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Prof. C. P. Gupta Department of Financial Studies
University of Delhi, South Campus New Delhi
The Challenge is to make meaningful sense from Accounting Numbers!!!!!!!!!!!!!!!!!!!!!!
Rs. Rs.
Rs. Rs.
Rs. Rs.
Rs. Rs.
First Step is towards …
Our journey starts with……
BALANCE SHEET…
¨ A statement that shows assets and liabilities of a company at a particular date
¨ A statement that shows balances of various accounts to be carried to next accounting period
BALANCE SHEET BALANCE SHEET
¨ an important accounting identity i.e Liabilities = Assets
BALANCE SHEET gives … BALANCE SHEET gives …
Liabilities Assets
Another way to understand …
BALANCE SHEET…
¨ A statement that shows the sources
and the application of funds.
BALANCE SHEET… A DIFFERENT PERSPECTIVE!!!
BALANCE SHEET… A DIFFERENT PERSPECTIVE!!!
Liabilities Assets
Balance Sheet as on ...
Sources of funds Application of funds
What a company owes
What a company owns
Now, we try to understand the financial statements of TATA STEEL!
First…
The Balance Sheet …
The Sources of Fund…
BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…
(Rs. in Crores)
Particulars 2008 2009 2010 2011
SOURCES OF FUNDS:
SHAREHOLDER'S FUNDS
Share Capital 6,203.30 6,203.45 887.41 959.41
Share Warrants 178.20
Reserves and Surplus 21,097.43 23,972.81 36,074.39 45,807.02
Total Shareholders' Fund
27,300.73
30,176.26
36,961.80
46,944.63
LOAN FUNDS
Secured Loans 3,520.58 3,913.05 2,259.32 2,009.20
Unsecured Loans 14,501.11 23,033.13 22,979.88 26,291.94
18,021.69 26,946.18 25,239.20 28,301.14
DEFERRED TAX LIABILITY (NET) 681.80 585.73 867.67 936.80
PROVISION FOR EMPLOYEE SEPARATION COMPENSATION 1,071.30 1,033.60 957.16 873.34
TOTAL
47,075.52
58,741.77
64,025.83
78,555.91
The Balance Sheet …
The Uses of Fund…
BALANCE SHEET OF TATA STEEL LIMITED AS AT 31ST MARCH…(Rs. in Crores)
Particulars 2008 2009 2010 2011APPLICATION OF FUNDS FIXED ASSETS Gross Block 20,847.04 23,544.69 26,149.66 29,815.64 Less: Amortization 100.47 100.47 106.07 126.30 Less: Depreciation 8,123.01 8,962.00 10,037.56 10,914.86
Net Block 12,623.56 14,482.22 16,006.03 18,774.48 Capital Work in Progress - - - - 12,623.56 14,482.22 16,006.03 18,774.48 INVESTMENTS 4,103.19 42,371.78 44,979.67 46,564.94
FOREIGN CURRENCY MONETARY ITEM TRANSLATION DIFFERENCE ACCOUNT - 471.66 (206.95) -
CURRENT ASSETS, LOANS & ADVANCES Inventories: Stores and Spare Parts 557.67 612.19 623.76 716.18 Inventories: Stock-in-Trade 2,047.31 2,868.28 2,453.99 3,237.58 Sundry Debtors 543.48 635.98 434.83 428.03 Cash in Hand and at Bank 465.04 1,590.60 3,234.14 4,141.54 Loans and Advances 33,348.74 4,578.04 5,499.68 15,688.97 Interest Accrued on Investments 0.20 - 0.29 -
36,962.44 10,285.09 12,246.69 24,212.30
Less: CURRENT LIABILITIES & PROVISIONS Current Liabilities 3,855.26 6,039.86 6,653.09 7,447.83 Provisions 2,913.52 2,934.19 2,346.52 3,547.98
6,768.78 8,974.05 8,999.61 10,995.81
Net Current Assets 30,193.66 1,311.04 3,247.08 13,216.49 Miscellaneous Expenses (to the extent not written off or adjusted) 155.11 105.07 - -
TOTAL 47,075.52 58,741.77 64,025.83 78,555.91
Sources of Funds… Tata Steel
FROM WHERE THE FUNDS OF TATA STEEL LIMITED ARE RAISED?
