[Music] [Music] welcome students so we are now in the say verge of closing the discussion on the ratio analysis this is my last lecture on the ratio analysis and say with reference to aggressive industries and their performance if he what we could find out so far I was discussing with you in the last part of discussion that here we are finding that the dividend paid by the gracia industry seems to be low and this could be the one reason that the market price has not appreciated but if people are looking or the potential or existing investors if they are looking from this perspective then it means they are totally financially illiterate I would say they don't know how to analyze the overall performance of the company and their financial outcomes because you see that one important indicator which you also as a financial analyst tomorrow has to see that if you look at the situation that is the resolve and surplus position here then it is six one three eight point three five and if you talk about the debt equity ratio we have seen that the debt equity ratio in this company where it should have been to is to one or more than that it is less than half hidden call it as 0. 47 is to one if you remember then it is less than half it means they have not at all adjusted their borrowing capacity reason was that most of the funds this form has generated internally that is resolved and surplus means they are starting the business with initial capital so for us a capital issue you talked about that is ninety about 292 corrodes and remaining capital is coming from the reserve and surplus it means how a company builds up the reserve and surplus how a company builds up the reserve and surplus when we prepare the profit and loss appropriation account you if you recall it if you know or we have discussed the profit and loss appropriation account and if you know that and if you recall the profit and loss appropriation accounts preparation in this case you can see that we have it by net profit after tax and here you have the appropriations and when you talk about the appropriations in case of the appropriations you see that we are first of all creating specific reserves and then we are paying that and then the amount is her remaining amount is going to the general reserve it means the form is creating very less amount of the special specific reserve very small amount is the little amount they're paying is a dividend and larger part of the investment is means that profits is going to be reinvested back in the business it means the money reinvested back in the form isn't it the shareholders money he's emptied the shareholders fund means if you talk about that earning per share anny per share is growing because if you talk about that total dividend or the total return from this it is seriously growing that to earning per share it was 94 rupees now it is 165 rupees it has grown by 70 rupees now this year it is a 65 rupees and it is it was 94 so 671 rupees growth is there is not a small growth and for example the company is not paying any dividend can you say that the company's yield to investor is very poor yield dividend is not the criteria because people who are thinking of getting the dividend and comparing that return on the investment on the basis of the dividend then they are the poor investors because in the market from the beginning of their until the end of the year when the dividend is declared in the market it changes hands in Saito to the number of people it changes number of hands so it means if you are talking about the dividend is lower that's why the share price has not gone up we can't draw their conclusion because finally that is also the that is also the shareholders money and reserve and surplus also goes to the equity shareholders so it means and we have the different kind of the remedies available remedies here is there for example somebody is not happy with the company's shares that the company share is not growing market price is not growing and the dividend is also not being paid by the company means the right amount of the dividend is also not being paid by the company in that case you want to continue as a shareholder of the company there is no issue at all they can sell the share in this country market and they can get rid of the company shares it's quite possible now for example you talk about there's for example some companies a share capital is one thousand rupees and number of shares are ten so what is a or number of shares are hundred what is the total market price of the share that is the or the book value of the share you can call it as ten rupees per share right but now whatever the company earned a profit of say two rupees or two hundred rupees and they didn't declare any dividend and they reinvested the entire amount back in the business so now the capital has become one thousand two hundred rupees number of shares is again hundred so what is now the price of the share twelve rupees per share it means share value is growing share value is appreciating in the market it's growing in the market so there's no point that when we talk about the yield to investors that they are paying very low amount of the dividend and that dividend was somewhere how much was like Dharam dividend they paid was is very less that the complicate the interim dividend this here is only two hundred and fifty two corrodes if you talk about the total profitability profit after taxes 1535 and only 250 crore is being declared as a dividend which is a very less amount it means larger part of the funds are being reinvested back in the business and with that also equity shareholders base is growing because the number of shareholders is number of shares in the market is same so company when they are not increasing the number of shares but they are reinvesting back the funds in the business the total capital base is growing and when the total capital base is growing that capital also ultimately belongs to equity shareholders if somebody not satisfied with the dividend somebody is not satisfied with appreciation in the market price because it is a temporary trend company like this people have misconceived the company people have misconceived the growth of the company and companies like this can't have the growth in the market share only by thirty three rupees it would happen certainly this price which was in the month of January in the month