Gross Profit / Sales

Gross Profit = 43,043.77 Sales = 60,519.37

Gross Profit Margin = 43,043.77/ 60,519.37 = 0.7112

● Net Profit Margin = Net Profit / Sales

Net Profit = 4108.43 Sales = 60,519.37

Net Profit Margin = 4108.43/ 60,519.37 = 0.0679

Importance of Profitability Ratios
1. Gross Profit Margin
● Used to assess a company's financial health and business model by revealing the amount
of money left over from sales after deducting the cost of goods sold.
● Major factor which affects the given ratio is COGS. The cost of goods sold for a certain
product is the direct costs associated with its production, including the materials and
labor necessary.
● An increased gross profit margin allows business to expand and invest in marketing to
increase sales.
● Declines in margin generally occur because of shrinking revenue relative to sales volume
or higher COGS.

2. Net Profit Margin

● Higher net profit margin means that a company is more efficient at converting sales into
actual profit.
● Net profit margin above 10% is considered excellent, but it depends on the industry and
structure of the business
Profitability Ratios
● Return on Total Assets = PAT / Total Assets

Profit after Tax = 4,169.55 Total Assets = 1,25,114.34

Return on Total Assets = 4,169.55/ 1,25,114.34 = 0.0333

● Return on Shareholder’s Equity = PAT / Shareholder’s Equity

Profit after Tax = 4,169.55 Shareholder’s Equity= 63,789.84

Return on Shareholder’s Equity= 4,169.55/ 63,789.84 = 0.0654

● Return on Capital Employed = EBIT / Capital Structure

EBIT = 18,317.54 Capital Structure = 89,397.18

Return on Capital Employed = 18,317.54/ 89,397.18 = 0.2049

Importance of Profitability Ratios
1. Return on Total Assets
● The total assets figure is inclusive of contra accounts which involves subtraction of
accumulated depreciation and doubtful accounts from gross amount of assets
● A low percentage return on assets indicates that the company is not making enough
income from the use of its assets
● A high percentage return on assets indicates that the company is earning more money on
less investment
● Return on assets is an indicator of the capital intensity of the company which depends on
the industry. Companies that require large initial investments will generally have lower
return on assets
● The ROA figure gives investors an idea of how effective the company is in converting the
money it invests into net income
Importance of Profitability Ratios
2. Return on Shareholders Equity
● More than a measure of profit, it is a measure of efficiency
● Increasing ROE indicates that a company is increasing its ability to generate profit
without requiring a lot of capital and has been able to manage shareholders’ investments
properly

3. Return on Capital Employed

● It is best used to compare between businesses for their performance evaluation
● High ROCE indicates efficient use of capital as compared to ROE, it also considers debt
and other liabilities while analysing a company which provides a more holistic view
●
Profitability Ratios
● Interest Earned Ratio = EBIT / Total Interest Charges

EBIT = 18,317.54 Total Interest Charges = 2,810.62

Interest Earned Ratio = 18,317.54/ 2,810.62 = 6.5173

● Earnings Per Share = Profit attributable to ordinary shareholders/ Number of Shares

Profit attributable =3,996.12 Number of Shares = 1,03,61,99,628

Earnings Per Share = 3,996.12* 10^6/ 1,03,61,99,628 = 38.57

Profitability Ratios

● Diluted EPS = PAT / (Number of Shares + Convertible debentures)

Profit after Tax = 4,169.55 Number of Shares = 1,03,61,99,628

Convertible Debentures = 0

Diluted EPS = 4,169.55/ 1,03,61,99,628 = 4.02

● PE Ratio = MPS / EPS

Market value per share = 570.84

Earnings Per Share = 3,996.12* 10^6/ 1,03,61,99,628 = 38.57

PE Ratio= 570.84/ 38.57= 14.80

Dividend Ratio
● Dividend Per Share = Equity Share Dividends / Number of Equity Shares

= 9712200000/ 1036199628 = 9.37

● Dividend Payout Ratio = DPS / EPS

Total dividends= 971.22

Earnings Per Share = 3,996.12* 10^6/ 1,03,61,99,628 = 38.57

DPR = 9.37/38.57 = 0.24

● Dividend Yield = DPS / Market price per share

= 9.37/ 571.05 = 0.016

Activity Ratio
● Fixed Asset Turnover Ratio = Sales / Fixed Assets

=60,519.37/ 90,470.43

= 0.67

● Total Asset Turnover = Sales / Total Assets

Sales = 60,519.37 Total Assets = 1,25,114.34

Total Asset Turnover = 60,519.37 / 1,25,114.34 = 0.48

● Accounts Receivable Turnover = Net Credit Sales / Debtors

Net credit sales=60,519.37 Debtors=

Activity Ratio

● Average Collection Period = 365 / Accounts Receivable Turnover

Accounts Receivables Turnover=

● Inventory Turnover = (Sales / COGS) / Average Stock

Sales = 60,519.37 Inventory at the end of year = 28,331.04