Ratio Analysis _Idea Cellular

Ratio Analysis of

Idea Cellular

Financial Accounting Project

Under Dr. Jayanta Kumar Seal

Submitted By

Akarshan Sachdeva (05) || Jatin Chauhan (20)

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Shashank Garg (43) || Pratik Dokania (83)

Profitability Ratios

A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.

Some examples of profitability ratios are

(Net) Profit Margin Effective Tax Rate Return on Assets Return on Equity Return on Capital Employed Earnings per Share

Profitability ratios are the most popular metrics used in financial analysis.

Net Profit Margin

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It is the amount of profit generated by the company as a percent of the sales generated. The objective of margin analysis is to detect consistency or positive/negative trends in a company's earnings.

Net Profit Margin = Net Income

Net Sales(Revenue)

Where, Net Profit = Revenue – COGS – Operating Expenses – Interest and Taxes

Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive its stock price.

Mar'14 Mar'13 Mar'12 Mar'11 Mar'10

IDEA Cellular 6.46 3.71 2.99 5.5 8.71

RELIANCE Communication 6.53 5.53 1.4 -5.69 3.33

TATA Communication 12.39 10.76 4.18 4.5 14.47

Airtel 13.22 11.23 13.77 20.29 26.36

Tata Teleservices -20.5 -25 -20.95 2.21 -13.44

-25

-15

-5

5

15

25

Net Profit Margin(%)

Analysis

Net Profit Margin of IDEA has increased marginally as compared to that of its last year's values. IDEA’s Net profit margin has remained almost constant and it is almost in accordance with the Industry average.

Return on Capital Employed

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The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total "capital employed".

This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. By comparing net income to the sum of a company's debt and equity capital, investors can get a clear picture of how the use of leverage impacts a company's profitability.

Return on Capital Employed (ROCE) = Net Income

Capital Employed

Where, Capital Employed = Average Debt Liabilities + Average Shareholder’s Equity


IDEA Cellular 9.86 8.54 10.74 8.12 10.76

RELIANCE Communica-tion

1.91 4.64 2.08 1.17 2.12


Airtel 13.4 12.67 14.48 17.54 24.36

Tata Teleservices 0.21 -3.04 0.1 -33.44 -4.54

-35

-25

-15

-5

5

15

25

Return on Capital Employed

Analysis

A moderate performance is been displayed by IDEA. A higher Return on Long term funds ratio shows that IDEA has been more effective in generating earnings from a company's total pool of capital.

Earnings per Share

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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.

EPS = Net Income−Dividends on Preferred Stock

AverageOutstanding Shares

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time.

Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.


IDEA Cellular 5.09 2.47 1.74 2.56 3.19

RELIANCE Communication 3.57 3.02 0.76 -3.67 2.32


Airtel 16.51 13.42 15.09 20.32 24.82

Tata Teleservices -2.86 -3.47 -2.73 0.26 -1.57

-7.5

-2.5

2.5

7.5

12.5

17.5

22.5

27.5

Earnings Per Share

Analysis

High growth of the telecom industry has favored strategic players like Idea, Airtel and Vodafone. Ownership sharing issues with Reliance and demerger and profitability issues of TATA teleservices with NTT DOCOMO has led to a decline in public’s confidence in the company.

Leverage Ratios

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Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.

Too much debt can be dangerous for a company and its investors. Uncontrolled debt levels can lead to credit downgrades or worse. On the other hand, too few debts can also raise questions. If a company's operations can generate a higher rate of return than the interest rate on its loans, then the debt is helping to fuel growth in profits. A reluctance or inability to borrow may be a sign that operating margins are simply too tight.

There are several different specific ratios that may be categorized as a leverage ratio, but the main factors considered are include

Interest Cover Ratio Fixed Charges Coverage Ratio

A leverage ratio may also refer to one used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ.

Finally, the consumer leverage ratio refers to the level of consumer debt as compared to disposable income and is used in economic analysis and by policymakers

Interest Cover Ratio

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A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period.

Interest Cover Ratio = EBIT

Interest Expenses

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.