(Rs. IN CRORES) 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11
SHARE CAPITAL 369.18
553.67
553.67
727.73
6,203.30
6,203.45
887.41
1,137.61
RESERVES AND SURPLUS
4,830.67
7,120.85
9,905.36
13,914.83
21,624.12
24,453.47 36,942.06
46,743.82
LOANS
3,382.21
2,739.70
2,516.15
9,645.33
18,021.69
26,946.18 25,239.20
29,801.14
CURRENT LIABILITIES & PROVISIONS
2,715.37
3,699.99
3,808.72
5,453.66
6,768.78
8,974.05
8,999.61
10,995.81
OTHERS
1,563.06
1,514.26
1,388.71
1,107.08
1,071.30
561.94
1,164.11
873.34
TOTAL SOURCES OF FUNDS
12,860.49
15,628.47
18,172.61
30,848.63
53,689.19
67,139.09 73,232.39
89,551.72
1.27%
52.20%
33.28%
12.28%0.98%
SOURCES OF FUNDS-2011: TATA STEEL
SHARE CAPITAL
RESERVES AND SURPLUS
LOANS
CURRENT LIABILITIES & PROVISIONS
OTHERS
Where this money is utilized?
Uses of Funds… Tata Steel
WHERE THE FUNDS OF TATA STEEL LIMITED ARE USED?
(Rs. IN CRORES) 31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11
FIXED ASSETS (Rs. IN CRORES)
7,857.85
9,112.24
9,865.05
11,040.56
12,623.56
14,482.22
16,006.03
18,774.48
INVESTMENTS
2,194.12
2,432.65
4,069.96
6,106.18
4,103.19
42,371.78
44,979.67
46,564.94
CURRENT ASSETS
2,808.52
4,083.58
4,237.60
13,701.89
36,962.44
10,285.09
12,246.69
24,212.30
TOTAL ASSETS
12,860.49
15,628.47
18,172.61
30,848.63
53,689.19
67,139.09
73,232.39
89,551.72
20.96%
52.00%
27.04%
USES OF FUNDS - 2011: TATA STEEL
FIXED ASSETS (Rs. IN CRORES)
INVESTMENTS
CURRENT ASSETS
REVISED BALANCE SHEET FORMAT…Revised Schedule - VI
INTRODUCTION
• Old Schedule VI had outlived its utility;
• Revised Schedule VI effective from 1st April, 2011;
• Being a statutory format its early adoption is not permitted;
• Revised Schedule VI has been framed as per the existing
non-converged Indian Accounting Standards notified under
the Companies (Accounting Standards), Rules, 2006;
NEW FORMAT OF BALANCE SHEET
EQUITIES AND LIABILITIES
Shareholders’ Funds Capital Reserve & Surplus Money Reserved against share warrants
Share Application money pending Allotment
Non Current Liabilities
Current Liabilities
TOTAL
ASSETS
Non-Current Assets Fixed Assets Non Current Investments/Assets
Current Assets
TOTAL
REQUIREMENTS UNDER REVISED SCHEDULE VI
• Accounting Standards will prevail over the Schedule;
• Revised Schedule VI has eliminated the concept of ‘schedule’;
• Terms in the Revised Schedule VI will carry the meaning as defined
by the applicable Accounting Standards;
• All items of assets and liabilities are to be bifurcated between
Current and Non-Current portions and presented separately on
the face of the Balance Sheet
REQUIREMENTS UNDER REVISED SCHEDULE VI
• Vertical format for presentation only prescribed;• Prescribes minimum disclosure requirements. AS disclosures are
additional;• Source of Funds now is Equity and Liabilities;• Application of Funds now is Assets;• Shareholding of more than 5% shares in the company now needs to
be disclosed;• Share allotments for non-cash consideration, buy back to be disclosed;• Statement of Profit and Loss (Dr. Bal.) will be disclosed under the
head “Reserves and Surplus” as a negative item.
REQUIREMENTS UNDER REVISED SCHEDULE VI
• Share application money pending allotment not refundable is to be included under ‘Equity’ and share application money to the extent refundable is to be separately shown under ‘Other current liabilities’.
• “Sundry Debtors” has been replaced with the term “Trade Receivables”;
• Disclosure of trade receivables outstanding for a period exceeding six months from the date the bill/invoice is due for payment;
• Tangible assets under lease are required to be separately specified under each class of asset;
• Current Liabilities will no longer be shown as deduction from Current Assets
REQUIREMENTS UNDER REVISED SCHEDULE VI
• Defaults in repayment of loans and interest to be
specified in each case;
• New name for P & L Account as “Statement of Profit and
Loss”;
• Segregation of Revenue components into revenue from:
1. sale of products,
2. sale of services, and
3. other operating revenues
REQUIREMENTS UNDER REVISED SCHEDULE VI
• Separate head for Intangible Assets and Intangible Assets under
Development;
• Information about Investments bought/ sold need not be disclosed;
• Capital Advances have to be shown separately under “Loans and
Advances” instead of CWIP/ Fixed Assets;
• Miscellaneous Expenditure as a separate head does not exists now.