of January this price was two thousand seven hundred and seventy eight had a seventy nine so this is a real price of the company sheer may be somewhere from January to March there might be some bad news or wrong news about the company misconception of the company and its performance in the market that's why it has not been misses the share price has not gone up to that extent so it means you as a true and a-list financial analyst you have to look at the balance sheet you have to look at the profit and loss account you have to look at the overall performance of the company because now you call back this when you talk about if you take that total say snapshot of all the ratios we calculated so far we have seen that return on investment was how much return on networks this year is 27 percent roughly 26 point something that is 27 percent similarly if you talk about the solvency position of the form solvency position of the form is is very very good there we have calculator the net asset value and if you look at the net net asset value here it is six seventy nine point three nine rupees for this share and similarly if you talk about the say your other ratios that the interest coverage ratio how many times 20 times similarly you talk about the debt service coverage ratio of the company that was about six seven times or eight times look at the solvency position of the firm then we went through the liquidity analysis and when you look at the liquidity ratios form is not maintaining any high amount of current assets or investment in the current assets it ways if the inventory level is low sundry debtors are very less low about 10% we have seen the Sunda debtors so it means if the compass because production process is continuous when the company is continuously producing in the market and their sales are also going to the market when they are continuously producing and sales are going to the market because the level of inventory is very very low and most of the sales 90% of the company's sales are on cash only 10% are on credit and amount of the bad dietitian also not very high if you look at let's check the bandits if you look at the bandits component I don't think that the company has any any high amount of the bandits here we don't have any bandits component is material manufacturing expenses purchases then all interest depreciation and if you look at the say Baghdad's component surplus right back of the provisions for domination then provisions for current tested effort X means there is no bad data at all it means whatever the current it says they are making they are making to the very good quality of the buyers so it means look at the liquidity liquidity does not mean only that whether the perform has a sufficient cash available or not or the form is able to pay off its obligations or not there's no other case while studying the liquidity ratios you have to look at in the total perspective how much inventory firm has how much debtors firm has how much say a cash firm has and how much other assets they're not having even a single prepaid amount they have not paid anything as a prepaid no advance pyramids nothing so they have rather given the loans and advances to the to the different interest groups so it means the liquidity position if you talk about the current ratio excellent one point two six times if you talk about the Cooke ratio that is one is to one almost and if you talk about the super quick ratio it was only eight percent so where is the where is the problem in the company so as a true financial analyst you can easily make out that this company is not a bad performer so if you look at this yield and you finally draw the conclusion on the basis of this eel then we are not the good financial analyst similarly you talk about the turnover ratios turnover so this company is a highly capital intensive industry this is working in a highly capital industry intensive industry where the capital the asset base is very very high physical assets if you talk about it's a very high amount of the physical assets how much physical assets we had if you look at the physical assets we have the level of the gross a block of the asset is six thousand seven hundred and seventy corrodes which is net if you talk about three thousand three hundred and ninety corrodes still if we talk about the net worth the turnover it was really wonderful if we talk about the fixed asset turnover it was really wonderful so it means their sales are to three times of the very high amount of the investment in the fixed aesir's so despite being a capital intensive industry they are having sufficient sales and the sales are growing that is spectacular rate it means another indicator says the companies are good for farmers in the market similarly when you talk about the other ratios like profitability ratios I discussed at length with you what is the meaning of the gross profit and what is the meaning of net profit operating means you have to look at that as a true financial analyst then you look at the operating structure of the firm and you look at the financial structure of the phone if it is a manufacturing sector firm I told you in my say in my previous lectures also that if the forms is a operating structure is good financial structure is not that good not worried it will improve but in this case we have found operating structure is excellent gross profit is 50 percent and financial structure is also well within control very good very strong and the net profit is you can see it is a very good amount is a sizable amount so when the profitability is in growing profitability is going up why the market price is not going up it means there is a mismatch around perceptions about the company people are not able to analyze the overall performance of the company and overall working of the company that's why that good performance has not been there but that has not reflected in the market price I shared with you that good companies who are the real companies or who have the good intentions to grow in the market and to sustain in the market to compete in the market on the long term basis they have this kind of the strategy financial strategy would call it as that they want declare a very high amount of dividend there's not a clear take the case of Reliance Industries Reliance Industries highly declare an individual maybe today they are declaring but in the past