Financial Analysis of CEAT LTD.

On the
basis of balance sheet and income
statement as on 31-3-2008.
1. Liquidity ratio:

a. Current ratio: current asset/current liability

Current asset =rs. 77197.93

Current liability=rs. 55352.13

Current ratio= 1.3946 times

Note: the general norm for current ratio in India is 1.33,while

internationally it is 2.

So here the CEAT LTD.’s Current ratio is 1.3946 times. So it shows

the solvency of CEAT LTD. Is good and investor can invest their
money in this company.

b. Quick ratio: quick asset/current liability

Quick asset = current asset-stock(inventory)=rs.43091.93

Quick ratio= 0.7785

Note: the general norm of quick ratio is 1 so the quick ratio of

this company is not as good as Indian norms. And it shows that
CEAT’s quick liquidity is not as much beneficial for the long
term investors.

2. Turnover ratio:

a. Stock turnover ratio: cost of goods sold/avg. Inventory

Cost of goods sold= rs. 153100

Avg. Inventory= rs. 34106+22121.71/2 = 28113.855

Stock turnover ratio= 5.4457 times

Note: the industries stock turnover ratio is 6.24 but CEAT’s stock
turnover ratio is 5.44. it shows that the management level of CEAT
LTD. Is very good and it also shows that the less amount is
employed in stock which leads to higher profit or more dividend to
the share holders so investor can invest his money more
 confidently. However it also shows that company keeps low amount
of inventory in stock and it can affect the customer goodwill of the
company.

b. Debtor Turnover ratio: net sales/avg. Debtor

Net sales = rs. 232996.67

Avg. Debtor= rs. 28553.945

Debtor turnover ratio= 8.1598 time or Avg. Collection period

(365/8.1598)=44.73 days.

Note: we will compare avg. Collection period with the firm’s credit
terms to judge the efficiency of credit management if avg.
Collection period is less then credit terms then it is beneficial for
investor to invest their money in this company because less amount
is employed in debtor’s leads to higher profit to the firm

3. Leverage ratio:

a. Debt equity ratio= i) long term debt /equity

Or

ii) Debt/equity

Long term debt = 47759.85

Equity = 54056.14

Total debt = 103111.98

i) long term debt /equity = 0.8835

ii) debt/equity = 1.907

Note: in general the lower the debt equity ratio the higher the
degree of protection enjoyed by the creditor and share holder. But
as much as firm will become more dependent on the debt it will
increase the profit of the firm but it will also increase the level of
risk for the firm due to its secure nature.

In this company the debt equity ratio is higher so the investor will
not shoe the interest to invest in this company.
 b. Interest coverage ratio: profit before interest and taxes/interest

PBIT= rs. 25424.92

Interest= rs. 5693.88

Interest coverage ratio = 4.4653

Note: this ratio is widely used by lenders to assess a firms debt

capacity further it is a major determinant of bond rating, a high
interest ratio means that the firm can easily meet its interest
burden even if earnings before interest and taxes suffer a
considerable decline, so the investor will be interested to invest
their money in CEAT’s bond and debenture because the interest
coverage ratio of CEAT LTD. is high which leads to regular payment
of interest.

4. Profitability ratio:

a. Net profit ratio: net profit/net sale

Net profit =rs. 14860.44

Net sales= rs. 232996.67

Net profit ratio= 6.37%

Note: the investor can compare the CEAT Company’s net profit ratio
with the industry’s avg. Net profit ratio to take decision to invest his
money in this company or not.

If CEAT Company’s net profit ratio is equal to or more then

industries net profit ratio then the investor will invest his money or
vice versa.

b. Earning power ratio: PBIT/Total asset

PBIT= rs. 25424.92

Total asset= net worth+long term debt=101815.99

Earning power= 24.97%

 Note: the investor can compare the CEAT Company’s earning power
ratio with the industry’s avg. Earning power ratio to take decision to
invest his money in this company or not.

If CEAT Company’s earning power ratio is equal to or more then

industries net profit ratio then the investor will invest his money or
vice versa.

c. Return on equity share ratio: PAT/networth

PAT = rs. 14860.44

Net worth = rs. 51325.73

Return on equity= 28.95%

Note: return on equity tell about the earning power of equity. Higher
the return on equity will invite higher number of investors to invest
their money in equity shares.

d. Earning per share: profit after tax/number of outstanding equity

shares

PAT=rs. 14860.44

Number of outstanding equity shares= rs. 45656626

EPS= rs. 32.54/share

Note: EPS ratio tells us about the earning per share. Higher the
profit will increase higher return on investments. Which will attract
large amount of investors.

5. Valuation ratio:

a. Maket value to book value ratio: market value of share/book value

of share

Market value of share as on 31-3-2008=rs. 109

Book value of share=rs. 10

Market value to book value ratio =rs. 10.9

 Note: when this ratio exceeds one it means that the firm has
contributed to the creation of wealth in the society. Here this ratio is
10.9 it means the firm CEAT has created a wealth of re. 10.9 for
every rs. Invested in it. So investor will compare CEAT co. This ratio
to industries avg. Market value to book value ratio. And take a
decision to invest in this company or not.

b. Price earning ratio: market value of share/EPS

Market price of share as on 31-3-2008= rs. 109

EPS= rs. 32.5482

PE ratio = 3.3488

Note: the PE ratio is a summary measure which primarily reflect the

following factors:-

Growth prospect, risk characteristics, corporate image, share holder

orientation.