JSW Steel - Financial Analysis

8/12/2019 JSW Steel - Financial Analysis

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CORPORATE FINANCEJSW STEEL FINANCIAL ANALYSIS

SHASHANK JOGANI S.Y. B.F.M. ROLL NO. 28

I. FINANCIAL RATIOS OF JSW STEEL AND ITS COMPETITORSRATIO JSW STEEL TATA STEEL SAIL

March 12 March 11 March 10 March 09 March 08 March 12 March 12

Current 0.76 0.78 0.58 0.44 0.51 0.79 1.22

Quick 0.54 0.49 0.31 0.28 0.28 0.52 0.82

Debt-Equity 0.69 0.74 1.26 1.51 1.06 0.45 0.40

Inventory Turnover 7.97 7.10 8.95 8.75 9.26 9.40 3.71

Assets Turnover 1.07 0.92 0.90 0.81 0.82 0.44 0.81

Interest Cover 3.43 4.44 3.81 3.00 6.13 5.93 9.00

Earnings Per Share 71.62 88.87 106.59 22.96 90.84 68.95 8.58

Net Profit Margin% 5.04 8.64 11.09 3.23 14.92 19.47 7.44

Operating Profit

Margin%

17.42 20.08 23.52 20.42 29.46 35.49 13.15

Debtors Turnover

Ratio

29.12 32.95 37.79 38.09 39.11 50.80 10.30

ROCE(Capital

Employed)%

13.22 11.73 15.08 11.53 18.76 15.03 10.91


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II. RATIO ANALYSIS1. Current ratio

Thecurrent ratio is a popular financial ratio used to test a company'sliquidity by deriving

the proportion of current assets available to cover current liabilities. The concept behind

this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents,

marketable securities, receivables and inventory) are readily available to pay off its short-

term liabilities (notes payable, current portion of term debt, payables, accrued expenses

and taxes).

This indicates that JSW Steel has 0.76 in short-term resources to service each rupee of

current debt. It is a low current ratio in comparison to its competitors, which indicates a

developing cash flow problem.

2. Quick ratioThequick ratio or theacid-test ratio is a liquidity indicator that further refines the current

ratio by measuring the amount of the mostliquid current assets there are to cover current

liabilities. The quick ratio is more conservative than the current ratio because it excludes

inventory and other current assets, which are more difficult to turn into cash. Therefore, a

higher ratio means a more liquid current position.

There is considerable difference between the current ratio and quick ratio of JSW Steel,

which means the current assets are heavily dependent on inventories.

3. Debt-Equity RatioThedebt-equity ratio is anotherleverage ratio that compares a company's total liabilities to

its totalshareholders' equity. This is a measurement of how much suppliers, lenders,

creditors and obligors have committed to the company versus what the shareholders have

committed.

JSW has a debt-equity ratio of 0.69, which is significantly low from previous years, which

means that the company has paid off their debt and is in a better leverage position.

4. Inventory TurnoverAn important resource that requires considerable management attention is inventory.

Control of inventory is important and is commonly assessed with the inventory turnover

measure.

The JSW number of 7.97 indicates that goods were bought and sold about 8 times in the

year. Generally, the higher the number the better it is. The less time goods spend in

inventory the better the return the company is able to earn from funds tied up in inventory.

A large stale inventory can distort the asset position of the company and should be

monitored for that reason also.
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5. Asset TurnoverThis indicates how efficiently assets are being used to support sales. This indicates that JSW

Steel with a ratio of 1.07 is generating about 1 rupee for every rupee invested in assets. A

high level of return suggests that corporate resources are being well managed and that the

firm is able to realize high level of sales from its asset investments. Asset turnover ratio of

JSW Steel is much higher than that of its competitors.

6. Interest Coverage RatioA ratio used to determine how easily a company can pay interest on outstanding debt.

The lower the ratio, the more the company is burdened by debt expense. When a

company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may

be questionable. An interest coverage ratio below 1 indicates the company is not generating

sufficient revenues to satisfy interest expenses.JSWs interest coverage ratio has fallen considerably in the past few years, thus questioning

its capacity to pay further debt expense.

7. Earnings Per Share - EPSThe portion of a company's profit allocated to each outstanding share of common

stock. Earnings per share serve as an indicator of a company's profitability.

JSW has one of the highest EPS in the industry. An EPS of 71.62% can be accredited to the

lower number of outstanding shares with the company and the higher profit margins.

8. Net Profit MarginNet profit margin is the percentage ofrevenue remaining after alloperating expenses,

interest,taxes and preferredstock dividends have been deducted from a company's total

revenue. The formula for net profit margin is:

(TotalRevenueTotal Expenses)/Total Revenue = Net Profit/Total Revenue = Net Profit

Margin

JSW has maintained a lower profit margin ratio of 5.04% as compared to the other players.

This signifies that the companys return on sale is quite less and the company is not taking

advantage of economies of scale as the sales are comparatively low.

9. Operating Profit MarginOperating margin gives analysts an idea of how much a company makes (before interest and

taxes) on each dollar of sales. When looking at operating margin to determine the quality of

a company, it is best to look at the change in operating margin over time and to

compare the company's yearly or quarterly figures to those of its competitors. If a

company's margin is increasing, it is earning more per dollar of sales. The higher the margin,

the better it is. The operating profit percentage of JSW Steel has been reducing since the

past few years, indicating fall in increase of earnings every year.
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10.Debtors Turnover RatioDebtor turnover ratio is the relationship between net sales and average debtors. It is also

called account receivable turnover ratio because the debtor and bill receivables' total isused for following formula

Debtor Turnover Ratio = Net Credit Sales / Average Debtors ( sundry debtors + bill

receivables)

JSW Steel has a debtor turnover ratio of 29.12, which indicates that its average debtors are

converted into cash roughly 29 times. It is a good turnover ratio, since it implied that money

is being collected faster.

11.Return on Capital EmployedThereturn on capital employed (ROCE) ratio, expressed as a percentage, narrows the focus

to gain a better understanding of a company's ability to generate returns from its available

capital base. Financial analysts consider the ROCE measurement to be a more

comprehensive profitability indicator because it gauges management's ability to generate

earnings from a company's total pool of capital.

JSW has a ROCE of 13.22% in 2012, which is a major decline compared to its ROCE of 18.76%

in 2008. This is an indicator to the fact that the company has utilised its shareholders funds

to the optimum level.
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JSW Steel - Financial Analysis