Financial Management

SLP – 2

Liquidity / Solvency Ratio:

Current Ratio:

This ratio shows the capacity of the firm to pay off its current liabilities by its current assets. Usually an average industry ratio of 1 is considered to be prudent. Ambuja Cements has high current ratio of 1.75 as compared to the India cements which has 0.65 and Ultratech 1.25. The reason is it has huge amounts of cash and equivalents balances in current assets. Also, India cements registered an unhealthy ratio on account of its low current assets and high current liabilities.

Quick Ratio:

This ratio measures an immediate solvency position of the firm. The inventories are excluded from the quick assets of the firm for calculating this ratio. The immediate realisation of quick assets and pay off of quick liabilities normally happen in 2-3 months. Ambuja Cements has reported a good quick assets ratio over the five year period and has finally registered 1.41 in 2012. Whereas the competitors India Cements and Ultratech has reported 0.43 and 0.88 respectively for the year under consideration.

Cash Ratio:

This ratio measures the immediate payoff of current liabilities from the cash and equivalents available. The more the ratio it can it be said that idle and unutilised cash. Ambuja Cements has ratio of 0.75, whereas India Cements has approx 0.0 ratio and ultratech has 0.02. The reason for Ambuja Cements’s ratio to be high is because it is offering a low credit period to customers and hence it realizes cash early as compared to its competitors. The average industry ratio is 0.26 which is considered to be a healthy position for operating in the markets.

All these solvency ratios are well above industry average and company was able to maintain the same position over the years so it is healthy position of Ambuja Cements according to creditors’ and short term debtors’ point of view.

Efficiency Ratio/ Turnover Ratios:

Total asset Turnover Ratio:

This ratio measures the total assets utilised in generating sales of the given year. The industry return is 80% while Ambuja Cements has effective asset utilisation of 91%. Hence it is more efficient as compared to industry. Competitor Ultratech has the same 90% and India Cements has 59% of asset turoner ratio for the period. So the position of the firm is much stronger compared to competitors as it is efficiently utilizing its assets in generating every Rupee of sale.

Receivables Turnover Ratio:

This ratio measures the number of times accounts receivable has been turned over into cash in the given period. The industry average is 30 times whereas for Ambuja Cements receivable turnover is 48 times. Competitors India Cements and Ultratech has 15 and 26 times the receivable turnover. So conversion for Ambuja Cements is faster and shows efficiency in collecting cash.

Inventory Turnover Ratio:

This ratio tells us how many times the raw material stock is getting converted into finished goods. The higher the ratio the better it is and vice versa. The industry average is 4 times whereas Ambuja Cements has 5.82 times inventory turnover ratio. The rival India Cement has 2.22 and Ultratech has 4.58 times. For Ambuja Cements, the ratio is above the average ratio thereby signifies better performance in the industry.

All the turnover ratios for Ambuja Cements are well above industry average. So its performance is better compared to its competitors. Also over the years, it is able to improve its performance thereby displaying gradual increase in these ratios.

Profitability Ratios:

Gross Profit Margin, Operating Margin and Net Profit Margin:

The ratio is decreasing over the year which implies that manufacturing cost is increasing compared to price. When operating margin is concerned, Ambuja Cements and Ultra-Tech show fairly similar performance while India Cement being in corporate debt restructuring shows very low operating margin as most of the part of revenue is spent on pending employees’ salaries and interest paid on debt.

Despite showing the lower gross profit margin compared to industry, Ambuja Cements is able to maintain the operating profit margin higher which shows the effectiveness of the to deal with selling, general and administrative expenses.

The net profit margin has reduced over the period for Ambuja Cements for the period 2008-2012. The reasons are increase in provision for taxes, increase in depreciation and finance charges. Ultra tech's income tax expense has gone up considerably by 24% and finance cost has reduced thereby maintaining a good net margin of 17%. In comparison to the average industry ratio Ambuja Cements’s net profit margin is lower i.e. at 12% which is because of our high tax liabilities which reduces its reporting net profit after tax.

ROA:

ROA has been decreasing over the years for Ambuja Cements and it has fallen to 0.12 this year because company has invested more amount in current assets but unable to utilize those optimally so as to maintain the ratio. Ultra-Tech shows the similar performance as that of Ambuja but India Cements shows very poor performance as its Net Income is low due to high debts.

