MANAGERIAL ACCOUNTING AND CONTROL 1

Financial Ratio Analysis

Mahindra & Mahindra Ltd.
Submitted by Group 3 Alok Ranjan Chiranjit Dutta Karthik KVR Nitin Kuraien Rajoo Milan Sarvagya Pathak Saurabh Chaubey 4/12/2010

INDIAN INSTITUTE OF MANAGEMENT RAIPUR

Contents
Financial Ratio Analysis: Mahindra & Mahindra Ltd. ................................................................................ 3 1. Introduction..................................................................................................................................... 3 2. Current Ratio Liquidity Measure.................................................................................................... 3 2.1 Time Series Analysis ................................................................................................................... 3 2.2 Comparison with Competitors.................................................................................................... 4 3. Quick Ratio Liquidity Measure ....................................................................................................... 4 3.1 Time Series Analysis ................................................................................................................... 4 3.2 Comparison with Competitors.................................................................................................... 5 4. Debt to Equity Ratio Solvency Measure ......................................................................................... 5 4.1 Time Series Analysis ................................................................................................................... 5 4.2 Comparison with Competitors.................................................................................................... 5 5. Inventory Turnover Ratio Activity Measure ................................................................................... 6 5.1 Time Series Analysis ................................................................................................................... 6 5.2 Comparison with Competitors.................................................................................................... 6 6. Gross Profit Margin Profitability Measure ..................................................................................... 6 6.1 Time Series Analysis ................................................................................................................... 6 6.2 Comparison with Competitors.................................................................................................... 7 7. Net Profit Margin Profitability Measure ........................................................................................ 7 7.1 Time Series Analysis ................................................................................................................... 7 7.2 Comparison with Competitors.................................................................................................... 7 8. Conclusion ....................................................................................................................................... 8 9. References....................................................................................................................................... 8

Financial Ratio Analysis: Mahindra & Mahindra Ltd.

1. Introduction
Financial ratios are derived from the financial statements to give details insights into various parameters of the company/organization. Generally the ratios can be segregated into five categories based on the information they convey. In the present report, four types of financial ratios (viz. Liquidity, Solvency, Activity, profitability ratios) of Mahindra & Mahindra Ltd have been used to get performance comparisons between years (time series analysis) and different other companies serving similar market segments (automobile industry in India). The years considered for time series analysis includes the period of 2006-2010. The companies considered for comparison include Tata Motors, Maruti Suzuki Pvt. Ltd and Eicher Motors. The Annual financial report of Mahindra & Mahindra Ltd for the period 2009-2010 has been utilized as the source of the financial data. For the time series comparison and for the comparison of competitor firms, databases of http://www.moneycontrol.com/ and http://money.rediff.com/ have been utilized.

2. Current Ratio Liquidity Measure

Liquidity ratios such as the current ratio measure the companys ability to meet short term projects. These ratios show the companys ability to remain solvent. Current ratio is defined as the ratio of current assets and the current liabilities. Current ratio considers all liquid assets such as inventory, cash, accounts receivable etc. Current liabilities are the liabilities which are to be cleared in a short period. For a healthy organization, the current assets should be greater than the current liabilities. A high current ratio is a positive indication because it implies that the company has the ability to settle the current liabilities by conversion of current assets into cash. 2.1 Time Series Analysis From the table and the graph, it can be observed that the highest current ratio of the company was in March 2007 with a value of 1.37. The least was seen in March 2009 with a value of 1.06. The current ratio of Mahindra & Mahindra had decreased from 1.37 to 1.06 from 2007 to 2009 before increasing to 1.11. The reason for this could be the economic recession witnessed by the world in the period 2007-09. It can be observed that the current ratio is again on an increase with the latest value being 1.11. These values show that the company like many other automobile companies in the world was hit by the recession but was safe as the current assets were always in excess of the current liabilities. As a conventional rule a current ratio of 2 or more is considered satisfactory. The Mahindra and Mahindra company has a current ratio of 1.11 in the year 2009-2010, therefore it may be interpreted to be having insufficient liquid.

Ratios Current Ratio

Mar '06 1.21

Mar '07 1.31

Mar '08 0.86

Mar '09 0.9

Mar '10 1.11

2.2 Comparison with Competitors The current ratio values of competitors of Mahindra and Mahindra viz. Tata Motors, Eicher and Maruti Suzuki for the period 2009-10 have been compiled and graphed. From the values, it can be observed that Tata motors has the least current ratio (0.62) while Eicher has the highest with 1.34. The value of Mahindra & Mahindras Current ratio lies between the extremes. Tata Motors 0.62

RATIO Current Ratio

M&M 1.11

Maruti 0.91

Eicher 1.19

3. Quick Ratio Liquidity Measure

Quick ratio is current assets minus inventories, divided by current liabilities. A high ratio allows little dependence on the salability of the inventory to meet current obligations. 3.1 Time Series Analysis

Ratios Quick Ratio

Mar '06 0.84

Mar '07 1.01

Mar '08 0.74

Mar '09 0.83

Mar '10 0.89

The current asset of Mahindra & Mahindra, according to balance sheet as of March 31, 2010 is 6224.56 Cr and current liabilities is 5619.04 Cr and inventories is 1188.80 Cr. Quick Ratio = (Current Asset Inventories) / Current liabilities Quick Ratio = (6224 -1188) / 5619 = 0.89 Generally, a quick ratio of 1:1 is considered to represent a satisfactory current financial condition. A company with a high value of quick ratio can suffer from the shortage of funds if it has slow paying, doubtful and long duration outstanding debtors. On the other hand, a company with a low value of quick ratio may really be prospering and paying its current obligations in time if it has been turning over its inventories efficiently. In case of Mahindra and Mahindra, Quick ratio of 0.89 in the year 2009-2010 indicates that company is doing good and prospering well. Among the previous few years considered, the Quick ratio was the highest in the financial statement of March 2007 which might be due to the recession.

