financial analysis of tata steel and jindal steel and power ltd.
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INTRODUCTION Financial statements are records that provide an indication of the organization’s financial status. It quantitatively describes the financial health of the company. It helps in the evaluation of company’s prospects and risks for the purpose of making business decisions. The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. They give an accurate picture of a company’s condition and operating results in a condensed form. Reported assets, liabilities and equity are directly related to an organization's financial position whereas reported income and expenses are directly related to an organization's financial performance. Analysis and interpretation of financial statements helps in determining the liquidity position, long term solvency, financial viability, profitability and soundness of a firm. There are four basic types of financial statements: balance sheet, income statements, cash- flow statements, and statements of retained earnings. Mining industries are capital intensive. Hence a lot capital is invested in it. Unfortunately very limited work has been done on analysis and interpretation of financial statements of Indian for mining companies. An attempt has been carried out in this project to analyze and interpret the financial statements of five coal and non- coal mining companies.
Transcript
INTRODUCTION
Financial statements are records that provide an indication of the organization’s financial status.
It quantitatively describes the financial health of the company. It helps in the evaluation of
company’s prospects and risks for the purpose of making business decisions. The objective of
financial statements is to provide information about the financial position, performance and
changes in financial position of an enterprise that is useful to a wide range of users in making
economic decisions. Financial statements should be understandable, relevant, reliable and
comparable. They give an accurate picture of a company’s condition and operating results in a
condensed form. Reported assets, liabilities and equity are directly related to an organization's
financial position whereas reported income and expenses are directly related to an organization's
financial performance. Analysis and interpretation of financial statements helps in determining
the liquidity position, long term solvency, financial viability, profitability and soundness of a
firm. There are four basic types of financial statements: balance sheet, income statements, cash-
flow statements, and statements of retained earnings.
Mining industries are capital intensive. Hence a lot capital is invested in it. Unfortunately very
limited work has been done on analysis and interpretation of financial statements of Indian for
mining companies. An attempt has been carried out in this project to analyze and interpret the
financial statements of five coal and non- coal mining companies.
OBJECTIVES
To understand, analyze and interpret the basic concepts of financial statements of different
mining companies.
Interpretation of financial ratios and their significance.
FINANCIAL STATEMENTS
Financial statements (or financial reports) are formal records of the financial
activities of a business, person, or other entity. Financial statements provide an
overview of a business or person's financial condition in both short and long term. All
the relevant financial information of a business enterprise, presented in a structured
manner and in a form easy to understand is called the financial statements. There are
four basic financial statements:
1. Balance sheet: It is also referred to as statement of financial position or condition,
reports on a company's assets, liabilities, and Ownership equity as of a given point in
time.
2. Income statement: It is also referred to as Profit and Loss statement (or "P&L"),
reports on a company's income, expenses, and profits over a period of time. Profit &
Loss account provide information on the operation of the enterprise. These include
sale and the various expenses incurred during the processing state.
3. Statement of Retained Earnings: It explains the changes in a company's retained
earnings over the reporting period.
4. Cash Flow Statement: It reports on a company's cash flow activities, particularly its operating, investing and financing activities.
Industry overview: Indian steel sector
India has emerged as the fourth largest steel producing nation in the world, as per the recent figures
release by World Steel Association in April 2011. In 2010, India was the 5th largest producer, after
China, Japan, USA and Russia had recorded a growth of 11.3% in steel production as compared to
2009. Overall domestic crude steel production grew at a compounded annual growth rate of 8.4%
during 2005-06 to 2009-10. The Indian steel industry accounted for around 5% of the world’s total
production in 2010.
Total crude steel production in India for 2010-11 was around 69 million tonnes and it’s expected
that the crude steel production in capacity in the country will increase to nearly 110 million tonne
by 2012-13. Further, if the proposed expansion plans are implemented as per schedule, India may
become the second largest crude steel producer in the world by 2015-16.
The demand for steel in the country is currently growing at the rate of over 8% and it is expected
that the demand would grow over by 10% in the next five years. However, the steel intensity in the
country remains well below the world levels. Our per capita consumption of steel is around 110
pounds as compared to 330 Pounds for the global average. This indicates that there is a lot of
potential for increasing the steel consumption in India.