ROE:

This ratio tells us about the earning power of the shareholders' funds. A high return reflects strong expansion opportunities and effective management. Ambuja Cements has failed in increasing the return on equity and this ratio has been coming downwards over the period under consideration from 27% in 2008 it has come down significantly to 15% in 2012. The competitor India Cement has 16% while Ultratech has a good ratio of 27% in the year under comparison. The average industry ratio is 16% and Ambuja Cements’s ratio is close to average ratio at 15%. Hence, it faces challenge from Ultra tech which has good returns for its equity investors as compared to Ambuja Cements.

Leverage Ratios:

Debt Ratio:

This ratio measures the total liabilities against total assets showing how much of the firms asset are financed by debts. The industry average is 42% whereas Ambuja Cements has 29%. Meanwhile the competitors India Cements and Ultratech have 54% and 44% respectively. Ambuja Cements finances most of the assets by equity as their ROE is less compared to industry.

Also the company is able to sustain the ratio over a period of 5 years and is much lower compared to industry.

Debt Equity Ratio:

The ratio indicates similar aspects of the company compared to previous one. Only difference is this ratio measures the total liabilities against the equity instead of assets showing what amount of assets are financed by debt. The average industry ratio is 0.79 whereas for Ambuja Cements ratio is 0.41. The rival firms India Cements and Ultra tech has .80 and 1.15 respectively. Again this ratio shows that our funds are mostly financed by equity.

Also the company is able to sustain the ratio over a period of 5 years and is much lower compared to industry.

Times Interest Earned Ratio / Interest Coverage Ratio:

The ratio compares the finance cost of a company compared to its earnings before calculating the interest and tax as tax is deducted after interest is paid. More the debt more is the interest paid and vice versa. The average industry ratio is 30.04 times whereas for Ambuja Cements the ratio is 69.06. Ultratech and India Cements have the ratio of 19.24 and 1.82 respectively. As most of the assets are financed by equity for Ambuja Cements, interest paid on debt and overall finance cost is very less thereby leading to higher ratio. India Cements being in corporate debt restructuring shows very poor ratio of 1.82.

In 2008, company has higher debt to finance its sales related activities. So despite having higher earnings before tax it is showing lower ratio. Later the company was able to reduce its debts. But again the debt increased in 2011-12 but it was not able to attain the similar trend in its sales level. Also the cost of production increased so operating margin reduced.

From the above category of ratios, it is implied that the company is more focused towards financing through equity instead of debts so it is reducing shareholders’ wealth.

1. Whether a creditor would give credit?The efficiency ratios of the Ambuja Cements are well above the industry average so they are collecting cash at faster rate. Also creditor would check sources of finance while offering credit to any company. Most of the financing is done by equity for Ambuja Cements so they have lower debt to equity ratio. Therefore it is a positive sign for creditors as their money is in safe hands and can be returned in a lower period compared to industry average.So creditor would definitely like to give credit.

2. Whether a bank would lend?Similar is the reason for banks to lend money to Ambuja Cements as stated above. On the top of that, the solvency ratios of company are higher compared to competitors and industry average. So assets can be liquefied quickly to claim the debt amount in case of defaults. So it will be safer for banks to lend money to Ambuja Cements so they will definitely lend.

3. Whether an investor should invest?An investor usually invests looking at the P/E ratio. Lower the P/E ratio, higher the returns.P/E Ratio = (Market Price of Share / Earnings per share)

= (Market Price * No. of Shares / Net Income)It indicates the amount (in Rupees) to be invested by an investor to get a gain of 1 Rupee. So, lower the ratio higher is the return on investment.But return comes in two parts: 1. Capital gain yield

2. Dividend yieldEven though India Cements shows lower P/E, their financial condition is not stable so risk involved in investment is very high.

Ambuja Cements Ultra-Tech

Market Price 181.30 1969.95

P/E (avg = 15.84) 21.68 26.56

Dividend Paid 180% 90%

Face Value 2 10

Dividend Value Rs. 3.6 for Rs. 181.30 Rs. 9 for Rs. 1969.95

By this fundamental analysis stock looks attractive. Even though most of the assets are financed by equity so return on equity is lower, it is providing higher dividend.

So investor should invest in Ambuja Cements.