REQUIREMENTS UNDER REVISED SCHEDULE VI
• Net exchange gain/loss on foreign currency borrowings
to the extent considered as an adjustment to interest cost
needs to be disclosed separately as finance cost.
REQUIREMENTS UNDER REVISED SCHEDULE VI
• Disclosures no longer required:
– Disclosures relating to managerial remuneration and computation of net profits for calculation of commission;
– Information relating to licensed capacity, installed capacity and actual production;
– Information on investments purchased and sold during the year;
– Investments, sundry debtors and loans & advances pertaining to companies under the same management;
– Maximum amounts due on account of loans and advances from directors or officers of the company
An item is classified as current if it is involved in the entity's operating cycle; or is expected to be realized/ settled within twelve
months; or If it is held primary for trading; or Is cash or cash equivalent; or If entity does not have unconditional right to defer
settlement of liability for atleast 12 months after reporting period
Other assets and liabilities are non current
CURRENT/ NON-CURRENT DISTINCTION
BALANCE SHEET OF TATA STEEL LIMITED
2011-12 2010-11
Now, we move to …
PROFIT AND LOSS ACCOUNT…
PROFIT & LOSS ACCOUNTPROFIT & LOSS ACCOUNT It records flows of income and
expenses over a period of time.
The flows are recorded on the ACCRUAL basis and not on the cash/fund basis.
The NET BALANCE of Profit and Loss Account is either Profit After Tax or Net Loss.
INCOME side… …
TOP LINE!!!
PROFIT AND LOSS ACCOUNT OF TATA STEEL LIMITED FOR THE YEAR ENDING ON 31ST MARCH…
(Rs. in Crores)Particulars 2008 2009 2010 2011
INCOME
Sale of Products and Services
22,191.80
26,843.73
26,757.80
31,902.14
Less: Excise Duty
2,498.52
2,527.96
1,735.82
2,505.79
19,693.28
24,315.77
25,021.98
29,396.35
Other Incomes
335.00
308.27
853.79
790.67
Total Income
20,028.2
8
24,624.0
4
25,875.7
7
30,187.0
2
PROFIT AND LOSS ACCOUNT OF TATA STEEL LIMITED FOR THE YEAR ENDING ON 31ST MARCH…
(Rs. in Crores)
Particulars 2008 2009 2010 2011
EXPENDITURE
Manufacturing, and Other Expenses
11,645.24
15,525.99
16,396.00
18,162.27
Depreciation
834.61
973.40
1,083.18
1,146.19
12,479.85
16,499.39
17,479.18
19,308.46
Less: Expenditure (Other than Interest) Transferred to Capital and Other Accounts
175.50
343.65
326.11
198.78
12,304.35
16,155.74
17,153.07
19,109.68
Interest
878.70
1,152.69
1,508.40
1,300.49
Total Expenditure
13,183.05
17,308.43
18,661.47
20,410.17
PROFIT/(LOSS) BEFORE TAXATION AND EXCEPTIONAL ITEMS
6,845.23
7,315.61
7,214.30
9,776.85
Employee Separation Compensation
(226.18) -
-
-
Profit on the Sale of Long-Term Investments -
-
-
-
Contribution For Sports Infrastructure
(150.00) -
-
-
Exchange Gain/(Loss)
597.31 -
-
-
PROFIT/(LOSS) BEFORE TAXATION
7,066.36
7,315.61
7,214.30
9,776.85
Current Tax
2,252.00
2,173.00
1,998.00
2,857.00
Education Cess on Income Tax -
-
-
-
Fringe Benefit Tax
19.00
16.00 -
-
Deferred Tax
108.33 (75.13)
169.50
54.16
PROFIT/(LOSS) AFTER TAXATION
4,687.03
5,201.74
5,046.80
6,865.69
EXPENSES side… …
Mastering Terms …
¨ EBIDTA – Earnings Before Interest
Depreciation Taxation and Amortization
¨ PBIT- Profit Before Interest and Taxation
¨ PBT - Profit Before Taxation
¨ PAT- Profit Before Taxation
Our Challenge No. 1: Determining the ability of a company to pay its current liabilities.
THIS CHALLENGE MEANS …
How to determine the liquidity position of the company?
