Operational Efficiency Ratios

Managerial Accounting 1
Under guidance of Dr. Sandeep Goel
PGPM (2013-15), Section A
Anirudh Krishnan (13P006)
Deepak Sasikumar (13P019)
Piyush Rathi (13P033)
Sandeep Banthia (13P042)
Suhail Sabharwal (13P049)
Sunanda Mohanty (13P051)
Steel Industry (India)
One of the core industries in India
India is 4
th
largest crude steel producer in
the world
Production: 75 million metric tonnes
Growth in 2013: 5.7 %
Indian steel consumption of 57 kg per
capita steel is way below the world
average of 214.7 kg



Operating Efficiency Ratios
Debtors Turnover Ratios =
Gross Sales
Average Debtors

Average Collection Period =
Days in an year
Debtors Turnover Ratio
Creditors Turnover Ratio =
Purchases
Average Creditors

Average Payment Period =
Days in an year
Creditors Turnover Ratio
Operating Efficiency Ratios
Stock Turnover Ratio =
Cost of Goods Sold (Gross Sales)
Average Stock

Inventory Holding Period =
Days in an year
Stock Turnover Ratio
Operating Efficiency Ratios
Working Capital Turnover Ratio =
Gross Sales
Working Capital
W.C. = (Current Assets Current Liabilities)

Fixed Asset Turnover Ratio =
Gross Sales
Fixed Asset
F.A. = Net Block + CWIP
Operating Efficiency Ratios
Asset Turnover Ratio =
Gross Sales
Total Assets

T.A. = Net Block + Capital work in-progress+
Current Assets + Investments +
Other Assets
Operating Efficiency Ratios
One of the seven Maharatnas
14
th
largest steel producer in the world
Turnover: US $ 7.7 billion
Total Assets: US $ 1.1 billion
Net Income: US $ 710 million
Annual production of 13.5 million metric
tonnes
Products Steel, flat steel products, long
steel products, wire products, plates

Steel Authority of India Ltd. (SAIL)
All values in Rs. Crore 2011 2012 2013
Gross Sales 47629.15 51029.49 49986.9
Average Debtors 3812.085 4439.52 4586.475
Total Purchases 21911.06 26199.26 24153.89
Average Creditors 3631.625 3197.295 3264.99
Average Inventory 10331.695 12693.94 15054.59
Working Capital 25535.48 16533.53 15919.43
Fixed Asset 37133.82 45207.41 52668.25
Total Assets 76250.92 76511.81 84402.27
Debtors Management
2011 2012 2013
D.T. Ratio 12.49 11.49 10.90
ACP (Days) 29 32 33
0
5
10
15
20
25
30
35
40
10.00
10.50
11.00
11.50
12.00
12.50
13.00
D.T. Ratio
ACP (Days)
Gradual increase in gross sales and
debtors over the period 2011-2013.
However, percentage increase in debtors
exceeds percentage increase in sales

Creditors Management
2011 2012 2013
C.T. Ratio 6.03 8.19 7.40
APP (Days) 60 45 49
0
10
20
30
40
50
60
70
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
C.T. Ratio
APP (Days)
Decreased due to increase in purchases while
creditors are falling.
Business may not be taking full advantage of
credit facilities and may be making more
purchases in cash rather than credit

Inventory Management
2011 2012 2013
S.T. Ratio 4.61 4.02 3.32
I.H. Period (Days) 79 91 110
0
20
40
60
80
100
120
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
S.T. Ratio
I.H. Period (Days)
Inventory is rising substantially while the
increase in gross sales isnt as
proportionate.
This can be attributed to over stocking
which may pose risk of obsolescence and
increase inventory holding costs

Working Capital Management
2011 2012 2013
W.C.T. Ratio 1.87 3.09 3.14
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
W.C.T. Ratio
W.C.T. Ratio
Working capital declining vis--vis rising sales.
Working capital decline due to fall in current assets.
Fall in current assets can be attributed to
substantial fall in cash in bank a sign of decline in
short term liquidity position

