Session 16 - FA&A

Financial Accounting and Analysis (FIN 1101)
Area: Accounts and Finance

Program: PGDM
Term: I (June - September, 2019)
Session 16: Financial Analysis through Ratios continues
PROF ABHIJIT ROY

Recapitulation
Profitability Analysis
1. Profit Margin = Profit/Sales
2. Asset Turnover = Sales/Asset
3. Return on Assets = Profit/Assets
4. Return on Equity = Profit/Equity
5. Earning per Share
DuPont Analysis and Extended DuPont Analysis
Liquidity Analysis
Liquidity is the ability of the business to meet its short term obligations.
1. Current Ratio = Current Assets/Current Liability
2. Quick Ratio = Quick Assets/Current Liability
Current Assets and Current Liab. Of Maruti
Current assets 2018 2019 Current Liabilities 2018 2019
Inventories 31,608 33,257 Financial Liabilities
Financial assets Borrowings 1108 1496
Investments 12,173 50,455 Trade Payables 104970 96330
Trade receivables 14,618 23,104 Other Financial Liabilities 13338 14400

Cash and bank balances 711 1,789 Provisions 5600 6244
Loans 30 160 Current tax liabilities (Net) 8541 6729
Other financial assets 2,846 4,964 Other current liabilities 20,864 16,304
Current tax assets (Net) 4,109 4,274 Total Current Liabilities 1,54,421 1,41,503
Other current assets 13,119 5,613
Total current assets 79,214 1,23,616
2018 2019
Current Ratio (CA/CL) =(79214/154421) = 0.51 =(123616/141503) = 0.87
Quick Ratio (Quick Asset/CL) = (79214 – 31698)/154421 = (123616 – 33257)/141503

Quick Asset = CA - Inventories = 0.31 = 0.64
Liquidity Analysis
Receivables Turnover and Average Collection Period
1. Receivables Turnover = Sales/ Avg. Receivables
2. Average Collection Period = 360/Receivable Turnver
Receivables Turnover and Average
Collection Period
2018 2019
Operating Revenue 8,19,944 8,60,203
Current assets
Inventories 31608 33257
Financial assets
Investments 12,173 50,455
Trade receivables 14,618 23,104
Cash and bank balances 711 1,789
Loans 30 160
Other financial assets 2,846 4,964
Current tax assets (Net) 4,109 4,274
Liquidity Analysis
Receivables Turnover and Average Collection Period
1. Receivables Turnover = Sales/ Avg. Receivables = 45.60 times
2. Average Collection Period = 360/Receivable Turnover

= 360/45.60 = 7.9 days
Liquidity Analysis
Inventory Turnover and Average inventory holding period
1. Inventory Turnover = Annual Cost of Goods Sold/Average Inventory
(if COGS is not available we can use ‘Sales’)
2. Inventory Holding period = 360/Inventory turnover

Inventory Turnover and Average
Inventory Holding Period
2018 2019
Operating Revenue 8,19,944 8,60,203
Current assets
Inventories 31608 33257
Financial assets
Investments 12,173 50,455
Trade receivables 14,618 23,104
Cash and bank balances 711 1,789
Loans 30 160
Other financial assets 2,846 4,964
Current tax assets (Net) 4,109 4,274
Liquidity Analysis
Inventory Turnover and Average inventory holding period
1. Inventory Turnover = Annual Cost of Goods Sold/Average Inventory
(if COGS is not available we can use ‘Sales’)
= 26.52 times
2. Inventory Holding period = 360/Inventory turnover = 360/26.52
= 13.57 days
3. Operating Cycle = Inventory Period + Receivables period = 13.57 + 7.9
= 21.47 days
Solvency Analysis
Solvency refers to the long term stability of the company.
1. Debt to Equity Ratio = Total Debt (short term + Long Term)/Equity
2. Liability to Equity Ratio = Total Liability (Current + Non-current)/Equity
3. Interest Coverage Ratio = EBIT/Interest Expense
Solvency Analysis of Maruti (2018)
Solvency refers to the long term stability of the company.
1. Debt to Equity Ratio = Total Debt (short term + Long Term)/Equity = 0.002653
2. Liability to Equity Ratio = Total Liability (Current + Non-current)/Equity = 0.42179
3. Interest Coverage Ratio = EBIT/Interest Expense
Profit before tax 1,10,034
Finance costs 3,457
EBIT 1,13,491
=113491/3457 = 32.83 times

