The document analyzes various financial ratios to evaluate the liquidity, profitability, and ownership of Larsen & Toubro (L&T) compared to its competitor TISCO.
L&T's current and quick ratios indicate average short-term liquidity, but it has poor receivables and inventory management efficiency. Its profit margins are lower than TISCO's despite a high asset turnover ratio.
L&T has a lower debt-equity ratio than TISCO, indicating less financial risk. Its interest coverage and return on equity are also higher, showing efficient use of capital. However, L&T's earnings per share and price-earnings ratio are lower, suggesting undervaluation.
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The document analyzes various financial ratios to evaluate the liquidity, profitability, and ownership of Larsen & Toubro (L&T) compared to its competitor TISCO.
L&T's current and quick ratios indicate average short-term liquidity, but it has poor receivables and inventory management efficiency. Its profit margins are lower than TISCO's despite a high asset turnover ratio.
L&T has a lower debt-equity ratio than TISCO, indicating less financial risk. Its interest coverage and return on equity are also higher, showing efficient use of capital. However, L&T's earnings per share and price-earnings ratio are lower, suggesting undervaluation.
The document analyzes various financial ratios to evaluate the liquidity, profitability, and ownership of Larsen & Toubro (L&T) compared to its competitor TISCO.
L&T's current and quick ratios indicate average short-term liquidity, but it has poor receivables and inventory management efficiency. Its profit margins are lower than TISCO's despite a high asset turnover ratio.
L&T has a lower debt-equity ratio than TISCO, indicating less financial risk. Its interest coverage and return on equity are also higher, showing efficient use of capital. However, L&T's earnings per share and price-earnings ratio are lower, suggesting undervaluation.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online from Scribd
The document analyzes various financial ratios to evaluate the liquidity, profitability, and ownership of Larsen & Toubro (L&T) compared to its competitor TISCO.
L&T's current and quick ratios indicate average short-term liquidity, but it has poor receivables and inventory management efficiency. Its profit margins are lower than TISCO's despite a high asset turnover ratio.
L&T has a lower debt-equity ratio than TISCO, indicating less financial risk. Its interest coverage and return on equity are also higher, showing efficient use of capital. However, L&T's earnings per share and price-earnings ratio are lower, suggesting undervaluation.
Copyright:
Attribution Non-Commercial (BY-NC)
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Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
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Introduction
Ratio analysis involves establishing a relevant financial relationship between components of financial statements. It helps in identifying significant relationships between financial statement items for further investigation. Financial ratios are used to evaluate profitability, liquidity and capital market strength.
Liquidity Ratio: Liquidity is the ability of a business to meet its short-term obligations when they fall due. An enterprise should have enough cash and other current assets which can be converted into cash so that it can pay its suppliers and lenders on time.
Profitability Ratio: Profitability ratios measure the degree of operating success of a company. The only reason why investors are interested in a company is that they think they will earn a reasonable return in the form of capital gain and dividends on their investments. Therefore, they are keen to learn about the ability of the company to earn revenues in excess of its expenses. They will not be interested in a company that does not earn a sufficient margin on its sales. Failure to earn an adequate rate of profit over a period will also drain the companys cash and impair its liquidity.
Ownership Ratios: The ownership ratio is the proportion of households who own their homes as opposed to renting. The ultimate effect on owners who bought before the bubble formed and did not sell is zero. Those who bought when low and sold high profited, while those who bought high and sold low (after the bubble has burst) or held until the price fell lost money. This redistribution of wealth, it is also argued, is of little macroeconomic significance. Ownership is the state or fact of exclusive rights and control over property, which may be an object, land/real estate or intellectual property. Ownership involves multiple rights, collectively referred to as title, which may be separated and held by different parties.
1. Liquidity Ratios Liquidity implies a firms ability to pay its debts in the short run. Short term liquidity depends on the net working capital of the company. Short term creditors, long term creditors & shareholders are interested to know the liquidity of the company.
1.1 Current ratio:
From the balance sheet given Current ratio = current assets/current liabilities = 34951.14/27823.25 = 1.25 Ideal current ratio is 2:1. But L&T has a current ratio of 1.2:1 which is less than the ideal one. The firm has current assets 1.2 times more than its current liabilities, which is not a very healthy situation. TISCO has a current ratio of 1.9. So short term liquidity of L&T is lower than its competitors.
1.2 Quick ratio:
From the balance sheet given Quick ratio = (current assets inventories)/ current liabilities = (34951.14-1577.15)/27823.25 = 1.19 The liquidity position of L&T is decresed from 1.25 to 1.19 due the deduction of inventories which contributes 4.5% of the current assets.The quick ratio of TISCO is 1.58. So from the above figures we can conclude that the liquidity position of L&T is below its competitors.