Immense growth potential in Indian Steel Sector
Domestic crude steel production grew at a compounded annual growth rate of 8.4% in the last few
years.
Crude steel production capacity of the country is projected to be around 110 million tonne by 2012-
13.
222 Memorandum of Understandings (MOU) have been signed with various states for planned
capacity of around 276 million tonnes by 2019-20.
Investments at stake are to the tune of $187 billion in the Steel sector.
Increase in the demand of steel in India is expected to be 14% against the global average of 5-6%
due to its strong domestic economy, massive infrastructure needs and expansion of industrial
production.
Demand of steel in the major industries like infrastructure, construction, housing, automotive, steel
tubes and pipes, consumer durables, packaging and ground transportation.
Target for $ 1 trillion of investments in infrastructure during the 12th Five Year Plan.
Infrastructure projects (like Golden Quadrilateral and Dedicated Freight Corridor) will give boost
to the demand in the steel sector in near future.
Projected New Greenfield & up-gradation of existing Airport shall keep the momentum up.
Increased demand of specialized steel in hi-tech engineering industries such as power generation,
automotive petrochemicals, fertilizers etc.
ANALYSISJindal Steel & Power Ltd.
Table : Balance Sheet of Jindal Steel & Power Ltd. as at 31st Mar-2009
Net profit 42,878.80 44,479.00 49,040.30Net profit hasincreased marginally.
FINDINGS
Comparison of Current ratio of Tata Steel and Jindal Steel and Power Ltd. from 2004-09
Table: Comparison of Current ratio
JSPL TATASTEEL
REMARKS
Dec , 2004-05 1.34 0.71JSPL has abetter ratio
Dec , 2005-06 1.26 0.72JSPL has abetter ratio
Dec , 2006-07 1.1 1.77Tata Steel has abetter ratio
Dec , 2007-08 1.5 3.92TATA STEEL has a betterratio
Dec , 2008-09 1.26 0.97JSPL has a betterratio
From the above table, it can be concluded that current ratio of JSPL Ltd. was always
more than 1 from 2004 -09. Short term liquidity of Jindal Steel & Power Ltd. was good
as current ratio was more than 1. Liquidity position of Tata steel was not satisfactory
as the ratio varied from 0.71 to 0.97 in five years.
In the period of 5 years JSPL has improved its liquidity position compared to TATA
STEEL, while positions of Tata Steel has come down. Current ratio of Tata Steel
decreased steeply from 2007 -09 due to its decrease in current assets position.
Comparison of Debt –Equity ratio JSPL and TATA STEEL Companies from 2004-09
Table : Comparison of Debt –Equity ratio
JSPL TATASTEEL
Remarks
Dec , 2004-05 1.13 0.38 JSPL has a better ratio
Dec , 2005-06 1.48 0.25 JSPL has a better ratio
Dec , 2006-07 1.4 0.68 JSPL has a better ratio
Dec , 2007-08 1 0.66 JSPL has a better ratio
Dec , 2008-09 0.91 0.91JSPL &Tata Steel has abetter ratio
From table it can be seen that Debt position of JSPL was satisfactory as the ratio varied from 1.13 to 0.91 from 2004-09 because of increasing investment. However D-E ratio of Tata Steel remained less than 1 from 2004-09 as their debts were paid off. JSPL has the highest debt- equity ratio of 1.48 and 1.40 from 2005-07 compared to TATA STEEL. Tata Steel has improved its ratio from 0.38 to 0.91 in five years. Though owner’s share in the company has decreased but more outsiders have started investing in the company and that has lead to desirable ratio.
Comparison of Net Profit margin of JSPL and TATA STEEL companies from 2004-09
Table : Comparison of Net Profit Margin
JSPL TATASTEEL
REMARKS
Dec , 2004-05 22.88% 23.97%TATA STEEL has a better net profit margin.
Dec , 2005-06 22.33% 23.17% TATA STEEL has a better net profit margin.
Dec , 2006-07 19.9% 24.19%TATA STEEL has a better netprofit margin.
Dec , 2007-08 23.04% 23.8%TATA STEEL has a better netprofit margin.