Fixed Assets Management
2011 2012 2013
F.A.T. Ratio 1.28 1.13 0.95
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
F.A.T. Ratio
F.A.T. Ratio
Declining due to increase in fixed assets due
to substantial increase in Capital WIP - huge
capital expenditure in order to increase
production capacity (adding 5 million tonnes
approx) in lieu of rising demand

TATA Steel
Tata steel limited formerly known as
TISCO
12
th
largest steel producer in the world
Turnover: US $ 24.67 billion
Total Assets: US $ 27.34 billion
Net Income: US $ 1.0 billion
Annual production of 23.8 million metric
tonnes
Products Steel, flat steel products, long
steel products, wire products, plates


All values in Rs. Crore 2011 2012 2013
Gross Sales 31,902.14 37,005.71 42,317.24
Average Debtors 429.43 664.05 850.50
Total Purchases 7,034.15 8,701.97 9,774.77
Average Creditors 4,255.53 5,736.26 7,384.69
Average Inventory 3,515.76 4,406.38 5,058.47
Working Capital 8,039.87 1,768.51 94.59
Fixed Asset 17,417.38 27,413.01 33,597.34
Total Assets 89,551.72 95,802.99 101,876.93
Debtors Management
2011 2012 2013
D.T. Ratio 74.29 55.73 49.76
ACP (Days) 5 7 7
0
1
2
3
4
5
6
7
8
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
D.T. Ratio
ACP (Days)
Low ACP Most sales in Cash/ bargaining power
of consumers is low
Rise in ACP due to ~100% rise in Debtors but only
~30% in Gross Sales
Creditors Management
2011 2012 2013
C.T. Ratio 1.65 1.52 1.32
APP (Days) 221 241 276
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
0
50
100
150
200
250
300
C.T. Ratio
APP (Days)
High APP High Credit Worthiness due to inc. in
Creditors
Not good from potential investors point of view


Inventory Management
2011 2012 2013
S.T. Ratio 9.07 8.40 8.37
I.H. Period (Days) 40 43 44
8.00
8.20
8.40
8.60
8.80
9.00
9.20
0
5
10
15
20
25
30
35
40
45
50
S.T. Ratio
I.H. Period (Days)
Constant throughout
Gross Sales and Inventory have increased in equal
proportions
Working Capital Management
2011 2012 2013
W.C.T. Ratio 3.97 20.92 447.38
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00
W.C.T. Ratio
W.C.T. Ratio
Low in 2011 showing inefficiency
Shoots up in 2013 because of fall in Working
Capital
Fixed Assets Management
2011 2012 2013
F.A.T. Ratio 1.83 1.35 1.26
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
F.A.T. Ratio
F.A.T. Ratio
Declining as Fixed Assets increase at a
greater rate than Sales
A capital investment in 2011 that has
culminated in fixed assets in 2012
JSW Steel Ltd.
Part of JSW group (O.P. Jindal group)
Among Indias largest steel producers
Turnover: US $ 5.5 billion
Net Income: US $ 260 million
Annual production of 14.3 million metric
tonnes
Products Steel, flat steel products, long
steel products, wire products, plates


All values in Rs. Crore 2011 2012 2013
Gross Sales 25,334.63 34,720.67 38,867.59
Average Debtors 700.95 1,061.64 1,573.41
Total Purchases 15,602.04 21,521.61 21,908.00
Average Creditors 1,482.55 1,619.31 2,093.59
Average Inventory 3,362.09 4,658.75 4,989.09
Working Capital -566.96 1,121.31 1,398.12
Fixed Asset 26,810.21 29,594.39 32,713.33
Total Assets 41,558.38 50,521.31 54,615.35
Debtors Management
2011 2012 2013
D.T. Ratio 36.14 32.70 24.70
ACP (Days) 10 11 15
0
2
4
6
8
10
12
14
16
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
D.T. Ratio
ACP (Days)
Rising due to120% increase in debtors
against 50% rise in gross sales.