IDEA Cellular 5.17 2.58 2.72 5 3.56

RELIANCE Communication 0.58 1.32 1.12 1.16 1.36


Airtel 7.42 4.91 5.98 27.92 85.82

Tata Teleservices 0.01 -0.17 0.01 -1.55 -0.14

-10

10

30

50

70

90

Interest Cover Ratio

Analysis

IDEA has a consistently moderate interest cover which indicates that although the company has the burden of debt, it has the ability to pay the interest through income earned from its operations. Also Interest cover has almost doubled from last year and it is on an increasing trend year on year.

Fixed Charges Coverage Ratio

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A measure of a company's ability to meet its financial obligations. In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders.

The trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company's financial position. Common coverage ratios include the interest coverage ratio, debt service coverage ratio and the asset coverage ratio.

Fixed Charges Coverage Ratio =Net Earnings+¿Charge

¿Charge+ Interest


IDEA Cellular 11.72 6.34 3.28 4.13 3.54


1.72 2.17 2.5 2.83 2.39


Airtel 12.83 9.04 10.22 42.15 49.64

Tata Teleservices 1.09 0.89 1.05 0.79 1.53

5

15

25

35

45

55

Fixed Charges Coverage Ratio

Axis

Titl

e

Analysis

IDEA has shown a high growth performance since last 2 years as far as fixed charge coverage ratio is concerned. IDEA can easily cover its fixed charges as 11.72 is considered as a good fixed charge coverage ratio.

Total Debt to Owners’ Fund

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A debt ratio used to measure a company's financial leverage, calculated by dividing a company’s total liabilities by its stockholders' equity. The debt equity ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity.

Total Debt to Owners’ Fund = Total Liabilities

Shareholder s' Equity

A higher debt-to-equity ratio typically shows that a company has been aggressive in financing its growth with debt, and there may be a greater potential for financial distress if earnings do not exceed the cost of borrowed funds.


IDEA Cellular 1.14 0.8 0.79 0.86 0.57


0.96 0.92 0.62 0.65 0.48


Airtel 0.13 0.24 0.29 0.23 0.14

0.1

0.3

0.5

0.7

0.9

1.1

Total Debt to Owners' Fund

Analysis

IDEA’s debt to owner’s fund ratio is growing very rapidly since past 5 years and currently IDEA has the highest debt to owners’ fund ratio i.e. 1.14 while Industry average is 0.54. A high debt to owners’ fund means that IDEA has been aggressive in financing its growth with debt.

Activity Ratios

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Accounting ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales. Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues, cash, etc. from its resources.

Following are some of the activity ratios:

Asset Turnover Ratio Fixed Asset Turnover Ratio

Debtors Turnover Ratio Inventory Turnover Ratio Investment Turnover Ratio

Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Such ratios are frequently used when performing fundamental analysis on different companies. The total assets turnover ratio and inventory turnover ratio are two popular examples of activity ratios used widely across most industries.

Debtors Turnover Ratio

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An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.

Debtors Turnover Ratio =Net Credit Sales

Average Account Receivables

The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.

A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.


IDEA Cellular 30.98 25.58 30.38 34.4 31.2



Airtel 22.63 20.7 23.14 21.32 15.3


2.5

7.5

12.5

17.5

22.5

27.5

32.5

37.5

Debtors Turnover Ratio

Analysis

IDEA cellular maintained a high debtor’s turnover ratio consistently and it is successful in maintaining the top position compared to the other players. It implies that IDEA operates on a cash basis or that its extension of credit and collection of accounts receivable is very efficient.

Inventory Turnover Ratio

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http://www.investopedia.com/terms/c/cashbasis.asp

A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."

Inventory Turnover Ratio = Sales

Inventoryor Cost of Goods Sold

Average Inventory

This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.


IDEA Cellular 535.73 404.39 364.1 293.64 253.76


41.55 37.06 33.77 0 41.2

TATA Communication 1054.55 1051.46 9092.82 0 2574.43

Airtel 45380.45 21595.67 1296.07 1105.17 1307.05


2500

12500

22500

32500

42500

Inventory Turnover Ratio

Analysis

IDEA Cellular’s Inventory turnover ratio has increased year-on year basis with a consistent growth rate but it is way behind Industry average which has gone very high in recent years due to Airtel’s Unprecedented growth.