1.3 Accounts receivables turnover ratio:
From the balance sheet given Accounts receivables turnover ratio =net credit sales/average account receivables Here, net credit sales= Rs 43496 cr Average account receivables = (12428+11158)/2 = 11793 So, accounts receivables turnover ratio = 3.68(approx 4) While that of TISCO is 67.93. So the receivables are collected approximately 4 times during a year. Its receivables turnover ratio is very low. And Average collection period = 365/ 3.68 = 99.18 (approx 100) days. While that of TISCO is only 6 days. From this we can infer that the firm doesnt follow a strict credit policy.
1.4 Inventory turnover:
Inventory turnover = cost of goods sold/ average inventory Now, cost of goods sold = 33431.62 cr Average inventory = (1577+1415)/2 = 1496 cr So, inventory turnover = 22.34 While that of TISCO is 8.07. its inventory turnover ratio is quite higher than its competitors which shows the inventory is moving very fast through the firm and generating sales. .So, it can be concluded that there has a probability of future shortages due to low inventory. It indicates poor management efficiency of L&T.
Overall Liquidity Position
Ratios Current ratio Quick ratio Receivables turnover ratio Inventory turnover ratio
L&T 1.25 1.19 3.68 22.34
TISCO 1.9 1.58 67.93 8.07
The above table conveys that the overall liquidity position of L&T in terms of current and quick ratio is average. But it has poor management efficiency which reflects from its receivables turnover and inventory turnover ratio.
2. Profitability Ratios Indicates the efficiency of the firms activities and its ability to generate profit. Profit can be measured in terms of sales or in terms of assets. Long term creditors & shareholders are interested to know the profitability of the company.
2.1 Gross profit margin ratio:
Gross profit margin ratio = gross profit/net sales Gross profit = net sales cost of goods sold = 43496 33432 = 10064 So, Gross profit margin ratio = 10064/43496 = 23% This ratio shows after deduction of direct production costs 23% profits generated relative to sale. But that of TISCO is much higher 35%.
2.2 Net profit margin ratio:
Net profit margin ratio = net profit/net sales = 3887/33432 = 12% So, overall efficiency of production is 12% relative to its sales. Net profit margin of TISCO is 22.8%. In comparison with the competitors it can be seen that the business efficiency is not good of L&T. Some mismanagement in the production is there.
2.3
Total Asset Turnover:
Total Asset turnover = sales/ average assets Now, average assets= (29557+25501)/2 = 27529 Asset turnover = 33432/27529 = 1.21 Total asset turnover ratio of TISCO is 0.38. So L&T has a high asset turnover than its competitors. This is a healthy sign because it can generate a large volume of sales on its asset base. By achieving a high asset turnover L&T reduces costs and increases the eventual profits to its owners.
2.4
Return on equity: Return on equity = net income/ average equity Now, average equity = (21846+18312)/2 = 20079 So, return on equity = 3887/20079 =19.35%
TISCO gives 14.68% return on equity. So, the productivity of the capital employed in the L&T is very good. Thus we can say that L&T has employed its resources properly.
The above table conveys that L&T is able to generate good profit in relation to assets but cannot be able to generate good profit in relation to sales. This implies that remedial measures have to be taken from the sales point of view.
3. Ownership ratios 3.1
Debt-equity ratio : Debt-equity ratio= debt/equity Total debt= 7161 So, debt-equity ratio= 7161/21846 =0.33 Debt-equity ratio of TISCO is 0.64. The ratio shows that in L&T the debt portion is less than the equity. This is a very healthy sign for the company because contribution by the shareholders is more than the contribution by the creditors. Degree of protection felt by the lenders is more in L&T than that in TISCO. So L&T dont have any financial risk and it can borrow money if it want expansion.
3.2
Interest Coverage Ratio
Interest coverage ratio = EBIT/ interest expense EBIT= 45348 -33431-2884-1990=7043 Interest coverage ratio = 7043/647 =10.88 L&Ts interest coverage ratio is much higher than TISCO(8.52). So it shows that L&T has efficiently handled its financial burdens.
3.3
Dividend pay-out ratio:
The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio
Dividend pay-out= dividend per share/earnings per share =3887/60=64.78
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Earnings per share is generally considered to be the single most important variable in determining a share's price EPS = Net Income(PAT)______ No.of outstanding share 3957.89_______ = 7.78 508073937
EPS =
3.5 Price-Earnings Ratio:
A valuation ratio of a company's current share price compared to its per-share earnings it is calculated by using the following formula:-
Market Value per Share Earnings per Share (EPS)
Therefore :-
2______ = 0.25 7.78
3.6 Debt-Service Coverage Ratio:
Debt coverage ratio, is the ratio of cash available for debt servicing to interest, principal and lease payments. It is calculated by the following formula:-
PAT+Depreciation+Other non-cash charges+Interest on term loan Interest on term loan + Repayment of the term loan Therefore:3957.89+576.87+583.72 = 2.82 583.72+1228.89