you talk about the 70 and 80s when the Euro by Ambani was the chairman of the company he was of the philosophy that don't pay much dividend to the people rather whatever the profits are available he reinvest back those profits in the business and you generate more funds for the growth diversification or any kind of vertical or horizontal diversification and growth you generate funds internally because if you generate funds internally you have many other advantages also number one it means companies attract many is from the government second advantages that that when you have less amount of the external debt borrowed debt or the borrowed investment in the company companies a threat for any kind of the external threat when the company is not there but when the extent of the borrowed capital war or money borrowed funds increases in the company in that case there is a problem so if you look at this company the debt to equity ratio is very very low it means that external claim on the company because financial institutions and lenders they don't wait for much longer if the company's performance doesn't come up to the expectations even for a year they will they will start say issuing the notices for they come to the company so it means not having sufficient amount or not having a high amount of external debt another feature of the company and 0by Ambani follow to the policy that most of the funds should be generated internally so it means this is a second advantage third advantages when you are declaring the dividend it is taxable at two places number one is false prophet is taxable first so form is paying that form is paying the tax on its profits which either way it has to be paid but second thing is when the dividend is being paid by the firm to the shareholders it is under the category of capital gain it is again taxable at the hands of the shareholder also so double taxation is there so then the more dependent is not being declared in that case what is happening the company is paying only corporate tax to the government and then the company is not paying any dividend for the dividend amount is very low major chunk of the funds are being reinvested back in the business it means the dividend tax can also be avoided so number of advantages are their reliance has followed this strategy financial strategy for generating internal funds maximum and I think Grasim is also the one who are also been following the same strategy that is of the reliance group and they have also invested the major chunk of the ferns internally and the dividend declaration dividend payment is very very low very very less so it means in this case you can make out that finally you can understand that not paying the dividend as a true financial analyst is not a bad thing so don't say analyze the company from the angle of say yield to investors yielded to investors as I told you that when the companies are investing the funds back in the business whose words are these these are again the equity shareholders funds but irony is in this company in this particular area is that that has not that a reinvestment and high amount of the reserve and surpluses have not reflected in the market share that is that that is the some misnomer must be there in the market some rumors or some bad as a news must be there in the market about this company miss by the end of the year because share price had gone up to two thousand seven hundred plus in the say month of January but misses by reaching to the month of March it has seriously gone down it means there is something fishy about the company which is not true so as a true financial analyst you should not be driven by this change in the share price from this to this you should analyze your company yourself when we invest in the company what are our objectives our objective first objective is that my investment should be safe and second investment objective is my investment must be growing and in this case both the objectives are being met your investment is highly safe and second thing is your investment is growing probably this year it has not grown at the desired rate but in the coming years it will grow and it is a rule in the stock market that if you want to earn the good returns you have to wait for the longer durations stock market is not a place that you may cook returns and it go out of it it's not possible there you can make good gains also and then you can unload money but you can have good losses also you can have a high amount of losses also that it may not be possible that you are buying and if you don't have the time to stay in the stock market not move to the stock market if you want to move to the stock market you have sufficient funds and if you have should have sufficient time if a sufficient time you see the Grasim industries share has not gone up this year it has only gone up from by 33 rupees but you can expect a very good growth or you might have seen we don't have the information beyond 2007 but in the other years it must have done very well so overall the performance of the company is wonderful excellent though it's not reflected sometimes in the market ratios or the market capitalization or in the capital market ratios or if you but still you can say that the value of the company is going down or the value of the company is not up to the expectations value of the company is very much up to the mark it is very much up to the expectations and you have to read this company as a very good compromise ratios now we talk about one more angle from one more angle we try to look at the ratios and when you talk about their issues and from one more angle you try to look at the ratios we see that you compare the performance of Grasim industries with the industry we have the industry averages also for that different indicators for the different things and if you compare it the Grasim industries performance with the industry as a whole they get the industry average you would be able to make out where that grass I mean lies and it is rated means how the grass him is rated let us look at these indicators we have return on net worth for the industry it is in the year 2007 they are a ton on net worth in the industry was more than the Grasim industries it is 29 percent whereas it was 20 almost 27 percent so in the Grasim it was 2 percent less as compared to the industry as a whole but you see in the previous year two thousand five and six the growth was more the return on investment as a return on net worth was more in the Grasim as compared to the industry it means in 2007 there is something seriously wrong with the company means not with the company but with AH about the perception of the company in the minds of the people it's only perceptional change not the physical change not the material change only perceptional change and perception changes only momentary then you talk about the debt equity ratio we can make out that the overall debt in the industries is low other forms in the industry are also not boring much money in the market but still you see that the Gracias boring is much less as compared to the industry is boring industries that we could be ratio is 0. 5 2 is 0.