NET WORKING CAPITAL
CURRENT ASSETS – CURRENT LIABILITIES
IS CALLED
NET WORKING CAPITAL
LIQUIDITY RATIOS
Current assets CURRENT RATIO =
Current liabilities
Quick Assets QUICK RATIO =
Current liabilities
Quick Assets are (Current Assets – Inventory-Loans and Advances)
LIQUIDITY RATIOS
CASH TO CURRENT LIABILITIES RATIO
= CASH AND BANK BALANCE /CURRENT
LIABILITIES
AVERAGE COLLECTION PERIOD
= DEBTORS*365/SALES
LIQUIDITY ANALYSIS of TATA STEEL LIMITED ………….
31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11
CURRENT RATIO 1.03 1.10 1.11 2.51 5.46 1.15 1.36 2.20
QUICK RATIO 0.33 0.22 0.22 1.52 0.15 0.25 0.41 0.42
CASH TO CURRENT LIABILITIES 9.23% 6.67% 7.57% 140.85% 6.87% 17.72% 35.94% 37.66%
AVERAGE COLLECTION PERIOD (in days) 20 13 11 12 9 9 6 5
NET WORKING CAPITAL (IN CRORES OF RUPEES)
93.15 383.59 428.88 8,248.23 30,193.66 1,311.04 3,247.08 13,216.49
The Challenge of Working Capital Management has to be seen in the light of …
LIQUIDITY
PROFITABILITYThe task before the Management is to keep
HARMONY between them.
Our Challenge No. 2: How to measure a
company’s ability to Generate Sufficient
Profits.
CHALLENGE # 2:How to know …“whether a company is earning desired
profits?”
THIS CHALLENGE MEANS …
How to determine the profitability of the company?How to determine the profitability of the company?
Operating Profit Ratio = EBIT/Sales
Net Profit Ratio = Net Profit/Sales
Return on Net Worth/Equity = Profit After Tax/Net Worth
Return on Total Assets = Profit before interest and Tax /Total Assets
PROFITABILITY RATIOS
Earning Per Share = Net
Profit/No. of Shares
Return on Capital Employed = Profit Before Interest and Tax/Capital Employed
PROFITABILITY RATIOS
PROFITABILITY ANALYSIS of TATA STEEL LIMITED ………….
31-Mar-0431-Mar-0531-Mar-0631-Mar-0731-Mar-0831-Mar-0931-Mar-1031-Mar-11
RETURN ON INVESTMENT(%) 23.41% 35.67% 29.78% 21.35% 14.39% 12.61% 11.91% 12.37%
RETURN ON CAPITAL EMPLOYED(%)
29.68% 46.73% 37.67% 25.94% 16.46% 14.56% 13.58% 14.10%
RETURN ON EQUITY(%) 33.58% 45.27% 33.52% 28.83% 16.84% 16.97% 16.46% 18.15%
OPERATING PROFIT MARGIN(%) 28.13% 38.45% 35.74% 37.53% 39.22% 34.83% 34.86% 37.68%
NET PROFIT MARGIN(%) 16.32% 23.96% 23.16% 24.06% 23.80% 21.39% 20.17% 23.36%
EPS (Rs.) 47.33 62.77 63.35 72.74 63.85 69.45 56.28 71.58
2004 2005 2006 2007 2008 2009 2010 20110%
5%
10%
15%
20%
25%
30%
35%
40%
23.41%
35.67%
29.78%
21.35%
14.39%12.61% 11.91% 12.37%
RETURN ON INVESTMENT(%): TATA STEEL
2004 2005 2006 2007 2008 2009 2010 20110%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
33.58%
45.27%
33.52%
28.83%
16.84% 16.97%13.34% 14.34%
RETURN ON EQUITY(%): TATA STEEL
2004 2005 2006 2007 2008 2009 2010 20110%
5%
10%
15%
20%
25%
30%
35%
40%
28.13%
38.45%35.74%
37.53%39.22%
34.83% 34.86%37.68%
OPERATING PROFIT MARGIN(%): TATA STEEL
2004 2005 2006 2007 2008 2009 2010 20110%
5%
10%
15%
20%
25%
16.32%
23.96% 23.16%24.06% 23.80%
21.39%20.17%
23.36%
NET PROFIT MARGIN(%): TATA STEEL
CHALLENGE # 3: How to know “whether a company is a sound company?”
THIS CHALLENGE MEANS …
How to determine the soundness of the company?How to determine the soundness of the company?
It is a challenge of Measuring the
Company’s Ability to Pay Long-Term Debt
NET WORTH
SHARE CAPITAL +
RESERVES AND SURPLUS –
FICTITIOUS ASSETS
IS CALLED
NET WORTH
SOLVENCY RATIOSDebt Equity Ratio = Long Term
Debts/Net Worth
Equity to Total Assets Ratio = Net Worth/Total Assets
Interest Coverage Ratio = Profit Before Interest and Tax/Interest paid
SOLVENCY ANALYSIS of TATA STEEL LIMITED ………….