Creditors Management
2011 2012 2013
C.T. Ratio 10.52 13.29 10.46
APP (Days) 35 27 35
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
0
5
10
15
20
25
30
35
40
C.T. Ratio
APP (Days)
Falls from 2011 to 2012 due to increase in
purchases.
However, from 2012 to 2013 purchases are
constant
Creditors is constantly rising throughout this period

Inventory Management
2011 2012 2013
S.T. Ratio 7.54 7.45 7.79
I.H. Period (Days) 48 49 47
7.20
7.30
7.40
7.50
7.60
7.70
7.80
7.90
0
10
20
30
40
50
60
S.T. Ratio
I.H. Period (Days)
Constant throughout
Working Capital Management
2011 2012 2013
W.C.T. Ratio -44.69 30.96 27.80
-50.00
-40.00
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
W.C.T. Ratio
W.C.T. Ratio
Improves from negative to positive which
is due to an increase in current assets
(increase in loans given out by company
to 3
rd
parties and govt. deposits of
Rs.1300cr made)

Fixed Assets Management
2011 2012 2013
F.A.T. Ratio 0.94 1.17 1.19
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
F.A.T. Ratio
F.A.T. Ratio
Increases as percentage increase in
sales is greater than percentage
increase in fixed assets

Essar Steel
Part of Essar group
Global footprint across Asia, Europe,
North America, Africa and Middle East
Turnover: US $ 5.6 billion
Annual production of 21.4 million metric
tonnes
Balanced portfolio of assets in
manufacturing and services sectors


All values in Rs. Crore 2010 2011 2012
Gross Sales 11388.31 13345.85 17561.42
Average Debtors 439.355 493 544.725
Total Purchases 3868.4 7602.17 8097.91
Average Creditors 1001.525 1229.135 1985.125
Average Inventory 2395.375 3927.865 4633.57
Working Capital 3625.3 5349.53 2269.39
Fixed Asset 26810.21 29594.39 32713.33
Total Assets 32239.19 39009.49 42420.53
Debtors Management
2010 2011 2012
D.T. Ratio 25.92 27.07 32.24
ACP (Days) 14 13 11
0
2
4
6
8
10
12
14
16
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
D.T. Ratio
ACP (Days)
ACP reducing. Debtors have been
efficiently managed
% increase in sales > % increase in
debtors

Creditors Management
2010 2011 2012
C.T. Ratio 3.86 6.18 4.08
APP (Days) 94 59 89
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
0
10
20
30
40
50
60
70
80
90
100
C.T. Ratio
APP (Days)
First decreases and then increases.
Major increase in purchases as compared
to that in creditors followed by a major
increase in creditors in the following year

Inventory Management
2010 2011 2012
S.T. Ratio 4.75 3.40 3.79
I.H. Period (Days) 77 107 96
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0
20
40
60
80
100
120
S.T. Ratio
I.H. Period (Days)
Increases due to increase in stock
of inventory
Working Capital Management
2010 2011 2012
W.C.T. Ratio 3.14 2.49 7.74
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
W.C.T. Ratio
W.C.T. Ratio
Major increase due to increase in sales in
2012 & approx. 50% reduction in working
capital due to reduction in inventory and
increase in current liabilities

Fixed Assets Management
2010 2011 2012
F.A.T. Ratio 0.42 0.45 0.54
0.00
0.10
0.20
0.30
0.40
0.50
0.60
F.A.T. Ratio
F.A.T. Ratio
No major change.
However, fixed assets are not being
effectively utilized as the ratio is less
than 1

RINL
Rashtriya Ispat Nigam Limited, also
known as Vizag Steel
Indian government owned steel producer
One of the Navratnas
Turnover: US $ 1.7 billion
Net Income: 130 million
Annual production of 6.3 million metric
tonnes