Asset Turnover Ratio

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The ratio of the value of a company’s sales or revenues generated relative to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue.

Asset Turnover = Sales∨RevenueTotal Assets

Generally speaking, the higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets.

This ratio can vary widely from one industry to the next. As such, considering the asset turnover ratios of an energy company and a telecommunications company will not make for an accurate comparison. Comparisons are only meaningful when they are made for different companies within the same sector.


IDEA Cellular 0.89 0.91 0.84 0.75 0.64


0.18 0.17 0.15 0.17 0.17


Airtel 0.7 0.69 0.71 0.79 0.92


0.05

0.15

0.25

0.35

0.45

0.55

0.65

0.75

0.85

0.95

Asset Turnover Ratio

Analysis

IDEA has shown a good performance and in recent years it has the highest Asset turnover ratio among the competitors. A higher asset turnover ratio shows that IDEA has been more effective in using the investment in fixed assets to generate revenues.

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Liquidity Ratios

A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

Common liquidity ratios include the following

Current ratio Quick ratio Operating cash flow ratio Debt Equity Ratio Long Term Debt Equity Ratio

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.

Testing a company's liquidity is a necessary step in analysing a company.

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Current Ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short term and long-term obligations. To gauge this ability, the current ratio considers the total assets of a company (both liquid and illiquid) relative to that company’s total liabilities.

The formula for calculating a company’s current ratio, then, is:

Current Ratio =Current Assets

Current Liabilities

The current ratio is mainly used to give an idea of the company's ability to pay back its liabilities with its assets. The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities.


IDEA Cellular 0.42 0.52 0.53 0.49 0.96


0.72 0.69 0.77 0.96 1.37


Airtel 0.93 0.65 1.02 0.63 0.7


0.25

0.75

1.25

1.75

2.25

Current Ratio

Analysis

IDEA’s Current ratio is on a downward trend and currently the average of top 5 players comes out to be = 0.732, for IDEA, it is 0.42 which is way below than the average. As the Current ratio is less than 1, IDEA is not in a position to pay out its current obligations using current Assets.

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Quick Ratio

An indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows:

Quick ratio = Current Assets−Inventories

Current Liabilities

Or

CashEquivalents+Marketable Securities+Accounts ReceivableCurrent Liabilities

The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. The higher the quick ratio, the better the company's liquidity position. Also known as the “acid-test ratio" or "quick assets ratio."


IDEA Cellular 0.46 0.55 0.55 0.52 0.86



Airtel 0.98 0.75 1.37 0.73 0.67


0.25

0.75

1.25

1.75

2.25

Quick Ratio

Analysis

Currently IDEA has the lowest Quick ratio compared to the Top 5 players in Industry and it is on a downward trend since 2010. A quick ratio of 0.46 of IDEA means that a company has $0.46 of liquid assets available to cover each $1 of current liabilities.

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Long Term Debt Capitalization Ratio

A ratio showing the financial leverage of a firm, calculated by dividing long-term debt by the amount of capital available.

Long Term Debt Capitalization Ratio=LongTermDebt

LongTermDebt+Preferred STock+Deffered Stock

A variation of the traditional debt-to-equity ratio, this value computes the proportion of a company's long-term debt compared to its available capital. By using this ratio, investors can identify the amount of leverage utilized by a specific company and compare it to others to help analyze the company's risk exposure. Generally, companies that finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios.


IDEA Cellular 1.1 0.75 0.67 0.72 0.57


0.73 0.69 0.52 0.46 0.38


Airtel 0.11 0.18 0.17 0.17 0.12

0.1

0.3

0.5

0.7

0.9

1.1

Long Term Debt Equity Ratio

Analysis

IDEA’s Long Term Debt Equity ratio is 1.1 while Industry average is 0.51. The ratio gauges not just how much a company owes, but also what that long-term debt (what is

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owed more than a year from now) amounts to as a percentage of the firm's equity. As IDEA has a high Long Term Debt Equity ratio, thus we can conclude it is more risky as in comparison to its counterparts

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Documents

Ratio Analysis _Idea Cellular