5 2 is to 1 whereas the boring Vida or the debt equity ratio of the Grasim is 0. 45 only and in this case you look at industries previous here also the industrials boring was more than the Grasim so it means the debt component in the Grasim is much less as compared to industry even overall it is less but as compared to industry also it is much less so it means that and this is the reason that if the companies fixed asset base is so high 6000 corrodes or 6600 corrodes but boring is very low in the from the market it means most of the funds are being generated internally so it means most of the profit is being reinvested back internally and that declaration of the dividend is low consequently it has to be low because company needs both funds for its growth and they are generating more funds internally and that's why they are declaring less amount of the dividend which is not at all a bad indicator then we talk about the interest coverage ratio it is about 20 times for Grasim and how much it is only 12 times for the industry how much time more solvent the form is look at the solvency of the firm how solvent the grass amazed how strength will powerful the grass M is so again another indicator interest coverage ratio which is 20 times it is only 12 times for the industry and it is in the previous area look at it was about 14 and half times and here it is only eight times so almost it is double almost it is double in case of the grass iam industry so it means average for him in the industry is having the interest coverage ratio that is only 12 times previously that was only eight times but the grass M is the leader here they have for 14 and half times and about 20 times and about 20 times so it means this is the interest coverage position of the form now come back to the liquidity position yes in the liquidity position maybe and you talk about the working capital approaches we have three approaches in the working capital current ratio maintaining their current ratio one is the say aggressive approach and other is the hedging approach and other is a conservative approach so aggressive approach means when the current asset level is very low as compared to current liabilities hedging approaches when the current assets are equal to current liabilities and say conservative approaches that when the current tests are much more than the current liability so Grasim seems to be somewhere between the hedging and the say conservative approach but keeping a say sufficient amount of the current assets is not bad because there here also they are keeping more cash and the cash ability because there iciar is high so normally they have a negative working capital if you look at the current ratio of the industry industry has the negative working capital they are running the show with the negative working capital by keeping the current ratio means the level of current assets is point zero point nine six as compared to the liabilities it is the same in both the years but it is one point two six and one two-five in case of the Crescent so gaseum is more prudent Grasim is more it's unlikely Grasim is quite unlikely to default in making the payments of the current liabilities whereas the other forms average from in this industry is more prone to that default in the making the means paying the liabilities or when the liabilities will become due it's quite likely that the other forms in the industry may become technically insolvent so they're also keeping a high current ratio is not a bad indicator it's a good indicator and it means the Grasim is able to maintain that then inventory holding period inventory yeah in case of industry it is 58 days and 65 days whereas it is about 70 days 70 74 days in case of the tourism it a little more they are converting their inventory into cash and a period of about 70 days industry is converting a little early so yes there may be but is not a very significant difference is a nominal period is a nominal amount of time similarly you talk about that debt conversion period or debtors collection period credit sales collection period it's really excellent it's really excellent their credit sales number one are very low as compared to total sales their credit sales are very low and if you talk about that debt collection period it is further much lower as compared to the industry the here it is 34 days for industry and they have 20 days 31 and 22 days it means they are very good performance whose product is saleable on cash in the market and if it is a credit very low amount of the credit and credit is collectible as quickly as possible whose product is efficient in the market then people buy it either on cash and if they expect credit then the credit is only for a very limited normal period of time 20 days to 22 days against the normal market credit a rate in the Indian scenario is 45 to 60 days in this industry we are seeing that it is almost one month but the Grasim is only giving 20 days to 10 days less than that one month that fixed asset turnover issue fixed asset turnover issue is very very high in this company so it means the amount of sales as compared the fix testers is very high so umbrageous 1. 45 times where is in case of aggressive it was two point two one times and it is two point five four times in case of Grasim as compared to the industry industry is one point four five it has little gone up from one one four five to one point five nine times but in case of the grass him it has gone up that it is really there's a much seriously big difference despite being a capital intensive industry their sales rabble is very very high and it is say a 2.