31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11
TOTAL DEBT/EQUITY RATIO (%) 65.04% 35.70% 24.06% 65.87% 64.76% 87.90% 66.72% 59.11%
TOTAL LIABILITIES/TOTAL ASSETS RATIO
59.57% 50.89% 42.45% 52.53% 48.17% 55.04% 48.06% 44.86%
TIMES INTEREST EARNED RATIO 24.64 29.84 45.69 37.88 8.79 7.35 5.78 8.52
NET WORTH (Rs. Crores)
5,199.85
7,674.52
10,459.03
14,642.56
27,827.42
30,656.92
37,829.47
47,881.43
NET WORTH TO TOTAL ASSETS RATIO
40.43% 49.11% 57.55% 47.47% 51.83% 45.66% 51.66% 53.47%
2004 2005 2006 2007 2008 2009 2010 20110
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000
5,199.85 7,674.52
10,459.03 14,642.56
27,827.42 30,656.92
37,829.47
47,881.43
NET WORTH(Rs. in Crores) : TATA STEEL
2004 2005 2006 2007 2008 2009 2010 20110%
10%
20%
30%
40%
50%
60%
70%
80%
90%
65.04%
35.70%
24.06%
65.87% 64.76%
87.90%
66.72%
59.11%
DEBT EQUITY RATIO(%): TATA STEEL
CHALLENGE # 4: How to know “PERFORMANCE OF A COMPANY’S SHARE?”
THIS CHALLENGE MEANS …
How to determine the performance of the share of a company at a stock market?
How to determine the performance of the share of a company at a stock market?
MARKET RATIOS Book Value Per Share = Net Worth/No. of
Equity Shares
Earning Per Share Ratio (EPS) = Net Profit/No. of Equity Shares
Dividend Per Share Ratio (DPS) = Dividend paid/No. of Equity Shares
Price Earning Ratio or P/E Ratio = Market Price/EPS
Market Value to Book Value = Market Price/Book Value
MARKET ANALYSIS of TATA STEEL LIMITED ………….
31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-112-Jul-2012
EPS Rs. 47.33 Rs. 62.77 Rs. 63.35 Rs. 72.74 Rs. 63.85 Rs. 69.45 Rs. 56.28 Rs. 71.58
DPS Rs. 10.00 Rs. 13.00 Rs. 13.00 Rs. 15.50 Rs. 16.00 Rs. 16.00 Rs. 8.00 Rs. 12.00
BOOK VALUE PER SHARE Rs. 140.92 Rs. 138.66 Rs. 188.97 Rs. 252.25 Rs. 380.89 Rs. 419.62 Rs. 426.38 Rs. 499.18
CLOSING PRICE PER SHARE Rs. 383.50 Rs. 400.90 Rs. 542.75 Rs. 449.60 Rs. 693.15 Rs. 206.00 Rs. 632.65 Rs. 620.50Rs. 447.00
P/E RATIO 8.10 6.39 8.57 6.18 10.86 2.97 11.24 8.67 6.25
MARKET CAPTIALISATION (Rs. IN CRORES)
Rs. 14,150.46
Rs. 22,188.73
Rs. 30,039.74
Rs. 26,098.06
Rs. 50,640.45
Rs. 15,050.04
Rs. 56,129.61
Rs. 59,518.36
Rs. 43,422.03
DIVIDEND PAYOUT RATIO 23.84% 23.64% 23.40% 26.16% 29.73% 28.69% 17.41% 19.05%
MARKET PRICE TO BOOK VALUE 2.72 2.89 2.87 1.78 1.82 0.49 1.48 1.24 1.17
Rs. 0
Rs. 10,000
Rs. 20,000
Rs. 30,000
Rs. 40,000
Rs. 50,000
Rs. 60,000
31-Mar-04 31-Mar-05 31-Mar-06 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11 2-Jul-2012
Rs. 14,150.46
Rs. 22,188.73
Rs. 30,039.74
Rs. 26,098.06
Rs. 50,640.45
Rs. 15,050.04
Rs. 56,129.61
Rs. 59,518.36
Rs. 43,422.03
MARKET CAPTIALISATION (Rs. IN CRORES)- TATA STEEL LTD
Closing Price as on 02-07-2012is Rs. 447.00
Now, how do you feel?
THANK YOU VERY MUCHTHANK YOU VERY MUCH