Capital Market Standing
Capital market standing relates to the market price of company’s shares.
1. Price to Earnings Ratio = Market price per share/EPS
Average Market Price = (7000+6228)/2 = 6614
Basic EPS = 248.3
PE Ratio = 6614/248.3 = 26.67 times(at Present on 24.08.2019)
It tells us how much an investor is willing to pay per Rs. of earnings.
Is PE of 26 is high, low or reasonable?
2. Dividend yield = current cash yield to shareholders
= Dividend per share/Market price per share
Dividend= 14th Aug, 2019 Maruti declares 1600% dividend = %s 5*1600% = Rs.80 per share
Average Market Price = Rs. 6614
Dividend Yield = 80/6614 *100 = 1.21%
Is it the return from a stock for an investor who is taking risk of investing in the stock
market?
3. Stock Return = It considers dividends + change in the stock price
Stock return = Change in the stock price (Capital gain)+ Dividend/ Beginning stock price
Stock price on 24.8.2018 = 9163
Stock price on 24.8.2019 = 6228
Dividend (1600%) = Rs. 80
Capital Gain= (Closing price-Beginning price) = 6228 – 9163 = - 2935
Stock Return = (-2935 + 80)/9163 *100 = - 31.15%
4. Price to Book Value Compares a company’s current market price with book value
Book Value = Shareholders’ Equity/number of shares
Shareholders Equity = Rs. 461415 million
Number of Equity Shares = 30,20,80,060 shares
Book value = (461415*10,00,000)/ 30,20,80,060 = Rs. 1528 per share
Price to Book Value Ratio = Avg Market Price/Book value per share
= 6614/1528 = 4.32 times
Price to BV ratio>1 indicates that investors expect to earn more return than ROE
5. Beta = it is a measure of Market Risk of the stock
Market risk is the change in the price of a share for the changes in the market
index as a whole.
Beta of a stock = 1.5 (that means beta>1) = the stock is aggressive
This means when the market moves by 10% either side the stock will follow by
moving 1.5*10 = 15% either side.
Beta of a stock = .5 (that means beta<1) = the stock is defensive
This means when the market moves by 10% either side the stock will follow by
moving 0.5*10 = 5% either side.
Beta Values of Maruti Suzuki India Ltd.
Beta of Maruti
Period Long Term Daily - One Daily - Weekly - Weekly - Weekly - Monthly -
Beta * Month Three One Year Two Year Two Year Two Year
Range Month Range Range Range Range
Range *
Beta 1.08 1.29 1.40 1.28 1.10 1.08 1.04
Mean 6586.54 5855.75 6276.04 7005.12 7899.79 7887.34 7854.22
Standard 7.79 % 2.14 % 1.85 % 4.23 % 3.43 % 4.92 % 7.81 %
Deviation
*Long Term Beta - Calculated on Mthly period calculated over 4 Yr, updated daily
Interpret the beta values of Maruti

Comment on the Capital Market
Standing of both companies.
Maruti Mahindra & Mahindra
ROA 12 6.8
ROE 17 15
EPS 253 55
Dividend per share 80 7.44
Average Market Price 6614 770
Book Value per share 1528 350
Beta 1.28 1.47
As an expert, which share would you

recommend?
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Financial Accounting and Analysis (FIN 1101)

Area: Accounts and Finance

Session 16: Financial Analysis through Ratios continues

PROF ABHIJIT ROY

Trade receivables 14,618 23,104 Other Financial Liabilities 13338 14400

Quick Ratio (Quick Asset/CL) = (79214 – 31698)/154421 = (123616 – 33257)/141503

2. Average Collection Period = 360/Receivable Turnover

2. Inventory Holding period = 360/Inventory turnover

=113491/3457 = 32.83 times

Interpret the beta values of Maruti

As an expert, which share would you

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