All values in Rs. Crore 2010 2011 2012
Gross Sales 10755.7 11616.3 14570.19
Average Debtors 186.225 255.725 378.71
Total Purchases 5208.4 7340.97 8560.32
Average Creditors 1207.345 903.1 465.57
Average Inventory 2989.06 2929.905 3328.91
Working Capital 6832.29 4110.48 4456.08
Fixed Asset 8972.3 10984.9 12397.93
Total Assets 18676.79 19053.45 21504.84
Debtors Management
2010 2011 2012
D.T. Ratio 57.76 45.42 38.47
ACP (Days) 6 8 9
0
1
2
3
4
5
6
7
8
9
10
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
D.T. Ratio
ACP (Days)
Increasing as increase in debtors
greater than increase in sales
Creditors Management
2010 2011 2012
C.T. Ratio 4.31 8.13 18.39
APP (Days) 85 45 20
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
0
10
20
30
40
50
60
70
80
90
C.T. Ratio
APP (Days)
Decreasing, total purchase rising but
creditors falling drastically
A sign that creditors are not extending credit

Inventory Management
2010 2011 2012
S.T. Ratio 3.60 3.96 4.38
I.H. Period (Days) 101 92 83
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0
20
40
60
80
100
120
S.T. Ratio
I.H. Period (Days)
Reducing, there is an increase in sales
while average inventory is more or less
constant

Working Capital Management
2010 2011 2012
W.C.T. Ratio 1.57 2.83 3.27
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
W.C.T. Ratio
W.C.T. Ratio
Increasing, working capital falling & sales
rising.
Working capital falling due to rise in
current liabilities (other liabilities)

Fixed Assets Management
2010 2011 2012
F.A.T. Ratio 1.20 1.06 1.18
0.95
1.00
1.05
1.10
1.15
1.20
1.25
F.A.T. Ratio
F.A.T. Ratio
No major change as increase in assets is
proportionate to increase in sales.
However, fixed assets are not being
effectively utilized as the ratio is less
than 1
Industry - Debtors Management
2010 2011 2012
SAIL 27 29 32
TATA Steel 7 5 7
JSW Steel 9 10 11
Essar Steel 14 13 11
RINL 6 8 9
Industry 26 27 27
0
5
10
15
20
25
30
35
ACP
SAIL
TATA Steel
JSW Steel
Essar Steel
RINL
Industry
SAIL ACP is high.
Reduce bargaining power of customers & provide them
with cash discounts to reduce the collection period

Industry - Creditors Management
2010 2011 2012
SAIL 73 60 45
TATA Steel 267 221 241
JSW Steel 54 35 27
Essar Steel 94 59 89
RINL 85 45 20
Industry 83 73 67
0
50
100
150
200
250
300
APP
SAIL
TATA Steel
JSW Steel
Essar Steel
RINL
Industry
TATA Steel has a very high APP as compared to other
major players.
JSW is below industry average should raise its own
bargaining power in order to take full advantage of
credit facilities

Industry - Inventory Management
2010 2011 2012
SAIL 81 79 91
TATA Steel 45 40 43
JSW Steel 43 48 49
Essar Steel 77 107 96
RINL 101 92 83
Industry 65 66 68
0
20
40
60
80
100
120
IHP
SAIL
TATA Steel
JSW Steel
Essar Steel
RINL
Industry
ESSAR & RINL have higher IHP than average
This reduces operating efficiency, increases
holding costs

Industry - Fixed Asset Management
2010 2011 2012
SAIL 1.54 1.28 1.13
TATA Steel 1.67 1.83 1.35
JSW Steel 0.83 0.94 1.17
Essar Steel 0.42 0.45 0.54
RINL 1.20 1.06 1.18
Industry 1.25 1.29 1.31
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
FAT Ratio
SAIL
TATA Steel
JSW Steel
Essar Steel
RINL
Industry
Low for Essar Steel - indicates not using FA effectively & FA
not materializing into increased sales.
Thus, should improve the efficiency of the production
process

References
http://www.cci.in/pdfs/surveys-
reports/Iron-and-Steel-Industry-in-
India.pdf
http://steel.gov.in/overview.htm
http://www.ibef.org/industry/steel.aspx
http://www.capitaline.com/user/framepage
.asp?id=1
http://www.indiastat.com/default.aspx
http://www.cptgl.com/steel-industry-in-
india-2013-report.pdf
Wikipedia