Dec , 2008-09 20.01% 21.36% TATA STEEL has a better net profit margin.
From Table it can be seen that TATA STEEL has the highest profit margin in all the five
years which is because of their increase in sales. Profit Margin of GMDC came down
from 28.04 % to 23.6% from 2004-09. Though sales of the company JSPL increased,
their profit percentage decreased from 2004-09 due to their decrease in net profit.
Comparison of ROI of Different Companies from 2004-09
Table : Comparison of ROI
JSPL Tata Steel Remarks
Dec , 2004-05 52.31% 74.57%Tata steel has a better ratio
Dec , 2005-06 39.64% 53.28%TATA STEEL has abetter ratio
Dec , 2006-07 37.48% 44.89%TATA STEEL has abetter ratio
Dec , 2007-08 44.14% 25.01%JSPL has abetter ratio
Dec , 2008-09 39.44% 23.62%JSPL has abetter ratio
From the above table it can be seen that ROI of Tata Steel was highest in 2004-05 with
74.57% and then it declined to 23.62%. Similarly ROI of JSPL decreased from 52.31 % to
39.41 % due to significant increase in its expenses.
CONCLUSION
Analysis and interpretation of financial statements is an important tool in assessing company’s
performance. It reveals the strengths and weaknesses of a firm. It helps the clients to decide in
which firm the risk is less or in which one they should invest so that maximum benefit can be
earned. It is known that investing in any company involves a lot of risk. So before putting up
money in any company one must have thorough knowledge about its past records and
performances. Based on the data available the trend of the company can be predicted in near
future.
This project mainly focuses on the basics of different types of financial statements. Balance
Sheet and Profit & Loss statements of five different coal and non coal mining companies have
been studied.
Short term liquidity position of JSPL in 2007 was good. However, current ratio, quick ratio, net
profit margin, return on assets, return on investments and return on capital employed were
unsatisfactory. The ratios that are found to be desirable are debt-equity ratio, operating profit
margin and gross profit margin.
In 2008-09, net working capital available with the company was adequate. The ratios that were
found to be satisfactory are quick ratio, debt-equity ratio, return on investments, return on net
worth, operating profit margin and gross profit margin. Current ratio, return on capital employed,
return on assets and net profit margin of the company were unacceptable.
For Tata Steel in 2007, net working capital, quick ratio, return on investments, return on net
worth, operating profit margin and gross profit margin of the company were satisfactory.
However, debt-equity ratio, current ratio, net profit margin, return on capital employed and
return on assets were undesirable.
In 2008, only company’s current ratio improved due to substantial increase in current assets
position. In 2009, net working capital available was inadequate. Company’s debt-equity ratio,
operating profit margin and gross profit margin were desirable and current ratio, return on
investments, return on net worth, return on capital employed and return on assets were found to
be unsatisfactory.
In this project, comparison of different ratios viz. current ratio, debt-equity ratio, net profit
margin and return on investment of all the companies from 2004-09 has been done.
It was observed Current ratio of Jindal Steel & Power Ltd. was satisfactory as it remained more
than 1 for all the five years. Liquidity position of Tata steel was not satisfactory as the ratio
varied marginally from 0.71 to 0.97 in five years.
Debt position of JSPL was satisfactory as the ratio varied from 1.13 to 0.91 from 2004-09.
However D-E ratio of Tata Steel was less than 1 in five years as their debts were paid off.
Though sales of the company JSPL andTata Steel increased, their profit percentage decreased
from 2004-09 due to their decrease in net profit.
ROI of Tata Steel was highest in 2004-05 with 74.57% and then it declined to 23.62%. Similarly ROI of JSPL decreased from 52.31% to 39.44%.
BIBLIOGRAPHY
Khan, M.Y. (1988). “Financial Management”, Tata Mc-Graw Hill , New Delhi, 1st
edition
Bhattacharya, Asish. K. (2007). “Introduction to Financial Statement Analysis”, Elsevier, New Delhi , 1st edition
Wanless, R.M. (1983). “Finance For Mine Management”, Chapman & Hall Ltd , New York , 1st edition
Khanna, O.P. (1999). “Industrial Engineering And management” , Dhanpat Rai , 1st