3.2 Comparison with Competitors

RATIO Quick Ratio

M&M 0.89

Maruti 0.68

Tata Motors 0.46

Eicher 1.14

The above table shows the quick ratios of the competitor firms. Less the quick ratio, better is the company in terms of liquidity. Hence it can be observed that M&M has the second highest quick ratio after Eicher. This is one area where there is might be a scope of improvement.

4. Debt to Equity Ratio Solvency Measure

It is calculated by dividing long term debt by member equity. This ratio shows the financial flexibility and the long term capital structure of the cooperative. High ratios indicate inadequate borrowing power of the cooperative. 4.1 Time Series Analysis

Ratios Debt Equity Ratio

Mar '06 0.31

Mar '07 0.46

Mar '08 0.6

Mar '09 0.77

Mar '10 0.37

It can be observed that the Debt to equity ratio of M&M has been the highest in March 2009 (0.77) and least in March 2006 (0.31). The present debt to equity ratio is 0.37 which is nearer to its lower value. Hence this ratio is in favour of the company. 4.2 Comparison with Competitors

RATIO Debt Equity Ratio

M&M 0.37

Maruti 0.07

Tata Motors 1.11

Eicher 0.03

The table shows the debt to equity ratio of the different comparable companies for the 2009-2010 period. It can be observed that M&M is higher than Maruti and Eicher Motors. Hence it can be said that the financial flexibility of the company is almost the industry average.

5. Inventory Turnover Ratio Activity Measure

This ratio indicates the efficiency of the firm in producing and selling its product. It is calculated by dividing the cost of goods sold by the average inventory. Inventory Turnover = Cost of goods sold / Avg. Inventory 5.1 Time Series Analysis For Mahindra and Mahindra, the inventory is given to be 1188.8 Cr and as no other information is given we take the cost of goods sold by sales as 20323 Cr. Inventory Turnover = 20323 / 1188 = 17.1 Ratios Inventory Turnover Ratio Mar '06 9.48 Mar '07 11.75 Mar '08 12.49 Mar '09 14.56 Mar '10 17.1

Inventory turnover ratio kept growing year by year from 9.48 to 17.1 during period 06 to 10, which shows that company is using its inventory more efficiently every year.

5.2 Comparison with Competitors

RATIO Inventory Turnover Ratio

M&M 17.91

Maruti 30.47

Tata Motors 13.07

Eicher 19.61

Maruti and Eicher seem to be doing better than M&M in this front.

6. Gross Profit Margin Profitability Measure

It is defined as the Gross profit divided by the total sales. Gross profit margin = Gross Profit / Sales 6.1 Time Series Analysis For the year 2009-2010, the Gross profit of Mahindra & Mahindra = 3016 Cr Sales = 20323 Cr. Gross Profit margin = 3016 /20323 = 0.14 90 = 14.9 %

The gross profit margin reflects the efficiency with which management produces each unit of the product. Gross profit margin of 14.9 % indicates that Mahindra and Mahindra is doing business efficiently because it is among its highest figures during the past few years. Ratios Gross Profit Margin(%) 6.2 Comparison with Competitors Mar '06 12.48 Mar '07 14.73 Mar '08 8.12 Mar '09 7.59 Mar '10 14.29

RATIO Gross Profit Margin(%)

M&M 14.29

Maruti 9.93

Tata Motors 8.84

Eicher 4.63

For the year 2009-2010, M&M is the best performer in this ratio among the other three companies. This shows that the company produces its products very efficiently.

7. Net Profit Margin Profitability Measure

Net profit is obtained when operating expenses, interest and taxes are subtracted from the gross profit. It is calculated as Net profit margin = Profit after Tax / Sales. 7.1 Time Series Analysis

Ratios Net Profit Margin(%)

Mar '06 10.28

Mar '07 10.34

Mar '08 9.45

Mar '09 6.25

Mar '10 11.08

For the year 2009-2010, the Net profit margin of M&M is = 11.08% From all the previous years it can be observed that the value for this year is the highest (11.08%). This shows the profitability of the company has been the highest this period. The least was in March 2009 (6.25%) where the recession might have affected the company. 7.2 Comparison with Competitors

RATIO Net Profit Margin(%)

M&M 11.08

Maruti 8.34

Tata Motors 6.28

Eicher 9.19

From this table, it can be observed that among the four companies considered, Mahindra & Mahindra seems to be the best performer in this parameter (11.08%) for the year 2009- 2010.

8. Conclusion
From the analysis of the above ratios through time series analysis and comparison with other competitor firms, it can be concluded that Mahindra & Mahindra was a company affected by recession in the period 2007-2009 but it is back to health as evident from the figures of the period 2009-2010. Specifically, Mahindra & Mahindra is found to be the best in Gross Profit margin and net profit margin. It is found to be lagging behind in parameters such as Debt equity ratio and inventory turnover ratio.

9. References
Mahindra & Mahindra Annual Report 2009-2010 Maruti Suzuki Annual Report 2009-2010 Tata Motors Annual Report 2009-2010 http://www.moneycontrol.com/ http://money.rediff.com/ http://en.wikipedia.org/ http://www.google.com/